Congratulations to my friend Vivek Wadhwa, who was just named an Outstanding American by Choice:
The Outstanding American by Choice initiative recognizes the outstanding achievements of naturalized U.S. citizens. Through civic participation, professional achievement, and responsible citizenship, recipients of this honor have demonstrated their commitment to this country and to the common civic values that unite us as Americans.
Vivek wrote about America’s other immigration crisis here.
Barack Obama thinks the sickly economy needs more demand. And if more demand can’t come from cash-strapped consumers, then government should provide more demand by borrowing money at extremely low interest rates and spending it. As former Obama economic adviser Lawrence Summers explained in a recent Financial Times op-ed:
What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. … It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation, and away from assuring adequate demand.
But what if Team Obama has the wrong diagnosis? Take a look at these two charts from Barclays Capital:
These charts are based on the U.S. Job Openings and Labor Turnover report. The first chart shows that with 13.1 million people unemployed, there were an estimated 3.9 unemployed people for every opening. That’s the lowest level since December 2008. Good news.
Yet, as can be seen in the second chart, job openings have been rising faster than hiring. As Barclays concludes: “This suggests that factors such as mismatched skills continue to be frictions in the labor market.”
Or, in other words, people who lost their jobs in the Great Recession will not be able to return to their old jobs or even new jobs in the same industry. As economist and blogger Arnold Kling notes:
Many jobs in home construction, durable-goods manufacturing and distribution, and mortgage finance were dependent on housing markets with ever-rising prices. In the U.S. and the U.K. in particular, the finance industry expanded well beyond its true economic value. Once the property bubbles burst, these jobs were exposed as not viable. Meanwhile, ongoing creative destruction brought about by the Internet and globalization have continued to allow substitution of capital and emerging-market labor for industrialized countries’ labor in many sectors. Together, these phenomena have caused widespread dislocation. … The necessary adjustments can only be made by the decentralized efforts of entrepreneurs. …
The Keynesian story would lead one to expect a recovery to consist of workers returning to the jobs that they held prior to the recession. That is not what happened after the Great Depression. It is not what has happened in recent recessions in the U.S., particularly the one that ended in 2009. Regaining full employment requires significant restructuring of the economy, rather than simply returning to the pre-slump status quo.
More government spending can at best create some unsustainable jobs in the short run. In the long run, it will only distort and impede the adjustments that are needed to create patterns of sustainable specialization and trade.
It will take time for entrepreneurs to create the new companies and industries America needs. And it will take time for workers to train and transition to them. If we can’t figure out policies to encourage both, then we at least need to get rid of policies that discourage.
Check out this great TED talk, in which British historian Niall Ferguson explains his answer to the question of why Western civilization achieved such a clear dominance over the rest of the world.
The presentation is a summary of Ferguson’s book Civilization: The West and the Rest. I highly recommend reading it; it expands on the points from the TED talk and is thoroughly enjoyable. What I’d like to do here is investigate, one at a time, the state of the six “killer apps” in modern America.
Let’s start with Ferguson’s first “killer app”: competition. Here’s a little more background from the book:
Competition—A decentralization of both political and economic life, which created the launch-pad for both nation-states and capitalism.
In Ferguson’s view, centralization of power (political, social, and/or economic) in the hands of a single authority leads to stagnation. On the other hand, if power is decentralized, competition to obtain power (or profit) will drive innovation, expansion, and wealth creation. How much of a difference can this make? Consider the following graph, taken directly from Ferguson’s book:
Source: Ferguson, Niall. Civilization: The West and the Rest. p.45
How can this massive disparity (rising to 16-to-1 during the 1960s), be explained? According to Ferguson, the crucial factor was that England faced far more competition than China, both internally and externally. Externally, the English were in constant competition with France and Spain, which drove them to, among other things, plant colonies in the Americas. But England was also a land of intense internal competition. As Ferguson says:
Officially, Henry V was king of England … But on the ground in rural England real power was in the hands of the great nobility… as well as thousands of gentry landowners and innumerable corporate bodies, clerical and lay. … crucially, the most important commercial centre in the country [London] was almost completely autonomous. Europe was not only made up of states; it was also made up of estates: aristocrats, clergymen and townsfolk.
Nothing of this sort existed in China, where the imperial bureaucracy was all-powerful. Ferguson again:
By comparison with the patchwork quilt of Europe, East Asia was—in political terms at least—a vast monochrome blanket … China was ruled from the top down by a Confucian bureaucracy…
Eventually, and over many years, the cumulative effects of these widely differing societies—one highly centralized, one borderline chaotic—is made clear in the graph above. Further confirming Ferguson’s point, note that the UK/China GDP ratio begins to reverse starting in the 1970s—when Deng Xiaoping introduced his economic liberalization reforms.
So, what does this all mean? Well, if you buy Ferguson’s argument, as I do, then you have to be concerned with the direction that America is moving in today. We are increasingly centralizing power—economic, political, and cultural—into the hands of the federal government in Washington, D.C.
Not only are we concentrating power in the hands of the federal government, we’re increasingly concentrating it in the sector of the government least influenced by competition: the federal bureaucracy. Ming China would be proud: The bureaucracy is nearly immune from both outside influences—look at how incredibly difficult it is to cut anything from the federal budget—and from internal competition, yet it has immense influence on the rest of society. We are forced to follow an ever-increasing number of mandates, laws, and regulations emanating from unelected, job-secure bureaucrats who possess no incentives to perform their jobs well. These regulations stifle innovation, hamper technological advancement, and, in general, hold our nation back.
The liberal desire for one-size-fits-all solutions is motivated by a sense of national unity—as Obama says “we’re greater together than we are on our own”—but these ideas ultimately fail to produce positive results for the nation they are trying to assist. History suggests that only by maintaining or even strengthening America’s historically decentralized approach to government and society, only by allowing for individual and corporate competition, can we achieve the innovation that our society needs to succeed in the future.
