issue: Economy

Indonesia: Road to the App Economy

Posted on by The Progressive Policy Institute

Indonesia’s growth rate has been slowing in recent years. In the second quarter, GDP grew 4.7% over the same quarter of the previous year, the smallest gain since 2009. Part of that slowdown is due to global economic weakness that has hurt commodity exports. However, that only points out the need to find another, more sustainable engine for growth for the Indonesian economy.

President Joko Widodo, in office since October 2014, seeks to transform Indonesia from an economy that imports manufacturing products such as telecommunications equipment into one that produces them. Indeed, his administration’s emphasis on production has included domestic content rules for smartphones using advanced networks, as a way of allowing Indonesia to participate in the global mobile revolution as producer rather than a consumer.

In this paper we take another perspective on Indonesia’s economy. Rather than focusing on hardware, we examine the potential of the production of mobile applications (“apps”) as a source of growth and jobs for Indonesia. The App Economy, as it is sometimes called, is the whole ecosystem of jobs, companies, and in- come connected with the production and distribution of mobile apps.

Many people mistakenly think of mobile apps as simply games or chat programs or social media. Games and social media are important—but in reality, they are only a small part of the App Economy. Apps are used by major multinationals, banks, media companies, retailers, and governments. As of July 2015, there were 1.6 million apps available for Android, and another 1.5 million available on Apple’s App Store.

App development is one route to economic success for a country such as Indonesia that has a large internal market. Today, many countries try to develop their manufacturing sector as a means to growth, emulating China and Korea. However, such a strategy necessarily requires a large investment in physical capital, not just for the factories but for the transportation infrastructure and power grid as well. Building and improving highways, rail lines, and ports is expensive and time consuming.

By comparison, mobile app development requires far less physical capital, and has the potential for paying off much more quickly. Moreover, going forward, mobile apps could be a major source of value-added and growth. What’s required is a skilled workforce and good telecom connections, both domestically and internationally. But once these are in place, a country such as Indonesia can become part of the global App Economy, creating good jobs and growth at home.

Download “2015.09 Mandel_Indonesia-Road-to-the-App-Economy”

Wall Street Journal: Broadband Investment is Falling

Posted on by The Progressive Policy Institute

PPI Senior Fellow Hal Singer’s analysis on the impact of the FCC’s net neutrality ruling was cited in the Wall Street Journal:

Before Obamanet went into effect, economist Hal Singer of the Progressive Policy Institute predicted in The Wall Street Journal that if price and other regulations were introduced, capital investments by ISPs could quickly fall from the $77 billion invested in 2014—between 5% and 12% a year, according to his forecast.

Now Mr. Singer has analyzed the latest data, and his prediction has come true. He found that in the first half of 2015, as the new regulations were being crafted in Washington, major ISPs reduced capital expenditure by an average of 12%, while the overall industry average dropped 8%. Capital spending was down 29% at AT&T and Charter Communications, 10% at Cablevision, and 4% at Verizon. ( Comcast increased capital spending, but on a new home-entertainment operating system, not broadband.)

Until now, spending had fallen year-to-year only twice in the history of broadband: in 2001 after the dot-com bust, and in 2009 after the recession. “In every other year,” Mr. Singer wrote for Forbes, “ISPs—like hamsters on a wheel—were forced to upgrade their networks to prevent customers from switching to rivals offering faster connections.”

Continue reading at the Wall Street Journal.

PRESS RELEASE: New PPI Report Highlights Benefits of TPP, Freer Trade for Vietnam

Posted on by The Progressive Policy Institute

HANOI—The Progressive Policy Institute (PPI) today released a new policy report highlighting how key reforms Vietnam would need to implement under the Trans Pacific Partnership (TPP) could ultimately provide important benefits for Vietnam itself. The report was made public at an American Chamber of Commerce event in Hanoi attended by influential U.S. and Vietnamese business leaders, as well as leading Vietnamese economic experts and proponents of economic reform.

“Vietnam is poised to benefit significantly from the Trans Pacific Partnership agreement,” said Ed Gerwin, PPI Senior Fellow for Trade and Global Opportunity and author of the report. “But TPP will also require Vietnam to undertake significant legal and regulatory changes in areas including transparency, the rule of law, labor and environmental rules, the digital economy, and rules for state-owned enterprises. These reforms in Vietnam will play a critical role in driving increased U.S. trade and commerce with a growing and vibrant Vietnamese economy.

“Those of us who believe strong trade agreements can promote inclusive growth and positive change need to continue to remind Vietnam that adopting these necessary reforms—and sticking to them—will also deliver tangible benefits for Vietnam and its people. PPI looks forward to continuing to be a constructive voice in this effort.”

