Category: Uncategorized

Ritz for The Hill: How to Strengthen the Bipartisan Infrastructure Framework by Controlling Costs

Posted on by The Progressive Policy Institute

As lawmakers return to Washington this week, one of their top priorities will be crafting legislation based on the bipartisan infrastructure framework agreed to by President Biden and Senate negotiators last month. Although that agreement set top-line numbers for broad categories of spending, the details for how the money would be spent still need to be fleshed out. Congress should maximize the impact of this transformative investment by including provisions to reduce construction costs and direct funds towards the most beneficial projects.

The costs of building infrastructure in the United States are significantly higher than they are in other countries. New York is home to some of the world’s most expensive mass transit projects, sometimes costing several billion dollars per mile, while costs in other American cities also dwarf those of comparable projects internationally. Roads are no better: A recent tunnel in Seattle cost more than three times as much as a similar project in Paris and seven times as much as one in Madrid. If policymakers can bring the cost of each project down closer to international norms, they can build more infrastructure with the same pool of funds.

Read the full piece. 

PPI Statement on White House Executive Order on Promoting Competition

Posted on by The Progressive Policy Institute

PPI Statement on White House Executive Order on Promoting Competition

The Progressive Policy Institute (PPI) released the following statement on the Biden administration’s Executive Order aimed at promoting competition. The bulk of this Executive Order is appropriately focused on problems caused by a lack of competition in labor markets, agricultural markets, and health care markets. The 72 initiatives included in this order will solve many of those problems and deliver concrete, tangible benefits for Americans.

“The Progressive Policy Institute commends the Biden administration for working to level the playing field for American consumers. This whole-of-government approach will put workers and families first, a promise the president made during his campaign that he is delivering on today.

“The administration’s actions to ban non-compete agreements and reduce unnecessary occupational licensing will make it easier for workers to pursue economic opportunity and increase their power in the labor market. The order also lowers the costs of medical devices by allowing patients to purchase hearing aids over the counter. Consumers will save money on their internet bills with new rules banning excessive early termination fees and new transparency requirements that will make comparison shopping easier. Changes to the airline industry will make it easier for consumers to get refunds and force airlines to display all add-on fees upfront. Lastly, the order highlights the real harms caused by hospital consolidation in recent decades and directs antitrust enforcement agencies to review and revise their merger guidelines to protect patients.

“While we celebrate many reforms and initiatives in this Executive Order, we are also concerned by policies that could potentially harm job-creating sectors and growth as we recover from the pandemic, including constraints on tech/e-commerce innovation and a return to the long-ago solved issue of net neutrality.

“We hope that the administration also engages with Congress to create meaningful, codified reforms that support consumers for generations to come. Legislative action is necessary to ensure the enduring legacy of these historic initiatives.”

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PPI Unveils High-Level Advisory Council to Reinventing America’s Schools Project

Posted on by The Progressive Policy Institute
Council features veteran K-12 leaders, a former U.S. Education Secretary, parents’ groups, public school choice reformers, education foundations and philanthropists, and rigorous policy analysts and evaluators. 

Today, the Progressive Policy Institute’s Reinventing America’s Schools Project announced their Advisory Council, which is composed of leaders in education innovation from across the country.

“PPI believes that ensuring high-quality public schools for all our children is the civil rights imperative of our times,” said Will Marshall, PPI President. “We’re delighted to welcome this impressive roster of leading education reform practitioners and innovators to the Reinventing Public Schools (RAS) Project.”

The Advisory Council will be a resource for strategic thinking, a sounding board for modernizing ideas, and a force for public advocacy.

“Our goal is to speed the pace of K-12 evolution away from standardized, factory-style schools toward 21st century schools designed around principles of parental choice, school autonomy, diverse learning programs and strict public accountability for results,” Marshall said.

The council will be led by David Osborne, Director Emeritus of PPI’s Reinventing America’s Schools Project and the author of Reinventing America’s Schools: Creating a 21st Century Education System. The Reinventing America’s Schools Project Advisory Council includes:

David Osborne, Director Emeritus of the Reinventing America’s Schools project

Myrna Castrejon, California Charter Schools Association

A.J. Crabill, Texas Education Agency

Arne Duncan, Emerson Collective and former Secretary of Education

Howard Fuller, Founder and Director of the Institute for the Transformation of Learning at Marquette University and former Superintendent of Milwaukee Public Schools

Chris Gabrieli, Empower Schools

Robin Lake, Center on Reinventing Public Education

Maya Martin, Parents Amplifying Voices in Education

Jacinto Ramos, Ft. Worth Independent School District and Council of Urban Boards of Education (CUBE)

Keri Rodrigues, National Parents Union

Andy Rotherham, Bellwether Education Partners

Mary Seawell, Gates Family Foundation

Kameelah Shaheed-Diallo, The City Fund

Joe Siedlecki, Michael and Susan Dell Foundation

Paul Vallas, Co-Founder of the Vallas Group, Inc. and former Superintendent of Bridgeport Public Schools

The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.

The Reinventing America’s Schools Project inspires a 21st century model of public education geared to the knowledge economy. One model, charter schools, are showing the way by providing autonomy for schools, accountability for results, and parental choice among schools tailored to the diverse learning styles of children. The project is co-led by Curtis Valentine and Tressa Pankovits.

Follow the Progressive Policy Institute.

Follow the Reinventing America’s Schools Project.

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Mosaic Economic Project Announces Applications Open for September Women Changing Policy Cohort

Posted on by The Progressive Policy Institute

The Mosaic Economic Project application process is now open for the September 2021 Women Changing Policy workshop, scheduled for September 13-15, 2021.

“The Women Changing Policy workshop is an opportunity for diverse women with expertise in economics and technology to hone the skills needed to communicate their work and ideas to policy makers and the media,” said Crystal Swann, Mosaic Economic Project Lead and PPI Senior Fellow. “Through our interactive format, participants get hands-on experience learning the ins and outs of Washington politics and on how to become a go-to policy expert. And it’s a chance to expand their networks.”

This is the third Women Changing Policy workshop. Previous workshops have included candid conversations with influencers in public policy, including leaders and representatives from the United States Congress, the media, and other experts from the policymaking ecosystem.

We encourage women with expertise in economics, finance, technology, telecom and corporate governance to apply. Applicants should be well established in their careers – be it at a corporation, academic institution or NGO–and looking for opportunities to grow their influence on critical issues, from the wealth gap to infrastructure to health care. The Mosaic Economic Project aims to bring new voices to the policy arena. To that end, we value diversity in applicants. This workshop will be held virtually, and the deadline to apply is August 31, 2021.

Interested applicants should apply here.

The Mosaic Economic Project is a network of diverse women in fields of economics and technology. Mosaic programming provides coaching on presenting skills and focuses on connecting and advocating for cohort participants’ to engage in public policy debates, with a particular focus on engaging Congress and the media.

The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.

Follow the Progressive Policy Institute.

Follow the Mosaic Economic Project.

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Media Contact: Aaron White – awhite@ppionline.org

Encouraging AI adoption by U.S. SMEs

Posted on by The Progressive Policy Institute

Introduction:

For the firms that adopt them, artificial intelligence (AI) systems can offer revolutionary new products, increase productivity, raise wages, and expand consumer convenience.[1] But there are open questions about how well the ecosystem of small and medium-sized enterprises (SMEs) across the United States is prepared to adopt these new technologies. While AI systems offer some hope of narrowing the recent productivity gap between small and large firms, that can only happen if the technologies actually diffuse throughout the economy.

While some large firms in the U.S. are on the cutting edge of global AI adoption, the challenge for policymakers now is to help these technologies diffuse across the rest of the economy. To realize the full productivity potential of the U.S., AI tools need to be available to 89% of U.S. firms that have fewer than 20 employees and the 98% that have fewer than 100.[2] An AI-enabled productivity boost would be particularly timely as SMEs are recovering from the effects of the ongoing COVID-19 crisis.

The report discusses the promise for AI systems to increase productivity among U.S. SMEs, the current barriers to AI uptake, and policy tools that may be useful in managing the risks of AI while maximizing the benefits. In short: there is a wide range of policy levers that the U.S. can use to proactively provide the underlying digital and data infrastructure that will make it easier for SMEs to take the leap in adopting AI tools. Much of this infrastructure operates as a type of public good that will likely be underprovided by the market without public support.