Harvard Business School recently surveyed 10,000 alumni about the state of U.S. economic competitiveness. Unfortunately, 71 percent said national competitiveness will decline over the next three years. That result actually tracks numerous public surveys finding the vast majority of Americans think the U.S. is headed in the wrong direction. More interesting is the evaluation of our strengths and weaknesses, summed up in the following graphic:
I think the red quadrant has it about right. The big problems are macroeconomic policy (soundness of government budgetary, interest rate, and monetary policies), political system (ability of the government to pass effective laws), legal framework (modest legal costs; swift adjudication), regulation (effective and predictable regulations without unnecessary burden on firms), K-12 education system (universal access to high-quality education; curricula that prepare students for productive work), and complexity of the national tax code. And improving those things will make our perceived strengths, the stuff in the green quadrant, even stronger.
Having lots of smart, entrepreneurial people in your country is a pretty good way to promote an innovative, growing economy. And if someone with those qualities wants to come to your country, you should make it as easy as possible for he or she to come. And if someone like that is already in your country, make it as easy and tempting as possible to stay. This piece in Bloomberg Businessweek makes the case:
Increasing bodies of evidence show that skilled immigrants are fueling technological innovation and job growth in America. A study released last week by Stuart Anderson of the National Foundation for American Policy found that immigrants were on the founding leadership teams of 24 of the top 50 privately held, venture-backed companies in the U.S. The highest percentage of these immigrant founders came from India. What’s more, Anderson found that in 76 percent of these companies, immigrants held key positions in engineering, technology, or management.
In another study released in December 2011, Madeleine Zavodny, an economics professor at Agnes Scott College, found that foreign-born adults with advanced science, technology, engineering, and math (STEM) degrees were strong net generators of jobs for native-born American workers. Zavodny found that 100 foreign-born workers with advanced STEM degrees generated 262 jobs for native-born workers, on average.
The study, sponsored by the American Enterprise Institute and the Partnership for a New American Economy, echoes earlier research by Professor AnnaLee Saxenian of the University of California, Berkeley, that showed that Chinese and Indian engineers managed 24 percent of the technology businesses started in Silicon Valley from 1980 to 1998. My own research found that in a quarter of the U.S. engineering and technology companies founded from 1995 to 2005, the chief executive or lead technologist was foreign-born. In Silicon Valley, the percentage of immigrant-founded startups was much higher—52 percent.
Indeed, AEI’s co-sponsored study makes three policy proposals:
1. Giving priority to workers who earn advanced degrees from U.S. universities, especially those who work in STEM fields.
2. Increasing the number of green cards (permanent visas) for highly educated workers.
3. Making available more temporary visas for both skilled and less-skilled workers.
The study’s conclusion:
America is currently mired in a period of the slowest economic growth seen in several generations, with persistently high unemployment, anemic job growth, and little bipartisan agreement on how to address these pressing problems. Action is required if America is to get back to work. Immigration policy can, and should, be a significant component of America’s economic recovery. Targeted changes to immigration policy geared toward admitting more highly educated immigrants and more temporary workers for specific sectors of the economy would help generate the growth, economic opportunity, and new jobs that America needs.
Call it the China Syndrome. An American visits Rising China and is immediately gobsmacked by the place. Giant airport terminals, speedy bullet trains, ubiquitous construction cranes, the Shanghai skyline. Everywhere you look, Stuff is Happening. And it’s all shiny new. Compared to China and its seemingly perpetual 10-percent annual growth rate, New Normal America just doesn’t rate. Then the gobsmacked American comes to a realization: America Must Become More Like China. Free-market capitalism is out, state-managed capitalism in. I have seen the future and it works!
I give you Andy Stern, former president of the Service Employees International Union (via the WSJ):
The conservative-preferred, free-market fundamentalist, shareholder-only model—so successful in the 20th century—is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA’s results—a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%—are pathetic. …
While we debate, Team China rolls on. Our delegation witnessed China’s people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.
Several observations:
1. Last time, I checked, the U.S. is 6-10 times as wealthy as China on a per capita GDP basis. On a purchasing power parity basis, China sits between Bosnia and Herzegovina and Albania.
2. Playing economic catch up from a low level is a lot easier than leading the pack. Indeed, developing nations often never close the gap with advanced economies, especially those with a rapidly aging population, low levels of consumption, and undervalued currency — like China.
3. Building infrastructure is easy and doesn’t take brilliant bureaucrats to do. Innovating is hard, and something government has shown precious little ability to do. How’s industrial policy working for the EU?
4. Stern wants government to intervene more in the market. Yet America’s problem in the 2000s was government interfering in the market and creating incentives that favored a chosen industry, housing. What America needs is more Schumpeterian, creative destruction sans government’s thumb on the scale.
5. As Warren Buffett puts it, ”It’s only when the tide goes out that you know who’s been swimming naked.” When China does slow, we’ll see just how efficient a capital allocator Beijing has been. The Chinese Miracle is stuffed to the gill with bad loans. State capitalism is really Crony Capitalism.
6. Maybe we need more “economic teams” like, say, public employee unions and government. American students are sure benefiting from such teamwork.
7. I think what folks like Stern really envy is the lack of democracy and accountability where technocratic elites can make all the decisions without pesky tea parties sticking their nose in.
More to come ….
In blogger and economist David Henderson’s fascinating review of A Great Leap Forward: 1930s Depression and U.S. Economic Growth by Alexander J. Field, he highlights some interesting findings by the author about the impact of World War II on the U.S economy, particularly as it relates to innovation and productivity. Oh, and whether the orgy of government deficit spending ended the Great Depression:
1. Improvements during World War II cannot explain the tremendous increase in productivity from 1929 to 1941 (Growth in the productivity of labor and capital averaging 2.3 to 2.8 percent annually over those twelve years.) Recall that the United States didn’t enter World War II until the last month of 1941. Combined Army and Navy spending in 1940 and 1941 was only 3.2 percent of cumulative Army/Navy spending from 1940 to 1946. It’s true that the United States had moved into war production before entering the war because Franklin Roosevelt was itching to help out his ally, Great Britain, and did so with Lend-Lease. … But Field points out that even with a broader measure of spending that includes Lend-Lease and the government’s Defense Plan Corporation, a subsidiary of the Reconstruction Finance Corporation, spending in 1940 and 1941 was only five percent of the cumulative defense spending that occurred between 1940 and 1945.