In “TPP and the Benefits of Freer Trade for Vietnam: Some Lessons from U.S. Free Trade Agreements,” Gerwin uses the experience of past high-standard U.S. trade agreements to illustrate why undertaking these often-difficult reforms would also be in Vietnam’s self interest. Gerwin notes, “the adjustments required by high-standard [trade deals] can also promote foreign investment, technological advancement, innovation, broader participation in trade, and other key developments that—together with additional reforms—can drive stronger and more broadly shared economic development.”

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TPP and the Benefits of Freer Trade for Vietnam: Some Lessons from U.S. Free Trade Agreements

Posted on by The Progressive Policy Institute

Countries trade because trade delivers mutual benefits. New market-opening trade agreements like the Trans Pacific Partnership (TPP) can enhance the shared benefits of trade by eliminating barriers to expanded international commerce and deepening economic cooperation between partners. It’s not surprising, therefore, that a detailed economic simulation of freer commerce under the TPP finds that each of the 12 TPP countries would see aggregate income gains and increased ex- ports under a comprehensive TPP. A strong TPP agreement, in short, could be a win—times 12.

But governments and their leaders don’t simply operate in the aggregate. Despite trade’s undeniable overall benefits, not everyone benefits from trade—and beneficial agreements that increase trade and open markets can require sometimes- difficult economic adjustments.

For the United States, for example, the TPP could support more good-paying jobs for U.S. workers who produce and sell American goods and services to growing Pacific Rim economies that should see even stronger growth under TPP. At the same time, however, growing trade can lead to lost jobs and lower wages for some American workers, and will require a renewed U.S. focus on comprehensive solutions, including assistance and better training for lower-skilled workers.

Other countries will need to adjust as well. Japan, for instance, will require reforms to its farm sector, while Canada will need to upgrade its intellectual property rules to comply with global standards.

Download “TPP and the Benefits of Freer Trade for Vietnam: Some Lessons from U.S. Free Trade Agreements”

Press Release: PPI Unveils Report Measuring Vietnam’s App Economy at Public Forum in Hanoi

Posted on by The Progressive Policy Institute

PPI Unveils Report Measuring Vietnam’s App Economy at Public Forum in Hanoi

Report estimates 29,000 App jobs in Vietnam

HANOI—The Progressive Policy Institute (PPI) today released a new policy report at a public forum in Hanoi, which measures the growing contribution of digital innovation to the Vietnamese economy, compares the environment for investment in Vietnam to other locations in Southeast Asia, and warns of potential policy pitfalls and regulations that might harm future digital growth and economic prosperity in the country.

The report, “Vietnam and the App Economy,” is an effort to measure the thousands of app-related jobs created in Vietnam since the introduction of the smartphone in 2007. Based on a methodology PPI Chief Economic Strategist Dr. Michael Mandel has developed to estimate app job growth in the United States, Great Britain, and Australia, the study is the first to quantify the number of Vietnamese jobs that are directly related to the building, maintenance, support and marketing of applications for smart-devices.

“Vietnam has a rapidly growing number of app developers—these are the people who design and create the apps distributed domestically and internationally,” writes Dr. Mandel, author of the report. “Moreover, Vietnamese companies that do app development also have to hire sales people, project managers, database programmers and other types of workers. Finally, each app developer supports a certain number of local jobs.

“In this paper, we estimate that Vietnam has roughly 29,000 App Economy jobs across the entire country. In addition, we show that Vietnam has the top-rated App Economy in Southeast Asia (including Singapore, Indonesia, Malaysia, Thailand, and the Philippines).

“Why is this important? The App Economy is the whole ecosystem of jobs, companies, and income connected with mobile apps. The rise of the App Economy may offer low- and middle-income countries such as Vietnam a faster route to economic success.”

In addition, PPI’s mission to Vietnam includes meetings with: Vietnam Ministry of Foreign Affairs; Vietnam Ministry of Information and Communication; Vietnam Ministry of Science and Technology; Ho Chi Minh City Department of Planning and Investment; Ho Chi Minh City University of Technology and Education; Saigon Hi-Tech Park Management Board; U.S. Embassy Vietnam; American Chamber of Commerce Vietnam; Viettel Corporation; FPT Software; and Vietnam Silicon Valley.

Please contact Cody Tucker at ctucker@ppionline.org with media requests or questions.

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The Progressive Policy Institute is an independent, innovative and high-impact D.C.-based think tank founded in 1989. Through research, policy analysis and dialogue, PPI develops break-the-mold ideas aimed at economic growth, national security and modern, performance-based government. Today, PPI’s unique mix of political realism and policy innovation continues to make it a leading source of pragmatic and creative ideas. PPI is a non-profit, nonpartisan, 501(c)(3) educational organization.