Benefits of AI adoption:

The central case for AI adoption is that human cognition is limited in a variety of ways, most notably in time and processing power. Software tools can improve decision-making by increasing the speed and consistency with which decisions can be made, while also allowing more decisions to be planned out ahead of time in the event of various contingencies. Under this broad framework, we can think about “AI” as being a broad suite of technologies that are designed to automate or augment aspects of human decision-making.

AI tools are already being used across a wide range of domains to decrease power costs, improve logistics and sourcing systems, predict cash flows, steamline legal analysis, aid in drug discovery, improve factory safety conditions, and identify logistics efficiencies. This is in addition to opening up entirely new fields like autonomous vehicles, drone delivery systems, and instantaneous language translation.

While many of AI’s most eye-catching use cases will likely remain the preserve of large platforms, the technology also holds tremendous promise for SMEs. The adoption of third-party AI systems will notably enable SMEs to streamline mundane (but often costly) tasks such as marketing, customer relationship management, pre- and post-sales discussions with consumers, and Search Engine Optimization (SEO). These systems can provide a lifeline for SMEs who are overwhelmed by the many challenges of running a business, and they can expand the number of businesses that are eligible for certain financial supports. For example, AI tools can be used to improve the accuracy of credit risk underwriting models and using alternative data sources and a streamlined process, they can make it easier for SMEs to take out loans they otherwise might not qualify for under traditional methods. Along similar lines, research shows that AI-driven robotics have (and will continue) to boost the productivity of SMEs in the manufacturing industry.

Importantly, this upcoming wave of AI technology can help SMEs catch up with larger, international firms because it can democratize the benefits of large information technology (IT) investments that superstar firms have been seeing over the last decade.

The economist James Bessen has argued that the top 5% of firms in many industries have been increasingly pulling away from the rest of the field because they’ve made large investments in proprietary IT systems. Their smaller rivals struggle to develop their own systems because they lack the necessary scale to hire a large stable of in-house technical talent. Amazon, for example, has a team of 10,000 employees working to improve their Alexa and Echo systems.

While AI tools can’t fully reverse this trend, they can help shrink the gap when embedded into Software as a Service (SaaS) platforms that smaller firms can make use of without the same level of investment. Essentially, through general-purpose AI tools, SMEs can have access to a host of productivity enhancements that these proprietary IT systems offer, but at a price point that is economical for SMEs. By shrinking this productivity gap, smaller firms can begin to compete in earnest while differentiating from large firms through improved customer service and greater product diversity. This will give a large leg up to SMEs who adopt these AI systems and help them better compete with large global incumbent firms.

Consider a firm like Keelvar Systems, which uses advanced sourcing automation to help businesses rapidly shift supply chains around the globe in the event of disruptions or delays. Essentially, it replaces or augments the work that a large supply chain and sourcing office would do within a firm. By using their service, or others like it, SMEs have the ability to benefit from similar levels of sophistication in their supply chain management without having employees spend hundreds of hours on tedious tasks or maintaining expensive proprietary IT systems.

There are firms like Legal Robot that have created a series of tools to help small businesses access legal services that would otherwise require a small army of in-house lawyers. With their service, SMEs can use smart contract templates based on their industry, receive instant contract analysis to make sure they are receiving fair terms and can automate certain aspects of compliance with laws like the GDPR.

Likewise, companies like Bold360 have helped SMEs improve their customer service experiences by offering a variety of AI-powered-chatbots and tools. Many basic customer concerns about products or delivery can be handled by these basic chatbots, freeing up human customer representatives to focus their time on the hard or advanced cases. Again, the pattern here is there is a service that large, multinational companies have been investing billions of dollars to create proprietary versions of, and now the customizability of AI is helping this service become more accessible to SMEs.

What are the barriers to AI adoption for SMEs in the U.S. and what can policymakers do to help create a welcoming environment?

Data investment as a public good

Depending on the context, data can often have the same traits as other public goods. First, it is non-rival—the marginal cost of producing a new copy of a piece of data is zero. Stated differently, multiple individuals can use the same dataset at almost no additional cost. The second important trait is that data is hard to exclude. Consider this report. Once it has been posted online, it is difficult to prevent people from accessing and sharing it as they see fit. This is one of the reasons why copyright infringement is so hard to stamp out.

Oversimplifying, these two features can lead to two opposite problems. On the one hand, economic agents might underinvest in public goods, absent government-created appropriability mechanisms (such as patent and copyright protection). Conversely, public goods tend to be underutilized (at least from a static point of view). Any price that enables economic agents to recoup their investments in a public good will be above the good’s “socially optimal” marginal cost of zero. Public good policies thus involve a tradeoff between incentives to create and incentives to disseminate. For example, patents give inventors the exclusive right to make, use and sell their invention; but inventors must disclose their inventions, and these fall into the public domain after twenty years.

What does this mean for data and artificial intelligence? If policymakers think that data is an essential input for cutting-edge AI, then they should question whether obstacles currently prevent firms from investing in data generation or disseminating their data.

While policies in this space involve significant tradeoffs, some offer much higher returns to social welfare. For instance, to the extent policymakers believe existing datasets are being underutilized, purchasing private entities’ data (through voluntary exchanges) and placing it in public data trusts would be a better policy than imposing data sharing obligations (which could undermine firms incentive to produce data in the first place). This is akin to the idea of government patent buyouts.

Of particular interest for policymakers, however, is the fact that some SMEs are sitting on top of data flows that are not being fully utilized because it is expensive to make data usable and these datasets may not be very valuable in isolation. As an example, industry-level manufacturing data might be quite valuable to all firms in a sector, but the dataflows from one SME are much less valuable. The U.S. could align incentives by providing investment funds to quantify various aspects of business flows and then submit them to public data trusts, which could be accessible for use by all firms in the industry. This would essentially be treating valuable dataflows as a type of public infrastructure that needs government investment to be fully realized.

This kind of public investment can happen not only through incentives for private firms but through the public sector as well. Governments at all levels (state, local, and national) have valuable dataflows regarding infrastructure development, the organization of public transportation, and general macro-level economic data that can be turned into open datasets for public and commercial use. Particularly on the national level, the U.S. should consider investment in IT infrastructure that can coordinate the submission of open datasets on the state and local level.

Indeed, if key scientific or commercial datasets do not yet exist, the public sector may be best positioned to create them in the first place as a type of digital infrastructure provision. One notable structure that may help in this regard is the idea of a Focused Research Organization, which would provide a team of researchers with an ambitious budget and a nimble organizational structure with the specific goal of creating new public datasets or toolkits over a set time period.

Provide regulatory certainty

For SMEs deciding whether to invest in adopting AI tools, regulatory and compliance costs can be a significant deterrent. Policymakers should recognize that regulation is often more burdensome for small firms that generally have less ability to shoulder compliance costs. Especially in industries with low marginal costs, such as the tech sector, larger firms can spread fixed compliance costs across more consumers, giving them a competitive edge over smaller rivals. Regulation can thus act as a powerful barrier to entry. For instance, a study found that the European experiment with GDPR led to a 17% increase in industry concentration among technology vendors that provide support services to websites.

This is not to say that additional regulation is, or is not, necessary in the first place. Indeed, there are a host of malicious or unintentional harms that can occur from improperly calibrated AI systems. Regulation can be a powerful tool to prevent these harms and, when well-balanced, can promote greater trust in the overall ecosystem. But potential regulation should follow sound policymaking principles that reduce the regulatory burden imposed on firms, notably by making regulation easy to understand, risk based, and low-cost to comply with.

In the U.S. there is to date no overriding national AI regulation. Instead, each sectoral regulator (i.e. Federal Aviation Administration, Security and Exchange Commission, Federal Trade Commission, etc.) has been steadily increasing their oversight over the use of algorithms and software in their specific area. This is likely an appropriate approach, as the kinds of risks and tradeoffs at play are going to be very different in healthcare or financial decision-making when compared to consumer applications. As this approach develops, it would be prudent to develop a risk-based framework that allows for more scrutiny of algorithmic decision-making in sensitive areas while giving SMEs confidence to invest in low-risk areas with the knowledge they will not later take on large compliance costs.

