Tax and trade, the two big economic policy debates in the US right now, have long been viewed mainly through the lens of the country’s largest public companies.
Their leaders want lower taxes, and claim that if the corporate rate were slashed from 35 per cent to 25 or 20 per cent (or better yet the 15 per cent President Donald Trump has proposed) they would bring back overseas cash and invest it in new factories, worker retraining and all the other sorts of things that politicians love.
There is, of course, no evidence over the past 20 years that this has been the case. During the last tax holiday the US had, in 2004, the bulk of the repatriated money went to share buybacks rather than real economy investment.
Likewise, the trade debate is all about how to craft rules that will stop the largest companies outsourcing jobs overseas. (Good luck with that goal, which requires global co-operation.)
Yet if you look at these issues through another lens, that of smaller, private and family-owned companies, you would come up with a totally different narrative, one with very different policy solutions.
For starters, you would see that tax rates don’t necessarily influence how companies invest. Consider a powerful paper from 2011, which looked at the behaviour of 250,000 businesses in the US over six years.
It found that private companies — which account for the bulk of employment and corporate revenues, though only 20 per cent of profits — invested more than twice as much in productive capital expenditure as public ones, regardless of the tax rate.
They were also quicker to jump on investment opportunities than public companies, which followed a predictable cycle of marshalling capital, investing as little as it takes to run the business and paying back most of the free cash to investors. The upshot? Public company behaviour is driven by Wall Street, not by tax policy. No wonder large public companies take a greater profit share, yet invest less than their private counterparts.
Cost-cutting pressure is also, according to any number of surveys, the number one reason for outsourcing. Perhaps that is why so many of the companies I know that do their sourcing locally are private. I recently spoke to Bayard Winthrop, the chief executive of one such business, the San Francisco based sportswear manufacturer American Giant, who told me he could take or leave lower tax rates or the North American Free Trade Agreement renegotiation, but would be interested in economic incentives that reward his company for keeping jobs local.
American Giant sells its hoodies for between $60 and $80, similar to a company like Levi’s. But the value proposition is entirely different. All of American Giant’s supply chain is US-based: cotton is grown in the Mississippi Delta, ginned, yarned, knitted, cut and dyed in North and South Carolina and distributed in Kentucky — in each case by private companies, many family-owned.
All this costs more than outsourcing to Asia. Yet American Giant, which runs its own factories and sells its goods online, has grown its production capacity seven-fold in five years by cutting out costs that in the big brand model would go to a retail middleman, Walmart or Kohl’s, say.
The result is a similar profit margin to rival brands but a much higher quality product (cotton rather than polyester, better quality control, finer tooling in factories equipped with cutting-edge machines).
“All the ‘Made in America’ White House talk hasn’t really helped my business,” says Mr Winthrop. Indeed, he insists measures like a restrictive immigration policy are hurting it. “I don’t need a different trade or tax policy. What I need is help skilling up an entry level workforce, and some R&D credits that reward the capex investments I’m making.”
It’s an entirely different way of thinking about growth. And it mirrors what Germany has done and, more recently, what China has attempted to do, by developing long local supply chains that enrich a larger economic ecosystem. It is a model that is more focused on small and mid-sized companies, rather than global titans.
Most American jobs are still created by these companies, and they are a crucial part of the innovation process.
The private company business model also has the advantage of being more humane. Shorter supply chains bring capitalists and workers closer to one another, and as everyone knows, when you have to look someone in the eye every now and again, you are much less likely to treat them badly. Pay differentials between managers and workers go down. Wages and growth at a regional level go up.
That, more than another conversation about tax cuts or tariffs, could be exactly what we need — not only to achieve better long-run growth, but also to make capitalism and democracy more comfortable bedfellows.