Vietnam and the App Economy

Posted on by The Progressive Policy Institute

All around the world we are seeing the rise of the App Economy—jobs, companies, and economic growth created by the production and distribution of mobile applications (“apps”) that run on smartphones. Since the introduction of the iPhone in 2007, the App Economy has grown from nothing to a powerful economic force that rivals existing industries.

Many people mistakenly think of mobile apps as simply games. In Vietnam, the mobile game app Flappy Bird got an enormous amount of attention after being released in 2013 by Vietnam-based developer Nguyễn Hà Đông, at one point becoming the number one downloaded free game on the iOS app store.

Games are important—but in reality, mobile games are only a small part of the App Economy. Apps are used by major multinationals, by banks, by media companies, by retailers, and by governments. As of July 2015, there were 1.6 million apps available for Android, and another 1.5 million available on Apple’s App Store.

Apps are the essential front door to the Internet. In the United States, most people use apps to access the Internet on their smartphones. They log onto the Face- book app, or their bank app, or the app of their airline. One could spend an entire day on the Internet while only using apps.

Download “2015.09-Mandel_Vietnam-and-the-App-Economy”

The Hill: No injury. No lawsuit. No service.

Posted on by The Progressive Policy Institute

The Supreme Court this month received the first round of briefing in a case that could cure one of the newest, most significant abuses in our civil justice system: massive class actions that lawyers file on behalf of people who are not injured. In these cases, the class action plaintiffs’ lawyers use novel legal theories and damage models to get their classes certified and then count on companies to settle the claims and pay them attorney fees – sometimes for more than the class members will end up collecting from the settlement.

The whole point of civil litigation is to make people whole for their losses. Any person who is not injured and has no loss to be corrected should have his or her claim dismissed. The person has no substantive legal basis for the claim, and Article III of the U.S. Constitution gives federal courts jurisdiction only over cases where people allege actual injury traceable to the defendant. But, what happens when uninjured people are nonetheless swept into federal class actions?

This is the issue before the Supreme Court in Tyson Foods, Inc. v. Bouaphakeo. The plaintiffs’ counsel used a controversial damages model to turn discrete wage-and-hour claims for some Tyson employees into a much larger class action. They created an “average employee,” claiming that this “average employee” would be due overtime pay if the time taken to put on and take off protective gear was included in the work week. They then sought to have every class member – some 3,300 people – paid the same overtime as the “average employee,” regardless of how much the real employees actually worked, spent putting on and taking off gear, or were paid.

The problem is that hundreds of class members had no injury at all. It was clear under the plaintiffs’ own statistical sampling model that these employees were fully paid, even accounting for the time to put on and take off gear. Yet, the district court certified the case as a class action with these uninjured people. At trial, the jury found that the modeling majorly overstated the damages and about half of the class had no or only a de minimis injury. Yet, the court allowed all class members, including the uninjured, to get the same pro rata share of the award.

Continue reading at The Hill.

The Daily Beast: Will Iran Get a Better Deal Than U.S. Oil?

Posted on by The Progressive Policy Institute

As Congress takes up the Iran nuclear deal next month, it ought to confront this paradox: The agreement allows the Iranians to do something Americans can’t—sell oil to the rest of the world.

Don’t get me wrong. I support the deal, under which Tehran would stop enriching weapons-grade uranium for the next 15 years in return for relief from economic sanctions. It’s not perfect, but President Obama is right that it’s better than what we’d have if his conservative critics got their way—no deal, leaving the Islamic Republic on the brink of acquiring nuclear weapons.

Still, freeing Iran to crank up its oil exports stands in stark incongruity to what’s happening here at home. Domestic oil production has soared by an amazing 68 percent over the past decade, yet we can sell very little of it abroad thanks to outdated laws banning U.S. oil and gas exports.

Passed during the energy crisis of the 1970s, these laws were intended to protect the nation’s then-dwindling oil and gas resources as a strategic reserve against supply disruptions like the Arab oil embargo. But the premise used to justify this deviation from our country’s free trade principles—energy scarcity—has been shattered by America’s shale boom.

Continue reading at the Daily Beast.

CNN: Why we need the 3-year college degree

Posted on by The Progressive Policy Institute

In rolling out an ambitious higher education plan this month, Hillary Clinton put a genuine national dilemma — America’s ballooning student debt crisis — at the center of the 2016 debate. What a refreshing contrast to her Republican opponents.

Clinton’s “New College Compact” is a big, multifaceted plan to take the debt monkey off the backs of millennials who attend public universities. But one thing it is not is cheap — the price tag is $350 billion. And it does not do enough to rein in college tuition costs, much less roll them back.

So let us offer a friendly amendment that would do just that and thereby complement Clinton’s otherwise creative proposal. Our suggestion? The three-year college degree.

