Politics & Policy

The Great Leap Forward

Outside an Apple Store in Santa Monica, Calif. (Reuters photo: Lucy Nicholson)
Apple is low-hanging fruit.

China was supposed to have its Great Leap Forward from 1958 to 1962, under the leadership of Chairman Mao. That didn’t work out — Mao’s policies ended up killing about 50 million people instead. China later had its genuine Great Leap Forward after the market-oriented reforms implemented by Deng Xiaoping. “To get rich is glorious,” he declared. “It doesn’t matter if it is a white cat or a black cat, as long as it catches mice.” (He was a prolific aphorist.) Deng’s program was “socialism with Chinese characteristics,” which turned out not to be socialism at all. But beginning in the late 1970s, China experienced an economic boom for the ages, with economic growth averaging 9.5 percent from 1978 to 2013. In purely material terms, life got substantially better for the average Chinese and radically better for the upper middle class and elites.

China isn’t the only country that has had a period of growth like that. The old Soviet Union had one, too, beginning in the late 1920s and lasting about 15 years. Both the Soviet experience and the Chinese experience are examples of the fact that a sufficiently brutal police state can, if it implements the right policies, transform a backward agrarian economy into a modern industrial economy, generating tremendous economic growth — once. But brutal police states get it wrong as often as they get it right, hence the sorry state of Cuba, North Vietnam, Venezuela, etc.

It isn’t only backward Communist countries that have seen such economic miracles. In the case of Great Britain and the United States — the places where the Industrial Revolution kicked off and took hold most deeply — those miracles appeared less dramatic, because they were not centrally directed and because they endured for a longer period of time, one of the many benefits of free trade, property rights, the rule of law, and democracy. Japan, France, Sweden, and Belgium all saw dramatic recoveries and expansions in the immediate postwar years, while the Greeks, Italians, Germans, and Austrians had to wait a little while for miracles that kicked off in the 1950s. The Asian Tigers roared from the 1960s to the 1990s, and India began its long journey on the road to prosperity after the economic reforms of Manmohan Singh and Narasimha Rao in the 1990s. (Dr. Singh’s political career may have ended in disappointment, but it is a scandal that he has not been awarded the Nobel Peace Prize for his successful efforts in bringing a few hundred million people out of the most abject poverty.) Brazil, Spain, Chile, and many other countries have seen similar periods of dramatic growth.

Once.

It is rare to see such dramatic growth in a country that already has an advanced economy. It’s partly a question of low-hanging fruit: Moving from an economy of subsistence agriculture, handicrafts, and small-scale industry to an economy based on modern technology and trade dramatically increases the value of land, capital, and human resources. (That’s why real estate in Hong Kong costs $11,000 per square foot.) Think of it this way: If the Reagan-era economic boom that kicked off in 1982 had seen the U.S. economy grow at the Chinese rate from then until now, U.S. GDP today would be almost five times as large as it is — about the size of the entire world economy in 2017.

But the United States in 1982 was not a country with a backward agrarian economy. We did experience a long boom from the Reagan years until the turn of the century, with dramatic economic growth in the 1990s driven by a new crop of relatively low-hanging fruit in the form of new technology that freed up labor and capital both to be put to better uses. The development of desktop computers and, later, of the Internet changed the economy in ways that were difficult to foresee, and those changes were not without pain for some people. In my business, newspaper publishing, work that had been done by dozens of skilled and specialized workers (compositors, paste-up artists, camera operators, platemakers) could suddenly be done by one person sitting at a computer. It was better to be that one person sitting at the computer than one of the consequently unemployed paste-up artists, but with the economy booming the way it was during that period, they — and other workers in thousands of other occupations made redundant by new technology — were absorbed into new positions. There was deep disruption and low unemployment.

But that isn’t the sort of thing that can be engineered. You can move from low-level agriculture to advanced manufacturing and services only once. The PC gets invented only once. The Internet changes everything only once. There will be new innovations in the future, and some of them have the potential to be as transformative as the Internet — and maybe even as transformative as the Industrial Revolution. But such things cannot be exnihilated into existence, predicted, managed, or relied upon. The wiser course of action is to be modest in our expectations, to keep our economy open to innovation, and to welcome unexpected economic overperformance as a windfall.

One of the low-hanging fruits that we should not count on too very much is Apple.

The Trump administration is congratulating itself with great energy on Apple’s recently announced plans to repatriate some of its overseas cash, paying $38 billion in corporate taxes to the U.S. Treasury and investing billions in the United States, creating perhaps tens of thousands of jobs in the process. That is all welcome news. But it is news that is easy to understand, too. Apple did not make any decision to repatriate those overseas funds. The U.S. government in effect seized them. The tax bill simply “deemed” those funds repatriated and imposed a 15.5 percent tax on them. There wasn’t any persuasion involved, and Apple was not responding to economic incentives. That was pure fiat. As for the future investments in U.S.-based facilities and workers, Apple CEO Tim Cook has said forthrightly that a big part of that is related to the tax reform and that a big part of it isn’t. The most arresting observation in the Reuters report on Apple’s $38 billion tax bill is this: “The payment would not represent a major impact on its cash flow this quarter.” Apple had long ago earmarked money for the eventual payment of some U.S. tax on its overseas earnings.

The “deemed” repatriation will produce a corporate-tax windfall. Once.

What’s next?

Apple will not pay another dime in U.S. taxes on its overseas earnings. The most important feature of the recent corporate-tax reform is the adoption of a “territorial” corporate-tax regime in the United States, which in short means that Apple and other multinational firms will pay U.S. taxes on their U.S. business activities, French taxes on their French income, Japanese taxes on their Japanese earnings, etc., whereas before the U.S. government had claimed the right to tax a U.S.-based company’s earnings everywhere in the world, which of course is what those offshore cash hoards were all about in the first place. And that change represents something more than low-hanging fruit: By modernizing its corporate-tax practices, the United States has made itself a more attractive place to do business, which makes U.S.-based assets — including U.S.-based workers — more valuable. Remember that when Washington was in a panic about corporate-tax “inversions” a few years back, U.S. companies were not relocating to tropical tax havens or even to such little islands of hypercapitalism as Singapore or Dubai: They were going to Canada, Ireland, and Switzerland — which are not countries with radically low taxes but countries with corporate-tax arrangements that were more sensible than our own. Fixing that isn’t a radical change on the order of going from oxen ploughs to semiconductors, but it is the sort of deep change that is available to an already-advanced modern economy. It isn’t the one-time event that will keep us innovative and prosperous — it is creating the conditions that allow billions of little experiments to take place, most of which will fail while the few that succeed will carry us all forward with their momentum.

What will really drive our future prosperity is what comes next.

Apple already was the largest corporate taxpayer in the United States. And Apple is a great company, but what will really drive our future prosperity is what comes next — and no one knows what that is. Very few people if any in Washington really understand that. The profit we are all so excited about today is only the residue (welcome residue!) of deals already done. Some low-hanging fruit has been picked.

What has been planted?

READ MORE:

The GOP’s Tax-Reform Parlay Is a Long Shot

Deficits Still Matter, Republicans

Tax Reform Isn’t Armageddon

– Kevin D. Williamson is National Review’s roving correspondent.

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