Facing The Challenges Of A Stalled Economy
Madam Speaker, as the 108th Congress begins, all of us recognize that we face many serious issues, both on the domestic front and on the international front. On the domestic front, obviously health care will be a key issue that we must…
Madam Speaker, as the 108th Congress begins, all of us recognize that we face many serious issues, both on the domestic front and on the international front. On the domestic front, obviously health care will be a key issue that we must work with, as well as others. But in order to do that, we must, first, focus on strengthening the economy of our country. Nothing is more important than that at this time.
Recently, I had the opportunity to read a speech given by Mr. Fred Smith, the chairman and chief executive officer of Federal Express. I would remind everyone that he started a company, and, with his associates, from scratch built a Fortune 500 company, operating today in 211 countries. It employs over 200,000 people and produced revenues in excess of $21 billion last year.
In this speech, he sets out what he believes are necessary steps to be taken to jump-start a stalled economy. I just want to touch on a few of the things that he points out.
First of all, he refers on page 6 to how he agrees with the legendary economist of the early 19th century, Jean-Baptiste Say, who said essentially that supply creates demand. Simply put, the technological and process innovations by scores of inventors, engineers, scientists and entrepreneurs that have marked the history of the industrialized world lie at the heart of economic prosperity.
Then he goes on and talks about why that has not occurred in recent years, why we have not had that type of action, and he talks about how innovations and inventions do continue to pour out of the labs and the R&D centers, but he says that business is not investing because of increased risk. He says that the risk today is unprecedented in modern times. He goes through and he talks about the problems in our legal system, for example, and how on the asbestos claims alone it has cost industry over $54 billion.
Then he talks about the necessary steps that must be taken to shorten tax depreciation regimes, reduce capital gains, and to remove the double taxation of dividends.
I want to place this speech in the Record because I think it is an important speech that sets out very clearly and succinctly steps that must be taken if we are going to strengthen our economy, expand our economy and to create more jobs.
Jumpstarting a Stalled Economy
U.S. Chamber of Commerce, Washington, DC, November 13, 2002
Thanks very much for the kind introduction and for inviting
me to speak to the Board of the Chamber of Commerce.
I am a big fan of the Chamber and the outstanding work
being done by Tom Donohue. He and his team have made the
Chamber once again a significant voice for business in the
Washington political debates. We at FedEx very much
appreciate Tom's leadership, energy, and commitment as well
as the work of the Chamber on many issues of great importance
to us.
I am concerned, as I'm sure most of you are, about the
state of the U.S. economy. Following the dotcom and telcom
meltdown, our economy has simply not gained enough traction
to improve the American standard of living and to continue
producing the capital stock necessary for the prosperity of
future generations.
Sometimes I think I am the Forrest Gump of the American
economic scene over the last 30 years. Like him, I've seen it
all and many times have been in the middle of the fray,
economically speaking.
I founded and ran a small company, and today am CEO of that
same company, which has grown to be one of the world's
largest--operating in 211 countries, employing over 200,000
people and producing $21 billion in total revenues last
fiscal year. I've also had the pleasure of serving on five
other New York Stock Exchange boards. And I participate in
several organizations that serve the needs of large
businesses such as the Business Roundtable, the Business
Council, and various transport industry associations. It is
important to recall that the last 1960's also saw the
bursting of a technological bubble that had put at risk the
fundamental principles of venture capital investing.
After FedEx went public in the late 1970s, the welcome
profits we produced for our venture capital investors helped
reinvigorate that important sector of the financial markets.
In early 80s, given the significant success of FedEx as a
start-up and its importance to the venture capital industry,
I, alone with the National Venture Capital Association and
the American Electronics Association, worked hard to lower
the capital gains tax by testifying before Congress on
several occasions. And, in fact, Congress did lower the
capital gains tax rate in 1983 from 28% to 20%. That same
year, capital gains tax revenues increased by 45%. More
important, tax revenues continued to grow every year
thereafter through 1986. Then, in 1987, the capital gains tax
rate was taken back up to 28%. Capital gains tax revenues
fell in that year and three of the following four years.
Now many of my views about the American economy have also
been influenced by some 30 years' involvement with various
administrations and Congress. In this regard, FedEx was a
leader in efforts to deregulate transpiration in the United
States (and more recently on a global basis), and we are
constantly involved with various governmental issues.
Due to this experience, I believe I have a reasonable
understanding of the political processes that now greatly
influence virtually all economic activity today. Because of
this, I know that any business tax proposal must meet the
test of the ``politically possible'' regarding near-term tax
receipts.