Three-year colleges are the norm in many European countries, and a few enterprising universities here have begun to follow suit. We propose requiring any U.S. college or university with students who receive any type of federal student aid to offer the option of earning a bachelor’s degree in three years.

While some schools might be tempted to squeeze a four-year degree into three years, that approach would be unwise, given that the majority of today’s college students need six years to complete a bachelors.

Continue reading at CNN.

Forbes: Does The Tumble In Broadband Investment Spell Doom For The FCC’s Open Internet Order?

Posted on by The Progressive Policy Institute

They said it wouldn’t happen. They offered assurances from three Wall Street analysts, who insisted that Internet service providers (ISPs) would continue to invest at the same levels regardless of the regulatory climate.

When it issued its Open Internet Order in February of this year, the Federal Communications Commission (FCC) never counted on its prediction being falsified before the U.S. Court of Appeals for the District of Columbia Circuit would rule on the legality of the agency’s net neutrality rules. But then came the second quarter S.E.C. filings of the largest ISPs. And the news was grim.

AT&T’s capital expenditure (capex) was down 29 percent in the first half of 2015 compared to the first half of 2014. Charter’s capex was down by the same percentage. Cablevision’s and Verizon’s capex were down ten and four percent, respectively.

This capital flight is remarkable considering there have been only two occasions in the history of the broadband industry when capex declined relative to the prior year: In 2001, after the dot.com meltdown, and in 2009, after the Great Recession. In every other year save 2015, broadband capex has climbed, as ISPs—like hamsters on a wheel—were forced to upgrade their networks to prevent customers from switching to rivals offering faster connections.

What changed in early 2015 besides the FCC’s Open Internet Order that can explain the ISP capex tumble? GDP grew in both the first and second quarters of 2015. Broadband capital intensity—defined as the ratio of ISP capex to revenues—decreased over the period, ruling out the possibility that falling revenues were to blame. Although cord cutting is on the rise, pay TV revenue is still growing, and the closest substitute to cable TV is broadband video. Absent compelling alternatives, the FCC’s Order is the best explanation for the capex meltdown.

Despite Comcast’s modest increase in capex in the first half of 2015—attributed to “customer premises equipment” to support its X1 entertainment operating system and other “cloud-based initiatives”—the net decrease across the six largest ISPs amounted to $3.3 billion in capital flight.

Why care about capital flight here? Every million-dollar increase in broadband capex in a given year generates almost 20 jobs through the multiplier effect. Chase a billion dollars in investment from the broadband ecosystem with heavy-handed regulation and you can wipe out 20,000 jobs. And if a billion dollars of withdrawn capital destroys 20,000 jobs, imagine what three billion . . . Shutter the thought.

In unrelated news, AT&T announced in June that it would invest $3 billion in Mexico to “extend mobile Internet to 100 million consumers and businesses” by 2018. It’s not as if investment dollars of the largest U.S. companies are fungible. Right?

Sadly, this capital flight was predictable. Reclassifying ISPs as public utilities under Title II of the Communications Act reduces the expected return of broadband investment. Although the ultimate purpose of Title II is to pry open the incumbents’ networks to resellers at regulated access rates, the FCC’s Open Internet Order promises to “forbear” from appropriating the ISPs’ property this way, at least as long as the political winds stay below a fresh gale.

Some analysts such as Anna-Maria Kovacs of Georgetown’s Center for Business and Public Policy tried to warn the FCC about the likely investment effects. Her submission was relegated to footnote 1229 on page 197 of the Order, while the FCC credited contrary (and demonstrably false) predictions of Philip Cusick (J.P. Morgan), Paul Gallant (Guggenheim), and Paul de Sa (Bernstein Research) in footnote 34 on page 13.

Economists fared no better. A seemingly relevant paper published in the prestigious Journal of Law and Economics in 2009 estimated that an increase in “regulatory intensity” in the European Union reduced “incumbents’ infrastructure stock by approximately 47 percent over the long term.” The FCC’s Order ignored that study altogether, as well as a rich economics literature with similar results.

Although the FCC’s Order failed to perform any cost-benefit analysis, a companion statement issued by the agency pursuant to the Congressional Review Act speculated that the Open Internet rules would generate $100 million in annual benefits for content providers. (I’ve assessed this casual empiricism here.)

Given the roughly $78 billion in ISP capex in 2014, Title II would need to scare off a mere 0.13 percent of ISP capex (equal to $101 million) to generate net losses for the economy. Based on the results from the first half of 2015, we’re heading for a capex decline nearly 100 times that level. Put differently, if just three percent of the observed $3.3 billion decline in ISP capex in the first half of 2015 can be attributed to Title II, the Order fails a cost-benefit test.

On December 4, some unfortunate FCC attorney will have to defend the Open Internet Order before a panel of judges on, among other things, cost-benefit grounds. With luck, a judge will ask about those assurances from the three Wall Street analysts.

