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Back in his 2013 State of the Union address, President Obama pledged to ask Congress to finance 15 of innovation and manufacturing hubs to “turn regions left behind by globalization into global centers of high-tech jobs … and guarantee that the next revolution in manufacturing is made right here in America.”
Except this mechanistic, top-down approach — bring together business and universities in some government-funded space sprinkled with tax incentives — has a terrible record of success. Here is economist Enrico Moretti, author of “The Geography of Jobs,” in an EconTalk podcast in 2012:
If you look at the history of America’s great innovation hubs, they haven’t found one that was directly, explicitly engineered by an explicit policy on the part of the government. It’s really hard. This is not how innovation hubs and clusters get developed. They often get developed because of idiosyncratic factors like a local firm succeeds and it starts attracting more firms like that. And this creates a cluster that then becomes stronger and stronger, and that feeds on itself.
No one knows this better than venture capitalist Marc Andreessen, who in an essay over at Politico offers his own organic recipe for creating the next Silicon Valley-type innovation hub.
But policymakers shouldn’t be trying to copy Silicon Valley. Instead, they should be figuring out what domain is (or could be) specific to their region—and then removing the regulatory hurdles for that particular domain. Because we don’t want 50 Silicon Valleys; we want 50 different variations of Silicon Valley, all unique from each other and all focusing on different domains.
Imagine a Bitcoin Valley, for instance, where some country fully legalizes cryptocurrencies for all financial functions. Or a Drone Valley, where a particular region removes all legal barriers to flying unmanned aerial vehicles locally. A Driverless Car Valley in a city that allows experimentation with different autonomous car designs, redesigned roadways and safety laws. A Stem Cell Valley. And so on.
There’s a key difference from the if-you-build-it-they-will-come argument of yore. Here, the focus is more on driving regulatory competition between city, state and national governments. There are many new categories of innovation out there and entrepreneurs eager to go after opportunities within each of them. Rethinking the regulatory barriers in specific industries would better draw the startups, researchers and divisions of big companies that want to innovate in the vanguard of a particular domain—while also exploring and addressing many of the difficult regulatory issues along the way.
Andreeseen goes on to say that this sort of regulatory arbitrage also helps end the regulatory capture of of government by incumbent business, a favorite topic of mine.
States and cities spend $70 billion a year in an arms race to retain business and attract businesses from other states. Even worse, explains a new Kauffman Foundation analysis, “incentives targeting existing companies miss the economy’s real engine of job creation: new and young businesses, which create nearly all net new jobs in the United States, a fact that also holds true at the state and city level.”
Here is Kauffman’s “create not relocate” agenda:
REEXAMINE PROFESSIONAL & OCCUPATIONAL LICENSING
• Nearly one-third of American workers are required to have a license to do their job. Occupational licensing acts as a barrier to entrepreneurs seeking to bring new innovations and business models to market. Revisit requirements for licensing and explore certification as an alternative to spur entrepreneurial competition and new business creation.
• Immigrants were significantly more likely than native-born Americans to start businesses in 2013. Create a welcome atmosphere for all immigrants and embrace ethnic diversity to attract job-creating immigrant entrepreneurs.
CULTIVATE HUMAN CAPITAL
• Higher levels of education are associated with increased entrep reneurial activity. An analysis of 356 U.S. metropolitan areas found that high school and college completion is important to startup rates. College graduates with degrees in diverse disciplines, including the arts, are likely to contribute to the creation and growth of new businesses.
CONNECT ENTREPRENEURS WITH RESOURCES
• Entrepreneurs operate largely at the local level, and regions are strengthened when entrepreneurs connect with one another. Programs created to help entrepreneurs should facilitate network formation, peer learning, and mentorships. Different types of entrepreneurs require different resources and cannot all be served by a one-stop shop. Policymakers should consider gaps in the local ecosystem and ways in which different programs can be connected to each other.
Starbucks wants to give an espresso shot to its workers’ career dreams — and retain talent — by providing financial aid to employees who enroll in an online bachelor’s degree program. But will those baristas without college degrees put in the hard work only to end up as baristas with a college degree?
That’s the worrisome and discouraging possibility raised by “The great reversal in the demand for skill and cognitive tasks,” a study by Paul Beaudry, David Green, and Ben Sand. While there has been a long-term polarization (driven by automation and globalzation) in the US labor market — jobs fleeing the middle toward high and low skill, the BGS researchers document a decline in demand for high-skill jobs since 2000. And this has led to a “skills cascade” effect:
We go on to show that, in response to this demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This de-skilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together.
