Taxing American Competitiveness

Why is Congress slapping fees on the most productive sectors of the U.S. economy?

Few noticed this August when lawmakers passed an emergency bipartisan measure to spend $600 million to help secure the U.S. border with Mexico by funding new unmanned aerial drones -- better known for their pinpoint attacks on terrorist strongholds in Pakistan -- and adding 1,500 new border enforcement agents. Even less attention, unfortunately, was paid to a provision in the new law that discourages high-skilled workers from coming to the United States -- all under the false political guise of "border protection" and budget demands.

Regrettably, what might be good politics is bad policy for America. It is unlikely to raise revenue, will inflict damage to American competitiveness, sour U.S. relations with India, and above all send the wrong signals about U.S. attitudes to open global markets.

Indeed, it's hard to see the bill, crafted by David E. Price (D-NC) in the House and Chuck Schumer (D-NY) in the Senate, as anything other than a transparent bid to be seen as "doing something" on immigration after years of failing to pass comprehensive reform. But with public outrage about government spending rising, proponents wanted to make the expenditure "budget neutral." Accordingly, Schumer inserted the visa provision, enabling him to claim that it does not add a dime to the deficit.

The first problem is that the Congress's budget neutrality numbers simply don't add up. The law calls for fees for the H-1B and L-1 immigrant visas to increase by $2,000 and $2,250 respectively for companies with 50 or more employees in the United States -- if more than half of the company's employees are on H-1B or L-1 visas. This provision effectively doubles the existing total government fees for the affected companies, predominantly Indian IT services firms. The government's annual revenues are expected to rise to roughly $135 million, based on about 65,000 H-1B and L-1 visas issued annually.

In anti-immigration fantasy land, where the U.S. labor market is perceived to be overrun by hundreds of thousands of cheap, high-skilled Indian workers, such a fee might seem like a plausible cash cow. But the real world of the U.S. labor market in 2010 looks very different.

Demand for high-skilled visas is extremely volatile, rising dramatically in times of high growth and slumping during recessions. According to our calculations, based on data for fiscal year 2009, the actual demand for high-skilled H-1B and L-1 visas in a relatively sluggish economy will be about 20,000 visas -- far below the target of 65,000. There goes Schumer's budget neutrality.

Congress or the administration might try to make up the revenue shortfall by expanding the extra fees to cover more H-1B and L-1 visas, a step that would hurt a greater number of U.S. companies. Mainstream U.S. business groups that declined to oppose the bill may come to regret their indifference once they too are hit with this extra cost.

The second problem with the new taxes is that they will inevitably fall on the very sector -- information technology -- in which the United States is most competitive. American IT services and software companies dominate their global industries and are critical to the growth of the domestic economy. Together with foreign competitors,the sectors, according to the Federal Reserve, has accounted for more than half the increase in U.S. productivity growth since 1995. It is as if a country that exports textiles were to impose a large tariff on, say, cotton.

A typical example of those affected by misguided U.S. visa policies is Sanjay G. Mavinkurve, an Indian-born, Harvard-educated computer user interface expert who helped design a precursor of Facebook and now works for Google. Mavinkurve has had to work in Canada because the lack of U.S. high-skilled visas has made it impossible to move his wife and family to the United States.

Without explicitly saying so, the law clearly targets India, home of the world's fastest growing IT services companies. Indians received about half of all H-1B and L-1 visas in 2009, and comprise most of the roughly 50 percent of all H-1B and L-1 recipients who work in computer-related occupations in the United States. Despite U.S. President Barack Obama's endless declarations that the U.S.-India "strategic partnership will continue to grow," this is a direct snub to India's most powerful domestic advocates of economic liberalization. India's commerce minister has already lodged a complaint with the U.S. trade representative about the new visa bill.