This was cross posted from Forbes.

Forbes: Don’t Tax Broadband In Order To Subsidize It

Posted on by The Progressive Policy Institute

The Federal Communications Commission (FCC) recently proposed amending its low-income “Lifeline” program—which provides a $9.25 per month credit for consumers of voice services—to permit recipients to apply that same subsidy instead to broadband services. Who could argue against increasing options for low-income Americans?

Before critiquing the FCC’s proposal, it’s important to point out that expanding broadband access is a laudable goal. But financing this expansion through the Lifeline program will eventually lead to the perverse outcome of taxing broadband in order to subsidize it. Better to raise the funds for subsidized broadband from taxes imposed on behavior we want to discourage.

To an economist, a subsidy (or a tax) is warranted only in the presence of a market failure. When the market produces too much a product—think driving—it’s because producers are not internalizing a negative externality (traffic or air pollution). When the market produces too little—think general (as opposed to applied) research and development (R&D)—it’s because producers are not internalizing a positive externality or spillover.

This understanding leads to a simple policy prescription: Tax the industries that produce negative externalities and subsidize those that produce positive spillovers. Yet our politicians won’t support a gas tax to finance our crumbling roads, reflecting their constituents’ myopic desires, even if the result runs counter to economic theory.

Broadband is a classic case of positive spillovers in that every person who joins the network makes the network more valuable for existing users and for application providers. In addition to tapping into those positive spillovers, a broadband subsidy could stimulate more broadband investment: If a broadband provider needs a 30 percent take rate to deploy fiber to a neighborhood, and if a broadband subsidy gives it assurance that that target will be exceeded, the neighborhood has a better chance of being deployed.

Now back to the FCC’s Lifeline proposal. Lifeline is currently funded by a “universal service fee” that shows up on your phone bill for services that are designated as interstate (as opposed to intrastate). The FCC imposes a fee on providers of these voice services, who in turn pass that fee onto their customers. Roughly half of the funds that flow to low-income residential users are raised on the backs of businesses, creating a cross-subsidy of sorts. The FCC proposes to leave the funding alone (for now), but to give Lifeline recipients the option to apply the existing subsidy to broadband instead of voice service.

By my calculations (produced below), to induce non-adopting Americans to share in the costs of broadband, the annual subsidy would cost between $1.1 billion (for a modest addition of 10 million of the 32 million disconnected homes) and $4.3 billion (for 20 million homes, leaving just 12 million disconnected). The immediate problem is that a large chunk of this cost estimate does not fit within the contours of the existing Lifeline budget, which stood at $1.7 billion in 2014.

How did I arrive at these cost estimates? A 2014 study by three FCC economists estimates that up to 10 million disconnected homes would be willing to subscribe to broadband if a subsidy of 15 percent were offered. The annualized cost of connecting the first 10 million disconnected homes would be $1.1 billion (equal to 10M x 15% x $60 per month x 12 months). Because the next tranche of non-adopters are less inclined to adopt, a larger subsidy would be required to reduce the disconnected share further. To the extent that 20 million homes could be induced to adopt broadband in response to a 30 percent subsidy, the subsidy would cost $4.3 billion per year (equal to 20M x 30% x $60 per month x 12 months).

Telling Lifeline-enrolled families that already purchase a bundled voice and broadband service that they can apply their existing $9.25 per month subsidy to broadband rather than voice is not going to reduce the number of disconnected broadband households (nor would it make their lives any better). And Lifeline-enrolled families that didn’t have broadband because they purchase voice on a standalone basis would be forced to lose their voice subsidy if they applied the subsidy to broadband instead (making their lives only slightly better). Tapping the existing base of Lifeline funds just won’t make a big difference when it comes to shrinking the digital divide.

And therein lies the problem. The current base of revenues—interstate voice services—are under siege as consumers increasingly obtain voice service as a free add-on to a wireless broadband data package. To raise the funds to make a real dent in the number of disconnected homes and improve lives, the Lifeline revenue base likely would have to be expanded to include broadband services.

As unelected officials, the FCC Commissioners would be happy to oblige. Some activists are practically begging the FCC to tax broadband to preserve the Universal Service program. And the FCC is not bashful about taxing and spending: In 2014, the FCC expanded the E-Rate program by $1.6 billion to give schools and libraries greater access to broadband.

But for the same reason we would never finance a general R&D subsidy by taxing firms engaged in general R&D, it makes no sense to tax broadband in order to subsidize it. Indeed, for those 10 to 20 million non-adopting households that would come aboard in response to a modest subsidy, there are likely millions of price-sensitive broadband households that would leave the broadband market in response to a modest tax. Unlike interstate voice revenues, which are paid in part by businesses, fixed broadband revenues are overwhelmingly paid by residential consumers. Thus, bringing broadband into the revenue base would cause U.S. households to bear a larger burden of the universal service subsidy.