However, regulation over data protection has been far more segmented and piecemeal. And the state-by-state patchwork of rules that has developed can be a significant deterrent for SMEs when considering whether to invest in the use of certain AI tools. Policymakers should consider an overriding national privacy law that would be able to set standard rules of the road over the protection of data in all 50 states so that U.S. SMEs can invest with confidence.

Finally, U.S. policymakers should consider aggregating all this information through the creation of a dedicated AI regulatory website that provides a toolkit of resources for SMEs about the benefits of AI adoption for their business, the potential obligations and roadblocks that they need to be aware of, and best practices for cybersecurity hygiene and data sharing.

Expand the AI talent pool

A lack of skilled talent is one of the biggest barriers to AI adoption as the technical skills required to build or adapt AI models are in short supply. In the U.S., especially, smaller companies struggle to compete with the high salaries paid out by large tech firms for top-end machine learning engineers and data scientists.

In broad strokes, this skills shortage can be alleviated in two ways: through upskilling the domestic population and by improving immigration pathways for global talent.

To upskill the domestic population, one relatively simple lever would be to pay some portion of the costs of individuals and businesses who wish to upskill. In the U.S., a portion of a worker’s retraining costs may be written off as a business expense so long as the worker is having their productivity improved in a role they currently occupy. But this expense is not tax deductible if the proposed training would enable them to take on a new role or trade.

For example, if a small manufacturing firm has technically competent IT staff who wish to attend a specialized training course on using machine vision systems in a warehouse environment, this expense would not currently be deductible as it would enable them to take on a new role within the company. This inadvertently creates an incentive to spend more on capital productivity investments than labor productivity investments. Addressing this imbalance would incentivize more firms to invest in worker retraining and help speed the creation of an AI workforce in the U.S.

Secondly, the U.S. needs to urgently address the shortcomings in the U.S. immigration system which make it more difficult for startups to compete with large incumbents on the basis of talent. Approximately 79% of the graduate students in computer science (and related subfields) studying in the U.S. are international students, which means a large majority of potential AI workers U.S. firms may look to recruit must operate through the immigration system. The cost, complexity, and length of this process inevitably favors large, incumbent firms who can afford to navigate the regulatory maze of procuring an H-1B or related work visa.

A recent NBER paper showed in detail the myriad ways in which access to international talent is important for startup success. Utilizing the random nature of the H-1B lottery system, the paper compared startups that randomly received a higher percentage of their visa applications approved to those who did not. The random nature of the H-1B lottery makes an ideal policy experiment because it allows for a clean test in which other potentially confounding variables are controlled for. The study found that a one standard deviation increase in the likelihood of successfully sponsoring an H-1B visa correlated with a 10% increase in the likelihood of receiving external funding, a 20% increase in the likelihood of a successful exit, a 23% increase in successful Initial Public Offering, and a 4.8% increase in the number of patents filed by the startup.

Policymakers could begin to counter this effect by waiving immigration fees for firms of a certain size and by streamlining the application process.

Further, policymakers should look to create a statutory startup visa so that international entrepreneurs have a viable pathway into the U.S. to launch firms of their own. According to research by Michael Roacha and John Skrentny, international STEM PhD students are just as likely to report wanting to work for or launch their own firm as native-born students, but the difficulty of our immigration system pushes them towards working at large incumbent firms.

Using these two levers of upskilling and immigration reform, the U.S. should increase the supply of AI talent available to SMEs or to launch SMEs themselves and thereby spur the adoption of AI adoption.

Conclusion

Artificial intelligence systems hold great potential to streamline the costs of doing business in a modern economy, particularly for SMEs. The last 20 years of the information technology revolution have helped large, established firms reach the cutting edge of productivity while smaller firms have been left behind. But general-purpose AI tools now provide an opportunity for SMEs to take advantage of many of these IT advancements at a cost and a scale that is feasible for them. Policymakers should attempt to proactively build out the digital infrastructure that will make it easier for SMEs to take the leap in adapting AI tools.

Summary of policy recommendations:

Data investment as a public good:

  • Where appropriate, align incentives for the private sector to contribute industry-level SME data to public and private data trusts that could be used by everyone.
  • Invest in making more government datasets open to the public.
  • Fund Focused Research Organizations or similar groups with the explicit goal of creating new scientific and commercial public datasets.

Provide regulatory certainty:

  • Clarify existing regulations and the obligations that SMEs must meet when utilizing a new AI tool.
  • Encourage the development of a risk-based framework that allows for more stringent regulation of sensitive applications while giving certainty to SMEs on investment in low-risk applications.
  • Pass an overriding national privacy law so that SMEs aren’t deterred from investing by a patchwork of differing state-by-state laws.
  • Consider the creation of a new SME regulatory website that provides informational resources to SMEs about the benefits of AI adoption for their business and the potential roadblocks that they need to be aware of.

Expand the AI talent pool

  • Encourage upskilling of the U.S. population by making worker retraining deductible as a business expense.
  • Reevaluate U.S. immigration pathways to make them more attractive for international technical talent.
  • Streamline the immigration application process and waive fees for firms below a certain size to make it easier for SMEs to compete for technical talent.

[1] This report is an adaptation of an earlier paper coauthored with Dirk Auer titled “Encouraging AI Adoption in the EU”.

[2] Annual Survey of Entrepreneurs – Characteristics of Businesses: 2016 Tables, United States Census Bureau

Constructing an Effective Manufacturing Policy

Posted on by The Progressive Policy Institute

President Biden’s American Jobs Plan proposed to spend $300 billion on rebuilding America’s manufacturing sector. The funds would be distributed through a variety of channels, including $50 billion in semiconductor manufacturing and research, $50 billion for a new office to fund investments to support production of critical goods. Biden also called for the creation of a “new financing program to support debt and equity investments for manufacturing to strengthen the resilience of America’s supply chains.”

The US Innovation and Competition Act of 2021, which passed the Senate in early June, also highlights pro-manufacturing polices. These include funding for semiconductor manufacturing and research, money for regional technology hubs, and the creation of the position of Chief Manufacturing Officer in the White House to coordinate the nation’s manufacturing policies.

We believe that these plans are a big step in the right direction, and applaud the President’s and the Senate’s focus on manufacturing. But the nation’s policy framework for manufacturing needs more explicit emphasis on digitization of physical production, which is the only way that American manufacturers can compete over the long run and create new jobs. In addition, the 2017 Tax Cuts and Jobs Act (TCJA) introduced an odd quirk into the business tax code that will make it more expensive for some manufacturers to borrow.  That quirk needs to be fixed.

First, we review the facts about manufacturing investment.  Government figures show that domestic investment by manufacturers has been lagging the rest of the economy by a substantial margin. During the last business cycle—which started in 2007 and ended in 2019—the productive stock of equipment rose by 15% in the manufacturing sector, far less than the 47% increase in the rest of the non-farm business sector (see chart below). (Equipment includes everything from industrial machinery to trucks to computers and communications gear bought by manufacturers).

This weakness in factory investment undermines the usual argument that manufacturing workers have been mainly displaced by automation. Certainly automation has been progressing, but if capital investment in robots and the like were the main cause of job loss, the investment surge in equipment would have been much bigger.  The White House 100-day supply chain review points out that “many SME manufacturers are underinvesting in new technology to increase their productivity.” Contrast this with the warehousing industry (including fulfillment centers) where the productive stock of equipment rose by 91% from 2007 to 2019, even as employment soared.

Moreover, manufacturers have been lagging in software and R&D investment as well.  The productive stock of software in the manufacturing sector rose by 50 percent from 2007 to 2019, compared to a 135 percent increase in the non-manufacturing sector.  The productive stock of research and development rose by 47 percent in the manufacturing sector, compared to a 63 percent increase in the non-manufacturing sector.

