Corporate Altruism?

June 20, 2011
Posted by Jay Livingston

I do not have a very sophisticated theory of the firm. I have never taken a business course, and, I must confess, I have never read Ronald Coase.* But I wonder how sophisticated a theory of the firm we need to be skeptical when corporations lobby for huge tax breaks saying that these will allow them to create jobs. Which is what they are doing. Corporations are asking us to buy a theory of corporate altruism.

US-based companies have bales of cash profits overseas, and they are now asking for huge tax breaks to “repatriate” all that glorious black ink. They will use it, they say, to create jobs here in the US.

Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as "the next stimulus" at a conference Wednesday in Washington, D.C.

"This is about creating jobs, expanding U.S. businesses and strengthening American companies," said Rep. Kevin Brady, R-Texas, who introduced such a measure this spring.

Really? How about this theory: Corporations are not in business to create jobs. They are in business to make money – money for the people who own the shares and money for the executives who run the show (and often own a hefty sackful of those shares or options). If they have to create jobs to do that, fine. But if they can do that without spending money creating jobs, even better.

We’ve been here before, so I guess you could classify this under “Fool me once . . . .” A front page article in the Times today (here), gives the details. In 2005, as part of the “American Job Creation Act,” the Bushies gave US corporations a similar “repatriation holiday” (yes, that’s what it’s called). And oh what a holiday celebration there was.

While the tax break lured 800 companies into bringing $312 billion back to the United States, 92 percent of that was used for dividends and stock buybacks, according to the nonpartisan National Bureau of Economic Research. The study concluded the program "did not increase domestic investment, employment or research and development."

The law forbade the use of repatriated funds directly for executive compensation or stock buybacks, but companies found plenty of ways around it. "Fungibility is one of my favorite words," [said Jay Schwartz, who in 2005 was head of Merck's international tax department].

Shareholders and executives made out very well, thank you. But none of those ex-pat dollars went to employee wages or to hiring. Some companies actually cut jobs.

A few years later, something similar happened in the bank bailout. The government gave the banks a ton of money with few strings attached. The bankers, rather than sending that money into the economy, used it first to shore up their own balance sheets and bonuses. (“Fool me once again. . . .”) Senators held hearings to register their shock and dismay at the bankers’ priorities and low level of altruism. And now, three years later, some of our lawmakers like Rep. Brady (quoted above) are still pushing that good old theory of corporate altruism.

* I’m not even sure how to pronounce his name.