Even worse, as soon as the FCC imposes a federal universal service fee on broadband to meet the surging demand for broadband among low-income Americans, the states are free to get in on the action. By reclassifying broadband as a “telecommunications service” in its February Open Internet Order, the FCC activated a series of dormant state and local telecom-based fees that had never been extended to broadband; Internet service was previously designated as an “information service,” and thereby immunized from this form of state taxation.

Recognizing this risk, the FCC preempted states from moving forward with their own universal service fees for broadband until the FCC adopted fees at the federal level: “[W]e preempt any state from imposing any new state USF contributions on broadband—at least until the Commission rules on whether to provide for such contributions.” The combined universal service fees from the FCC and the states would perversely contribute to the digital divide by driving even more price-sensitive adopters out of the broadband market.

To avoid this spiral, we need to look elsewhere for the financing of a broadband subsidy. Were it designed by an economist, the subsidy would be financed through the general treasury so as to reduce any distortions in the broadband marketplace. And the source of the funds would be the elimination of existing subsidies for sugar, corn, coal, or oil—all of which generate negative externalities.

Raising taxes on broadband users in order to subsidize broadband makes no economic sense.

This is cross posted from Forbes.

What the China Currency Depreciation Means for the Chinese Model–and for the US

Posted on by The Progressive Policy Institute

I argue here that critics of China’s recent currency depreciation are missing the big picture. First, depreciation is a desperate measure which is a sign of the coming implosion of the Chinese economic model. Second,  depreciation is a double-edged sword for China, because the Chinese export machine is heavily dependent on imported components that will rise in prices with depreciation. Third, the ultimate effect of a China economic implosion will be to send US interest rates and inflation soaring. Fourth,  on the positive side, there may be an opportunity to rebuild the US manufacturing sector, if China’s economy is in turmoil.  Fifth, the political implication is that presidential and other candidates should not expect a stable economy going into 2016, and a ‘crisis’ message may be needed.

China has been experiencing a massive debt bubble, with Bloomberg reporting that “outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008.” The stock market has plunged, construction is slowing, and  consumer spending is weak.

So what happens next?  We’ve never seen a situation like China before, when a country that is a massive exporter of goods and lending gets into trouble. Most economists, if they have put any thought into a Chinese economic collapse, believe that the government will deflate the currency and ramp up exports to get out of trouble.

But that simply misses the nature of the Chinese economy.  In recent years China has been a massive machine for importing components in other countries, assembling them in China, and shipping them abroad. According to the OECD, roughly one-third of the value of Chinese exports consists of “foreign value-added,” meaning imported components and the like.  Depreciation can only help so much, since a weaker currency will also increase the cost of the components, even as it makes exports less pricey. What’s more, as the financial system implodes, it will become harder for Chinese companies to get the financing to import the needed components, or to pay back loans for their factories. Moreover, facing a higher unemployment and a restive population, the Chinese government may have to let wages rise even more, reducing China’s competitiveness and boosting the cost of Chinese exports to foreigners.

What does this mean for the US?  China will have to start liquidating some of its mammoth foreign exchange reserves to deal with the crisis, including handling bad debt and importing consumer goods from the rest of the world. And if the Chinese government starts selling US Treasures in large quantities, rather than buying, that will mean upward pressure on interest rates.

More important will be the effect on inflation. Arguably the flood of cheap exports coming out of China has been the single most important force holding down the US inflation rate. Chinese-made goods have dropped in price in recent years, while US made consumer goods (excepting food and energy) have risen in price at the producer level. If the China export machine stalls or rises in price, we could see a spike in inflation in the US. Rising interest rates and inflation could be bad news for the US economy.

The positive news, from the US point of view, is that this may provide an opportunity to do some rebuilding of the US manufacturing sector. As Chinese supply proves unreliable, companies may be more likely to look at home.

And what about the US presidential campaign?  Rather than issues like wages and inequality, candidates may find themselves facing a rerun of the 1980 campaign, when inflation and interest rates were the key problems. Candidates need to develop a ‘crisis’ message ahead of time, because events may be quick moving.

 

 

 

 

 

 

 

 

WSJ: Beyond the Internet, Innovation Struggles

Posted on by The Progressive Policy Institute

PPI Chief Economic Strategist Michael Mandel’s recent work on measuring innovation was featured in the Wall Street Journal:

In a new study, Michael Mandel of the Progressive Policy Institute notes that previous innovation waves straddled numerous disciplines: information processing, transportation, medicine, energy and materials. There’s a reason why, in the 1967 film “The Graduate,” Dustin Hoffman’s character is told “there’s a great future in plastics.” The development of thermoplastics in the 1930s and 1940s made possible products that are now ubiquitous in business and household life.