The Obama administration should tread carefully. If India shifts its economic orientation away from the United States, the costs would far outweigh any of the political benefits or fiscal revenue from this visa fee policy. India could choose to retaliate by buying more Airbus planes from Europe, importing more cars from Japan, or moving toward a trade agreement with the European Union that discriminates against U.S. exporters. So when Obama lands in New Delhi on his upcoming trip this fall, he could find himself in the middle of an ugly trade skirmish with a rising Asian superpower.

Finally, consider the symbolism of the bill: It aims to keep low-skilled immigrants out of the country (i.e. Mexicans) by deterring high-skilled immigrants from other parts of the world. This bizarre coupling sends an unfortunate signal about America's commitment to keeping markets open. It is willing to hit its most competitive sector, and forego the benefits of globalization, for small, short-term political benefits.

Before August, the most charitable way to describe the trade policy of this Congress, the administration, and increasingly U.S. state governments (which have again begun to penalize companies that purchase services from foreign IT companies) was to say that there was no policy at all -- but at least there was a willingness to prevent a protectionist backslide. With this new law, even that can no longer be said. If Congress wants to secure America's borders, it should have the political courage and wisdom to do so but without endangering the very open borders that are key to sustaining global prosperity.

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The Radical Presidency

What would happen if the Tea Party took over an Oval Office that has grown dangerously powerful?

After America's century-long rise to world hegemony, the presidency is a vastly different institution than it was in the days of Theodore Roosevelt and Woodrow Wilson. The next few decades will be equally transformative, but in ways that will cause great difficulty for the sober formulation of U.S. foreign policy.

A series of political, bureaucratic, and military developments threaten to make the presidency into a platform for charismatic extremism and abrupt swings in foreign policy. Barack Obama's centrism and constitutionalism may disguise their significance in the short term. But this should not lead the president to ignore the long-term dangers. He should use his time in office to support reforms that will ameliorate, if not cure, underlying pathologies -- lest a Sarah Palin, or her mirror image on the left, someday come to power and use the presidency as an engine of  destructive radicalism.

Let's begin with the presidential primary system. Before 1972, when our current system was adopted, party chieftains steered the nomination to figures who would maximize their appeal to the political center. But the new rules shifted the balance in the direction of extremism -- away from the median voter in the general election, toward the median voter in the primary or caucus. With turnouts low, mobilizing the base is now often a recipe for winning the nomination.

This tendency toward extremism is heightened by the increasingly polarized character of the voting public: The Democratic base is becoming strongly isolationist; the Republican, emphatically militarist. Successful nominees have little choice but to pander to their base during the primary campaign. Once they win the White House, they may move toward the internationalist center. But then again, they may not -- generating a foreign policy that gyrates from extreme to extreme with each electoral cycle.

At this point, a second institutional development intervenes: Presidents now surround themselves with a White House staff of super-loyalists -- numbering more than 500 in recent years. This is a modern development. It was only in 1939 that Franklin D. Roosevelt won the right to name six "presidential assistants" to serve on his staff. Until then, the president governed through his cabinet, relying only on occasional advisors loaned to him by one or another department.

Since FDR, the concentration of power in the White House has only accelerated. Although the president appoints his leading staffers unilaterally, his nominations to key positions in the State and Defense departments require confirmation by the Senate -- where they are notoriously subject to sometimes-infinite delay by a single senator. Between 1979 and 2003, Senate-confirmed positions were, on average, vacant 25 percent of the time. As the Senate finally fills empty jobs, others open up, continually undermining the team effort required for the smooth operation of cabinet departments.

In contrast, the president can easily replace burned-out White House staffers with new cadres of ambitious up-and-comers. Although new recruits will be closely vetted for political loyalty, they may not take seriously the advice of long-time government experts who don't have easy access to the West Wing. This is a recipe for policymaking that is strong on presidential "vision" at the expense of real-world experience or a sense of enduring national commitments.

A third institutional transformation may counterbalance these shifting presidentialist enthusiasms, but at a very high price. As civilian policymakers come and go, the military leadership demonstrates greater staying power -- and it has been remarkably successful in colonizing positions previously reserved for civilians over the past generation.