2. Productivity growth slowed during the war. Field estimates it at 1.29 percent per year from 1941 to 1948. (His explanation for why he goes three years beyond the war is persuasive but complicated.) This was down from the earlier low-end estimate of 2.3 percent from 1929 to 1941. The huge increases in output were due to more people being employed, not to large increases in productivity.
3. The war effort diverted attention from innovation for the private market into innovation in producing the instruments of war. This was costly in two ways. First, much of the innovation was irrelevant to peacetime. Second, producers had to learn the arcane rules of dealing with the federal government. Field writes: “When scientists and engineers devoted their time to producing atom bombs, when businessmen were preoccupied with learning new administrative rules, and when success was measured by one’s ability to produce large quantities of ordnance quickly in an environment of cost-plus contracts, it is scarcely surprising that the overall rate of commercially relevant innovative activity slowed down.”
Field points out that there were few technological improvements during World War II that made the postwar peacetime economy more productive. It’s almost the reverse. It was the tremendous increase in underlying productivity of the U.S. economy before the war that allowed the U.S. economy to be so productive during the war.
4. World War II ended the Great Depression. Field notes that unemployment was falling rapidly in 1941 and that the unemployment rate for the last quarter of 1941 (the government did not collect monthly data back then) was down to 6.3 percent.
Does all the federal government funding for research and development, direct and indirect subsidies, tax credits and other tax benefits, such as deductibility of research expenses, actually boost economic growth and American prosperity? The Minneapolis Fed tried to find out—and discovered it couldn’t really come to a conclusion. Here is the problem:
In particular, the idea that innovative activity by firms has “spillovers” that promote the wider diffusion (intentional or inadvertent) of new innovations and knowledge created at just one location, firm, or industry is central in justifying government subsidies for innovation. As a result, we want to know how important these spillovers are for the economy as a whole.
And since measuring spillover effects is difficult, evaluating the effectiveness of innovation policy is also tricky (bold is mine):
The response of economic welfare and GDP over the long run to changes in innovation policy is highly sensitive to the size of innovation spillovers; welfare gains could vary between virtually no change and a 50 percent increase in equivalent consumption, depending on spillover size.
Unfortunately, we cannot accurately measure these long-run effects without accurate estimates as to the magnitude of innovation spillovers. Results from our model indicate, however, that even under ideal conditions, it should be very difficult to measure spillovers using data on medium-term response of the macroeconomy from changes in innovation policy. That is, evidence from the medium term is not likely to help differentiate long-run effectiveness because all policies have similar medium-term outcomes regardless of the size of spillovers.
What does this imply for policy?
The clearest implication of our research is that to the extent that policymakers choose to subsidize innovative activity by firms, they should consider the full set of tax and regulatory policies that impact aggregate innovation through firm profitability. Taxing corporate profits or enacting regulations that make it more costly for firms to start up or operate has a significantly negative influence on innovation, undercutting the stimulative impact of R&D subsidization. The net effect may be to depress, rather than encourage, innovation by firms.
How can American cities be more like vibrant Seattle and less like moribund Detroit? Certainly not by offering them government-backed green jobs programs. Instead, says Ed Glaeser, unleash the entrepreneurs. And here is how:
How can more cities become centers of skilled invention and entrepreneurship?
Entrepreneurship doesn’t happen overnight, and it’s rarely the direct creation of government. Bureaucrats aren’t experts in finding unexpected market niches, so politicians are prone to throwing money at the fad of the moment, like “green jobs.” Also unhelpful are policies that privilege older, big-firm industries. My research with William Kerr has found that places blessed—or cursed—with natural resources, such as coal or iron mines, 100 years ago still have larger firms today, across all their industries, and that the employment picture there is correspondingly bleaker than in cities with fewer natural resources. So we should worry about policies like auto bailouts, which are the artificial equivalent of coal mines, encouraging big, stagnant companies at the expense of job-creating start-ups.
Still, certain policies can help entrepreneurs and boost American employment. Since an educated workforce is so important to urban success, America needs better schools, especially in its dense urban areas. Perhaps the most hopeful development on this front is the emergence of charter schools. Since entry to the most successful of these schools is typically by lottery, social scientists can compare the test scores of those who won and got in with the test scores of those who didn’t. A significant number of papers now show the remarkable long-run effects that getting in can have on children’s academic outcomes.
Another badly needed reform that would help unleash entrepreneurs: every level of government needs to rethink and reduce its regulations, which have grown excessive and stifle innovation (see “The Regulatory Thicket”). The federal government could lead the way by establishing a federally funded independent body, perhaps attached to the Congressional Budget Office, to analyze state and local regulations. Localities that instituted entrepreneurship-killing regulations would lose their power to issue federal-tax-exempt bonds.
In general, we should never use public dollars to bribe people to remain in dead-end jobs. We should place far less emphasis on the industries of the past and more on those of the future. Federal policies that bail out auto companies and subsidize agriculture aren’t merely expensive; they also encourage people to stay in declining industries rather than strike out on their own.
Is America suffering from technological stagnation? Is a lack of innovation undermining economic growth and our standard of living? It’s a popular thesis right now, one outlined brilliantly by economist Tyler Cowen in his recent Kindle ebook, The Great Stagnation.
But MIT’s Erik Brynjolfsson and Andrew McAfee see things quite differently. In their new Kindle ebook, Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, they highlight research that shows there’s been technological acceleration rather than stagnation — computers can now drive cars in traffic, translate effectively between human languages, and beat the best human Jeopardy! players.