The investment picture gets even worse when we look at specific industries within manufacturing. Consider the computer and electronics products industry, which includes semiconductor manufacturing. The productive stock of equipment in this industry did not grow at all from 2007 to 2019, and similarly for the stock of software. In other words, the computer and electronics product industry, including semiconductors, had no net investment in equipment and software over this 12-year stretch. This may help explain why government action to boost semiconductor manufacturing investment is necessary now.

Similarly, capital investment in the motor vehicle industry has been lagging. The 22 percent increase in the productive stock of equipment (including robots) is above the norm for manufacturing, but well behind the average for the nonmanufacturing sector. And investment in motor vehicle R&D, while still strong in absolute terms, has barely kept up with the industry’s need to shift to electric vehicles. Once again, the investment data helps us identify manufacturing sectors that need help in competing with China.

We note that the manufacturing sector is responsible for the entire slowdown in equipment investment compared to the 1990s.  That shows how important it is that the U.S. address the issue of weakness in investment in manufacturing.

So what can we do? Biden’s manufacturing plan and the Competition and Innovation Act passed by the Senate are both heading in the right direction, but they could be improved with an overarching vision. As PPI has noted in several reports, we need the American manufacturing industry to invest in digitization—not just robots on the factory floor, but manufacturing platforms that make it easier for American startups to join global supply chains.  The Biden Administration should think in terms of an Internet of Goods, where manufacturers plug into a network of companies that are linked digitally. The Biden manufacturing initiative should build on existing platforms such as Xometry and Fictiv to connect smaller suppliers.

The other big issue is funding. Manufacturing requires large capital investments, so borrowing costs are always a consideration. Unfortunately, in an example of the law of unforeseen consequences, key provisions of the 2017 TCJA are about to make it much more expensive for manufacturers and other capital-heavy businesses to fund their investments, even before any potential increase in the corporate income tax rate.

First, the TCJA permitted full expensing for investments in short-lived assets such as machinery and equipment. However, the “bonus depreciation” will begin phasing out in 2023 and will be eliminated by 2027. That will make it more expensive for manufacturing investment.

Second, the TCJA reduced the amount of interest expenses that most businesses could deduct from 50 percent to 30 percent of a business’s “earnings before interest, taxes, depreciation, and amortization” (EBITDA). Because of the pandemic, the CARES Act temporarily relaxed this restriction for 2020, but it comes back into effect for 2021.

Third, as of 2022, the TCJA further reduces the tax deductibility of interest to 30 percent of business “earnings before interest and tax” (EBIT).  The difference between EBIT and EIBTDA is depreciation and amortization, which can be enormous for asset-heavy manufacturers. This 2022 shift, as embodied in current law, will have the effect of reducing the amount of interest that a manufacturer or other investment-heavy company can deduct.

To understand the magnitude of this change, consider American Axle & Manufacturing, a leading automotive supplier that did $4.7 billion in sales in 2020. The company’s EBITDA was $720 million, and depreciation and amortization was $522 million. That means EBIT was only $188 million (Note: These numbers are all drawn from the company’s public 10K, with no contact with the company).

In 2020 American Axle paid $212 million in interest. Under the TCJA rules that apply to 2021, it would all be deductible, since $212 million is less than 30 percent of $720 million. Under the TCJA rules that apply to 2022 and after, assuming that all numbers remain the same, only $56 million of the interest payment will be deductible. Future borrowing will take the same hit.

When the TCJA was passed, the increased restrictions on the deductibility of interest seemed appealing to many policymakers for several reasons. First, it reduced the bias in the tax code toward debt financing. Second, it discouraged excess borrowing by companies. Third, it raised money and helped balance out the cost of cutting corporate income tax rates.

However, the increased restrictions are likely to disproportionately affect manufacturers, who as a whole paid $96 billion and $90 billion in interest in 2018 and 2019 respectively, more than any other sector of the economy except real estate (who could opt out of the new requirements).  The impact of this provision on companies like American Axle will be even greater if interest rates rise, as seems likely.

Given the acknowledged importance of manufacturing, it might make sense for lawmakers to consider extending the provision of the CARES Act that relaxes the limitations on interest expense deductions to avoid imposing another financial burden on the U.S. manufacturing sector.  This would also cover the coming shift to EBIT. Such a move might be especially appropriate if the current provisions of the tax law that phase out bonus depreciation stay in effect. If we care about domestic factory investment, it seems like a mistake to make it more expensive for manufacturers to borrow even while the depreciation rules become more restrictive.

 

PPI’s Paul Bledsoe Joins Charles Ellison on WURD Radio

Posted on by The Progressive Policy Institute

WURD Radio · Reality Check 6.29.2021 – Paul Bledsoe

PPI Strategic Advisor Paul Bledsoe joined Charles Ellison on WURD Radio for a conversation about the human cost of climate change, cutting Trump-era policies around methane regulations, and President Biden’s efforts to include bipartisan climate policy in his infrastructure package, among other things.

Listen to the full interview on WURD Radio’s Soundcloud.

Biotech Innovation: Two Important Questions

Posted on by The Progressive Policy Institute

INTRODUCTION

It’s rare when a single acquisition can offer insight into two different important questions in innovation. But the proposed purchase of cancer-diagnostic developer Grail — a startup with tremendous potential — by gene-sequencing leader Illumina is just that pivotal. First, is it pro-innovation for European antitrust regulators to have the power to block a deal involving two American biotech companies that do no substantial business in Europe? We argue that such “regulatory imperialism” by the EU has the potential to slow down biotech innovation, especially given the region’s generally lagging performance in biotech (BioNTech notwithstanding).

Second, under what conditions is vertical integration a socially beneficial strategy for accelerating innovation? Successful innovation in the biosciences often combines risk-taking by small companies with the development and regulatory resources of larger companies. We conclude that excessive antitrust focus on blocking vertical integration in the biosciences could impede the development of important new products and treatments.

These issues go far beyond Illumina and Grail. But it’s helpful to have the facts about this particular case. Grail has spent the past five years developing a diagnostic capable of screening for 50 different cancers at once — a test set to launch this year — while Illumina makes the hardware that performs those tests.  Illumina offered to buy Grail, with the idea of integrating Grail’s technology with its own, to simplify the process of using gene sequencing for clinical diagnostics on a massive scale. If successful, this would dramatically reduce the cost of performing cancer screenings.

The Federal Trade Commission (FTC) intervened to block the acquisition, worried that Illumina would block potential competitors of Grail from using its gene sequencers. Illumina promised to supply these competitors with gene sequencing equipment and supplies without price increases.  The FTC, through a complicated series of maneuvers that are not relevant to this paper, temporarily pulled back from its intervention to allow the European Commission to take the first swing at blocking the acquisition. The EU antitrust regulators are planning to rule by July 27 on whether to clear the merger.

And here’s where we come to the first issue: Should the EU antitrust regulators be considering a biotech deal that by the ordinary rules would not come under their jurisdiction? As the Wall Street Journal notes, “Since the merger doesn’t qualify for antitrust review under the bylaws of the European Union or any member states, the Commission asked countries to invoke Article 22 of the EU’s Merger Regulations. This rarely used provision allows countries to refer transactions to the Commission when their governments lack jurisdiction.”

This fits the general EU strategy of “regulatory imperialism.” Rather than focusing on innovation, the EU has tried to position itself as the global leader in regulation in a variety of areas, from artificial intelligence to chemicals to GMOs to data privacy.  The European approach to regulation has been framed by the precautionary principle, which puts less weight on the benefits of innovation and more on the potential harms.

That risk-avoiding approach is one important reason why Europe has consistently lagged in biotech. European biotech is not nonexistent — after all, Pfizer partnered with a German biotech firm, BioNTech, to develop a very successful COVID-19 vaccine. Nevertheless, data from the Organisation for Economic Co-operation and Development shows that business spending on biotech research and development (R&D) in the EU comes to roughly one-third that of the U.S.

Tacitly accepting European jurisdiction over American biotech deals has the potential to slow down commercialization of important technologies. According to the New York Times, Europe has been “a world leader in technology regulation, including privacy and antitrust.” In a recent speech, Emmanuel Macron said that during its turn at the helm of the EU presidency, France would “try to deliver a maximum of regulation and progress.” When the EU sets the global standard on regulation and companies choose to comply with it everywhere (even where standards are lower), that’s known as the “Brussels effect.”

