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Bill Clinton famously said in his 1996 State of the Union speech that the “era of big government is over.” President Obama is shouting, at least through his actions, that era of big-and-getting-bigger government is here stay.
OK, then. We can have universal preschool and free community college and mandatory sick leave and whatever-else for all. We surely can. American is a rich and powerful nation. But it does have a cost. Sociologist and social democrat Lane Kenworthy has outlined a portfolio of welfare policies, including the ones I just mentioned, that he thinks are doable for a rough estimate of about 10% of US GDP, or around $1.5 trillion a year (raising total government spending from 37% of GDP to 47% of GDP). And they’re not all bad ideas.
As an honest guy, however, Kenworthy concedes taxing rich folks and business, Buffett rules and carried interest, isn’t going to be sufficient: “The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT), which the government would levy on goods and services at each stage of their production and distribution.” Yep, we can have full-on, social democratic America. But as Cliff Asness put it awhile back, “What we cannot have is the Life of Julia at no additional burden to 99 out of 100 of us. Nobody, Left or Right, really thinks that math works, no matter what they may say in public.”
Somehow I think that part won’t make it into next week’s SOTU.
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The math is the math. Global population growth is slowing and so is the working-age population. Employment will grow by just 0.3% annually during the next 50 years, forecasts a new report from the McKinsey Global Institute. And if even if productivity growth matches the rapid rate of the past half century, “the rate of increase in global GDP growth will therefore still fall by 40%, to about 2.1 percent a year.” Or to put it another way, the “new normal” would be global growth slower than what it has been during the Not-So-Great-Recovery. Global living standards will still rise, but more slowly. Not such a big deal for advanced economies versus the impact on developing nations.
So productivity needs to accelerate. McKinsey:
The world isn’t running out of technological potential for growth. But achieving the increase in productivity required to revitalize the global economy will force business owners, managers, and workers to innovate by adopting new approaches that improve the way they operate.
Our study found that about three-quarters of the potential productivity growth comes from the broader adoption of existing best practices, or catch-up improvements. The remaining one-quarter—counting only what we can foresee—comes from technological, operational, or business innovations that go beyond today’s best practices and push the frontier of the world’s GDP potential. Efforts to improve the traditionally weak productivity performance of the large and growing government and healthcare sectors around the world will be particularly important.
Business must play a critical role: aggressively upgrading capital and technology, taking risks by investing in R&D and unproven technologies or processes, and mitigating the labor pool’s erosion by providing a more flexible work environment for women and older workers, as well as training and mentorship for young people. In an environment of potentially weaker global economic growth, and definitely evolving growth dynamics, executives need to anticipate where the market opportunities will be and the competitors they will meet in those markets. Above all, companies need to be competitive in a world where productivity will increasingly be the arbiter of success or failure.
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The Occupy movement never really caught fire the way many on the left thought/hoped/dreamed it would. They probably thought it was an easy sell: Point out how income inequality had risen, blame Wall Street greed for the Financial Crisis, and — Ba-Bam! — 90% tax rates and a Scandinavian welfare state here in America. But inequality alarmists have never quite been able to connect dots by showing how the rise in high-end inequality has really hurt middle-class living standards. But the Economic Policy Institute is working hard to make that connection clear as day. I give you the Inequality Tax (bold is EPI’s):
In 2007, the last year before the Great Recession, the average income of the middle 60 percent of American households was $76,443. It would have been $94,310, roughly 23 percent (nearly $18,000) higher had inequality not widened (i.e., had their incomes grown at the overall average rate—an overall average buoyed by stratospheric growth at the very top). The temporary dip in top incomes during the Great Recession did little to shrink that inequality tax, which stood at 16 percent (nearly $12,000) in 2011.
Well, $18,000 (actually $17,867) is a pretty good chunk of change. But the Manhattan Institute’s Scott Winship raises several objections, a few of which I will attempt to summarize:
First, EPI uses pre-tax income data, which is weird because progressives advocate raising taxes for income redistribution. That is already happening, of course. Using CBO’s after-tax data immediately slashes that $18,000 by 28% to $$12,802.