But human skills have not kept up. And that’s the problem:
Workers whose skills have been mastered by computers have less to offer the job market, and see their wages and prospects shrink. Entrepreneurial business models, new organizational structures and different institutions are needed to ensure that the average worker is not left behind by cutting-edge machines.
So what should we biological entities do? Well, that is what I asked Brynjolfsson via email:
1. Clearly there is a major jobs issue at play here. But how confident are you that median incomes are stagnating and income inequality is exploding? I know the Piketty-Saez data, but in a 2009 paper, for instance, Northwestern professor Robert Gordon called the supposed sharp rise in U.S. income inequality “exaggerated both in magnitude and timing.”
Perhaps this is a matter of degree. Median wages are clearly growing more slowly than incomes at the very top. Depending on how you adjust for unmeasured quality etc, you may or may not call that “stagnating”. The American middle class is still relatively wealthy relative to much of the rest of the world. Bob Gordon’s work is excellent. There are debates about the timing and magnitude of the growing inequality, but I don’t think You can argue there hasn’t been any at all.
2. The book suggests the pace of technological change is accelerating, yes? If machines can learn and evolve faster than men, how will we ever catch up and “race with the machines?” Is better education, for instance, a solution or just a mitigating force?
Education is a mitigating force for sure, and to the extent it helps people adapt faster, perhaps more than just mitigating. We don’t need to win a race against machines. As the book argues in ch 4, the right approach is to race using machines. That means entrepreneurs need to keep inventing new ways combine technology and people to create new industries and innovations. There’s never been a better time to be a a talented entrepreneur and they will be needed even more in coming years as the economy undergoes faster creative destruction.
3. What is Tyler Cowen getting wrong about the pace of innovation and technological advancement? He makes it sound as if the last 30 years have only given us new ways to distract ourselves (like Facebook) and little else.
The digital revolution will be as big as the first and second industrial Revolution, if not bigger. We’re only in the early stages, but already productivity growing more rapidly. The late decade was the better for productivity than the1990s which was better than the 1980s. And using Facebook for entertainment is not inherently less worthy than watching movies or tv. Let people be their own judge of what gives them utility.
4. Your focus is mostly on IT, a bit on robotics. Those two areas are often mentioned along with nanotech and genetic engineering as the Four Big Technologies of the future. Any thoughts on how those other two technologies might intersect with your thesis?
They are all closely related and draw on massive improvements in information processing power. There are big waves of innovation in the pipeline. The bottleneck is our ability to adapt.
5. What will America look like in a generation if policymakers ignore your 19-pt agenda for adapting to the pace of technological change?
Change of this magnitude creates huge opportunities to shape the kind of society we live in. We can have an inclusive society where everyone has a chance to contribute or one that is increasingly polarized. I didn’t think it is a winning strategy for the elites to try to secede from the rest of America. We need to foster openness, flexibility, and opportunities for as many people as possible.
Economic analyst Ed Yardeni makes the case:
1) The widespread perception is that America is in decline. The reality may be that the best is yet to come. That’s because America is rapidly developing very cheap domestic sources of energy. At the same time, the relative cost of labor is declining in the U.S. as it rises more rapidly in China. These two developments are already starting to reindustrialize America. They are also likely to change the political dynamics in the United States as booming oil and gas industries favor conservatives in the new oil states such as Pennsylvania and Ohio. There may be fewer blue and red states, and more in the black, which happens to be the color of oil.
2) Let’s begin in Youngstown, Ohio. That’s where Vallourec & Mannesmann is building a new $650 million steel mill that will employ 400 construction workers and create as many permanent jobs. The company isn’t getting a subsidy from the government to do this. Rather, Ohio is experiencing an energy boom as new “fracking” technologies permit tapping into huge reserves of oil and gas embedded in shale. The new steel plant will build steel tubes for the energy industry.
3) An “Economic Impact Study” released in September concluded that developing the Utica shale gas formation in eastern Ohio should create more than 200,000 jobs by 2015, boosting wages and tax revenues. There’s already a land rush in the area, with farmers receiving $5,000 per acre and a royalty of 19½ percent. Gas wells require lots of concrete and steel. Northeast Ohio’s steel producers, including Canton-based Timken, U.S. Steel in Lorain, and V&M Star in Youngstown, are already seeing rising demand.
4) In Sunday’s The Telegraph, Ambrose Evans-Pritchard, the newspaper’s international business editor who usually accentuates the negatives in his stories, was positively giddy about the prospects that world power is likely to swing back to the United States: “The American phoenix is slowly rising again. Within five years or so, the U.S. will be well on its way to self-sufficiency in fuel and energy. Manufacturing will have closed the labour gap with China in a clutch of key industries. The current account might even be in surplus.”
The passing of Steve Jobs means that we will soon learn where he chose to bequeath his vast fortune, estimated to be in excess of $8 billion. In Jobs’s case, the question is particularly interesting because Jobs was notoriously un-philanthropic in public settings throughout his life. Jobs largely escaped the typical miserly-capitalist critique, but occasional complaints about his supposed lack of concern for philanthropic causes have lingered.
Jobs may have been privately philanthropic, so his charitable giving is simply unknown. This seems unlikely. The Steven P. Jobs Foundation was closed less than a year after opening, having given away very little money. Under Jobs, Apple’s philanthropic arm closed, and Apple was branded one of “America’s Least Philanthropic Companies” by the Stanford Social Innovation Review. Additionally, Jobs refused to join the “Giving Pledge,” an organization aimed at convincing America’s wealthiest to give away at least half their fortunes.
Far more likely is the possibility that Jobs viewed Apple’s output as hugely valuable in raising social welfare. Just like Sam Walton, who thought Wal-Mart’s core contribution to social benefit was to reduce the cost of living for ordinary Americans, Jobs viewed Apple’s operations as a means of making life better for people through innovation.
Jobs realized his comparative advantage was in creating new technology, not poverty alleviation, education transformation, cancer treatment, or any of the other causes he could have offered his wealth. As he told Playboy in 1985, “in order to learn how to do something well, you have to fail sometimes… most of the time, the people who come to you with ideas don’t provide the best ideas. You go seek the best ideas out, and that takes a lot of time.”
