AEI » Blog http://www.aei.org American Enterprise Institute: Freedom, Opportunity, Enterprise Fri, 21 Nov 2014 16:22:44 +0000 en-US hourly 1 The disappointment of President Obama’s executive actionhttp://www.aei.org/publication/disappointment-president-obamas-executive-action/ http://www.aei.org/publication/disappointment-president-obamas-executive-action/#comments Fri, 21 Nov 2014 15:28:36 +0000 http://www.aei.org/?post_type=publication&p=822069 The real disappointment is that this executive action distracts Congress and the American public from the far more important issue of the need to reform the entire US immigration system. Instead of focusing on unauthorized immigrants, who are less than 30% of all immigrants in the US, the US should rethink how it admits legal immigrants. The US needs to change its legal immigrant system to increase the number of visas available to workers and to reduce chain migration based on family ties.

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President Obama’s supporters and opponents are likely to be disappointed by his executive action on immigration, albeit for different reasons. His supporters may be disappointed that the action does not cover more unauthorized immigrants and falls far short of a pathway to citizenship. Meanwhile, his opponents may be disappointed—or more accurately outraged—by a blatant sidestepping of congressional authority and disregard of most voters’ expressed desire that he not take such action. Both of these disappointments miss the bigger picture.

The real disappointment is that this executive action distracts Congress and the American public from the far more important issue of the need to reform the entire US immigration system. Instead of focusing on unauthorized immigrants, who are less than 30% of all immigrants in the US, the US should rethink how it admits legal immigrants. The US needs to change its legal immigrant system to increase the number of visas available to workers and to reduce chain migration based on family ties.

Only 14% of permanent resident visas, or green cards, are awarded on the basis on employment, and half of those are to accompanying dependents of workers. Two-thirds of green cards are awarded on the basis of family ties. We limit every country to at most 25,620 green cards a year across numerically-limited categories, resulting in some skilled immigrants from India and China waiting years for a green card. Many give up or never even apply. The number of H-1B visas for skilled specialty workers is capped at 85,000 per year, and so the US ran out of them within a week after they become available the last two years. The number of H-2B visas for temporary non-agricultural workers is capped at 66,000 per year, also less than the number desired by employers and potential workers. And the H-2A visa system for temporary agricultural workers remains filled with bureaucratic red tape that leads farmers to turn to unauthorized workers. The system discourages high-skilled workers from trying to enter or remain in the US while encouraging low-skilled workers to enter illegally or overstay visas.

This executive action, as well as the earlier Deferred Action for Childhood Arrivals program, does nothing to address these fundamental flaws in our immigration system. The few changes that the executive action makes regarding legal immigration, such as increasing some temporary visa holders’ ability to switch employers, are steps in the right direction, but they are only baby steps. Worse yet, the outrage over the action makes it even less likely that bigger steps will occur in the next Congress, which seems likely to instead spend its time arguing about whether to block funding for carrying out the executive action. Congress and the White House would better serve the American public by adopting changes that would boost immigration’s economic contribution. Such changes would include increasing the number of green cards available to workers, particularly the high-skilled, and streamlining and expanding temporary worker programs.

Dealing with the large number of unauthorized immigrants in the US is a challenge. The unauthorized population has grown so large—and, in the case of the Dreamers, so vocal—that some action may be required. And a population that has worked so hard in the US for so long may have morally earned the right to stay here. But surely any action should consider the incentives it creates. The executive action creates an incentive for more people to come here illegally and have children here. Coupling legal status for some 5 million people with increased border enforcement is not enough. If the US wants to get serious about reducing future illegal immigration, it needs to require all employers to participate in E-Verify while also providing a legal way for more temporary workers to enter the US The executive action does neither of those. Instead, it seems doomed to just worsen the problems created by current policy by delaying true reform for even longer.

I sometimes remind my children, just because you can doesn’t mean you should. President Obama would have been wise to follow such advice.

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Long live the Maidan!http://www.aei.org/publication/long-live-maidan/ http://www.aei.org/publication/long-live-maidan/#comments Fri, 21 Nov 2014 14:27:22 +0000 http://www.aei.org/?post_type=publication&p=822063 The Ukrainian revolution, which began a year ago, started with no more than 150 people deciding to stay on Independence Square (also known as the Maidan) to protest the decision of former President Viktor Yanukovich to turn away from signing an Association Agreement with the European Union and, instead, accept $15 billion from Moscow, on top of a 30% discount on the Russian natural gas.