Second, EPI assumes that a nearly 40% drop in the average 2007 income of the top 5% — that’s what it would take to keep inequality static since 1979 — would have zero impact on economic growth. “Would those who made it to the top have worked as hard, taken as many innovation-promoting risks, or invested as much if we had taxed them enough to reduce their payoff by 39 percent?,” Winship writes. Indeed, research suggests inequality boosts economic growth, at least in advanced economies. Do we want the rich less rich if it means everyone else is also poorer?
Third, even if you assume no harm to economic growth from increased income redistribution, that transfer “likely would have shifted a disproportionate amount of income to knowledge workers and professionals between the 80th and 95th percentiles rather than sending enough gains to the middle class to maintain its 1979 income share.” If half of that top income gain went to the middle class, then the inequality tax drops to $6,401 — and that assumes no growth impact. Winship illustrates this point thusly:
Consider the case of Mark Zuckerberg. The Facebook founder and CEO reportedly earned $2.3 billion in 2012 exercising stock options. Imagine he had never been granted those options or that they ended up being worth less than they were. In that event, the likely beneficiaries from Zuckerberg’s loss would have been not middle-class families, but Facebook’s other investors (who saw their own Facebook shares decline in value when Facebook issued the additional shares to compensate Zuckerberg). According to economist Edward Wolff, the stocks and mutual funds held by the wealthiest 10 percent of households amount to 91 percent of the total value of those securities. Zuckerberg’s money would have mostly gone into the pockets of the rest of the top fifth.
And once you factor in a potential hit to economic growth plus some other reasonable — though arguable — tweaks,”the inequality tax disappears entirely.” Winship goes into far more depth that what I present here and also offers some interesting international comparisons. Really a must-read analysis.
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What’s the best way to keep the Internet open to new competition and innovation? President Obama’s approach is built around two government-centric solutions: net neutrality and municipal broadband, the latter initiative being announced yesterday. But here are some other perspectives, from both within AEI and that I have gathered from elsewhere:
1.) Bret Swanson, president of Entropy Economics and visiting fellow at AEI’s Center for Internet, Communications, and Technology Policy:
First, we should recognize that broadband is a fast changing component of a large and complex digital ecosystem. In this arena of “digital dynamism,” network, software, computer, and Web firms make huge and risky investments in innovative products and infrastructure, and they increasingly play on each other’s turf. The competitive landscape is much broader than commonly assumed.
If the question, however, refers narrowly to broadband service providers, we can say a few things. Because cable networks cover more than 94% of the United States, and because America has far more coverage of leading edge LTE wireless networks, the U.S. already enjoys more real broadband competition than most nations.
Nevertheless, we should remove remaining obstacles that discourage investment: (1) soften local and municipal roadblocks that limit access to public infrastructure or make it difficult to deploy new wireless cells; (2) get Washington to relinquish more wireless spectrum to the commercial sector (today the government controls some 60% of the best airwaves, which mostly lay fallow); and (3) avoid policies like the Title II proposal now at the Federal Communications Commission, which eyes the Internet as a public utility and would thwart broadband investment and market entry.
An obsessive regulatory and political focus on “competition,” however, can be disastrous. In the late 1990s, the FCC’s open access rules for telecom and DSL led to the creation of many dozens of CLECs (competitive local exchange carriers), whose business models were built not on real competitive networks but on regulatory arbitrage of government set prices. The rules paralyzed the industry and were a harmful factor in the tech-telecom crash of 2000-01. Nearly every CLEC went bankrupt. When we removed these policies in the early 2000s, we began the broadband boom that continues today.