First, on privacy, the General Data Protection Regulation (GDPR) has become a de facto floor on policy for many large multinational companies. The problem for companies — especially in biotech and software — is that there are very high fixed costs to product development (and low marginal costs for distribution), and reworking a product for a different regulatory environment is often more trouble than it’s worth. That leads to a race to the top (or bottom, depending on your perspective) in terms of regulation.

In its first few years in effect, GDPR’s flaws have become manifest and EU policymakers are starting to consider reforms to the law. According to a recent joint report from three academy networks, “GDPR rules have stalled or derailed at least 40 cancer studies funded by the US National Institutes of Health (NIH).” The authors go on to note that “5,000 international health projects were affected by GDPR requirements in 2019 alone.” This flawed model for privacy regulation has unfortunately been exported around the globe.

Second, mergers between globally competitive firms with a presence in multiple jurisdictions have to get clearance from multiple antitrust enforcement agencies. If a single agency in a large market objects to the merger, the deal might fall apart completely. For example, a merger between U.S.-based Honeywell and U.S.-based General Electric collapsed after the EU competition enforcement agency decided to block the deal out of concern it would create a monopoly in jet engines. Of course, the EU’s investigation of the Illumina-Grail merger takes that one step further, given the fact that Grail doesn’t conduct any business in the EU, and Illumina’s business there isn’t substantial, with revenues below the usual threshold for antitrust scrutiny for both the European Commission and individual countries.

The next important question raised by the Illumina-Grail purchase is the role of vertical integration.  We start with the simple observation that innovating in complex systems is both risky and expensive. That’s true in frontier industries such as electric vehicles and e-commerce, and it’s especially true in the biosciences, with the high hurdle set by the need for safety and efficacy.

The cost to bring a drug to market is a huge barrier for startups to remain independent. A 2020 paper in JAMA examining 63 of the 355 new therapeutic drugs and biologic agents approved by the U.S. Food and Drug Administration between 2009 and 2018 found that the median capitalized research and development cost per medicine was $985 million. Other studies using private data have found even higher figures. A 2019 study published in the Journal of Health Economics estimated the average cost to reach approval at $2.6 billion (post-approval R&D costs nudge the total up to $2.9 billion).

Should these complex systems be built by one company, which is better able to integrate all the pieces of the puzzle? (Tesla comes to mind when we are discussing electric vehicles). Or is it better to distribute the risk over multiple companies? The biotech industry has mostly followed this second strategy. Risky R&D is done by small firms with financing by high-risk capital such as venture firms. Then the resulting product, if successfully passing clinical trials, is acquired by a larger firm for commercialization.

In some cases, both strategies are important. The initial stages of research and development of a new idea are farmed out to a smaller company and financed by risk capital. And then when it comes time to build the idea into a complex system, the actual integration is done by a larger company, which has an established distribution network and marketing resources for reaching patients in a targeted fashion. This can greatly accelerate the development process.

The question, then, is whether this integration would be easier within one company or at arms-length. Illumina has made an offer to buy Grail, which was originally spun off from Illumina in order to get funding from risk capital. The goal, obviously, is to accelerate the development of this game changing integration.

The FTC has objected to the acquisition, because the agency worries about Illumina prioritizing its internal customer over other potential cancer diagnostics systems. Certainly, it’s true that some vertical mergers are anti-competitive. “Killer acquisitions” are one type of merger in biotech that is anti-competitive in nature. A recent paper from Ederer, Cunningham and Ma found that between 5% and 7% of acquisitions in the pharmaceutical industry are killer acquisitions, meaning the incumbent firm purchased the startup with the intention of shutting down one or more of its products, because the legacy company offers a competing product that is more profitable.

There is increasing agreement among regulators on both sides of the Atlantic that acquisitions — especially in the pharmaceutical sector — need to be scrutinized more closely if products have the potential to be killed off post-acquisition. One heuristic a regulator might use is to look at how much overlap there is between the acquired product and the incumbent, especially in terms of benefits and use cases. If the incumbent’s product is still on patent, then there is a significant incentive to acquire a competitive product that might be disruptive to an acquirer’s portfolio and shut down the new product.

But there’s little evidence that most vertical acquisitions are anti-competitive. Vertical mergers — or the combination of two companies at different layers of the supply chain — are less likely than horizontal mergers — acquisition of a direct competitor — to be anticompetitive as both economic theory and empirical evidence show. Regarding the theory, firms are engaged in “make or buy” decisions all the time. If they choose to produce an input in-house instead of buying it from the market, then they have vertically integrated (either by developing the capacity on their own or by acquiring another firm with that capacity). Prohibiting firms from vertically integrating via acquisition would forgo some of the benefits of economies of scope and economies of scale. A literature review by Lafontaine and Slade showed that vertical mergers were procompetitive on average.

One of the most common reasons vertical mergers are less suspect than horizontal mergers has to do with “double marginalization.” If you assume two products are monopolies in their respective markets, then the producers of those products will each charge the monopoly price, which is higher than socially optimal. If the two products are complementary, then the companies can merge and create a positive sum scenario by lowering prices. Lower prices reduce deadweight loss, which is good for consumers, and lead to higher profits for the combined firm.

We note that if the FTC ruling stands, it will mean that developers of complex integrated systems will choose to keep their technologies in house rather than spinning them out and run the risk of having an acquisition blocked. And innovative development will be slowed rather than accelerated.

 

PPI Paper Examines Antitrust Role in Biotech Innovation

Posted on by The Progressive Policy Institute

A new paper released today by the Progressive Policy Institute examines two key questions facing the biotech industry in America and the European Union (EU): Is it pro-innovation for European antitrust regulators to have the power to block a deal involving two American biotech companies that do no substantial business in Europe? And, under what conditions is vertical integration a socially beneficial strategy for accelerating innovation?

The paper, titled “Biotech Innovation: Two Important Questions,” is authored by Dr. Michael Mandel and Alec Stapp.

“There is little evidence that most vertical acquisitions are anti-competitive. If our shared goal is to support innovation and scaled production of potentially-lifesaving drugs and medical products, the U.S. and E.U. governments should work to advance integrated development — not regulatory imperialism,” said report authors Dr. Michael Mandel and Alec Stapp.

The paper examines the proposed purchase of cancer-diagnostic developer Grail by gene-sequencing leader Illumina. The Federal Trade Commission (FTC) recently intervened to stop the acquisition, worried that Illumina would block potential competitors of Grail from using its gene sequencers. The FTC ultimately dropped its case, instead allowing the European Commission to take the first swing at blocking the acquisition. The EU will rule by late July on the merger.

The paper concludes that excessive antitrust focus on blocking vertical integration in the biosciences could impede the development of important new products and treatments (though so-called “killer acquisitions” are an important exception that warrant increased scrutiny from regulators). The paper also broadens the scope of the issue, extending beyond the Grail and Illumina case and into the larger climate of regulation, innovation, and integration in the EU and U.S.

Read the full paper here:

The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.

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PPI Releases New Report Reimagining SNAP After the Pandemic

Posted on by The Progressive Policy Institute

As Congress and the White House continue negotiations on the American Families Plan, PPI’s policy experts released a report today outlining new ways that policymakers and the U.S. Department of Agriculture (UDSA) should modernize the Supplemental Nutrition Assistance Program (SNAP) to make the program more accessible to families in need and more resilient in a future crisis. The report, titled “Reimagining SNAP After the Pandemic,” is authored by Veronica Goodman and Kaitlin Edwards.

“When it comes to nutrition assistance, we can’t return to business-as-usual after this pandemic. The post-pandemic era must mark the beginning of a new national dialogue on how to wipe out hunger and malnutrition in America,” said report authors Veronica Goodman and Kaitlin Edwards. “As the Biden administration and Congress begin to craft the American Families Plan, they should prioritize modernizing SNAP, a critical and often lifesaving program.”

Even prior to the COVID-19 pandemic, millions of American families faced food insecurity. In 2019, over 38 million individuals participated in SNAP, with nearly half – 44% – being working families with children.

