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Are America’s cronyist copyright laws suffocating US innovation and economic growth? In this episode of Ricochet’s Money & Politics Podcast, I chat about that issue with technology policy consultant Derek Khanna. Khanna is also a fellow with the Information Society Project at Yale Law School and a former lead staffer for the Republican Study Committee where he focused on defense, technology and national security issues with a particular expertise in intellectual property, privacy and cyber security legislation. In addition, Khanna writes regularly for Forbes.com. Here are some edited highlights from our conversation:
Here is something you wrote about the impact of copyright on the economy:
Take the state of America’s copyright system. Congress last made a substantial revision to it in 1998, three years before the iPod, six years before Google Books, and nine years before the Kindle. Those changes, as well as others that came years before, were pushed by major lobby groups to greatly expand the impact of copyright law beyond its traditional purpose, scope, and length. In so doing, the abdication of copyright’s constitutional purpose and our founders’ intent has inhibited content creation and innovation and hurt the public.
OK, so how exactly is the current state of US copyright law hurting the public and innovation?
The answer is I support copyright and I want to see 10 Disney corporations, I want to see 20 Disney corporations—I don’t want to see one Disney corporation. The Disney corporation has made a name for themselves by taking these works that were in the public domain, the Brothers’ Grimm Fairy Tales for example. Pretty much all their stories that you’ve heard of come from the public domain, books that are no longer under copyright.
So when you change the dynamic so that way there’s no longer works that are available out of copyright in the public domain, it inhibits the ability for new market participants to jump in. And further, when you’ve expanded how large copyright’s dominion is to affect other technologies, that traditionally copyright meant you couldn’t reproduce a book in its entirety of course, but today copyright has been interpreted through the DMCA to affect things like unlocking your phone and affect a variety of market models. And that really stifles legitimate business models that have nothing to do with piracy. And that’s what I was talking about there. (more…)
Republicans have focused a lot on Obamacare, Dodd-Frank, and the sharp increase in federal debt as reasons for the slow recovery. Or to put it more broadly: tax, spending, and regulation. But that analysis fails to incorporate (a) the role of tight money and (b) the aftermath of a recession which saw both a financial shock and housing collapse.
What’s more, obsessing about Obamanomics can also mean missing some of the big macro trends affecting the US economy. The above chart shows one: Employment in traditional middle-class jobs has fallen sharply over the last few decades. Economists call this “job polarization.” It has been driven by technology replacing — whether directly or by enabling offshoring – middle-skilled manufacturing, clerical, and other occupations. characterized by procedural, rule-based or “routine” activities. Here is a key bit from “Job polarisation and the decline of middle-class workers’ wages” by Michael Boehm:
… what emerges unambiguously from my work is that routinisation has not only replaced middle-skill workers’ jobs but also strongly decreased their relative wages. Policymakers who intend to counteract these developments may want to consider the supply side: if there are investments in education and training that help low and middle earners to catch up with high earners in terms of skills, this will also slow down or even reverse the increasing divergence of wages between those groups. In my view, the rising number of programs that try to tackle early inequalities in skill formation are therefore well-motivated from a routinisation-perspective.
It is this phenomenon that has led some economists to gloomily predict a smaller and smaller slice of the population working in high-wage jobs. Such forecasts assume that between dysfunctional schools and families, we don’t have the institutions capable of transmitting social and educational capital need to allow vast numbers of workers to prosper in age of accelerating automation. Creating more winners and helping the losers should be a key focus of the Washington policy debate.
I will write up the January jobs report — lousy (establishment survey), pretty good (household survey) — later, but I wanted to toss something out there. The recent CBO report on the labor market effects of Obamacare has raised the general issue of whether the US is moving away from work.
Here is a stat, reflected in the above chart, to think about: Before the Great Recession, there were 122 million full-time jobs in America. Now 4 1/2 years after its end, there are still just 118 million full-time jobs in America despite a labor force that is 1.6 million larger and a nonjailed, nonmilitary adult working-age population that is 14 million larger.