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The Ukrainian revolution, which began a year ago, started with no more than 150 people deciding to stay on Independence Square (also known as the Maidan) to protest the decision of former President Viktor Yanukovich to turn away from signing an Association Agreement with the European Union and, instead, accept $15 billion from Moscow, on top of a 30% discount on the Russian natural gas.

Yet what was truly remarkable and inspiring about the unfolding protests —in addition, of course, to the heroism of the people who stayed, day and night, in an open square in freezing temperature, beaten and, toward the end of the three month vigil, even killed by the “anti-riot” police — was how quickly it evolved into a movement that at its finest could serve as a prototype for a kind of mature democracy that they hoped Ukraine may one day become.

To begin, unlike the previous anti-authoritarian mass protests, including the 2004 Orange Revolution, the people were not predicating their hopes on a particular party or an individual. Instead, they were counting primarily on themselves: their own determination, their own wisdom. “Vlast —eto my!” (“We are power!”) was the chant that became the leitmotif of the protest.

Very quickly, the demonstrators began to exhibit another key feature of successful democracy: an active,  self-organizing and responsible civil society. Feeding and, if only sporadically, warming up tens of thousands of people every day required a sustained, daily and nightly, voluntary effort of hundreds of men and women, donating their time and money to a cause they deemed morally imperative.

Unlike the Orange Revolution (or the Winter 2011-2012 mass protests in Russia), the Maidan movement was not about a flaw in the current regime, but about the national purpose, the country’s strategic direction. “Ukraine is Europe!” and “For a European future for Ukraine” were key slogans, whose cyber symbol was #EuroMaidan.

And the Maidan was European, at least in the ideal sense, in the unity of ethnicities and religions represented on the square: Ukrainians and ethnic Russians (at least 30% of the protesters were Russian speakers), Jews and Muslims, Ukrainian Catholics and Orthodox froze and fought and sang and danced together to forge a new Ukraine.

Now, by the decree of President Petro Poroshenko, November 21 is declared a national holiday, the Day of Dignity and Freedom.

Kiev – the cradle of the Russian state and its Christianity – is suddenly showing Russia the way toward dignity in liberty and democratic citizenship.

No wonder Vladimir Putin is mortally afraid of this Ukraine.

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Have changing household composition and retirement caused the decline in median household income?http://www.aei.org/publication/changing-household-composition-retirement-caused-decline-median-household-income/ http://www.aei.org/publication/changing-household-composition-retirement-caused-decline-median-household-income/#comments Fri, 21 Nov 2014 04:15:02 +0000 http://www.aei.org/?post_type=publication&p=822044 One of the most frequently reported economic trends is the gradual decline in US real median household income from its 1999 peak of about $57,000 to below $52,000 in each of the last three years (see blue line in top chart above). We hear a number of reasons from politicians and pundits for the decline [...]

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earners

One of the most frequently reported economic trends is the gradual decline in US real median household income from its 1999 peak of about $57,000 to below $52,000 in each of the last three years (see blue line in top chart above). We hear a number of reasons from politicians and pundits for the decline in median household income over the last decade, mostly reasons that involve a narrative about economic stagnation and growing inequality caused by the progressives’ usual suspects: gains in worker productivity, income and wealth going to corporations and “the rich” instead of being shared by average workers; failure to increase the minimum wage or pass “living wage” laws; the combined effects of globalization, free trade and outsourcing putting downward pressure on middle-class incomes in America, and other variations of economic pessimism. Former President Bill Clinton recently offered his three reasons for stagnant median household income that include not raising the minimum wage and excessive corporate greed.

But there are some other very obvious, but mostly overlooked, factors that could easily explain why median household income has declined over the last decade that have nothing to do with economic stagnation: demographic changes in the composition of US households. AEI’s Alex Pollock addressed this issue recently in his essay “If income is going up, can median household income go down? It’s possible.” Here’s how Alex frames the issue:

One of the most commonly cited numbers in discussions of inequality is the trend in median household income, often used as if it settled the issue. Using median household income poses a fundamental problem, however. It conflates two measurements — changes in the composition of households and changes in income — and thus can easily mislead us.