Yet, about 16% of eligible individuals – which equates to millions of Americans – do not utilize the program. This rate is even higher among seniors and students. Research suggests a lack of information, barriers to applying for benefits, costs to applying, and stigma around needing food assistance account for most of the gaps in participation.

As the pandemic ravaged communities and shuttered businesses, many families and individuals were forced to wait in miles-long lines outside of food banks and nutrition assistance centers. Unemployment rates shot up to levels even higher than during the Great Recession, and many families who never struggled to put food on the table found themselves in desperate need of help. Throughout the pandemic, nearly 44 million individuals enrolled in SNAP, a more than 20% jump from about 36 million in 2019.

To modernize SNAP and increase its effectiveness as one of the most far-reaching hunger prevention interventions, PPI proposes the following reforms:

Reduce administrative burdens by streamlining the application process by creating a single application for multiple social safety net programs, and reduce barriers for eligible populations.

Ease the restrictions on what SNAP benefits can and cannot be used for, and remove restrictions for hot and prepared meals.

Reinforce SNAP as an “automatic stabilizer” in future economic downturns, triggering enhanced benefits and suspended work requirements when the economy enters a recession.

Fill in the gaps in nutrition by adopting the “child multiplier” proposal that would increase the benefit size for families with children under the age of five.

Reform counterproductive limits on savings and assets that dissuade families from creating even small rainy day funds.

Use information technology to modernize the program and reduce the administrative burden on low-income people, states, and retailers.

Read the full report here:

The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.

Follow the Progressive Policy Institute.

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Media Contact: Aaron White – awhite@ppionline.org

Reimagining SNAP After the Pandemic

Posted on by The Progressive Policy Institute
EXECUTIVE SUMMARY:

 

The coming months present the Biden administration with an opportunity to rethink the structure and role of SNAP, our country’s largest anti-hunger program, to better address food insecurity in the United States. During the pandemic, policymakers eased rules around eligibility and access to make it easier to prevent widespread hunger resulting from the economic toll of the pandemic. Studying these changes can inform how we modernize SNAP for the post-pandemic future.

Even before the pandemic, hunger was an intractable problem faced by millions of Americans, and there is a wealth of evidence to support reimagining SNAP by building in more resiliency and making it easier to navigate for both consumers and retailers to strengthen our country’s food system. In this paper, we address recent developments related to SNAP and propose reforms to the program to reduce administrative burdens and churn, ease restrictions on what can be purchased with benefits, make SNAP more resilient for a future crisis as an automatic stabilizer, increase monthly allocations for families with young children, eliminate asset limits, and invest in technologies to increase access and improve participant experience, especially in rural communities. As the Biden administration looks ahead to major public investments, the modernization of SNAP should be included in the American Families Plan.

 

CONTENTS:

 

INTRODUCTION:


Last spring, one of the most startling and grim images from the beginning of the COVID-19 pandemic were the miles-long lines outside of food banks as the economic toll of the pandemic began to spread across the country. As unemployment rates shot up to levels even higher than during the Great Recession, many families who had never struggled to put food on the table found themselves in desperate need of help.


The sharp rise of hunger during the pandemic would have been immeasurably worse had the Trump administration succeeded in forcing states to impose work requirements on Supplemental Nutrition Assistance Program (SNAP) recipients, which would have kicked nearly 700,000 unemployed people out of the program. Fortunately, a federal judge blocked the attempt as “arbitrary and capricious.” The Trump White House also considered new federal requirements to drug test applicants and expand work eligibility — two ways of attempting to push more hungry families off of SNAP.


In contrast, President Joe Biden and Congress have made food assistance a top priority, providing aid to hungry families through stimulus and expanded anti-hunger funding, including through SNAP. These efforts have succeeded in reducing historically elevated levels of hunger in America. Recent data released from the U.S. Census Bureau for the end of April 2021 shows that, after multiple rounds of economic aid to struggling families, the percentage of Americans who reported they faced food insecurity was at its lowest point since the pandemic began — at 8.1%.

 

However, even prior to the pandemic, hunger was an urgent problem for many working families, and especially households with children. In 2019, according to the U.S. Department of Agriculture, as many as 10.5% of households were food insecure at some point during 2019, and that number was even higher for households (13.6%) with children under age 18.

While critical, more money alone won’t end hunger. The pandemic served as a metaphorical earthquake that stress-tested many of our social safety net programs, revealing stark vulnerabilities. SNAP is an essential program that needs to be made more resilient against future public emergencies.


SNAP (formerly known as the Food Stamp Program) is our country’s single most effective and wide-reaching anti-hunger program. It subsidizes food purchases for nearly half of all Americans at some point during their lives and an estimated one in nine Americans in any given month. In 2019 alone, there were 38 million participants who received SNAP benefits in the U.S, and 44% of SNAP recipients are children. The majority of SNAP recipients are also working families with at least one worker, as the program is structured to reward work with increased benefits.


While Republican politicians call for significant cuts to SNAP benefits and giving states more leeway to make it harder for people to apply, Americans broadly recognize the need for food assistance and support SNAP. A 2020 poll conducted by Hunger Free America, a national nonprofit, found that 58% want to increase funding for SNAP, with 32% of that group saying that the money should be boosted significantly. This included support from 40% of Republicans and 75% of Democrats. Historically, domestic hunger has been considered a bipartisan issue, though it has become more partisan over time.

Yet millions of eligible Americans each year do not enroll in SNAP. In 2017, according to the USDA, the take up rate for SNAP was about 84%. Participation rates vary across states, with 52%, in Wyoming, being the lowest. Research suggests that a lack of information, barriers and costs to applying, and stigma around needing food assistance account for most of the gap in participation. For example, in New York City, approximately a quarter of households or
700,000 eligible people do not receive them.

A related challenge is keeping participants in the program. Administrative burdens and inflexibility in recertifying for SNAP benefits increase churn in the program at high costs.

 

To make it easier and faster to get meals to hungry families during the pandemic, the government relaxed some of the burdensome rules around applying for and retaining food assistance. As enhanced pandemic benefits expire in the coming months, policymakers should act to ensure that SNAP doesn’t revert to the onerous application requirements, poor customer service, and outdated enrollment systems that plagued it in the past. We propose that the Biden administration include the modernization and expansion of SNAP in the American Families package later this year given the state of food insecurity both before and after the pandemic.

 

KEY RECOMMENDATIONS: 
To modernize SNAP and increase its effectiveness as one of the most far-reaching hunger prevention interventions, we propose the following reforms:
• Reduce administrative burdens by requiring states to simplify and shorten SNAP applications to reduce barriers for eligible populations. In fact, U.S. policymakers should require states to create a single, straightforward application for multiple social safety net programs to reduce administrative burdens and barriers.
Policymakers should also streamline the burdensome process of applying to be an online retailer for SNAP benefits delivered to recipients’ homes.

• Ease the restrictions on what SNAP benefits can and cannot be used for. For example, recipients should be able to use SNAP benefits for hot and prepared meals. A better approach beyond restrictions would be for policymakers to employ lessons from pilot programs, such as the USDA’s Health Incentives Pilot in Massachusetts, to create incentives for recipients to use the benefits for more nutritious foods.

• Reinforce SNAP as an “automatic stabilizer” in future economic downturns by passing the Food for Families in Crisis Act, proposed by Senator Michael Bennet, D-Colo., that triggers enhanced benefits and relaxed work requirements when the economy enters a recession, and requires that states to use broad-based categorical eligibility (BBCE) for SNAP requirements.

• Fill in the gaps in nutrition by adopting the “child multiplier” proposal that would increase the benefit size for families with children under the age of five.

• Reform counterproductive limits on savings and assets that are having the unintended consequence of causing families to avoid rainy day funds and requiring the use of BBCE by all states would help reduce this harm. For example, the Allowing Steady Savings by Eliminating Tests, or ASSET, Act, introduced by U.S. Senators Chris Coons, D-Del., and Sherrod Brown, D-Ohio, would remove these harmful limits.