View related content: Pethokoukis
Nonfarm productivity increased at a 3.2% annual rate in Q4, with hours continuing to increase at a healthy clip and output climbing even faster. Productivity is up 3.4% over the past two quarters at an annualized rate, the fastest growth since the second half of 2009 when productivity surged rapidly as it often does very late in a recession and early in a recovery.
Although non-farm productivity is up only 1.3% at an annualized rate in the past two years, we think the recent acceleration signals an end to a multi-year period of lackluster productivity growth.
We also suspect the government is underestimating output in the increasingly important service sector, which means growth data and productivity are higher than the official data show. (For example, do the data fully capture the value of smartphone apps, the tablet, the cloud,…etc.?)
Note that on the manufacturing side, where it’s easier to measure output per hour, productivity is up at a 2.0% annual rate in the past two years. From 1973 through 1995, overall productivity growth averaged 1.5% per year.
In spite of these problems with measurement, we anticipate faster productivity growth over the next few years as new technology increases output in all areas of the economy. The declining unemployment rate, decline in labor force participation, and faster growth in wages should create more pressure for efficiency gains, while the technological revolution continues to provide the inventions that make those gains possible.
In one of my recent podcasts, I chatted with AEI scholar and former Federal Reserve economist Stephen Oliner. While we mostly talked about US productivity, I also hit him with a few monetary policy questions on Janet Yellen, inflation, and market monetarism:
You’ve been less worried than some about [new Federal Reserve Chair] Janet Yellen being a super-dove who’s going to cause a return to 1970-style, high inflation. What makes you so confident?
So I believe that both based on personal experience working with her and observing the arguments that she made in FOMC team meetings and also from reading the many speeches that she’s given, I think she really has very little tolerance for inflation, notably above the Fed’s 2 percent target as does essentially every member of the FOMC.
I mean, they all recognize that the continued loose policies in the 1970s paved the way for the inflation that we had during that period, which was brought back under control only at great cost through the economy by Paul Volker. And none of them want that to happen again on their watch.
I mean, if there’s anything that unites the people on the FOMC it’s that inflation needs to be kept relatively close to target. What they disagree about is whether the underlying conditions in the economy, as they perceive them, so just there’s a lot or little inflation risk at any given point in time. It’s really not about tolerance for inflation, just whether the risk is high.
And when you view the economy right now, does this economy look like we’re about to see an outbreak of inflation?
Well, I think price inflation as we conventionally measure it, which is the goods and services that people buy, I’d say no. There’s really no sign of inflation in this economy that price indexes that the Fed looks at and that are published regularly all show inflation rates below their 2 percent target, some of them way below their 2 percent target. And I think, overall, there aren’t wage pressures either that would be worrisome and would be driving inflation higher. A lot of that is just that the world economy is still relatively weak and there isn’t a lot of push on inflation coming from demand worldwide.
So, no, I’m not really worried about what the inflation trends are right now, but of course the Fed needs to remain vigilant because they do plan to keep policy very accommodative and they need to be careful about those pressures are starting to build.
One last question I want to talk about, market monetarism, which is an update of Milton Friedman monetarism. There’s been some economists, such as Scott Sumner and a few others, who have said that the Fed should run monetary policy by targeting the level of nominal gross domestic product, total spending in the economy, not separating out inflation. And if we did that, you would have a much better macro environment. I’d love to get your thoughts on that idea.
So I think as a theoretical idea, it has a lot of merit. And I think many economists who aren’t necessarily associated with market monetarism as a school thought would agree that, as a theoretical idea, it has a lot of promise. I think the problem is in the implementation. So if a central bank targets nominal GDP, it means they are not specifically targeting either prices, they’re not targeting inflation, and they’re not specifically targeting real GDP. So the focus on keeping inflation near a target rate gets pushed to the back of the bus in a sense. And so I think the Fed will not go to a nominal GDP target, nor has any other central bank to my knowledge in the world gone to a nominal GDP target because they see it as risky from the point of view of maintaining inflation near target and maintaining credibility that they’re going to do that.