Has the composition of households in America been changing? Obviously, it has. The percent of married couple households has fallen from more than 60 percent in 1980 to less than 50 percent in 2010. One-person households have risen from 23 percent to 27 percent of households in this period. Shifting from two-earner households to one-earner households lowers the median household income, even if everybody’s income is the same as before [or rising].

Alex provides a series of hypothetical examples showing how simple household demographic changes can result in rising individual incomes while at the same time the median household income is falling. For example, if there is a shift from two-earner, married households to one-earner single households as a result of divorce, the overall median household income could fall even when income is increasing for all individuals in the new mix of households with a greater share of single households.

Alex’s key point is that when demographics and household composition are dynamically changing, individual income and median household income can naturally move in opposite directions. The most frequent mistake, according to Alex, is to look at median household income over time assuming that household demographics are static. And that is precisely the mistake made in almost all of the discussions about median household income, and that leads to a distorted and inaccurate conclusion about why median income is falling.

One example of a major dynamic change in household composition is the significant increase in the share of US households with no earners, from fewer than 20% of all US households in 1980 to 23.7% of households in 2013 (see blue line in bottom chart above, Census data here from Table H-12). Likewise, the share of single-earner households has also increased from 33.2% in the early 1990s to above 37% for the last five years (see red line). In contrast, there’s been a decrease in the share of US households with 2 or more earners from above 46% of all households in 1989 to fewer than 40% of US households in every year since 2010 (see brown line in bottom chart above).

In summary, over the last several decades, there’s been an increasing share of no-earner, single-parent and single-earner households and a decreasing share of married and two-or-more-earner households. That major demographic shift has likely depressed median household income significantly in the last decade, even though it’s possible, as Pollock shows, that the income of individual working Americans could be rising.

Another key demographic shift is the increasing number of retired Americans as a share of the adult population based on Social Security data. As the red line in the top chart above shows, US retirees represented a pretty stable 15% share of the US population from 1990 to 2008. Starting around 2008 when the early “baby-boomers” – those born in 1946 — reached early retirement age of 62, the share of retirees started increasing from less than 15% of the adult population in 2007 to more than 16.6% in 2013.

In the five year period between 2008 and 2013, the number of retired Americans increased by 5.6 million, which was the largest five-year increase in US history, and more than double the 2.5 million increase in the previous five-year period. Given that wave of recent retirements, there have been millions of older, experienced, highly-paid workers going from their peak earning levels to a much lower retirement income that would typically include Social Security payments, pensions, and distributions from retirement accounts. As those millions of retirees are replaced in the workforce by younger, less experienced, lower paid workers, median household income could be falling even though the average income of working Americans could be rising.

It’s probably no coincidence that the recent increase in retirees, both in absolute numbers and as a share of the adult population, along with the other demographic changes described above, has naturally coincided with a decline in median household income. It would be hard to imagine that an aging population with a significant increase in the number and share of retirees, wouldn’t depress median household income, for purely demographic reasons.

Bottom Line: Most explanations of the recent decline in US median household income are based on some variation of a narrative of economic stagnation, rising inequality and pessimism. But what is almost always overlooked are the very significant demographic changes that have taken place in the composition of US households over time that would significantly impact the income of the median US household. Taken together, a) the increase in the share of no-earner, single-earner, and single-parent households, b) the increase in the number and share of retirees, along with c) the decline in the share of two-earner and married households, would logically and necessarily depress the income level of the median US household.

In summary, the composition of US households is not static, fixed and permanent; rather it’s dynamic, evolving and ever-changing. Discussions on changes in median household income over time that ignore the changes in household composition over time will always be incomplete, distorted and misleading. Perhaps the decline in median household income this century is not a narrative of economic pessimism and stagnation after all, but a more upbeat story of a greater number of Americans living longer lives, and enjoying periods of time in retirement that were never possible until this century.