Where are the comparable advances in materials today? The Nobel prize was awarded in 1987 for the discovery of high-temperature superconductors—material that can carry electric current without resistance at temperatures above extreme cold. But as Mr. Mandel notes, few commercial superconductor applications are on the market. Nanotechnology—building materials out of microscopic particles—has found its way into tennis balls and odor-resistant fabrics but hardly measures up to steel or plastic in its breadth of uses.

The staggering sums invested in biosciences haven’t yielded breakthroughs comparable to antibiotics in the 1930s and 1940s. The human genome was sequenced more than a decade ago. Yet as Mr. Mandel notes, there is still no approved gene therapy for sale.

Quantifying innovation is difficult: Government statistics don’t adequately measure activities that only recently came into existence. Mr. Mandel circumvents this problem by surmising that innovation leaves its mark in the sorts of skills employers demand. For example, the shale oil and gas revolution is apparent in the soaring numbers of mining, geological and petroleum engineers, whereas the ranks of biological, medical, chemical, and materials scientists have slipped since 2006-07.

Continue reading at the Wall Street Journal.

POLITICO: New Democrats plan ‘assertive’ new presence in House

Posted on by The Progressive Policy Institute

The New Democrat Coalition sees opportunities this fall on taxes, trade, Medicare and others.
 by Lauren French, POLITICO

In the hierarchy of the House, moderate Democrats — a minority in a party already deep in the minority — should be totally powerless.

But a group of pro-business Democrats, who allied with President Barack Obama and Republicans to pass landmark trade legislation, are angling to cut more deals with the GOP and White House as a way to assert themselves — and force the Democratic Caucus to the center.

Led by Rep. Ron Kind of Wisconsin, the New Democrat Coalition of some 50 members sees opportunities this fall on taxes, trade, Medicare and government spending. Those are all areas where House Republicans have struggled to fashion 218-vote majorities from within their own party, with a cadre of restive conservatives often rejecting leadership’s compromises with Senate Democrats and Obama.

That leaves an opening for swing moderates to get legislation across the finish line.

“We need to reconstitute the center of American politics again, on both sides. That is a crucial role we have to play, especially when it comes to the economic message and what resonates in those competitive districts,” Kind said in a recent interview.

Moderates are tired of being overshadowed in a party where liberals have long dominated the agenda, even as Democrats slipped further into the House minority after the 2014 midterm elections. They’ve accused the White House and party leaders of focusing too much on niche economic issues like the minimum wage and pay equity — policies, moderates argue, that turn off suburban voters Democrats need if they want to take back the House. And top Democratic leaders have released them to break with the party’s liberal base, in many cases an acknowledgement that many moderates come from tightly contested districts.

Early returns have been positive.

When Obama needed support from his own party to pass landmark trade legislation, he turned to the New Democrat Coalition. The group mustered just enough votes — 28 in total — to clear fast-track trade authority through Congress, despite opposition from the party’s left, including Democratic Leader Nancy Pelosi of California. It was the latest — and most controversial — instance of the group flexing its muscles.

And now moderates are staking a claim to other economic polices normally dominated by Republicans. Reps. John Delaney of Maryland and Scott Peters of California introduced a “dynamic scoring” bill — an issue normally favored by Republicans — that would encourage budget scorekeepers to score tax cuts favorably to reevaluate how Congress spends money on infrastructure, research and education. Connecticut Rep. Jim Himes is one of the most outspoken advocates for reforming the Dodd-Frank financial regulations bill, which he supports, and Delaney has worked to find common ground on foreign tax issues with both parties.

“There is a real opportunity to work with the administration and to work with the majority to try and get [our issues] done,” said California Rep. Ami Bera, a member of the group. “There is an appetite.”

Read More on POLITICO.

Does the FCC’s Open Internet Order Survive a Cost-Benefit Test? These 13 Economists Don’t Think So.

Posted on by The Progressive Policy Institute

Yesterday, a stellar constellation of regulatory economists—including three economists affiliated with the Progressive Policy Institute—submitted an amicus brief to the D.C. Circuit Court of Appeals, demonstrating that the Federal Communications Commission’s 2015 Open Internet Order failed a cost-benefit test.

How could this happen?

When proposing a remedy to address a perceived market failure, a regulatory agency may fail a cost-benefit test in three ways. First, the agency can overstate the benefits of its proposed remedy. Second, the agency can understate the costs of its proposed remedy.

Third, and a bit less obvious, the agency can ignore a less-restrictive alternative that would generate the same purported benefits but at a lower cost, thereby rendering its proposed remedy inefficient. For example, if the net benefits of a proposed remedy are $10 million per year, but a less-restrictive alternative generates net benefits of $15 million, then the proposal fails a cost-benefit test, even though the proposed remedy would have generated benefits in excess of costs.

