One Percent Capitalism

In 2011 President Obama appointed Jeffrey Immelt, CEO of General Electric, to lead the President’s Council on Jobs and Competitiveness.  Not surprisingly, the appointment raised eyebrows among those concerned about jobs since GE (per The New York Times) eliminated a fifth of its US workers in the last decade and now (per Bloomberg) employs more people abroad than in the US.

Nonetheless, Immelt’s record on competitiveness is impressive.  He refocused GE’s operations (and employment) from domestic manufacturing to more profitable overseas financing.  In the 1990s, according to the Times article, three-quarters of both revenue and profit came from domestic operations.  Today more than half of its revenue and more than four-fifths of its profit are earned overseas.  In 2011, in the midst of a worldwide economic slump, GE’s revenue, 150 billion dollars, was 6th highest of all US corporations and produced a profit of 11½ billion dollars.

Thomas Edison’s manufacturing powerhouse has become a very profitable international bank.  How does this bank compete?

The Times concluded that “one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.”  Much of that ability is embodied in GE’s tax law firm, said to be the best in the world.  What’s different about it is its size – almost a thousand people – and the fact that everyone works exclusively for GE.  The “firm” is GE’s tax department. 

GE encourages these employees to spend half their time on complying with tax laws and the other half on finding ways to avoid them.  The second half makes the GE tax department a profit center with its own lobbyists.

One significant tax break, called “active financing,” allows GE and other banks to avoid US taxes on interest income earned abroad as long as the income remains abroad.   When in 2008 the Democratically controlled Congress was considering letting the tax break expire, GE sent in the head of its tax department and its lobbyists to preserve it.  A key convert was Representative Charles Rangel of New York City.  A month after his conversion, Immelt announced in his presence that GE was donating 30 million dollars to New York City schools including schools in Rangel’s district. 

By tax expert David Kay Johnston’s reckoning, over the period 2008-2010, GE received 56 dollars and 40 cents in tax refunds for every dollar that it spent on lobbying.  That’s 56.40 times 80.4 million dollars—its lobbying expenses—for a total of 4½ billion dollars in tax refunds.  According to another report, GE received almost 8½ billion dollars in tax subsidies of all kinds during this period, making its effective tax rate minus 45 percent.  The tax rate for business corporations is supposed to be plus 35 percent.

But as the late Chicago economist Milton Friedman instructed us, there is

"one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Spending corporate resources to engage in open and free competition to influence Congress through lobbying is not only lawful but constitutionally protected as an exercise of any corporation’s First Amendment right to petition the government.  If such activities are designed to increase its profits, then according to the Friedman doctrine the business corporation has a social responsibility to engage in them.

By this standard GE, led by the President’s new chief of jobs and competitiveness, is one of the best.  Its investors are surely grateful, if not so much the US job holders that it fired.  And not so much, perhaps, the group of investment professionals who want GE and other public corporations to disclose their spending on political activities.  Their reasoning is in part economic (read closely):

“Political spending disclosure helps prevent corporations (and unaccountable corporate executives) from using corporate treasury funds to obtain competitive advantages through political means, rather than by adding value in the marketplace. . . .  Secret political giving undermines free enterprise and creates unearned advantages in the marketplace.  These activities distort the workings of the market, and result in misallocations of capital.  Mandatory corporate political spending disclosure would further a marketplace where companies compete and win based on superior products and services, rather than by superior access to lawmakers.”

So in the view of these professionals, using corporate money to obtain competitive advantages through political means—which surely include lobbying Congress even when it’s disclosed—undermines free enterprise, creates unearned advantages and distorts the workings of the market.  But of course they’re talking about the free market guided by Adam Smith’s invisible hand.  In the 1% capitalism of Milton Friedman, Jeffrey Immelt and Corporate America, the invisible hand has been replaced by money and competition by the political advantages that it buys.

To change back to free-market capitalism, forget the likes of GE—change Congress.