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Banter #164: Cami Andersonhttp://www.aei.org/publication/banter-164-cami-anderson/ http://www.aei.org/publication/banter-164-cami-anderson/#comments Thu, 20 Nov 2014 19:50:08 +0000 http://www.aei.org/?post_type=publication&p=821993 Appointed by Governor Chris Christie, Anderson has been implementing an aggressive reform agenda that expands charter school options, allows for merit pay, makes room for the dismissal of ineffective teachers, and provides “open enrollment” to students so that they can choose which schools they attend.

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We’re joined this week by Superintendent of Newark City Public Schools, Cami Anderson. Appointed by Governor Chris Christie, Anderson has been implementing an aggressive reform agenda that expands charter school options, allows for merit pay, makes room for the dismissal of ineffective teachers, and provides “open enrollment” to students so that they can choose which schools they attend. We talk with her about what she’s accomplished since taking over in 2011 and what she hopes to accomplish going forward. Enjoy!

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Yikes. Here’s just how high the corporate tax rate is in the UShttp://www.aei.org/publication/yikes-heres-just-high-corporate-tax-rate-us/ http://www.aei.org/publication/yikes-heres-just-high-corporate-tax-rate-us/#comments Thu, 20 Nov 2014 19:11:09 +0000 http://www.aei.org/?post_type=publication&p=821734 Because the US has not cut corporate tax rates, we now have the highest corporate tax rate – 39.1%— in the Organization for Economic Co-operation and Development (OECD), beating out Japan and France.

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The Tax Foundation recently came out with a compilation of charts on “Business in America” that look at US economic growth, labor force, corporate tax rates and more. Here are three charts that illustrate just how high the US corporate tax rate is compared to other countries.

1.)    The US corporate tax rate has stayed basically constant for the last 25 years. As seen below, this breaks from the norm, as other OECD countries have reduced their corporate tax rate, increasing their economic competitiveness. Alan Viard and Eric Toder write that “The current method of taxing the profits of large, publicly traded corporations was designed for an economy in which international investment was relatively unimportant and most corporate profits were produced by tangible assets, such as machinery and buildings. It doesn’t work well in today’s economy, which features increasing globalization and a rising share of profits produced by patents, brand reputation, and other intangible property.” Read their full piece to see the two structural reform options they suggest.

US corporate tax rate is out of line with our trading partners

2.)    Because the US has not cut corporate tax rates, we now have the highest corporate tax rate — 39.1%— in the OECD, beating out Japan, Sweden, and France (see featured graph). In fact, we are 10% above the weighted average and about 14% above the simple average for OECD countries. Jim Pethokoukis notes, “for many US multinationals, there is little incentive to stay officially based in America and remain subject to a complex, confiscatory tax code. … There’s no mystery as to why companies are going through all this trouble to escape the Treasury Department. It has nothing to do with a lack of patriotism, or the evasion of some sort of national duty, and everything to do with reducing costs and maximizing profits. That’s what businesses do — at least the ones that want to stay in business.”

3.)    When matched up with 163 countries’ corporate tax rates, not just OECD ones, the US is beat only by Chad (40%) and UAE (55%). Something to think about.

Corporate tax rates throughout the world have declined over the past decade

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.

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Children are not science projectshttp://www.aei.org/publication/children-science-projects/ http://www.aei.org/publication/children-science-projects/#comments Thu, 20 Nov 2014 14:39:59 +0000 http://www.aei.org/?post_type=publication&p=821852 A Head Start center that provides a child from a terrible home environment with a few hours a day of affection, warmth, and security has done a good thing. The fact that Head Start has been proved to have no long term effects is irrelevant to that good thing. I don’t how many Head Start centers accomplish even that much, but that too is irrelevant to my broader point.

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Last week I wrote an article for Bloomberg View about two recent studies that reinforce an accumulating body of knowledge: the usual environmental explanations of a child’s IQ actually don’t explain much. Those two articles dealt specifically with parenting practices and socioeconomic status. But they are just new additions to a large literature finding that parental influences and educational interventions that “should” explain a lot are attenuated to nearly nothing once genes are taken into account—not just regarding IQ, but educational achievement more generally, along with all sorts of personality and behavioral characteristics.

Among the responses I received was this affecting email from Ben Williams, which read in part:

My wife and I are adoptive parents with one natural child. And because of this we’ve spent more than a few minutes discussing our trials, tribulations, successes and failures with other adoptive parents. Often times these discussions have tended more to a “comparing notes” format, with a good portion of “you too” being passed back and forth.