Because there could theoretically be periods in which you would have, you know, 4 percent inflation to hit that 5 percent NGDP target …
You could have that. And if it were possible to have the public continue to believe that inflation – the inflation target is going to be a target that will –eventually inflation will return to so there’s no loss of credibility, then I think I would be OK.
The problem is that once inflation starts to move away from targets, say it gets up to 3 percent, 3.5 percent and it doesn’t appear that any control is being provided by the central bank to bring it back, then I think you do risk un-anchoring inflation expectations. And once that genie gets out of the bottle, it can be very hard to get it back in. So I just don’t think the Fed is going to take that risk.
Some people say that they felt that the Greenspan Fed was almost doing de facto targeting of nominal GDP. Does that sound right to you?
I would say that in the second half of the 1990s, Greenspan was one of the early observers to recognize that productivity growth in the economy was really picking up. And he allowed the economy to run hotter than most others would have because he felt that the real growth potential of the economy was much greater, so nominal GDP could be relatively high. The growth could be fast without endangering their inflation objective. It wasn’t an explicit target at that point, but they had an objective. And he was right.
So I think it could be viewed as kind of backdoor nominal GDP targeting, but it didn’t really have – it wasn’t sold that way internally at the Fed. I think basically it was just potential GDP is going faster than we had thought. Let’s not lean against the economy when it really has more growth potential.
To focus on the NGDP targeting stuff, I actually found Oliner’s comments fairly supportive. of the idea. It really sounds like the issue is one of effective, persuasive communication. Business, consumers, investors need to know and understand what the Fed is doing and why it is doing it. It would also be helpful, I guess, if some other, smaller economy — or several — were (a) explicitly targeting NGDP as as proof of concept, (b) successfully did so over an entire business cycle.
Sure, the US may have the highest statutory corporate tax rate, but so what? No one pays that rate because of the all the tax breaks and other loopholes, right? A new analysis by the Tax Foundation offers some disturbing possible answers to those questions:
The marginal effective tax rate (METR) on corporate investment (i.e., the tax impact on capital investment as a portion of the cost of capital) is 35.3 percent in the U.S.—higher than in any other developed country. The U.S. has maintained the highest METR in the OECD since 2007, when Canada’s multiyear program of corporate tax reform brought its METR below the G-7 average. … The excessively high corporate income tax rate has become a cause of tax inefficiency and ineffectiveness by leading businesses to excessive tax planning and tax-induced avoidance of incorporation. … The findings dispel the misconception that while the U.S. statutory corporate tax rate is high, “loopholes” in the code make our effective tax rates competitive with those found in other developed countries.
It is also worth noting that the burden of the corporate income tax falls on investors and workers. Several studies have shown that a $1 increase in corporate tax revenue might decrease aggregate wages by more than $1 — high-end estimates show them falling $2 to $4. That means a corporate tax cut might be a big gain for lower-income Americans.
View related content: Pethokoukis
It’s simple: climbing the opportunity ladder into the middle class or higher requires a job. And there’s your trouble with the Affordable Care Act. It slaps working class and low-income families with a big tax increase if they try and climb that ladder. Higher incomes are offset by lower insurance subsidies from government. As a result of steep effective marginal tax rates, some people will work fewer hours. Other will quit the job market completely.
Obamacare supporters call that a feature not a bug. People who are only working to pay for health care will now have the ability to make a different “choice.” Older workers doing physical labor will be able to retire earlier. Moms can switch to part-time work or even stay home full-time. Workers will have more flexibility to change jobs or start a business. So it’s good news … wait … fantastic news that the Congressional Budget Office now says that “more than 2.5 million people are likely to reduce the amount of labor they choose to supply to some degree because of the ACA,” three times more than its earlier forecast.