• Use information technology to modernize social service delivery and reduce the administrative burden on low-income people, states, and retailers. For example, Congress should enact the HOPE Act, which would create online accounts that enable low-income families to apply once for all social programs they qualify for, rather than forcing them to run a bureaucratic gauntlet.
Technology could also improve customer experience and the recertification process to reduce churn in SNAP, and these approaches should be tailored based on the particular barriers and vulnerabilities of certain groups, such as the elderly, rural communities, and college students. The Biden administration should also encourage the U.S. Department of Agriculture to invest in innovative payment systems beyond Electronic Benefit Transfer (EBT) that will allow SNAP recipients to use mobile wallets and chip cards to purchase food at stores.

 

READ THE FULL REPORT:

 

McDermott for The Hill: Taxing just the super-rich won’t fund America’s future

Posted on by The Progressive Policy Institute

President Biden has proposed to finance his $4 trillion American Jobs and Families Plans by raising taxes exclusively on corporations and households that earn above $400,000 — the top 1.5 percent of taxpayers. Biden is right that the rich should pay more than they currently do given the staggering income inequality in America that’s been made worse by the COVID pandemic.

Almost 60 percent of Americans support funding Biden’s spending plans with his proposed tax increases — seven times the share that supports debt-financing them. But while taxing the rich is smart policy and politics, funding America’s future and realizing Biden’s policy vision will also require asking more taxpayers to contribute to the public good.

Read the full piece. 

PPI Celebrates Child Tax Credit Awareness Week

Posted on by The Progressive Policy Institute

Thanks to an expansion of the Child Tax Credit enacted by President Biden and Democrats in Congress, millions of families with kids will begin receiving monthly payments on July 15th that are estimated to cut child poverty by half. This landmark program from the Biden administration will deliver automatic monthly payments of up to $300 for each child under six and $250 for each child under 18 to more than 36 million working families. However, because the credit is delivered through the Internal Revenue Service and based on 2020 and 2021 tax filings, millions of eligible households could be left out of receiving payments.

To address this issue, the IRS has begun sending letters to potentially eligible households to make them aware of the coming payments and has launched a non-filer sign-up tool for those families that don’t traditionally file taxes but have eligible children to send their information directly to the IRS. This subset of households usually have very little income and stand to benefit the most from the credit so getting them signed up is critical to the CTC’s purpose of reducing poverty.

Earlier this week, the IRS also announced partnerships with a national network of local non-profits and community organizations to help eligible taxpayers get registered and encouraged families without bank accounts to set up accounts online to receive the monthly payments faster via direct deposit.

There are remaining challenges to ensure that all eligible children reap the benefits of the CTC. For example, children in households with a student loan borrower in default on federal student loans could be penalized if this critical benefit is seized come next tax season. As the pandemic moratoriums are lifted as the economy bounces back, we hope that Congress takes action to ensure that the CTC and Earned Income Tax Credit, two well-targeted anti-poverty measures, are exempted from garnishment.

As CTC Awareness Week comes to a close, we hope that this is just the beginning of a concerted, targeted effort to spread the word and reach every eligible household to make them aware about this credit and get them signed up. Because the CTC was only passed for 2021, PPI also encourages lawmakers to pass a permanent and fiscally responsible expansion of the CTC that makes the credit fully refundable for low-income families and continues monthly payments beyond 2021.

Fixing What Ails Credit Reporting

Posted on by The Progressive Policy Institute

Are Americans obsessed with their credit score? They have good reason to be worried, as there is much that ails the credit reporting industry.

 

    • Information at risk. As the Equifax breach in 2017 highlighted, the industry is vulnerable to cyberattacks that give hackers access to personal data and financial information.[1]
    • Reporting errors. According to a study by the Federal Trade Commission (FTC), one in five Americans had an error on their credit report.[2]
    • Credit reports are discriminatory. A study by the Consumer Financial Protection Board (CFPB) found that 45 million Americans have no (or an un-scorable) credit history — with the largest cohort of individuals residing in communities of color or low-income areas.[3]
    • Consumers have too little control over their credit reports. Historically, Americans have lacked any real control over their credit reports and credit reporting agencies have put in place barriers that make it very difficult to challenge errors in those reports.

 

Unfortunately, the leading legislative fix — creating a public credit reporting agency — would fail to remedy these serious problems.

The government has not proven to be a better guardian against cyberattacks any more than the private sector. Over 22 million Americans had their information stolen in the course of two separate attacks launched on the U.S. Office of Personnel Management between 2012 and 2015.

Error rates are common in government data, and trying to get them fixed is hardly simple. Anyone who has ever dealt with their local Department of Motor Vehicles (DMV) can attest to that. Furthermore, a public entity would be relying on the same data inputs as the private sector credit reporting agencies. So any errors in the data will still spoil the results.

Ensuring the algorithms used in credit scoring don’t have discriminatory impacts is long overdue. But the government doesn’t need to replace private credit agencies to ensure non‐traditional sources of data like rental history and utility bills are used to determine a fair credit report. Congress could just require it and give the FTC and CFPB the resource and staff to enforce the rules.

While well-intentioned, the proposal to create a public credit reporting agency is an example of a classic problem in policymaking, the misalignment between the policy problem and the policy solution. That’s a shame, because anyone who has ever dealt with the credit reporting agencies (basically everyone over the age of 18) knows the present system is rife with problems. But there are some ideas that could improve the credit reporting.

To safeguard private information, the credit reporting agencies should be required to adopt the latest and most effective anti-cyberattack protections — and be subject to fines and other penalties if they fail to do so. And if someone’s information is stolen, credit agencies should provide a free and seamless way to freeze and un-freeze their credit reports — as often as they want.

To help consumers keep tab on their credit report, Congress should enact legislation that requires the credit reporting agencies to continue the practice started during the Covid-19 pandemic — to provide free credit reports on a weekly basis.

Finally, to help reduce the discriminatory impacts of the credit ratings, Congress should enact a Community Reinvestment Act (CRA) type law for the credit reporting industry. Such a law would give the FTC and the CFPB the ability to limit the credit reporting agencies from using discriminatory data and to add non-traditional sources of information. The law would also would require the FTC and the CFPB to issue an annual report tracking the efforts of credit reporting agencies to reduce the discriminatory impacts.

America’s credit reporting system needs fixing. But success means we need to put in place the right policies. If we don’t, we will have missed a historic opportunity to protect consumer information, reduce errors, and eliminate discrimination in credit reporting.

Paul Weinstein Jr. is a PPI Senior Fellow and Director of the MA in Public Management at Johns Hopkins University.

[1] “Equifax Data Breach Settlement,” Federal Trade Commission, January, 2020.

[2] Michelle Black, “Millions of Americans have errors on their credit reports — do you?” bankrate.com, May 13, 2019

[3] Kelly Holland, “45 million Americans are living without a credit score,” CNBC, May 5, 2015

PPI Statement on Infrastructure Deal Breakthrough

Posted on by The Progressive Policy Institute

Today, a bipartisan group of Senators and the White House reached a deal on a major $1.2 trillion infrastructure overhaul, which will help America recover economically from the pandemic and rebuild our failing roads, bridges and dams.

Will Marshall, President and Founder of the Progressive Policy Institute, released the following statement:

“The greatest challenge facing President Biden and his party is to show they can govern our country effectively after four wasted years of Donald Trump’s divisive and incompetent presidency. They need to prove to doubters here and around the world that democracy can deliver.

“Now the President has negotiated a deal with Senate Democrats and Republicans for a massive national push to modernize America’s aging economic infrastructure.

“The magnitude of this accomplishment should not be understated. The Bipartisan Infrastructure Framework would roughly double federal infrastructure spending over the next eight years, including a big and well-targeted investment in rural broadband. Crucially, it will lay new foundations for the inclusive innovation and growth our country needs to reduce inequality and win the contest with China for economic and technological leadership.

“The bipartisan deal also fulfills Biden’s central campaign pledge — to govern in the interests of all Americans, including those who didn’t vote for him. Democrats shouldn’t forget that Biden’s promise to bridge rather than deepen the nation’s political and cultural divides was key to his 2020 election.

“Nonetheless, Sen. Bernie Sanders has declared he won’t back the bipartisan deal. That’s his prerogative. But Democrats should stand with President Biden.

“We’re also disappointed that some important features of the White House’s original jobs plan were dropped in the difficult negotiations with Capitol Hill lawmakers. But that’s part of the normal give and take of representative democracy.