On the business front, I have watched with great interest
the cyclical changes in the economy and the give-and-take
between the so-called ``symbol economy'' of Wall Street and
the financial markets, and the ``real economy'' of hard
assets and industrial corporate operations. Clearly, in the
late 1990's, the symbol economy was the great driver of
economic activity as opposed to the real economy. As a
result, the fantastic valuations given various companies by
the financial markets led all to often to excesses and in
some cases criminal activities. The bursting of the bubble
was an inevitable consequence.
But perhaps the most important lesson I have learned
watching the economic froth over the years is that the modern
economy is extremely complex. Since the beginning of the
Industrial Age, great economists have argued that ``chicken-
or-egg'' question--Is it supply that drives economic growth
or is it demand?
For decades, Keynesians have debated the disciples of the
so-called Austrian school. Its progeny, ``the Chicago boys,''
have had a remarkable influence over many economic decisions
here and abroad. A recent cover of The Economist plotted
business cycles since the beginning of the Industrial
Revolution. Remarkably, it showed that the extremes of these
historical highs and lows have steadily decreased over time.
Clearly, the advent of the Federal Reserve System and its
international counterparts, and the influence of the great
monetarists like Milton Friedman have helped domesticate if
not fully tame the economic beast. In addition, one would
certainly have to mention the Kennedy tax cutters and the
Reagan ``supply-siders'' in any pantheon of key economic
architects of the late 20th century.
We have lived through ``stagflation'' in the 1970's, the
``greed is good'' LBO mania of the 1980's, and of course the
incredible bubble of the late 1990's--an event perhaps
matched only by the 1920s stock market crash brought on by
that decade's ``irrational exuberance'' (to borrow a famous
recent quote).
During this 30-year time period, there have been many
societal and governmental changes that have helped improve
economic performance. Of particular importance to FedEx was
the series of deregulatory changes that freed up
transportation and logistics industries. These began in 1977
with air cargo deregulation and concluded in 1994 with
federal pre-emption of the last vestiges of state regulation.
As a direct result of these new laws, total logistics
costs, meaning the interest expense of carrying inventory,
warehousing costs, and transportation, have declined from a
little over 16% of GDP in 1980 to about 10% today. This
remarkable improvement in national productivity has made
dramatic improvements in the national well-being.
Equally important, transport deregulation permitted
significant business innovations such as the now legendary
Wal-Mart just-in-time distribution system, the Dell made-to-
order computer revolution, and FedEx itself.
Government has also helped economic growth by funding a
significant amount of research and development that led to
such innovations as the Internet, communications satellites,
swept-wing jet aircraft, and many others. Private capital
subsequently invested to exploit these government-funded
innovations has spawned significant economic growth.
Finally, both Democratic and Republican administrations
since World War II have been committed to opening global
markets so that today over 25% of all U.S. economic activity
is related to imports and exports. Increased trade has been
an enormous overall boon to U.S. GDP, particularly since
1970, when trade was only 10% of the economy.
Having observed all these various economic phenomena over
the years, and having studied the various macro-economic
theories to the extent this poor brain can absorb them, I
have come to agree with that legendary economist of the early
19th century, Jean-Baptiste Say. He said, essentially, that
``supply creates demand.''
Simply put, the technological and process innovations by
scores of inventors, engineers, scientists and entrepreneurs
that have marked the history of the industrialized world lie
at the heart of economic prosperity.
I believe economic theorists and politicians greatly
underestimate the importance of the ``animal spirits'' as
John Maynard Keynes called entrepreneurial endeavor.
Moreover, I also believe economists are often too concerned
about the investment rates in historical or mature businesses
which, as all economic theories agree, move constantly
towards commoditization, absent innovation and change.
A good example of Say's law is the RF key chain in my
pocket. A decade ago I simply did not know that I needed this
tiny device that allows me to lock and unlock my car from a
distance. More recent versions allow me to remotely turn the
lights on or off and even open the trunk.
This invention has been an incremental but important
convenience for millions of people and has, on occasion, even
saved lives. The idea sprang from the mind of an inventor,
and some entrepreneur inside or outside of a corporation
championed its production. The rest is history. This
invention came from scientific innovation in fields seemingly
unrelated to the traditional automobile--radio frequencies
and miniature batteries. And the final product created its
own demand, just as Say predicted some two centuries ago.
Naturally, all of us can think of scores of products or
processes that have improved our well-being, enhanced
productivity, and created economic activity and wealth. The
Lipitor I take for my heart is a Godsend; Satellite weather
imaging technology has improved all sorts of human
activities; and The plethora of entertainment options today
can satisfy virtually any taste in leisure activities.