In a new study, I show the United States generates an astounding two to three times more Internet traffic per capita and per Internet user than most advanced nations. Internet traffic — which includes email, websites, searches, video streams, social feeds, ecommerce, software downloads, interactions with the cloud, and much more — is a general measure of “digital output.” It distills the complex equation of broadband coverage, access, speed, price, and content availability. Lots of traffic means lots of people with widespread access to broadband voluntarily paying for lots of capacity. At 18.6 exabytes per month, US per capita traffic is 2.1 times that of Japan and 2.7 times Western Europe. US per user traffic is twice Japan’s and 2.5 times Western Europe’s. The bottom line is that despite its flaws, US broadband excels. With 4% of the world’s population, the US has 10% of its Internet users, 25% of its broadband investment, and 32% of its consumer Internet traffic.
We should, however, encourage entrepreneurial experimentation and investment in new networks. Technologies like 5G wireless, increasingly capable satellites, and fiber-optic networks from big outsiders like Google and small upstarts like Metronet will continue to make inroads and push the the cable and telecom giants — if we let them. Real competition is desirable. But competition isn’t really the central question. Internet freedom is.
So, I think the net neutrality issue is very difficult. I think it’s a lose-lose. It’s a good idea in theory because it basically appeals to this very powerful idea of permissionless innovation. But at the same time, I think that a pure net neutrality view is difficult to sustain if you also want to have continued investment in broadband networks. If you’re a large telco right now, you spend on the order of $20 billion a year on capex. You need to know how you’re going to get a return on that investment. If you have these pure net neutrality rules where you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment — which means you’ll stop investing in the network. And I would not want to be sitting here 10 or 20 years from now with the same broadband speeds we’re getting today. So the challenge, I think, is to accommodate both of those goals, which is a very difficult thing to do. And I don’t envy the FCC and the complexity of what they’re trying to do.
The ultimate answer would be if you had three or four or five broadband providers to every house. And I think you actually have the potential for that depending on how things play out from here. You’ve got the cable companies; you’ve got the telcos. Google Fiber is expanding very fast, and I think it’s going to be a very serious nationwide and maybe ultimately worldwide effort. I think that’s going to be a much bigger scale in five years. So, you can imagine a world in which there are five competitors to every home for broadband: telcos, cable, Google Fiber, mobile carriers and unlicensed spectrum. In that world, net neutrality is a much less central issue, because if you’ve got competition, if one of your providers started to screw with you, you’d just switch to another one of your providers.
2.) Steven Titch, R Street Institute, “Alternatives to Government Broadband“:
Perhaps the ideal solution is being missed because it is so obvious. Reduce or repeal taxes, eliminate outdated regulations and bureaucracy, and broadband investment will increase. Competitors will be willing to enter a market against entrenched incumbents. Incumbents will raise investment.
Google Fiber makes a great case for revisiting the decades-old tax and regulatory structures that may have worked in the monopoly era, but are counterproductive now. To lure Google, cities are waiving long-cherished revenue mechanisms. At some level, they understand the economic gain from greater broadband exceeds the loss from these obsolete models.
But what’s good for Google is good for everyone—incumbent and newcomer alike. Furthermore, research shows that states and cities who took initiative to reform franchise fees, reduce taxes and streamline construction and permitting processes saw better outcomes in terms of broadband growth.
A multi-million dollar municipal system is not necessary for universal broadband. The private sector is well-positioned to do the job. All it needs is the right climate for investment. That includes a local government willing to do its best to work with prevailing market forces, not against them.
3.) Brian Deignan, Mercatus Center, “Community Broadband, Community Benefits? An Economic Analysis of Local Government Broadband Initiatives”:
This paper examines the economic impact of community broadband, and the results show that public broadband initiatives have not had a large economic impact apart from expanding the size of local government. I find that networks increase business establishments by more than 3 percent, while reducing worker income and having no effect on private employment, all else being equal. Instead of increasing private employment, networks increase local government employment by around 6 percent. Further research is needed to make sense of the employment effect in light of the increase in business establishments. Research into the size of establishments that are attracted by fiber networks could help reconcile these findings because presumably the establishments are small like startup software companies. Also, further research is needed to 40 understand the political economy of public intervention in the broadband market. For example, local officials’ political party affiliations or local governance structures could help explain where these networks occur as well as their comparative success.