By using his comparative advantage in the marketplace, Jobs has done a lot to better many other people’s lives. Apple employs 34,000 people directly and thousands more in factories around the world. Jobs worked tirelessly to create devices that can identify currency for the blind, raise money for charities, accelerate the transfer of medical records, teach dyslexic and autistic children to read and write, and do scores of other things that benefit real people.
Jobs dedicated his life to free enterprise—something that has reaped dividends in increasing standards of living. Absent a better guide, we should probably judge Jobs through his own words on philanthropy: “In that area, actions should speak the loudest.”
This summer Catoctin Creek Distillery opened a sales room where the public can buy its terrific whiskeys. This is good news, and not just for the Purcellville, Virginia distillery and its visitors.
This is yet another chip in the nation’s antiquated, three-tier alcoholic beverage distribution system, which has fleeced consumers for decades. Under the three-tier system, beer, spirits, and wine producers cannot sell directly to the public. Instead, they must sell to distributors, who then sell to retailers who may sell to the public. It is a grossly inefficient system, one that adds to the price of drink at each step. The three-tier system produces patently ludicrous scenarios—distillery visitors can see how the whiskey gets made and bottled, but then must schlep to a liquor store to buy it.
The Virginia legislature finally recognized the insanity of this and changed the law. Other states, including Maryland (wine), Minnesota (beer), Illinois (beer), and North Carolina (liquor), have removed three-tier system impediments between producers and consumers.
A few factors seem to have nudged states to act. First, consumers have complained loudly that the three-tier system is an impediment to choice. They do not appreciate government telling them, for example, “No you cannot buy this wine online from the winery. You must ask a retailer to order it for you, and then go pick it up at the store.”
Second, the economic downturn has states itching to find ways to grow employment and tax revenues. Many states long ago changed their laws to permit wineries to sell directly to the public, fueling wine tourism. The same thing is happening with breweries and distilleries—they are becoming destinations.
Third, and relatedly, distilleries and breweries have been popping up like daisies. Distributors frequently refuse to carry their beverages, leaving these small businesses shut out of the retail market. Politicians do not like seeing these small businesses croaked in the cradle; hence they are freeing them to sell directly their customers.
Whether the economy is up or down, alcohol sells, so sweeping away costly post-Prohibition regulations on commerce is a no-brainer.
Kevin R. Kosar is the author of ‘Whiskey: A Global History.’
Here’s a fascinating interview in the New York Times with Neil Blumenthal, a founder of one of my favorite start-ups, Warby Parker.
When asked what Washington can do to help businesses these days, Keynesians say Washington must spend money to increase aggregate demand. What does this entrepreneur say Washington can do?
“The first is streamlining regulation … I’d also do something about the dearth of technical talent—it is really difficult to hire Web developers and engineers. We aren’t educating enough of these people … let’s get some of the smart engineers into the country by granting them their H-1B visas.”
Pew’s new survey, released yesterday, focuses on the wealth gap between whites and minorities. It will surely provide fodder for advocates of racial politics and class warfare, given the findings: from 2005 to 2009, net worth among whites dropped 16%, compared to 66% among Hispanics and 53% among blacks.
The report notes that the sharp drop among minorities is primarily owing to the housing bubble. Assets in Hispanic and black households have been more heavily concentrated in their homes compared to white households, which have more diversified asset combinations.
Early coverage of the report has understandably focused on this point and the issue of wealth disparity more generally. But buried in chapter three of the survey is a notable finding that hasn’t been covered at all: as a percentage, the loss in business equity by every group—white, black, Hispanic, Asian—outpaced losses in housing (and many other categories).
The authors write:
It is notable that business owners, regardless of race and ethnicity, reported large losses in the equity they hold in their businesses. The loss in business equity was highest among minority households, all losing about half the value they started with in 2005. For Hispanics, business equity fell from $32,961 in 2005 to $15,000 in 2009; for blacks, equity in their businesses decreased from $23,403 to $10,000; and, for Asians, business equity dropped from $54,935 to $27,000. White households experienced a loss of 24%, the median equity in their business falling from $32,961 in 2005 to $25,000 in 2009.
To sum up: whites lost 24% in business equity, 18% on their homes; black families lost 57% on the business side, 23% on their homes; among Hispanics, the difference was 54% to 51%, and among Asian families, it was 51% to 32%.
This is a surprisingly underreported consequence of the recession. It’s not just housing values that have tanked. So have businesses. The scale of the housing losses is much larger in absolute terms, but it’s no small matter that business owners have been getting up in the morning in their de-valuing homes and driving to their de-valuing enterprises.
Regardless of race or ethnicity, American business owners should be united (they’re not, of course) around some of the key elements—tax and regulatory reform, for starters—to restoring certainty and stability to the marketplace.
Ryan Streeter is editor of ConservativeHome.
The state of California is becoming legendary for creating the most anti-business climate in the country because of its high taxes, excessive regulations, forced unionism, and bloated public sector. For the second year in a row, a large group of America’s CEOs recently rated California as the worst state in the country to do business in an annual survey conducted by Chief Executive Magazine. California currently ranks No. 49 among U.S. states for “business tax climate” according to the Tax Foundation’s 2011 State Business Tax Climate Index, and it ranks No. 48 for “economic freedom” according to a recent study by the Mercatus Center.
It shouldn’t be any surprise then that companies are leaving the “Golden State” in record numbers this year (see chart below) for “golder pastures” and more business-friendly climates in other states. In just the last two years, the number of companies leaving California has accelerated more than five-fold, from one per week in 2009 to 5.4 per week this year, according to California relocation expert Joe Vranich.
And now because of new online sales taxes signed into law this week by Governor Jerry Brown, California’s business climate has become even chillier. According to the L.A. Times, “Amazon.com dropped about 10,000 California-based associate sales partners late Wednesday so that it would not be forced to collect California state sales tax on purchases made through them.” Many of Amazon’s sales partners in California are small business like book stores that rely heavily on online sales to stay in business, and might now be forced out of business, or out of state.