In his New York Times column, Thomas Edsall asked Harvard University labor economist Lawrence Katz about the findings:
Katz agreed that “lots of new college graduates are moving into the service sector, that is, into traditionally non-college jobs, displacing young non-college workers.” While graduates of elite colleges — by definition a minority of all those getting degrees — continue to do well in the labor market, “the average college graduate is experiencing slow wage gains,” a trend that is “worrisome and problematic,” Katz said.
Over at this blog, Andrew McAfee, coauthor with Erik Brynjolfsson of the must-read “The Second Machine Age,” also agrees that the BGS study and other related research “solidifies the conviction that our labor market is shifting both deeply and quickly these days.” McAfee and Brynjolfsson offer a number of policy ideas to boost economic growth, the creation of high-skill, high-pay job — and a workforce capable of filling those jobs — including education reform, greater entrepreneurship, upgraded infrastructure, and smarter taxation. To those ideas, I would add reducing government-imposed barriers to startups and state favoritism for incumbent companies. Less cronyism, more radical innovation, better jobs.
View related content: Pethokoukis
The teachers unions will undoubtedly fall back on the tired rhetoric that this is a “war on teachers.” But there is no such war. These laws protect just a very small minority of teachers who are harming children and who should not be in the classroom. Indeed, protecting these grossly ineffective teachers seriously harms better teachers who are unfairly tarnished by association with unquestionably bad teachers shelteredby the unconstitutional statutes.
The decision brings into sharp focus the central policy issue of student achievement. As the court noted, students facing grossly ineffective teachers suffer long term economic losses, amounting to hundreds of thousands of dollars for each classroom of students subjected to these teachers.
There is also a larger national interest in resolving this problem. The economic future of our nation rests on the skills of our population. My own research suggests that replacing just 5% to 8% of the least effective teachers with an average teacher would noticeably boost the achievement of our current students and would pay off lavishly in the future, through their enhanced productivity and faster economic growth. The gains according to historical economic patterns would be measured in trillions of dollars and would be sufficient to solve our national fiscal problems as well as the vexing income distribution issues currently being debated.
Some key findings of a national survey of 12,000 small business owners by Thumbtack, in partnership with the Ewing Marion Kauffman Foundation. (Key factors evaluated include ease of hiring. ease of starting a business, regulations, licensing, tax code, and zoning.) Note the importance of regulation and government-created barriers to entry:
– Utah, Idaho, Texas, Virginia and Louisiana gave their states the highest rating for friendliness to small business.
— In contrast, small business owners gave California, Rhode Island and Illinois an “F,” while Connecticut and New Jersey both earned a “D” grade.
— Small businesses in Texas, Utah and Idaho have rated their states in the top five every year this survey has run, while California and Rhode Island have been rated in the bottom five every year.
— The friendliness of professional licensing requirements was the most important regulatory issue in determining a state’s overall friendliness to small businesses. Closely following licensing requirements was the ease of filing taxes.
— Once again, tax rates was a less important factor than the ease of regulatory compliance in determining the overall friendliness score of a jurisdiction. Two-thirds of respondents said they paid their “fair share” of taxes – that is, they felt like they were neither under-paying nor over-paying.
… Alan Greenspan in 2000 suggested that the economy was in the midst of a “once-in-a-century acceleration of innovation.” That hope has fallen short. At its peak from the mid-1990s to early 2000s, TFP growth was similar to its pace from the 1940s to early 1970s.
But after 2004, the IT-induced burst in TFP growth faded. For three of the past four decades, productivity growth has proceeded relatively slowly, suggesting this slower pace is the benchmark. … For now, the IT revolution is a level effect on measured productivity that showed up for a time as exceptional growth.
Going forward, productivity growth similar to its 1973-95 pace is a reasonable expectation. The end of exceptional growth implies slower growth in potential output. But this fact does not mean that all the economy’s problems in recent years are structural or supply-related. After all, output gaps by any measure have closed very slowly despite substantial monetary accommodation. In other words, growth in aggregate demand has also been weak.
Slower productivity and population growth also point towards a lower neutral real interest rate, which increases the challenges of providing sufficient monetary stimulus to close gaps. Uncertainty about any such forecast is inherently high. Jones (2002) argues that 20th century U.S. growth depended on rising education and research intensity. That is, maintaining growth required us to pedal ever harder and harder. That isn’t sustainable in steady state, so his model implies slower long-run growth.