I do not examine a comprehensive list of economic benefits, but the private sector impact of this form of public infrastructure investment is not large enough to ignore the growth in local government and the financial stress that publicly supported broadband puts on a community. In the end, the difference between private and public sector involvement concerns who is best equipped to innovate in the broadband market and who bears the uncertainty inherent of innovation: the taxpayer or the shareholder. While some cities could use better broadband service, deploying FTTP networks without regard to the profit and loss discipline has not caused large robust economic benefits in terms of luring businesses, worker income, and employment.
4.) Michael Mandel, Progressive Policy Institute, “Obama’s Muni Broadband Initiative: Bad Economics, Bad Politics”:
Here are some staggering statistics: Since 2006, state and local real investment in highways and streets has fallen by 22%. Their spending on sewer systems, in real terms, is also down by 22%. And real investment by state and local governments in water systems has fallen by a stunning 34% (chart below). Meanwhile, over the same period, private real investment by telecommunications and broadcasting companies is up by 13%, according to statistics from the Bureau of Economic Analysis.
Why, then, does President Obama want to load yet another spending burden–muni broadband–on localities that are already stretched too thin to cover their existing obligations? On Wednesday the President unleashed a set of initiatives designed to make it easier for cities and towns to build their own broadband networks. Setting up muni broadband networks certainly has some superficial appeal—apparently creating more competition for private ISPs and offering cheaper rates to poor residents.
But there’s an enormous problem: State and local governments are already struggling to come up with the funds to maintain the current infrastructure of roads, bridges, sewer and water systems. Government infrastructure spending in real terms is way down compared to before the recession, leading to potholed roads, leaky water systems, and inadequate sewers.
Meanwhile private investment in telecom and broadcasting has continued to rise, boosting network speeds for both wireless and wired broadband. Private companies are putting private money into improving the nation’s networks, without any cost to the taxpayers. So if state and local governments have any spare change—or rather, if they have any of the taxpayer’s spare change—they shouldn’t put it into building broadband networks that would duplicate already existing private networks.
5.) Michael Hendrix, director of emerging issues and research at the U.S. Chamber of Commerce Foundation, “Net Neutrality Is Already Obsolete”:
Thousands of other cities across America have campaigned for Google Fiber. Austin, Texas, and Provo, Utah, are now on board, and the company plans to roll out its service to 34 more cities in nine metro areas. Despite the not-insignificant cost of building out a new fiber broadband service, Google expects to easily turn a profit. What started as a small experiment in the Midwest is now turning Google into a nationwide broadband provider.
What’s good for Google is, in this case, good for everyone. Municipalities have long had a penchant for wrapping broadband investment in a complicated framework of rules and licenses of varying levels of legitimacy. Google asks applicant cities to be transparent about existing infrastructure (such as telephone poles or underground conduits), to have clear and predictable rules about gaining access to that infrastructure, and to expedite permitting and construction licenses, among other requests. The company states in its “Google Fiber City Checklist” that it is “not asking for any special treatment, tax incentives, or subsidies.” Nevertheless, Portland, Ore., to cite one example, chose to waive its 3 percent “public, educational, and government access” tax and not require Google to service every neighborhood. As long as this tax and regulatory streamlining is extended to other local providers, which Google does not object to and which usually occurs, the result is an easier business environment and a more level playing field. …
The introduction of a disruptive new competitor—even when it started on a very small scale—spurred customer demand for better broadband. True to form, Comcast and Time Warner recently announced much faster Internet speeds at no additional cost in Kansas City. Even cities that are not in the running for Google Fiber are seeing broadband investments increase. AT&T recently announced the expansion of its ambitiously named “U-verse with GigaPower” fiber service in 21 major metropolitan areas. Incumbent firms have long been staring down a regulatory buzz saw and are now finding ways around it.