With another new tax in place on business activity, California will likely remain at the bottom of the state rankings for business and tax climate, and it’s a good bet that the rate of “disinvestment events” (companies leaving California) will accelerate ever more.
Over at EconLong, Arnold Kling has a quick comment on the new version of my federal pay paper with Jason Richwine, arguing that our analysis of salaries, benefits, and job security isn’t really necessary: “All you need to look at are the low quit rates and the high ratio of applicants to openings.” If nobody quits federal jobs and everybody wants to have them, then that’s the market telling you that these are pretty sweet positions to hold.
I basically agree, but there’s a reason we went to all the trouble of analyzing salaries, benefits, and job security explicitly rather than simply relying on entry and exit numbers. One is that we don’t have particularly good data on the numbers of applicants for federal jobs versus private positions. One older study by Alan Krueger had some numbers, but large sample recent data is very hard to come by. So we don’t know as much about federal job queues as we’d really like.
Second, there’s a common argument that low federal quit rates aren’t due to overcompensation but due to the fact that federal employees have defined-benefit pensions. DB pensions are back-loaded, meaning that you receive higher implicit rates of compensation at older ages. So federal workers, once vested in the system, are reluctant to leave. That’s the basic argument in Richard Ippolito’s 1987 paper “Why Federal Workers Don’t Quit.” We think he’s got part of it right, but it’s not the whole story.
Since the 1980s, federal pensions have shifted from being all-DB to roughly half DB, half-DC. Ippolito himself argues that, if his theory is true, then a shift to DC pensions should produce an increase in quit rates. In our paper, Jason and I compared federal quit rates for 1984, when federal employees would have had only DB pensions, to 2008, focusing on younger federal workers who would have had the mixed DB/DC pension plan. While other factors may enter the picture, federal quit rates in 2008 were significantly lower than in 1984 when theory says they should have been significantly higher. This tells me that pensions, while a factor in low federal quit rates, aren’t the main factor.
So while I don’t disagree with Arnold, I do think that the data on entry and exit from the federal workforce is scanty enough that you really do need to look explicitly at the wages and benefits paid to federal employees relative to those received by similar private-sector workers. And Jason and I make what I think is a compelling case that overall federal compensation is significantly higher than private-sector pay.
Mickey Kaus made a good point in bringing this latest top 10 list to my attention through Twitter: How does Meg Whitman control Americans’ lives? The former eBay CEO stepped down in 2007 and ran for governor of California in 2010, dumping more of her own money into a political campaign than any other self-funded candidate, and ultimately losing to re-run Governor Jerry Brown. It sounds like the voting public controlled her purse strings, not the other way around.
Some of the others in Mogulite’s Top 10 Conservative Moguls Who Control Your Life:
— The Waltons (cue evil thunderclap), on the premise that the WalMart clan gives millions to GOP causes and “stands to benefit from political conservatism perhaps more than anyone on this list.” Do they control your life, or the price of Rollback specials?
— Rupert Murdoch (cue dramatic pipe organ), for being the grand baron of a media organization who gave $1 million to the Republican Governors’ Association last year. Does he control your life, or do you choose to watch Fox News or read the Wall Street Journal and make what you will of the stories within?
— Donald Trump (cue noisy intraparty debate)! He controls this news cycle, not your life.
Read the whole list here…
Several progressive groups and commentators are not pleased with President Obama’s recent visit to the Chamber of Commerce. They argue that Obama’s association with the Chamber and its initiatives will prove unpopular for the president in the long-run. This argument is made three different ways. First, the president’s critics say the Chamber of Commerce is an unpopular lobbying group. Robert Borosage at the Huffington Post put it bluntly when he wrote, “Under the guidance of Tom Donohue, the Chamber has become less a business association than a right-wing lobby operation that makes its money selling its services to entrenched corporate interests.” Second, these critics argue, it will be a big political mistake for President Obama to make friends with big business. Adam Green of the Progressive Change Campaign Committee asks rhetorically if “Obama is picking up some niche of voters by sucking up to Wall Street while dragging progressives along. That’s just not true. What voters is he picking up? None.” Third, the president’s critics argue that the White House and the Chamber’s common cause of promoting the South Korean free trade agreement (FTA) will be seen as a job-killing measure. Public Citizen issued a statement that says it is “mortifying” to see Obama “allying [with] his fiercest political opponents to help him overcome the majority of Americans who oppose more-of-the-same job-killing trade agreements.”
Polling data casts significant doubt on all three claims.
First, the Chamber of Commerce is more popular than many suppose. In January 2010, Harris Interactive ranked the Chamber as one of the top five most-trusted organizations in Washington. Sixty-six percent of those who were familiar with the organization said they trusted it “a great deal” or a “fair amount.” While it is clear that some in Washington view the Chamber unfavorably, the organization has local and affiliate chapters throughout the country. These local connections help the Chamber of Commerce remain a popular institution.
Second, the business community’s image is multifaceted. Looking at the polls, it’s correct to conclude that big business is not exactly at the high-water mark of its popularity. Gallup’s latest polling shows that only 19 percent have a lot or a great deal of confidence in big business. However, while big business is certainly one part of the larger business community, there are other important components. Small business and entrepreneurs are very popular, as is the idea of free enterprise. In addition, 66 percent told Pew pollsters that the strength of this country is based on the success of American business. And while Pew has not updated the question since 2009, the trend has shown remarkable consistency in its 15 askings since 1987. As the president acknowledged in his speech on Tuesday, “the men and women in this room are living testimony that American industry is still the source of the most dynamic companies, and the most ingenious entrepreneurs.” With the White House emphasizing the need to “win the future” through innovation and job creation, the more positive aspects of American business are likely to be on display. While Americans have reservations about big business, especially its influence in Washington and its respect for the public good, that doesn’t diminish the positive attributes of the business community.