“We have no doubt that the President will continue to push for additional investments in scientific research, clean energy, and strengthening social programs for children in need. We hope that any reconciliation bill passed to supplement this agreement will be fiscally responsible and encourage the White House to consider a broader package of revenue-raising options.

“On the whole, however, we think it is good for the nation’s democratic health to see bargaining, horse-trading, and compromise return to Washington.

“Democrats shouldn’t heed the demands of left-wing purists who are better at making maximalist demands than winning majority support for them. It was the pragmatic Joe Biden, after all, who flipped five states from red to blue and soundly defeated Trump by more than seven million votes.

“He won the popular mandate, not his dogmatic critics. That’s why Democrats should give President Biden the benefit of the doubt and seize this opportunity to deliver concrete benefits to the American people.”

The Progressive Policy Institute (PPI) is a catalyst for policy innovation and political reform based in Washington, D.C. Its mission is to create radically pragmatic ideas for moving America beyond ideological and partisan deadlock. Learn more about PPI by visiting progressivepolicy.org.

Follow the Progressive Policy Institute.

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California tech-ecommerce jobs and tax revenues

Posted on by The Progressive Policy Institute

The large tech and ecommerce companies have become massive job generating and income creating machines, hiring hundreds of thousands of workers in the United States. This is one of the great hiring surges in history, providing well-paying jobs for an unprecedented number of workers.

But just looking at hiring by the tech giants themselves does not fully answer the question of their impact on the labor market. It could be that, like tall trees, they block the sunlight and keep other tech companies and ecommerce companies stunted.

This “ecosystem dominance” would manifest as weak job and income growth in the tech-ecommerce sector as a whole.  If true, this harm to workers becomes a powerful justification for strong regulatory and antitrust growth against the tech giants. In other words, chopping down the trees would help the rest of the forest grow.

Alternatively, strong job and income growth across all tech and ecommerce industries would show the tech giants–who invested a stunning $65 billion in the United States in 2020—are playing a crucial role in a thriving ecosystem that benefits workers, raises wages and generates tax revenues.  Indeed, from 2015 to 2020—a period that includes the pandemic—the tech-ecommerce ecosystem generated 1.7 million net new jobs and added $289 billion in labor income. By comparison, the whole private sector lost 360,000 jobs. In that case, common sense would call for regulatory prudence.  As the saying goes “if it ain’t broke, don’t fix it.”

 

California

For this blog post we will focus on the job, income, and tax impact of the tech-ecommerce sector on California, which is the headquarters of three out of the four tech giants. In addition, in the fourth quarter of 2020,  Amazon employed more workers in California (153,000+) than it does in Washington (80,000+).

Our analysis builds on PPI’s April 2021 paper, “Innovative Job Growth in the 21st Century: Has the Tech-Ecommerce Ecosystem Become the New Manufacturing?”. The tech-ecommerce ecosystem includes five tech industries and three ecommerce industries. The tech industries are computer and electronic production manufacturing (NAICS 334); software publishing (NAICS 5112); data processing and hosting (NAICS 518); Internet publishing and search, and other information services (NAICS 519); and computer systems design and programming (NAICS 5415). The three ecommerce industries are electronic shopping and mail order houses (NAICS 4541); local delivery (NAICS 492); and ecommerce fulfillment and warehousing (NAICS 493).

We draw on Bureau of Labor Statistics data from the Quarterly Census of Employment and Wages (QCEW). This dataset reports on all wages, salaries, and bonuses, including ordinary income from exercised stock options. We look at the five-year period from 2015 to 2020, which includes the pandemic year.

 

Table 1. Strong Job and Labor Income Growth in California’s Tech-Ecommerce Sector
Percentage change, 2015-2020
Tech-ecommerce sector California Core tech counties* Rest of California United States
Jobs 38% 30% 43% 31%
Total wage and salary income** 76% 77% 74% 56%
*San Francisco, San Mateo, Santa Clara
**Includes exercised stock options
Data: BLS QCEW

 

Table 1 shows the growth of jobs and labor income in California’s tech-ecommerce sector from 2015 to 2020.  Tech-ecommerce jobs rose by 38% over the five-year stretch in California, compared to 31% in the United States as a whole. Meanwhile, private sector jobs rose by 0.3% in California and fell by 0.3% nationally (not shown on table).

Wages and salaries in California’s tech-ecommerce sector rose by an astounding 76% from 2015-2020, compared to 56% nationally. Meanwhile, private sector wages and salaries rose by 31% in California, and 21% nationally.

Table 2 shows the importance of the tech-ecommerce sector for California’s economy. The tech-ecommerce sector added 350,000 jobs between 2015-2020 in the state, and $100 billion in additional wage and salary income. That means the tech-ecommerce sector accounted for 38% of the entire increase in private sector wages in the state over that period.

 

Table 2. Tech-Ecommerce Sector Powers California Income Growth
Tech-ecommerce sector California Core tech counties Rest of California United States
Increase in jobs, 2015-2020 (thousands) 350 113 237 1738
Increase in wage income, 2015-2020 (billions of dollars) $100 $62 $37 $289
Share of private sector wages, 2020 (percent) 21% 45% 11% 11%
Share of private sector wage growth, 2015-2020 (percent) 38% 56% 25% 22%
*San Francisco, San Mateo, Santa Clara
**Includes exercised stock options
Data: BLS QCEW

 

Note that Table 1 and Table 2 break out the core tech counties, San Francisco, San Mateo, and Santa Clara, from the rest of the state. Taken together, the two tables show that both the core tech counties and the rest of the state have shown roughly equal rates of income growth from the tech-ecommerce sector.

Table 3 looks specifically at ecommerce and retail jobs in California. Obviously, the pandemic forced a dramatic decline of brick-and-mortar retail jobs in the state. At the same time, the number of ecommerce jobs increased by more than enough to counteract the decline of brick-and-mortar retail. Moreover, the ecommerce jobs were substantially better paid on average.

As a result, when we combine brick-and-mortar retail with ecommerce industries in California, the number of net jobs rose by 28,000. Average annual pay rose by 22 percent.

 

Table 3. California’s Ecommerce Industries Create Net New Jobs and Boost Average Pay
Brick-and mortar retail Thousands of jobs Average annual pay
2015 1611 33229
2020 1475 40199
Change, 2015-2020 -136
Ecommerce industries
2015 207 54078
2020 372 55882
Change, 2015-2020 164
Brick-and-mortar retail plus ecommerce
2015 1819 35608
2020 1847 43360
Change, 2015-2020 28
Data: BLS QCEW

 

 

Finally, we turn to the question of the impact of the tech-ecommerce sector on personal income taxes in California. Tax collections have come in much stronger than expected, with personal income tax collections in the first nine months of the 2020-21 fiscal year running at 17% or $14 billion above forecast. Personal income tax revenues in the 2020-21 fiscal year are now forecast to be 54% about 2015-2016 levels.

How much of that gain is accounted for by the tech-ecommerce sector? There are several issues with making this calculation. The state government reports and forecasts tax revenue data on a fiscal year basis, while our data on the tech-ecommerce sector is on a calendar year basis and stops with 2020. Second, our definition of the tech-ecommerce sector includes a wide variety of industries, with average annual pay that runs from roughly $50,000 to well over $300,000. Third, much of the surge in personal tax revenues is coming from capital gains, which is directly connected with the success of the tech-ecommerce sector but is not reported in the BLS QCEW data.

Nevertheless, we can make a back-of-the-envelope estimate of the personal tax revenue generated by the tech-ecommerce sector. First, let’s start by looking the increases in personal tax revenues coming from wage and salary income (included ordinary income from exercised stock options) over the 2015-2020 period. By our estimate, the increase in tech-ecommerce wages and salaries accounts for roughly 37% of the increase in personal tax revenues from wages and salaries in the 2015-2020 period.

But of course, there has been a surge in capital gains revenues as well. If we attribute half the unanticipated increase in capital gains in 2020 to the tech-ecommerce sector, then tech-ecommerce accounts for roughly 42% of the increase in California personal tax revenues from 2015 to 2020.  This should be viewed as a rough estimate rather than a final number.