And it is not just established telecom companies that are in the fray. Regional startups such as Sonic.net in California, Falcon Broadband in Colorado Springs, MINET Fiber in Oregon, and many others are using a mix of new fiber and old copper cables to deliver faster broadband. C-Spire is using the Google Fiber playbook to roll out a new fiber network in Mississippi using existing infrastructure. Other new providers are building broadband in the “last mile,” communities that currently have no Internet access. And then there are cities, such as Chattanooga, that have (controversially) created municipal broadband networks in direct competition with private companies.
When we look several years down the road, the view is yet more intriguing. Around 2020, mobile 5G technologies will be rolling out, offering roughly the speeds of average broadband today, and there is an opportunity for unlocking unlicensed wireless spectrum for a new crop of providers. Wireless broadband will always be slower than its wired cousin, but even at today’s speeds it is able to satisfy most basic Internet needs, such as e-mailing cat photos or streaming viral videos. With impending increases in speed and ubiquity for wireless, households are looking not just at parallel options for Internet service but at competing ones too.
Higher up in the sky are the high-altitude platforms of blimps and drones and balloons backed by Silicon Valley heavyweights to bring the Internet to less-developed areas. Meanwhile, Elon Musk recently announced SpaceX’s development of a network of micro-satellites that will provide global Internet access. Assuming that any one of these efforts gets off the ground, we are talking about an Internet landscape that will be remarkably different from the one we have now. While we operate on the assumption of a static broadband marketplace, evidence of change is already clear.
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Venture capitalist Sam Altman, president of Y Combinator, offers his policy views on improving US growth and innovation. Lots of good stuff here. Some are unsurprising, such as education reform and more high-skill immigration. But he also wants more government research spending: “If the government wants more innovation, then it should stop cutting the amount of money it spends producing it. I think current policy is off by something like an order of magnitude here.” See, even a venture capitalist think there’s a major role for government.
Altman also views housing policy as critical, noting how expensive housing is — particularly in the Bay Area: “I think policy should target an aggressive increase in the housing supply in the next 5 years and undo many of the regulations currently preventing this.” This very much echoes the work of economist Enrico Moretti who advocates making it cheaper to live in high-wage, high-innovation cities by making it easier to build housing through looser zoning laws and other kinds urban development deregulation. And here is Altman at length on two other key areas:
Reduce regulation. I think some regulation is a good thing. In certain areas (like development of AI) I’d like to see a lot more of it. But I think it often goes too far—for example, an average of $2.5B and 10 years to bring a new drug to market strikes me as problematic.
Many of the companies I know that are innovating in the physical world struggle with regulatory challenges. And they’re starting to leave. The biggest problem, usually, is that they just can’t get clarity out of the massive and slow government bureaucracy. In 2014, 4 companies that I work with chose to at least partially leave the US for more friendly regulatory environments (3 for regulatory violation or uncertainty, and 1 for concern about export restrictions). Many more kept their headquarters here but chose somewhere else as their initial market (including, for example, nearly all medical device companies, but also drone companies, nuclear fission companies, pharmaceutical companies, bitcoin companies, etc etc etc).
This is not good. We live in a global society now, and not all countries are as backward about immigration as we are. If our best and brightest want to go start companies elsewhere, they will do so. I think one interesting way to solve this would be with incentives. Right now, as I understand it, regulators mostly get “career advancement” by saying “no” to things. Though it would take a lot of careful thought, it might produce good results if regulators were compensated with some version of equity in what they regulate. Again, I think some regulation is definitely good. But the current situation is stifling innovation.