With that background let me ask you a question about adoption……and it is kind of disconcerting and uncomfortable to both think about and ask……but here goes.

If as the article seems to suggest, IQ is gene-based to the greatest extent what will the policy impacts be on adoption? I mean, if it is a FACT that the not-so-bright have not-so-bright children and that WE cannot alter that by our efforts, and accepting that a predisposition of violence and all manner of other social problems may also be the same…….if that is so, then what information do we dispense about adoption? Do we pass this along to potential parents as a warning? And if we do does it make the prospect of more children, especially those from less intelligent birth parents (today a whole lot more information is usually dispensed about the genetic donors) to be left in permanent foster care, or in “homes”?

The whole thing is hard to figure out, and worrisome.

Mr. Williams raises a core issue that goes far beyond adoption. Ever since programs to help children became part of the federal government’s brief in the 1960s, they have been touted on the basis of how they will change children’s lives for the better—higher IQ and educational attainment, lower unemployment or drug use; you name it.

They don’t come close to delivering on their rhetoric. It turns out that children are not plastic. They are pretty much who they are from the get-go, for reasons that neither programs nor parents can do much to change. For those of you who bridle at that statement but have more than one child, I have a question: Were you ever under the impression that you could make one of your children more like the other in any significant way? I have yet to meet the parent who answers “yes, and I did it.”

But children aren’t science projects. Parents may hope to produce good results 20 years down the road, but that’s not why we love and nurture our children. Parents who have the terrible experience of learning that their children won’t be alive even a few years later don’t love and nurture them less, but more.

The same response should apply to all of our efforts to help children. A Head Start center that provides a child from a terrible home environment with a few hours a day of affection, warmth, and security has done a good thing. The fact that Head Start has been proved to have no long term effects is irrelevant to that good thing.

I don’t how many Head Start centers accomplish even that much, but that too is irrelevant to my broader point. All children need love and nurturing. Children who are not getting those things should be subjects of our concern. It is my belief that government is the worst of ways to respond to their needs, but we can argue about that. Let’s simply agree to dispense with long-term outcomes as the measure of success, and focus on how best to get love and nurturing to children in need of it.

That brings me back to Mr. Williams’s question about adoption. What do we tell to prospective adoptive parents? The first answer, and the only answer that ultimately counts, is that they are doing the Lord’s work. They have the opportunity to provide love and nurturing to a child who needs it. There are few better things that human beings can do with their time. The second answer is that they, like biological parents, are not miracle-workers. They will be unable to mold the child. Sometimes their adopted child will experience problems that are not the adoptive parents’ fault; sometimes they will reveal gifts of talent and character that are equally not to the adoptive parents’ credit. What is to the credit of good parents, adoptive and biological alike, is enfolding the child in love.

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Wednesday night linkshttp://www.aei.org/publication/wednesday-night-links-7/ http://www.aei.org/publication/wednesday-night-links-7/#comments Thu, 20 Nov 2014 00:17:22 +0000 http://www.aei.org/?post_type=publication&p=821817 1. Markets in Everything: a) Apprenticeship 2000 — “Free college, apprenticeship certification, a paycheck, and a job upon graduation,” b) the first permanent cat adoption cafe opens in Oakland, this could be the “future of pet adoption,” c) Bellhops is an on-demand moving help platform that currently employs over 10,000 college students in 100 cities [...]

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1. Markets in Everything: a) Apprenticeship 2000 — “Free college, apprenticeship certification, a paycheck, and a job upon graduation,” b) the first permanent cat adoption cafe opens in Oakland, this could be the “future of pet adoption,” c) Bellhops is an on-demand moving help platform that currently employs over 10,000 college students in 100 cities across the U.S. for $40 an hour, and d) restaurant “table scalping” is on the rise with apps that let diners buy and sell the hottest restaurant reservations.

2. Who’d a-Thunk It? I Big Taxi thuggery? Taxi cartels don’t like competition and they’ll disrupt travel, clog traffic, and strand thousands of travelers just to prove it? (HT: Morgan Frank)

3. Who’d a-Thunk It? II Faced with a punitive 21% theater tax, Spanish theater groups find ways around it by selling carrots and porn magazines that include theater admission?