But, before we reach that point, there could be another wave of the IT revolution—as Brynjolfsson and McAffee (2014), Baily, Manyika, and Gupta (2013), and Syverson (2013) suggest—or some other, unexpected productivity breakthrough. In addition, as Fernald and Jones (2014) suggest, the future growth model might look substantially different from the past—perhaps reflecting the innovative potential of robots and machine learning, or the rise of China, India, and other countries as centers of frontier research. In that case, the results in this paper could reflect an extended pause, a return to normal before the next wave of transformative growth.
This is the wonkier version of what Treasury Secretary Jack Lew said the other day.We should take such forecasts seriously, assume the worst, and act to prevent such long-term stagnation. Of course, I can think of a number of reasons why Fernald is too pessimistic, such as more minds coming online, using better tools, and operating in a global marketplace that both spreads innovation and creates new feedback innovation itself from users. But better tax, regulatory, education, and public investment policy also have a role to play.
Mr. Brat’s victory is surely awkward for a new wing of the conservative movement that has taken to arguing that the whole free-market, supply-side, Reaganesque agenda is passé. Humbly declaring themselves the “reform” conservative moment, this group has … some interesting ideas, all overshadowed by the book’s central premise: That conservatives need to embrace government to better endear themselves to the “middle class.”
The authors are clear that politics, not principle, needs to drive conservative policy. Nowhere is that clearer than in the chapter by former Bush Treasury official Robert Stein on tax policy. A summary: Marginal tax rates are no longer popular because they don’t give much to the middle class. Republicans instead need to embrace redistribution and lard the tax code with special, conservative-approved handouts for said middle class—namely a giant tax credit for children, similar to that proposed by Utah Sen. Mike Lee.
… Absent from the chapter is any recognition of why Reagan, and the party, embraced tax cuts. It’s this thing called “economics.” Cutting taxes on capital—and cutting high marginal rates—spurs investment, which grows the economy, which benefits everyone, including the middle class. The good politics follows. The middle-class beneficiaries of Reagan’s economic boom showed their own appreciation by signing up for a conservative political realignment that lasted decades.
As someone who contributed to “Room to Grow,” (and someone who considers himself a fan of Strassel’s work) that’s not how I see things.
1.) The book’s central premise is that conservative economic policy should address today’s economic challenges, not yesterday’s. And those problems extend beyond tax policy. Robert Novak’s famous axiom, “God put the Republican Party on earth to cut taxes. If they don’t do that, they have no useful function,” is incomplete in a nation where (a) health care costs are rising faster than income and gobbling up wages, (b) the nation’s $600 billion in annual K-12 spending is failing to prepare students for the modern job market, (c) family life in middle-class America is growing increasingly fragile. At the same time, the job market is becoming steadily more bifurcated due to automation and globalization. Some economists fear a permanently split labor force with rising pay for a slice of tech-savvy workers, and stagnant wages for everyone else. I mean, anyway you slice it, this is not a good chart for middle-class America:
2.) Do reform conservatives argue against free-market economics? Strassel surely must know better. My bit, instance, focuses on how all manner of government interference into markets — from the “too big to fail” bank backstop to overly strict patent and copyright law among other things — has steadily reduced the US economy’s competitive intensity and business dynamism. In short, the private sector needs a lot more Schumpeterian creative destruction — and a lot less cronyism — to create good-paying jobs. And the chapters on education and health care reform center on how choice and competition can improve value and productivity in those key sectors.
3.) The core of Strassel’s argument revolves around the reform conservative approach to taxes. A few facts to keep in mind: When Ronald Reagan took office, the top marginal rate was 70% and inflation-driven “bracket creep” (consumer prices rose by more than 8% a year from 1973 through 1981) pushed middle-class wages and salaries into higher and higher tax brackets. Today, by contrast, the top rate is 40%, tax brackets are annually adjusted for inflation (which has averaged only 1.6% the past five years), and 43% of American’s pay no federal income tax (although two-thirds of those folks pay payroll taxes.)
4.) So what sort of tax reform do the above facts suggest? Well, the “Room to Grow” tax plan would, effectively, expand the child tax credit (including letting it apply to both income and payroll taxes). A married couple with two children earning $70,000 would get a tax cut of roughly $5,000 per year vs. current law. Unlike Strassel, I don’t see howletting parents — the folks who are doing the hard and costly work of creating the workers and investors and innovators and entrepreneurs and safety net-supporting taxpayers of the future — keep more of their income as government redistribution. And if this sort of tax reform creates a less anti-family tax code that helps families have the number of kids they prefer, the result could be a younger and more dynamic society. That sounds pro-growth to me.