Third, the White House’s current embrace of FTAs may turn out to be a popular move. Bloggers had a host of colorful terms to refer to FTAs in their analysis of the president’s speech on Tuesday. Borosage calls them “corporate trade accords.” Think Progress referred to “unfettered free trade deals.” Polling on FTAs has shown attitudes growing more negative towards them over the last decade. A plurality of 47 percent told NBC/Wall Street Journal pollsters in November 2010 that free trade agreements have hurt the United States overall. However, according to a January 2011 Gallup poll, 53 percent said they approved of the pending free trade agreement with South Korea. Americans may have concluded that participation in global trade is beneficial for the economy. They aren’t hostile to a more globalized economy, either. Seventy-eight percent of respondents told the Washington Post in a recent survey that the “the trend toward a global economy” is a good thing. With few initiatives available to the White House to promote job creation concretely, an international agreement, signing ceremony and all, could be a strong and visible pro-job policy for the president—if it’s cast in the proper light.
The Annual Meeting of the World Economic Forum (WEF), which brings together hundreds of business, political, and social leaders from around the world, began today in Davos, Switzerland. The Davos agendas in the last couple of years have been dominated by the causes and costs of the Great Recession. However, the theme for this year’s meeting, Shared Norms for the New Reality, suggests that the focus will shift to discussing the economic and political partnerships necessary to transform the prevailing (modest) recovery into a more inclusive and sustainable global growth model.
An indicator of the expected dialogue was the release of the “More Credit with Fewer Crises: Responsibly Meeting the World’s Growing Demand for Credit” report last week by WEF and McKinsey & Company. WEF undertook the study leading to this report in response to some of the common concerns raised by attendees of the Davos 2010 meeting, which included striking a balance between economic growth and excessive leverage as well as identifying the under- and over-served areas of the credit market. The stage has now been set for an animated debate among participants with the report’s finding that the world needs to double its existing credit levels by 2020, an increase of more than $100 trillion, to sustain the economic recovery and enable the developing world to achieve its growth potential.
For their study, WEF and McKinsey developed a detailed model using historical leverage levels and forecasted potential debt demand to 2020 across 79 countries, representing 99 percent of world credit volume. They used an estimate of credit stock tracking GDP growth (flat global leverage) until 2020. This includes modest deleveraging in developed markets that is offset by credit growth in developing markets. However, it will be interesting to see if the base-case assumption of flat global leverage holds true given the findings of Carmen and Vincent Reinhart, who examined 15 recent financial crises in their paper “After the Fall.” The Reinharts show that the median decline in credit/GDP ratio in countries affected by a crisis is 38 percent over a ten-year period following the crisis. Detractors of the WEF-McKinsey report will probably welcome this reduction in leverage, even if it is at the cost of forgone growth opportunities, as a necessary reduction in the debt/equity ratio. The WEF-McKinsey team, on the other hand, would argue that global deleveraging will result in insufficient access to debt financing to various parties, from American homebuyers to Chinese consumers and Indian microfinance firms, that are essential for global growth.
Rohan Poojara is a research assistant at AEI.
The next time you call your cell phone company and get Rajiv in India, there’s a good chance that Rajiv is outsourcing some of his own tasks to Marcos in the Philippines.
The Financial Times’s beyondbrics blog has an interesting post about how many Indian outsourcing companies are now outsourcing some of their own back-office operations to more cost-effective labor markets like the Philippines. It’s a fascinating tale of connectivity and market integration.
So far, outsourcing has been a net plus for Indian companies like Tata Consultancy Services, as it helps them further reduce operating costs and increase efficiency. And, unlike in our country, there has been little complaining in India about jobs moving from Mangalore to Manila. But with increasing competition from countries such as the Philippines, Thailand, and perhaps some African countries, will India start getting nervous about losing its comparative advantage in the world’s service economy?
The other lesson to take from this is the limits of India’s service economy in generating wide-scale employment for India’s lower middle class and poor. As Indian companies outsource some of their lower-level tasks to other developing countries, the service jobs that will remain in India will be those that require higher skilled (in other words, more educated) workers.
So we come full circle to one of India’s two biggest human capital challenges: education (the other being health). It’s more and more evident that there will be no easy way out for the Indian poor—not agriculture, not manufacturing—without a massive push for higher and more widespread educational availability and quality.
The last couple of years have been tough for those of us who defend the moral superiority of free markets. We constantly have to respond to the trope that “unfettered capitalism,” “the free market run amok,” and “Wall Street greed” caused the financial crisis.
A friend and I were recently corresponding about how best to respond. After all, greed is a serious moral problem. He argued that we need to say something more than “privatize Fannie and Freddie.” For whatever the economic wisdom of that advice, it does nothing to answer the overwhelming public sense that, somehow, a greedy cabal of bankers caused or at least contributed to the crisis.
In responding to this concern, I said that I have tended to follow Adam Smith. That is, I assume that we are a fallen race, capable of good and bad. Therefore, we should treat greed as, to some degree, ubiquitous, and consider what incentives best channel legitimate self-interest, as well as greed and creative freedom, into socially beneficial outcomes. In explaining the financial crisis, the politically motivated degrading of mortgage eligibility standards, along with overly complicated financial instruments and contaminated ratings standards, seem to explain a lot. Greed looks to me mostly like noise rather than signal (except in specific instances of downright corruption, for which we have laws). If the same basic outcome would have occurred if people were just following their legitimate self-interest, then greed doesn’t offer much by way of explanation.
My own suspicion is that when people think that greed explains the financial crisis, they’re falling for a lazy explanation, akin to seeing a car blow up and “explaining” it by saying that there was oxygen present.
My friend agreed, but asked: “Are current laws against corruption really adequate, or are there useful opportunities for reform? Is our system of greed-channeling incentives rightly constructed? Doesn’t the behavior of the banks before, during and since the crisis demonstrate that in fact we are not channeling the right incentives?”