4. Video of the Day. Can’t keep up with all the videos? Here’s the ultimate compilation in two minutes. (HT: Hitssquad)

5. Quotation of the Day is from Charles Cooke’s NRO article “Whence Keystone Comes: A trip to the Canadian oil sands, a modern wonder of the world“:

Fossil fuels are the foundation of the modern economy. They give us heat, light, food, technology, and transportation. They make possible travel, education, and medicine, among an endless parade of things that even their discontents cannot live without. In our search for supplies, there is of course a need for some regulation and for self-awareness. But there is no need whatsoever for the companies that make our lifestyles possible to prostrate themselves in front of us apologetically.

The people I meet in northern Canada are selling what the world wants. Ultimately, that is what their opponents hate. People who hate oil don’t want more oil in the world; instead, they desire to replace oil with the mythical energy sources of their choice or, if that is not possible, they want to lower total global energy consumption — the poor be damned.

Could things be better? Yes. Are there costs to maintaining civilization? Yes. But we could also stop buying oil from sadistic medieval regimes run by family crime syndicates. I’d take a 15 percent increase in carbon emissions in exchange for North American energy independence. So would the Canadians I meet in the wilds. So, the polls show, would most Americans. One day soon, I hope, so will the person sitting in the White House.

7. Occupational Licensing Gone Wild. Some of the 300 licensed tour guides in Savannah are suing the city to end its licensing requirement. With Yelp, Trip Advisors, and other online review websites, who needs government regulators to ensure quality? 

8. Cartoon of the Day.

Minimum-Wage

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In defense of sweatshops — they’re often the best and fastest way for the poor to escape povertyhttp://www.aei.org/publication/defense-sweatshops-theyre-often-best-fastest-way-poor-escape-poverty/ http://www.aei.org/publication/defense-sweatshops-theyre-often-best-fastest-way-poor-escape-poverty/#comments Wed, 19 Nov 2014 19:51:54 +0000 http://www.aei.org/?post_type=publication&p=821759 1. Sweatshop Video of the Day I. A surprising and inspiring 2012 TED Talk above on the alleged exploitation of Chinese factory workers, who we are told lead miserable and bleak lives making iPhones, Coach handbags and Nike running shoes in factory sweatshops for rich Americans. Author Leslie T. Chang explains why that’s a completely [...]

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1. Sweatshop Video of the Day I. A surprising and inspiring 2012 TED Talk above on the alleged exploitation of Chinese factory workers, who we are told lead miserable and bleak lives making iPhones, Coach handbags and Nike running shoes in factory sweatshops for rich Americans. Author Leslie T. Chang explains why that’s a completely false and disrespectful narrative. Here’s an excerpt:

Across China, there are 150 million workers, one third of them women, who have left their villages to work in the factories, the hotels, the restaurants and the construction sites of the big cities. Together, they make up the largest migration in history, and it is globalization, this chain that begins in a Chinese farming village and ends with iPhones in our pockets and Nikes on our feet and Coach handbags on our arms that has changed the way these millions of people work and marry and live and think. Very few of them would want to go back to the way things used to be.

Certainly, the factory conditions are really tough, and it’s nothing you or I would want to do, but from their perspective, where they’re coming from is much worse, and where they’re going is hopefully much better, and I just wanted to give that context of what’s going on in their minds, not what necessarily is going on in yours.

HT: Bob Wright

2. Sweatshop Video of the Day II. In the Learn Liberty video above, you’ll learn from UC-San Diego professor Matt Zwolinski about the “Top 3 Ways Sweatshops Help The Poor Escape Poverty.”

nikeplant

3. Sweatshop Cartoon of the Day. A sweatshop cartoon classic, first featured on CD back in 2007.

4. Sweatshop Quotation of the Day I:

Closing sweatshops and forcing Western labor and environmental standards down poor people’s throats in the third world does nothing to elevate them out of poverty. Instead, it forces poor people to buy a lot of rich man’s toys, like clean air, clean water, and leisure time. If clean air and leisure time don’t strike you as extravagant luxuries, that’s because Americans – even the poorest of us – are so rich these days that we’ve forgotten what true poverty is like. But chances are your great-great-grandparents could have told you what it’s like: when you’re truly poor, you can’t afford things like clean air. Nobody in 1870 America worried about the environment.