Before 1980, national security advisors were foreign-policy intellectuals like McGeorge Bundy, Walt Rostow, Henry Kissinger, and Zbigniew Brzezinski -- men who often eclipsed their secretaries of state during the presidencies of Lyndon Johnson, Richard Nixon, and Jimmy Carter. The only exception was retired Air Force Gen. Brent Scowcroft, who served as advisor to Gerald Ford while Henry Kissinger was dominating the field as secretary of state.

Things changed under Ronald Reagan. After running through two undistinguished civilian advisors in three years, the president made a fateful turn to the military -- choosing Col. Robert "Bud" McFarlane, followed by Vice Adm. John Poindexter. Despite the Iran-Contra scandal, Reagan and his successor George H.W. Bush continued the new practice with the appointments of Colin Powell and a repeat performance by Scowcroft. Neither could provide the intellectual firepower of a Kissinger or Brzezinski, but they did well enough to blot out the disastrous precedents left by McFarlane and Poindexter, making the position ripe for further military colonization at later moments. When Barack Obama named the former commandant of the Marine Corps, James Jones, to serve as his national security advisor, nobody seriously questioned the propriety of his choice. This top National Security Council post is no longer a job that is specially reserved for a civilian.

The military is gaining a foothold in other key positions. Consider the new directorship of national intelligence, charged with coordinating the entire surveillance effort. George W. Bush's first choice was a civilian, but he has been followed by three retired military men.

The active-duty high command is also carving out a much more aggressive political role. During the first generation after World War II, the Joint Chiefs of Staff did not have the capacity to present a united front to its civilian bosses. It was a forum for intense inter-service rivalry, with each chief fiercely promoting his service's distinctive interests and weapon systems. But the Goldwater-Nichols Act of 1986 changed all that, transforming the chairman of the Joint Chiefs into a political actor who could speak for the military as a whole. Colin Powell quickly exploited this new opportunity. As chairman under George H.W. Bush, he took the unprecedented step of formulating his own Powell Doctrine on the use of military force -- and then backed it up by writing a New York Times op-ed during the 1992 campaign, lecturing Bill Clinton on his foreign-policy responsibilities. Subsequent chairmen have, in one way or another, followed Powell's example of operating as political spokesmen.

In contrast, career State Department types play a diminishing role in White House deliberations. All this adds up to a fundamental imbalance. While civilian loyalists in the White House come and go, top military leaders have greater political influence, even after they leave active service. Although each president will bring his own enthusiasms (and enthusiasts) to the world stage, the larger policy establishment increasingly emphasizes the military over civilian aspects of the national interest.

So what's the big picture? Over the long haul, we can expect U.S. foreign policy to exhibit outbursts of extremism that swing in opposite directions but are sequentially taken up with partisan zeal by White House loyalists in a fashion that emphasizes the narrowly military aspects of the problem. Not a pretty picture, especially for a country in decline. If a rising superpower exhibits such erratic behavior, other nations may go along, fearing that open opposition will lead to even harsher sanctions. But when a superpower is in decline, its unreliability will spur rising powers to search for more reliable partners. Which leads to the obvious question: Can anything be done to fix the presidency's multiple pathologies before it is too late?

I explore this question systematically in a recent book, but one thing is clear: America won't get anywhere without a far broader recognition of the severity of current pathologies. For example, the recent McChrystal affair -- in which Obama's Afghanistan field commander and staff made outrageous comments about civilian leaders -- should not be dismissed as a passing indiscretion by a naïve general, but as a symptom of dangerous changes in civilian-military relations. Understanding the depth and scope of the problem is the first step toward proposing long-term, structural solutions.

The United States is very far from such a debate today -- and meanwhile the electoral clock keeps ticking. Who knows when an extremist will be speaking to the nation from the Oval Office?