Make being a public company not be so terrible. I’d hate to run a public company. Public companies end up with a bunch of short-term stockholders who simultaneously criticize you for missing earnings by a penny this quarter and not making enough long-term investments. … Most companies stop innovating when they go public, because they need very predictable revenue and expenses. … I’ve seen CEOs do the wrong thing because they were scared of how “the market might react” if they do the right thing. It’s a rare CEO (such as Zuckerberg, Page, Cook, and Bezos) who can stand up to public market investors and make the sort of bets that will produce long term innovation and growth at the expense of short term profits.
There are a lot of changes I’d make to improve the situation. One easy one is that I’d pay public company directors in all stock and not let them sell it for 5 years. That will produce a focus on real growth (in the current situation, making $200k a year for four days of work leads to directors focusing on preserving their own jobs).
Another is that I’d encourage exchanges that don’t trade every millisecond. Liquidity is a good thing; I personally don’t see the value in the level of “fluidity” that we have. It’s distracting to the companies and sucks up an enormous amount of human attention (one of the things I like about investing in startups is that I only have to think about the price once every 18 months or so). If I had to take a company public, I’d love to only have my shares priced and traded once every month of quarter.
A third change would be something to incent people to hold shares for long periods of time. One way to do this would be charge a decent-sized fee on every share traded (and have the fee go to the company); another would be a graduated tax rate that goes from something like 80% for day trades down to 10% for shares held for 5 years.
Another thing the government could do is just make it much easier to stay private for a long time, though this would have undesirable side effects (especially around increasing wealth inequality).
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The Washington-based development institution expects the global economy to expand 3% this year, up from 2.6% in 2014, but still slower than its earlier 2015 forecast of 3.4%. The World Bank’s economists see oil prices, which have lost more than half their value in the last six months, providing uneven benefits to major oil importers. The tumble in oil has bolstered the U.S. recovery by giving consumers more money to spend, leading the bank to revise up its growth projection for the world’s largest economy by 0.2 percentage point to 3.2%.
The U.S. last year racked up its smallest budget deficit since 2007, marking an economic shift of fortunes as President Barack Obama and congressional Republicans prepare to face off over legislative priorities this year. Capped off by a $2 billion surplus in December, the government ended the calendar year with a deficit of $488 billion, $72 billion less than the 2013 tally, according to data from the U.S. Treasury. The federal government uses a fiscal year that begins in October; on that basis, the 2014 fiscal year ended in September saw a deficit of $483 billion, also the lowest of Mr. Obama’s presidency.
… the U.S economy is generating some some much-awaited good news.
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— The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.
— American business deaths now outnumber business births. The U.S. Census Bureau reports that the total number of new business startups and business closures per year — the birth and death rates of American companies — have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.
— Until 2008, startups outpaced business failures by about 100,000 per year. But in the past six years, that number suddenly turned upside down. There has been an underground earthquake.
— Business startups outpaced business failures by about 100,000 per year until 2008. But in the past six years, that number suddenly reversed, and the net number of U.S. startups versus closures is minus 70,000.
The analysis from Gallup CEO Jim Clifton goes on to argue that governments around the world have placed to much emphasis on innovation and too little on entrepreneurship: “Our leadership keeps thinking that the answer to economic growth and ultimately job creation is more innovation, and we continue to invest billions in it. But an innovation is worthless until an entrepreneur creates a business model for it and turns that innovative idea in something customers will buy.”
I don’t think that’s quite right, or at least it’s kind of fuzzy. I think Clifton confuses basic scientific research and invention with economic innovation that generates consumer-relevant value. It is often the entrepreneur that turns the former into the latter. We need more of both. We need more ideas and more startups to run with them, especially startups that can become big, profitable employers. More exploration and exploitation. And when it comes to that, the U.S. is still a leader. No large economy generates more high-impact entrepreneurs that America’s. (There is also an important difference between entrepreneurship and self employment.) But we could do better. And if we want to have a dynamic economy that generates sustainable growth and good jobs, we must. Here is some good stuff on entrepreneurship from an interview with Erik Brynjolfsson and Andrew McAfee, authors of The Second Machine Age:
Erik Brynjolfsson: We think the best way to try to find the new jobs is to crowd source this question, and that means throwing it out to hundreds and thousands, millions of entrepreneurs, who are going to try lots of different things. Some of them are going to fail spectacularly, but we’re hopeful that some of them will hit upon new ideas that I haven’t thought of, and that you haven’t thought of, and that President Obama hasn’t thought of, that will turn out to be the big growth industries of the next decade.