5.) Of course, tax reform doesn’t have to stop there. Strassel wrongly assumes that since the book doesn’t lay out a comprehensive, soup-to-nuts tax plan, reform conservatives don’t care about investment or business or economic growth. Actually, reform conservatives have written quite a bit about moving to a consumption tax. As Ryan Ellis explain on his Facebook page:
… a key element of reform conservatism’s tax policy has been moving toward a consumption base while lowering business tax rates for competitiveness. The point they have made on rates is that cutting the top personal rate from its current level is simply not the highest pro-growth tax reform priority. Yes, it cuts rates on flow-through firms. But much of the “juice” is wasted cutting wages for high income earners, which at current marginal rates doesn’t get you much at all of a Laffer curve effect.”
And my chapter is also about economic growth but tries to compensate for the fact that center-right policymakers have focused too much on tax reform at the expense of all the ways government impedes growth.
As for the politics of all this, well, my primary concern is whether or not “Room to Grow” is smart policy. And I obviously think it is. Creating and promoting good ideas to make America prouder, stronger, and better is what drives me and, I would assume, the rest of the book’s authors.
But I will say this about politics: If the 2016 Republican nominee wants to make his big economic idea cutting corporate taxes at a time when corporate profits are at their highest level in 85 years and worker compensation is at its lowest level in 65 years as a share of national income … well, good luck with that. Not only does that intuitively seem like a losing message — and recent history seems to support that intuition — but there is also this recent survey from Global Strategy Group:
Government vs. Startup America: Starting a craft brewery in US as tough as starting a small business in China or Venezuela
A great Mercatus analysis of how hard it is to start a craft brewery in Virginia:
In aggregate, the number of regulatory procedures that we identify (12), the wait times to complete many of these procedures (in excess of 100 days), and the associated costs (e.g., $2,150 for a single license) represent formidable barriers to entry.
All of these barriers are in addition to the standard regulatory hurdles that all small businesses must surmount (zoning ordinances, incorporation rules, and tax compliance costs).
This means that starting a microbrewery in the state of Virginia requires as many procedures as starting a small business in China or Venezuela, countries notorious for their excessive barriers to entry.
This study really illustrates all the ways, big and small, that government stands in the way of an entrepreneur turning ideas and effort into a job-creating, wealth producing business. That is just not going to cut in an America where wage income will be harder and harder to come by.
More Americans must become direct capitalists. Entrepreneur Ashwin Parameswaran offers this alternative to redistrubution: “Instead we should empower the low and medium wage earners of today to become the capitalists of tomorrow while protecting them with a safety net that protects them as individuals rather than protecting the firms and unions that they are members of… In order to enable every person to become a capitalist, we need to reduce the regulatory burden on all aspiring capitalists as well as removing the protections enjoyed by incumbent large firms.”
View related content: Pethokoukis
It’s darn close. In 2000, a big study concluded that solar panels could get below $1 per watt [a level thought to make solar competitive in many markets]. At the time, everyone in the industry thought the authors were in la-la land. Now we’re under that cost target.
It’s not like there’s one cost number and then everything is all good. The value of solar power varies widely, depending on local sources of electricity that it’s competing with, the amount of sunlight, and other factors. There are geographic pockets where it’s becoming quite competitive. But we need to cut costs by at least another factor of two, which can happen in the next 10 years.
View related content: Pethokoukis
Lots of interesting results from a new Bloomberg poll including:
— 44% approval rating for President Obama
— 64% of Americans think the nation is on the wrong track
— By 58% to 31%, Americans see the US in decline as a world leader
— 56% think we should wait to see how Obamacare works before modifying it
— By 51% to 26%, Americans are more likely to vote for a candidate who wants to address climate change
But I wanted to briefly focus on the poll result reflected in the above chart. It shows Americans are about split on what to do about income inequality, if anything. One interpretation is that America’s aspirational streak is still there, but thinning. Of course, the options are so vague and general that I am not sure which I option I would choose. I don’t want to raise income taxes, but I would favor government policies like wage subsidies. I would also like to see a question that differentiated between income inequality and opportunity inequality / income mobility. I am more concerned about the latter than the former.