~Economist Steven E. Landsburg, from his book “More Sex is Safer Sex: The Unconventional Wisdom of Economics.

5. Sweatshop Quotation of the Day II:

Well-meaning American university students regularly campaign against sweatshops. But instead, anyone who cares about fighting poverty should campaign in favor of sweatshops, demanding that companies set up factories in Africa. If Africa could establish a clothing export industry, that would fight poverty far more effectively than any foreign aid program. American students should stop trying to ban sweatshops, and instead campaign to bring them to the most desperately poor countries.

~Nicholas Kristof’s 2006 NY Times op-ed “In Praise of the Maligned Sweatshop.”

6. Sweatshop Quotation of the Day III:

I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade.

Among people who work in development, many strongly believe (but few dare say very loudly) that one of the best hopes for the poorest countries would be to build their manufacturing industries. But global campaigns against sweatshops make that less likely. The best way to help people in the poorest countries isn’t to campaign against sweatshops but to promote manufacturing there.

~Nicholas Kristof’s 2009 NY Times op-ed “Where Sweatshops Are a Dream.”

7. Child Labor Quotation:

As any historian could tell you, no society has ever pulled itself out of poverty without putting its children to work. Back in the early 19th century, when Americans were as poor as Bangladeshis are now, we were sending out children to work at about the same rate as the Bangladeshis are today. Having had the good fortune to get rich first, Americans can afford to give Bangladeshis a helping hand, and there are plenty of good ways for us to do that. Denying Third Worlders the very opportunities our ancestors embraced, whether through fullfledged boycotts or by insisting on health and safety standards they can’t afford to meet, is not one of those ways.

~Steven E. Landsburg, from his blog “The Big Questions.”

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Where are all the startups? More on America’s economic calcificationhttp://www.aei.org/publication/startups-americas-economic-calcification/ http://www.aei.org/publication/startups-americas-economic-calcification/#comments Wed, 19 Nov 2014 18:29:02 +0000 http://www.aei.org/?post_type=publication&p=821773 Job gains at opening establishments amounted to only 1.06% of total employment, the lowest on record going back to the early '90s. As we discussed in a note a few months ago (The consequences of economic calcification), the decline in start-up activity has been a disconcerting feature of this expansion. Given the maturity of the expansion, the proposition that this weakness owes to demand factors is looking less credible. This is especially the case since most measures of business profit margins look elevated, which should stimulate new business formation. In fact, traditional views of the margin cycle see start-up activity, as well as capital spending, as forces that ensure the mean-reverting nature of profit margins: both tend to rise when margins expand, slowly eroding the profits of incumbents.

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America isn’t creating as many new companies as it used to. That, even though in many ways it’s easier than ever to start your own firm, thanks to cheap digital technologies. But it’s just not happening, as I have written frequently. Here is JPMorgan economist Michael Feroli in a morning note on the phenomenon and what might explain it:

 Job gains at opening establishments amounted to only 1.06% of total employment, the lowest on record going back to the early ’90s. As we discussed in a note a few months ago (The consequences of economic calcification), the decline in start-up activity has been a disconcerting feature of this expansion. Given the maturity of the expansion, the proposition that this weakness owes to demand factors is looking less credible. This is especially the case since most measures of business profit margins look elevated, which should stimulate new business formation. In fact, traditional views of the margin cycle see start-up activity, as well as capital spending, as forces that ensure the mean-reverting nature of profit margins: both tend to rise when margins expand, slowly eroding the profits of incumbents.

The absence of these responses may help explain the surprising strength of corporate profits. What is not explained is why start-up activity hasn’t responded as would be expected. One hypothesis is that those elevated margins owe to natural monopoly profits, perhaps due to an increased prevalence of network effects. In this case, the incumbent profits are incontestable, and start-up activity shouldn’t be expected to increase.