Andrew McAfee: We spent a lot of time on entrepreneurship in the book, not because some entrepreneurs get spectacularly wealthy and we love plutocrats, but because entrepreneurship is how job creation and economic growth actually happen. It’s not a centralized activity. It’s a very decentralized one.
Erik Brynjolfsson: It’s not that we think everyone’s going to become an entrepreneur, or even a personal trainer. It’s that entrepreneurs are the ones that invent and discover the new industries. Ninety percent of Americans used to work on farms, remember, back in 1800, and it was 42 percent in 1900, but Henry Ford, Steve Jobs, Bill Gates, and lots of other people, helped invent whole new industries that we couldn’t have conceived of at that time. We’re hopeful that there will be a next generation of entrepreneurs that will help invent the new industries. …
There’s definitely a role for government as a catalyst today, just as there was in the first machine age, but ultimately, the bulk of job creation, and the bulk of innovation, is likely to come from the private sector, or from partnerships between the government and the private sector. That’s why we’re in favor of creating platforms for entrepreneurship and doing things that will boost job creation throughout the economy, not just in government programs. here’s definitely a role for government as a catalyst today, just as there was in the first machine age, but ultimately, the bulk of job creation, and the bulk of innovation, is likely to come from the private sector, or from partnerships between the government and the private sector. That’s why we’re in favor of creating platforms for entrepreneurship and doing things that will boost job creation throughout the economy, not just in government programs.
And here are a few other things I have written on the subject:
If you want to believe a higher minimum wage helps workers and is ‘settled science,’ then don’t read this
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Democrats and much of the media continue to spread the myth that the beneficial effects of raising the minimum wage are “settled science.” But apparently no one told economists Jeffrey Clemens and Michael Wither of the University of California at San Diego. Or if someone did, the researchers didn’t listen. Over at VoxEU, they offer a summary of their latest minimum wage research — conducted by analyzing groups of workers in states that raised the wage floor and those that didn’t — that should make proponents think twice:
Over the late 2000s the average effective minimum wage rate rose by nearly 30% across the United States. Our best estimate is that these minimum wage increases reduced the employment of working-age adults by 0.7 percentage points. This accounts for 14% of the employment rate’s total decline over this time period and amounts to 1.4 million workers. A disproportionate 45% of the affected workers were young adults (aged 15 to 24).
We next estimate the minimum wage increases’ effects on low-skilled workers’ incomes and income trajectories. We find that binding minimum wage increases reduced low-skilled individuals’ average monthly incomes. Targeted workers’ average incomes fell by an average of $100 over the first year and by an additional $50 over the following two years. While surprising at first glance, we show that the short-run estimate follows directly from our estimated effects on employment and the likelihood of working without pay. The medium-run estimate reflects additional contributions from lost wage growth associated with lost experience and training.
Because most minimum wage workers are at early stages of their careers, lost opportunities for accumulating experience can be quite costly. We provide direct evidence that such losses translate into meaningful reductions in upward economic mobility. Two years following the minimum wage increases we study, low-skilled workers had become significantly less likely to transition into higher-wage employment in bound states than in unbound states. Over this recent historical episode, the minimum wage’s effects on career paths thus appear to be quite important.