But even the best-intended, smartly-devised plans often have unintended and harmful consequences. Here is one trade-off, one reality that President Obama doesn’t want to talk about. Keith Hennessey offers the example of a working-class family of four whose sole wage earner makes $35,000 a year and doesn’t get health insurance through a job. The other spouse wants to take a $12,000 part-time job to raise the family’s income. But doing that would reduce Obamacare’s subsidy and raise the family’s effective federal tax rate to 50% from 37%. Yes, the Obamacare subsidies help the family afford health insurance. But there is the trade-off:
Do the benefits of the premium subsidy to this family outweigh the costs of trapping this family at this income level by killing the financial benefit they receive from more work, education, training, or other professional advancement? … Nobody wants to trap people and discourage further economic advancement, even if they do so by helping that family with generous subsidies.
For that fictional family – and maybe thousands or hundreds of thousands real-life counterparts – Obamacare pulls up the opportunity ladder and leaves them mired in a kind of poverty trap.
Does the Obama White House know the impact on the broad middle-class who are now more resemble the poor in having to value government subsidies versus the return from work? As AEI’s Scott Gottlieb puts it, “We are now subsidizing the middle class who are employed and grow their income incrementally in the form of small promotions and overtime. So this creates a giant distortion to that productive part of the market.”
Along those same lines, Tyler Cowen looks at the research and raises the issue that all those folks choosing more “leisure” — as economists would put it — over work might possibly “undervalue the benefits of having a job and … also underestimate the costs of remaining unemployed.” Hayekian information problems abound. Maybe we don’t care as much, as Ross Douthat argues, when we are talking about 800,000 people versus 2.5 million people. But we are talking about that larger number, if not more, which contributes to the long-term economic drag of slowing labor force growth. All these problems deserve more than a hand wave from Obama — which is all they’ve received so far.
Are the best days of the US economy over? A Q&A on productivity, innovation, and growth with Stephen Oliner
Will the New Normal ever end? Or is another golden age of growth and innovation already beginning? There are few people better to ask than Stephen Oliner, a resident scholar at the American Enterprise Institute and a senior fellow at UCLA’s Zyman Center for Real Estate.
Oliner joined AEI after spending more than 25 years at the Federal Reserve Board,where he specialized in analyzing US productivity. In a recent paper, Oliner writes that slower productivity growth of late is largely explained by reduced contributions from information technology, after the tech boom from the mid-1990s to about 2004.
But he also points out, for instance, that chip innovation is continuing at a rapid pace, “raising the possibility of a second wave in the IT revolution [and] that the pace of labor productivity growth could rise to its long-run average of 2¼ percent or even above.”
Are we stuck in a Great Stagnation or new Era of Innovation? Here are lightly edited highlights from our recent chat on my Ricochet’s Money & Politics podcast:
Anyone who discusses productivity, at some point you dig out the old Paul Krugman quote from the ’90s in which he said productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living depends almost entirely on its ability to raise its output per worker. Should I be worried that productivity – and perhaps innovation – seems to have slowed, at least according to government statistics.
So what’s going on is that starting in about 2004, the trend rate of productivity growth in the United States did start to slow after it had been on a pretty rapid increase for the prior decade. I have no doubt that the financial crisis exacerbated the slowdown in productivity, but something else was going on before the crisis hit. And I think what was going on is related to developments in the information technology.
So the period from the mid-’90s to about 2004 was a time when productivity was growing very, very fast. This was the period during which the Internet really started to affect the economy. It became part of what businesses used in their own business models. So this is a period in which, for example, Amazon started to really begin the whole trend toward online retailing as a real game-changer for how retailing is done, as one example.
The other thing that was happening during that decade is that the prices of information technology equipment – computing equipment, communication equipment – was falling at a historically rapid rate because of really rapid gains in semiconductor technology that allowed those prices to drop tremendously on a performance adjusted basis.
So firms had a lot of incentive to buy computing equipment, to automate, and they had the Internet as a tool to make those investments very valuable. And then, about a decade later, it really started to peter out. And that’s I think what was behind the break starting in about 2004. Part of it was just that, you know, the best ideas for how to use the Internet to improve profits and productivity are the ones that are developed relatively early on, and after a decade of development, there just wasn’t that much really good innovation that could be pulled out of the Internet compared to what had been done before.