Network effects are positive feedback loops. The more people who use a technology — eBay, Skype, Facebook, Bloomberg terminals, LinkedIn — the more valuable it becomes and the more unassailable its market position. As one venture capital firms puts it: “Network Effects are special because they 1) provide  logarithmic growth and value creation potential, 2) erect barriers to entry to thwart would-be competitors, and 3) can create “Winner Take All” market opportunities. Network Effects are like a flywheel–the faster you spin it the more momentum you generate and enjoy.” It that the explanation, and is it the only explanation?  Well, it might be one factor, though I think there are others.But it is an explanation that I had not previously considered. This analysis does have much in common, though, with the “creative monopolies” that Peter Thiel discusses in his new book:

In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you.  … Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better. …The dynamism of new monopolies itself explains why old monopolies don’t strangle innovation. With Apple’s iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft’s decades-long operating system dominance.

Before that, IBM’s hardware monopoly of the 1960s and ’70s was overtaken by Microsoft’s software monopoly. AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cellphone plan from any number of providers. If the tendency of monopoly businesses was to hold back progress, they would be dangerous, and we’d be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and finance the ambitious research projects that firms locked in competition can’t dream of.

If network effects are making it tougher for startups to compete with incumbents, then all the more reason to look at how government policy is impeding entrepreneurial efforts.

JPMorgan

JPMorgan

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What to learn from Google’s failed effort at clean energyhttp://www.aei.org/publication/learn-googles-failed-effort-clean-energy/ http://www.aei.org/publication/learn-googles-failed-effort-clean-energy/#comments Wed, 19 Nov 2014 16:13:10 +0000 http://www.aei.org/?post_type=publication&p=821732 Consider Google’s approach to innovation, which is summed up in the 70-20-10 rule espoused by executive chairman Eric Schmidt. The approach suggests that 70 percent of employee time be spent working on core business tasks, 20 percent on side projects related to core business, and the final 10 percent on strange new ideas that have the potential to be truly disruptive.

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In 2011, Google shuttered RE<C, a four-year R&D and startup investment effort to develop renewable energy technologies that could generate electricity at lower cost than coal-fired power plants. As Google engineers David Fork and Ross Koningstein write in an IEEE Spectrum piece, “What Would It Really Take to Reverse Climate Change”, “Unfortunately, not every Google moon shot leaves Earth orbit.”

Looking back, Fork and Koningstein concede that existing technologies or incrementally better new technologies are insufficient for realizing economically feasible — without government subsidy or regulation — zero-carbon energy sources and removing CO2 from the air. Example: rather than using electricity to boil water that turns a steam turbine — coal already does that superefficiently — imagine a fusion technology that skips “the steam and produce high-energy charged particles that can be converted directly into electricity. Or how about “special-purpose crops to pull CO2 out of the air and stash the carbon in the soil”?

So how to develop these breakthrough technologies? How about a variation on the Google innovation formula:

Consider Google’s approach to innovation, which is summed up in the 70-20-10 rule espoused by executive chairman Eric Schmidt. The approach suggests that 70 percent of employee time be spent working on core business tasks, 20 percent on side projects related to core business, and the final 10 percent on strange new ideas that have the potential to be truly disruptive.

Wouldn’t it be great if governments and energy companies adopted a similar approach in their technology R&D investments? The result could be energy innovation at Google speed. Adopting the 70-20-10 rubric could lead to a portfolio of projects. The bulk of R&D resources could go to existing energy technologies that industry knows how to build and profitably deploy. These technologies probably won’t save us, but they can reduce the scale of the problem that needs fixing. The next 20 percent could be dedicated to cutting-edge technologies that are on the path to economic viability. Most crucially, the final 10 percent could be dedicated to ideas that may seem crazy but might have huge impact.

Our society needs to fund scientists and engineers to propose and test new ideas, fail quickly, and share what they learn. Today, the energy innovation cycle is measured in decades, in large part because so little money is spent on critical types of R&D.

Of course, as the engineers found out, even highly profitable public companies are reluctant to fund blue-sky efforts. But the duo certainly chart a handy and reasonable blueprint for a government research agenda to supplement what’s happening in the private sector. Again, I would also combine them with deregulation, certainly for nuclear power. And further, let me quote Sam Altman of startup accelerator Y Combinator, which is invested in an experimental nuclear fusion company, who argues “the 20th century was clearly the carbon century [and] the 22nd century is going to be the atomic power century. I’m very convinced of that. It’s just a question of how long it takes us.”

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