How to Create Millions of New Jobs

A shift in global economic trends favors America, if it can repair its reputation as a place to do business.

Outsourcing is a hot issue in the presidential campaign, but of greater economic consequence is whether the winner will seize a golden opportunity in the next few years to create millions of new high-paying jobs.

SEE ALSO: A Push for New Labor Concessions

After years in which globalization resulted in many American jobs moving overseas, a recent shift in trends has put the U.S. in an excellent position to reverse the flow.

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First, China’s advantages are eroding. Labor costs there are rising 15% a year, compared with barely 2% in the U.S. Factor in America’s advantages in productivity, innovation, infrastructure and legal protections, and the U.S. is already near parity.

Also, Europe’s problems will make the U.S. a more attractive place to produce. In the short term, the European crisis has reduced demand and weakened the euro, curbing growth in U.S. exports. In the long run, a stronger euro, slow growth in Europe and higher labor costs will benefit the U.S.

And emerging nations won’t need as much foreign investment. India, China and the rest are getting wealthy enough to finance their own growth.

It might seem that President Obama and Republican challenger Mitt Romney recognize this opportunity, as they tout tax credits and “buy American” preferences for U.S.-based companies to shift jobs from abroad or create them here. But this approach and its narrow view of what constitutes an “American” company is precisely the problem. At a time when a low savings rate has starved the U.S. of investment capital, the proposals would add to regulatory hurdles and laws discriminating against foreign investment that have eroded America’s reputation as a good place for the world to do business.

Scarcely a decade ago, the U.S. attracted 41% of the world’s foreign direct investment (FDI). That share has dwindled to 18%, in large part because investors perceive the U.S. as hostile to foreign ownership. One 2012 survey of investors placed the U.S. 36th out of the world’s 55 largest economies in its openness to foreign investment. That’s behind Egypt.

About $1.2 trillion in FDI will be spread around the world this year, about $200 billion of it in the United States. Policies that encourage FDI could increase total business investment by 10% and add one percentage point a year to GDP growth. Over a decade, this would create as many as 10 million jobs.

But so far, neither candidate seems willing to join a bipartisan push to identify and deal with the regulatory and political hurdles that discourage such investment.

The president proposes a tax credit for relocation expenses if a company shuts down a division overseas and reopens it in the U.S. Most companies that the president congratulates for relocating jobs, such as Ford and Caterpillar, aren’t actually returning jobs to the U.S. They’re adding jobs here and abroad. And for some that do bring jobs back to the States, the numbers are small. The president often cites Master Lock, without pointing out that the relocated jobs total 100 over the last few years.

Romney, a strong supporter of foreign investment when he was governor of Massachusetts, has endorsed a media campaign by the Republican National Committee that equates any federal money spent on foreign-owned companies with shipping jobs to other countries. The goal is to vilify Obama’s alternative energy spending under the 2009 Recovery Act, much of which went to foreign-owned companies bringing new technology and jobs to the U.S. But the GOP effort incorrectly contends that foreign-owned firms with operations in the U.S. obtain more components from abroad than U.S. firms.

For example, the GOP criticizes city officials in Santa Clarita, Calif., for awarding a federally funded contract to a New Zealand-based company over a local bidder, claiming jobs will be sent overseas. But all equipment and labor for the contract is being sourced locally, and the New Zealand company is doing the job for half of the local firm’s bid.

Overall, nearly $3 trillion in foreign investment employs 5.6 million Americans directly, 60% them in manufacturing, according to a PricewaterhouseCoopers report on behalf of the Organization for International Investment. These U.S. subsidiaries effectively create another 15.8 million jobs by purchasing goods and services from other businesses and through consumer spending by those 21 million workers. In all, $2 trillion a year in GDP comes from foreign investment, 14% of the total.

Economic shifts abroad will give the winner of this election a rare opportunity to reclaim a larger piece of this pie, if he can reject policies that discourage foreign investment.

That’s a pretty big if, but the prize is within reach.

John Maggs
Senior Economics Editor, The Kiplinger Letter