Those are just the right kinds of questions. Greed is a moral and spiritual problem, and its solutions are also moral and spiritual. But economically, what we want is to make sure that whether someone is acting out of greed, legitimate self-interest, or whatever, they don’t have incentives to destroy the financial system. If financial reforms require that no banker ever be greedy, however, we’re doomed.
The remaining problem, which my friend noted, is that this response doesn’t really satisfy the legitimate moral concern that greed is bad. It can sound like we’re saying: “Well, yeah, greed is bad, but you can’t really do anything about it.” What we want is to say something like this: “If you care about fighting greed, you should be a capitalist.” I’m still thinking about how to make that point. But happily, Dean Zarras anticipated it in a recent piece at Forbes, “How the Free Market Tames Greedy Investors.” Read the whole thing.
The Indian newspaper The Hindu has published a fascinating story about the Indian city of Pune, which is quickly becoming a hub for India’s burgeoning automobile industry. Between 2006 and 2008, the city and its surrounding region received almost US$2.6 billion in auto investment and is expected to receive another $8.6 billion between 2008 and 2013.
The global financial meltdown only underscored the importance of cost control and cost-effectiveness for auto manufacturers and further re-affirmed their decision to move to cheaper manufacturing locations available in India, particularly as quality was not going to be compromised.
We normally think of India’s comparative advantages in the service sector (IT, telecommunications) rather than in manufacturing; but does Pune, coined “India’s Detroit,” foretell broader changes in India’s economy?
In my conversation with Hindustan Times foreign affairs editor Pramit Pal Chaudhuri in July, Pramit argued that India—and not China—will become the world’s premier manufacturing power because of its ability to produce high quality products at low cost, undercutting Western manufacturers like Japan and Germany on cost and undercutting China on quality and precision.
In Pune, multinational companies seem to agree. New auto projects in the city include an $800 million Fiat-Tata Motors joint venture, a $280 million General Motors project, and a $760 million project by Volkswagen. For many years now, companies in India have manufactured parts such as brakes and tires for luxury car manufacturers in Europe and Japan. As more and more car components are made in India, the inevitable next step is to manufacture the whole car. And because of India’s highly trained human resource base, it could truly compete (as opposed to China) in a luxury car market, for example.
Anant Sardeshmukh, director of a regional chamber of commerce, puts it this way:
At present, one lakh [100,000] engineers are working in and around Pune, a figure probably unmatched anywhere in the world … This region has a steady supply of trained technical manpower with more than 1,000 technical and engineering institutions dotting the landscape. There is a steady availability of a 3-lakh-strong qualified manpower.
Since 2001, Indian companies have also won the Deming Application Prize, an award for businesses operating in Japan that make major advancements in reducing the number of errors during the manufacturing process, 13 times—more often than any other country.
Each of these signs—skilled human resources, high quality production, and low costs—point to a more diversified and competitive Indian economy in the future. Infrastructure and a difficult business environment are big hurdles to jump, but in India’s federal system, where states and regions can compete against each other (see how Tata moved its Nano car factory from West Bengal to Gujarat because of political difficulties in the former), Pune’s experience could be a sign of what’s ahead.
Apoorva Shah is a research fellow at AEI.
From Friday’s Wall Street Journal editorial, “Gates and Buffett Take the Pledge,” by Kimberly O. Dennis:
Bill Gates and Warren Buffett announced this month that 40 of America’s richest people have agreed to sign a “Giving Pledge” to donate at least half of their wealth to charity. With a collective net worth said to total $230 billion, that promise translates to at least $115 billion. It’s an impressive number. Yet some—including Messrs. Gates and Buffett—say it isn’t enough. Perhaps it’s actually too much: the wealthy may help humanity more as businessmen and women than as philanthropists.
Successful entrepreneurs-turned-philanthropists typically say they feel a responsibility to “give back” to society. But “giving back” implies they have taken something. What, exactly, have they taken? Yes, they have amassed great sums of wealth. But that wealth is the reward they have earned for investing their time and talent in creating products and services that others value. They haven’t taken from society, but rather enriched us in ways that were previously unimaginable.
A 2004 paper by Yale Economics Professor William D. Nordhaus concluded that “only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers” [emphasis added].
In that case, the total value created for society from Bill Gates’s innovative activities, including starting Microsoft, far exceeds his own personal gain. In the process of creating benefits for billions of consumers around the globe, Gates has certainly amassed great wealth, but the vast majority of the benefits from Gates’s innovative genius have already gone to consumers, as lives around the world have been changed for the better because of Microsoft products. By introducing technological changes that have profoundly and permanently affected the world in immeasurably positive ways, Gates has already generated billions of dollars worth of value for consumers in hundreds of countries, and should feel no obligation to “give back” any more.
Simply put, Gates has already “given at the office,” and the contribution to society from his capitalist activities will likely dwarf the contribution to society from his charitable giving, as Kim Dennis suggests.
(Thanks to Chris DeMuth for the title.)
We thought it ironic and worth pointing out that The British East India Company, which paved the way for the military and political takeover of India by the British crown in 1857, was recently purchased by an Indian entrepreneur, Sanjiv Mehta. You can watch his interview on CNBC here.
Starting as a commercial outpost in India in the 1750s, trading in cotton, silk, indigo, dye, and tea, the company gradually came to rule large swathes of India. Under General Robert Clive, it waged wars against the Mughal rulers of Bengal, Bihar, and Orissa. Clive thus became the first governor general of Bengal. Over a 100-year period, from 1757 to 1857, the company consolidated its rule and functioned more as a nation than a trading firm. The revolution of 1857 finally ended company rule, and India came to be directly administered by the British crown.
The East India Company was involved in other revolutions around the world as well—The Opium Wars resulting in Britain’s seizure of Hong Kong (19th century) and the Boston Tea Party, the revolt against the tax on tea imported into America by the company and a key event leading to the American Revolution. All historic events in the tale of one of the largest multinational companies ever that was founded way back on December 31, 1600, to trade with the East Indies.
Aparna Mathur is a resident scholar at AEI, where Rohan Poojara is a research assistant.
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