Clearly, the fundamental driving forces of our economy are
continued invention and innovation, exploited by capital
investment. After all, the fundamental difference between
well-paid FedEx drivers and pilots versus a third-world
person moving commodities slowly over a dirt road is the
investment in the airplane and the truck; in the ATC system
and the highway; and in the education and training afforded
our employees.
Today U.S. business is not investing at a level necessary
to create adequate GDP growth, despite the fact that interest
rates are lower than they have been in years. Innovations and
inventions continue to pour out of the labs and R&D centers,
as reflected by the increasing number of patent applications.
What then is the problem? Why are we not investing more
robustly? In my opinion, the issue can be summed up in two
words--increased risk.
About 3,000 companies make 70% plus of all capital
investments in our economy. The leaders of these companies
today perceive a level of risk unprecedented in modern times.
Our legal system has become a minefield for those who aspire
to develop something new or unproven. All economic activity
today is subject to after-the-fact scrutiny that may ascribe
completely different motives and beliefs than were originally
intended. The development of the class-action lawsuit, itself
a process innovation, has clearly wobbled our of control. So
has the ability of juries to assign appropriate damages and
``punishments.''
Now, I have good friends who are plaintiff attorneys. They
tell me outrageous awards and abuses of the legal process are
the exception rather than the rule. But unfortunately
(perhaps because of profile media coverage of the extreme
cases) that is not the perception in boardrooms across
America. And I am not speaking about the new regulations
required by Sarbanes-Oxley or the New York Stock Exchange. I
am confident these new requirements are of little concern to
the vast majority of honestly run businesses in this country.
A bit more bureaucracy will be created and more money spent
on various control activities. But if this makes our public
business activities more transparent and improves the
confidence level of the investing public, they are welcome
changes.
The litigation landscape in the United States, however, has
now become a significant drag on economic activity and
particularly the all-important activity of invention,
innovation and investment required to produce economic
wealth. For example, asbestos-related suits alone have cost
businesses more than $54 billion and now threaten companies
representing 85% of the economy. (from 11-5-02 WSJ article by
George Melloan) Our litigation system simply MUST be reformed
if we are to regain appropriate levels of these core economic
activities. And I applaud Tom Donohue, the Chamber of
Commerce and the Bush administration for making the reform of
the U.S. litigation system a top legislative priority.
In a related vein, the Congress must also solve the issue
of terrorism insurance. The U.S. air transportation industry
simply could not function today were it not for Congress
having passed emergency legislation to provide terrorism
insurance through the Department of Transportation. This
temporary fix must be made permanent not just for
transportation, but for all industries. We live in an age
when shadowy enemies can strike innocent targets in a variety
of devious ways. The commercial insurance marketplace simply
cannot provide affordable and adequate coverage necessary to
sustain an appropriate level of economic activity without
Federal government's willingness to be the ``insurer of last
resort'' or to cap private liabilities for acts of war.
In addition to the fear of litigation and the lack of
adequate insurance against terrorist attacks, businesses
today face an equally unprecedented array of new risks due to
rapidly changing markets, international competition, and
accelerated technological change.
Let me give an example from the aviation industry.
Airlines that invested in domestic wide-body aircraft in
the early 1970's found that the market fundamentally changed
in the 80s. Why? Because passengers preferred smaller
aircraft flying more frequent flights. Thus, the original
book depreciation estimates of 20-25 years for the wide
bodies were wildly out of step with reality. The same thing
has happened in industry after industry, as rapidly changing
markets, new technologies, or new competitors with
revolutionary business models have appeared.
The concept of depreciation was developed as an accounting
discipline to reflect the expected useful life of a capital
asset. Yet, over the years, tax depreciation schedules and
book depreciation schedules have diverged, and they have each
become a less accurate reflection of reality. In fact, most
of the time, companies that make capital investments simply
cannot accurately predict the economic life of the asset
being acquired. With FedEx having invested over $20 billion
over the last 10 years, I am keenly aware of the role tax
policies have on investment decisions.
In my opinion, the most important stimulus for increased
capital investment would be simpler, shorter tax depreciation
regimes applied to capital in this country. To this end, I
suggest moving to a simple, three-category tax depreciation
system as follows: First, a one-year depreciation schedule
for all high-technology investments and low-value software
purchases; Next, a three-year depreciation schedule (perhaps
40%, 30%, and 30%) for all equipment and major software
purchases or developments; and Third, a five-
year tax depreciation schedule, 20% per year, for buildings.