And a second is that the prices for computing equipment stopped falling as rapidly as they had been, so firms had less incentive to buy that equipment.
And a third thing, which I think has not been given a lot of weight in the discussions, is that the U.S., through the ’90s, got a lot of productivity boost just from the production of computing equipment and semiconductors in this country. And a lot of that activity has been off-shored. It’s now in Asia. It’s in Mexico. And those sectors are very, very technologically dynamic sectors that by themselves contribute a lot to productivity growth. And we’ve shifted a chunk of that. A lot of that has now moved abroad, and isn’t in the United States anymore, and it doesn’t occur in the United States. It’s not part of our GDP. (more…)
If college is so necessary (college grads and higher have just a 3.3% jobless rate) and so expensive (published tuition has more than doubled in real terms since 1980) and student debt is so out-of-control (it now stands at $1.2 trillion), then why not make college free for everyone? Why not make taxpayers pick up the cost for this important public good?
It’s an idea that pops up every now and then. But expect lots more talk if Tennessee makes good on a proposal to offer two years of community college or technical school free for all students with a high school diploma or equivalency degree.
But government should think twice before creating a public option for higher education. First, strong evidence that student outcomes will improve is lacking. As AEI’s Andrew Kelly points out, retention and completion rates at California’s community colleges — which have the nation’s lowest published tuition and are free to many because of Pell grants — were above the national average but below those at some schools with tuition several times higher.
Second, Tennessee’s focus is misplaced. The problem isn’t how much students have to pay. It’s how much education costs. As economist and college president Howard Bowen described the inflationary dynamic: colleges raise and then spend all the money can. And why not? Students are at an information disadvantage. They equate higher prices with higher quality and are unable to accurately gauge the value of specific institutions or programs.
Third, the adverse though unintended side effects could be quite large. Significantly reducing costs and increasing value will require more cost-benefit transparency for students, as well as “unbundling” what colleges do. We need to rethink the delivery of knowledge and credentials, explains AEI’s Daniel K. Lautzenheiser, with reforms such as massive open online courses and competency-based education. And these disruptive innovations are best generated by outside competitors who might be crowded by a public option. It’s also worth noting a 2004 New York Fed study that found a “high-subsidy, low-tuition policies have disincentive effects on students’ study time and adversely affect human capital accumulation.”
Finally, why exactly should taxpayers subsidize the higher education of kids who can afford it and will reap huge lifetime gains from more schooling? They shouldn’t. While the Tennessee proposal is correct in signalling the importance of increasing education levels, it distracts from more fundamental reform.
The long-term, anti-employment impact of the Affordable Care Act is, unfortunately, not the worst bit of news from the Congressional Budget Office. More disturbing and important is the CBO’s gloomy US economic forecast. After nearly five years of glacial economic recovery, the agency sees GDP growth accelerating from 2014 through 2018 to 3.2% — roughly its postwar average.
Great. But that’s apparently as good as it gets: “Beyond 2017, CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades.” Obamacare’s effect on hours worked is one factor, though hardly the only one. More important is slower labor force growth from the aging of America and the retirement of the Baby Boomers. And slower labor force growth also means less business investment to equip workers. Innovation is also lower than in previous decades.
The result? CBO expects annual growth through 2024 to decelerate back to the low level seen right after the Great Recession, just 2.2%. To put it another way, potential US GDP growth is now only two-thirds what it was in the 1980s and 1990s.
Two more CBO predictions: not only will depressed labor force participation – which CBO blames half on demographics, the rest on labor demand and worker mismatch – remain low, it’ll dip further. At the same time, budget deficits will begin rising again due to entitlements. (Also, the CBO sees $2 trillion in additional debt over a decade since its previous forecast due to slower GDP growth.)
So there you have it: slow growth, too little work, too much debt. The New Normal made permanent. Yet according to President Obama, America faces no bigger challenge than income inequality?