As my AEI colleague Stan Veuger notes, “the 14% employment decline identified by Clemens and Wither works out to some 1.4 million people, ” a staggering figure during a once-in-a-lifetime economic crisis, and hopefully a sufficiently strong warning for those considering more of the same poisonous medicine.” Is there a better way. Again, Clemens and Wither:
We conclude by emphasizing that the minimum wage is one among many policies that seek to improve low-skilled workers’ incomes. Most notably, the Earned Income Tax Credit (EITC) has been used for precisely this purpose, and to great effect, for several decades. Research on the EITC seemingly uniformly recommends it as a tool for increasing the employment and incomes of low-skilled workers (Eissa and Liebman 1996, Eissa and Hoynes 2006). By supplementing incomes without burdening employers, it has meaningfully offset some of the inequality-inducing trends discussed above (Liebman 1998). Our evidence augments the case for shifting attention away from the minimum wage and towards the EITC as a means of improving the well-being of low-income households.
View related content: Pethokoukis
The chart below, from Rob Valletta’s new piece for the San Francisco Fed, illustrates the annual change in employment by occupation category. It shows that job growth has been focused on the high-skill and low skill occupations, with losses in the middle of the skill scale (i.e. those jobs “for which computer technologies are well-suited and can largely replace human labor”), indicating increasing polarization in the labor market.
Valletta points out that, beginning in 2000, the US labor market has increasingly favored workers with a graduate degree, while the “wage advantage” for four-year college grads has hardly changed (see featured chart). This divergence between those with college and graduate degrees “may be one manifestation of rising labor market polarization, which benefits those earning the highest and the lowest wages relatively more than those in the middle of the wage distribution.”
One explanations for this, says Valletta, is the polarization hypothesis, which “accounts for excess employment and wage growth in the top and bottom portions of the wage distribution, with erosion in the middle.” According to this hypothesis, the increasing “reliance on computer-related technologies increases the employment and wages of workers” — primarily the highly educated ones with the skills to use those technologies, that is. He continues (emphasis added):
The polarization hypothesis revolves around the idea that new workplace technologies tend to replace workers whose job tasks are largely routine in nature. To assess the extent of polarization, it is common to divide jobs into four broad categories defined by the nature of the tasks involved, routine versus non-routine and cognitive versus manual (following Acemoglu and Autor 2011). Routine jobs are those that follow relatively set rules and consist largely of repeated actions, for which computer technologies are well-suited and can largely replace human labor. By contrast, non-routine jobs require flexibility and often social skills. The second dimension, cognitive versus manual, reflects the mental versus physical focus of the required tasks.
This sounds like the rise in automation we are currently seeing (which Jim Pethokoukis has written on extensively, see here, here, and here), and could explain the drop in middle-skill jobs seen above. Valletta again:
The combination of these two dimensions forms a straightforward hierarchy of skills and wages in the job market. Non-routine cognitive jobs are at the top of the hierarchy. They rely heavily on abstract reasoning skills, tend to pay well, and generally employ highly educated individuals; they include mostly professional and technical occupations, such as management, medicine, law, engineering, and design work.
By contrast, routine cognitive and routine manual jobs are concentrated toward the middle of the wage and skill distribution. They include white-collar office jobs such as bookkeeping and clerical work, as well as selected blue-collar occupations that involve repetitive production or monitoring activities. Some of these tasks are also easy to send offshore to foreign sites, reinforcing downward pressure on U.S. employment in these categories due to computerization.
Finally, non-routine manual jobs consist mostly of service-based occupations such as food preparation and serving, maintenance work, in-home health services, and transportation and security services. These jobs typically do not require extensive education or technical skills, but they are not readily replaced by computer-based technologies and therefore are difficult to automate or send offshore.
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America’s infrastructure is like a house where the carpets are worn, the shower is leaking, and cracks in the wall let through the winter winds. The average age of U.S. highways and streets now stands at about 28 years, almost double the average age fifty years ago. (That figure factors in the amount spent on repairs and upgrading). To avoid the U.S. becoming a shabby nation, Congress should act on raising the gas tax. By itself, that won’t solve America’s infrastructure woes. But at least we can patch the biggest cracks.
Love the diagnosis, but I prefer my prescription over a gas tax hike.