I would also recommend that the book life of any asset be
restricted to no longer than five times the tax life. For
instances, an aircraft with a tax life of three years would
be limited to a book life of 15 years. All too often, I have
seen managements reluctant to invest in new, improved
equipment because of the impact to the reported P&L of a
premature write-off of already obsolete equipment.
I believe the second change that's needed to re-ignite our
economy is to reward patient equity investment through a
graduated reduction of capital gains taxes over the years the
investment is held. Lowering the capital gains tax,
preferably to zero over several years, would allow the
resumption of the all important start-up and mezzanine
financing of new businesses. Such a tax schedule would unlock
shares of stock long-held by a company founder, a
circumstance that applies to me, by the way. I am confident
that the release of such stock would be a net plus to the
Treasury and the markets. A new capital gains tax schedule of
the current 20% for securities held for one year, then
dropping 5% a year to zero after a five-year holding
period, would be a real stimulus to our equity markets for
companies of all sizes. Such a capital gains regime would
dampen the speculative churning of securities that was a
big factor in the late 1990s bubble.
Lastly, the phase-out of the double taxation of dividends
would restore the balance between the ``symbol'' economy and
the ``real'' economy. Companies that need to make investments
would have the option of doing so with equity capital versus
debt. Dividends, like interest, would be fully deductible at
the corporate level. The same impulses that drove the
excesses of the 1980's LBO mania occur now on a smaller scale
in American boardrooms everyday. The decision to invest or
not is often made and financed based on the deductibility of
interest and the punitive taxation of dividends. Having
dividends and equity treated the same as interest and debt
respectively would offer business managers an alternative
model for economic growth. Investors claims on cash flows
would be a powerful discipline to invest in only the most
productive and wealth-creating projects for society.
If you objectively review the various fads and cycles of
the last 30 years, you will see that the unintended
consequences of our business tax structure in terms of
depreciation schedules, capital gains taxes, and dividends
taxation are at the heart of many of our economic cycles and
disappointments. While there are many excellent ideas as to
how to reform the business tax system, the vast majority are
politically infeasible. Valued-added taxes, and so forth all
founder on the revenue stream requirements of the U.S.
Treasury or the vested interests of powerful political
lobbies.
The advantage of the three changes I have suggested is that
they will increase federal tax revenues in short order. In
the case of depreciation acceleration, I am confident that
tax receipts would grow almost immediately due to the rapid
increase in transactions and additional economic growth. With
respect to a graduated capital gains tax, as I mentioned
earlier, figures show that tax revenues rose in the years of,
and following the 1983 introduction of the 20% capital gins
rate, and fell again when the rate was taken back up to 28%
in 1987. A similar phenomenon occurred after the rate was
again reduced to 20% in 1997. In fact, according to the CBO,
the actual tax revenue increases for the years 1997 through
1999 exceeded initial projected revenues gains by 40 to 50%.
We can expect the same kind of impact from a graduated
capital gains tax rate. I believe this is true in the case of
the deductibility of dividends as well, although there are
conflicting studies as to the timing of the overall
benefit. In any case, the reform of dividend taxation
could be phased in over several years to lessen the
immediate reduction in federal taxes. The new ability of
members of Congress to request a dynamic scoring of the
effects of tax policy proposals should be able to
demonstrate the positive effects of these tax reforms or
reforms similar to them.
Most people today are surprised to learn that in fiscal
'01, business income taxes only produced about $170 billion
or 8.5% of total federal revenues of slightly over $2
trillion that year. The vast majority of U.S. tax revenues
come from personal income taxes and FICA taxes. This split in
revenues reflects the transition over many years to a
wealthy, consumer-driven economy, nourished by substantial
private investment. The relatively low percentage of federal
revenue coming from the current corporate tax system means
that such fundamental business tax reform as I've suggested
is, in fact, possible, In other words, such a stimulus
package for business investment has great upside and
manageable downside risks in terms of increasing the near-
term deficit.
In conclusion, we must reinvigorate business investment.
This engine of future prosperity must now be re-tuned if we
are to achieve adequate levels of economic growth and
improved productivity to meet the income aspirations and
needs of our citizenry. To these ends, the five reforms I've
outlined should be the centerpiece of an immediate
economic stimulus initiative by the President and
Congress.
I'm confident our political leaders have the best interests
of the future generations in mind. Being an optimist, I think
we can muster the will to get this done. The alternative is
so grave that I cannot contemplate our not doing so.
Thank you so very much for your kind attention.