The FCC committed all three errors in its Open Internet Order (OIO). As Chris Cillizza of the Post says in his recurring award for Worst Week in Washington, “Congrats, or something.”

The amicus brief explains in great detail how the FCC committed the first two errors.

In terms of overstating benefits, the OIO fails to consider that the profitability of (and thus the incentive to engage in) discriminatory conduct vis-à-vis content providers depends on whether the Internet service provider (ISP) could generate higher profits from the promoted (affiliated) products to cover the lost margins from departing broadband customers. The anticompetitive behavior feared by the Commission has simply not come to pass, which explains why the OIO is hard-pressed to cite any recent examples of consumer harm. A very limited number of service disruptions or degradations have actually occurred—among literally millions of opportunities for such behavior—and many of these have been dealt with expeditiously through private negotiations.

And in terms of understating costs, the OIO ignores or dismisses the economic evidence of the impact of Title II on investment in the late 1990s and early 2000s, and thereby dismisses the very real threat to ISP investment. Rather than ground its findings on economic scholarship, the OIO relies instead on the casual empiricism of an advocacy group that operates outside of the constraints of academic reputations, to reach the extraordinary conclusion that telco investment was “55 percent higher under the period of Title II’s application” than in the later period. These results hinge on which years are included in the Title II era: If one includes the years 1999 and 2000 as part of the pre-2005 period, then removal of Title II appears to have caused a decline in Bell investment. But those early years are associated with the dot.com boom and long-haul fiber glut, and it is difficult to remove Bell investments in backbone infrastructure from the capex figures.

The amicus brief spends less time on the third element of cost-benefit, largely due to a 4000-word limitation. So more on that here.

The OIO casually dismisses a less-restrictive alternative for handling paid priority disputes—namely, case-by-case enforcement—as being “too cumbersome” to enforce, despite the fact that: (1) the 2015 OIO itself embraces case-by-case review to address interconnection disputes and other conduct such as zero-rating; (2) the 2010 Open Internet Order embraced case-by-case to address paid priority disputes; (3) the FCC’s May 2014 Notice of Proposed Rulemaking would have permitted ISPs and content providers to engage in “individualized bargaining” subject to ex post review; and (4) the FCC relies upon case-by-case to adjudicate discrimination complaints against traditional video distributors. Why is this conduct different from all other conduct?

Recognizing this disparate treatment of paid priority and interconnection, the OIO argues that case-by-case enforcement “is an appropriate vehicle for enforcement where disputes are primarily over commercial terms and that involve some very large corporations. . . .” (paragraph 29). But interconnection disputes can involve small content providers as well. And if the concern is an asymmetry in litigation resources, the case-by-case regime can level the playing field by shifting evidentiary burdens and providing interim relief.

Indeed, the 2010 Open Internet Order considered and rejected a “flat ban” on paid priority in favor of a case-by-case approach; embracing the ban in 2015 presumably pushed the FCC towards its dreaded reclassification decision. This dramatic policy reversal begs the question: What happened in the intervening five years that caused the Commission to lose confidence in case-by-case adjudication for paid priority? The OIO does not give an answer.

It would seem that an overt and pronounced shift in regulatory policy would necessitate a clear and confident finding that such an alternative policy approach toward the Internet would produce better results—more innovation, more investment, and more consumer benefits. When viewed with an economic lens, the OIO fails a basic cost-benefit analysis.

U.S. News & World Report: Put Infrastructure Back on Track

Posted on by The Progressive Policy Institute

The Highway Trust Fund is a good first step to funding infrastructure, but private investment is key.

Before we celebrate pending congressional action over funding for the Highway Trust Fund – be it a short-term deal now or long-term deal later – consider that the United States needs about nine times that amount annually to get U.S. infrastructure back on track.

The Department of Transportation estimates that we need to spend between $124 and $150 billion a year just to maintain our current, decrepit, system. In 2013, the American Society of Civil Engineers estimated that to actually improve the quality of current infrastructure, the price tag rises to about $450 billion annually, or over $3.6 trillion, by 2020.

HighwayTrustFundFallsShort The Highway Trust Fund supports about $50 billion in infrastructure projects annually. This is known as the infrastructure funding gap – the country needs to spend a lot more on infrastructure than current policy funding allows for. No matter how you calculate the need, the heralded Highway Trust Fund starts to look more like legislative symbolism than pragmatic policy solution.

There is broad bipartisan agreement around the importance of infrastructure and the Highway Trust Fund, but little consensus on how to pay for it. This political gridlock, and overall federal and state belt-tightening, means there’s a need for new ways to pay for infrastructure.

That’s where the private sector comes in. They have the resources to help fill this gap and modernize America’s infrastructure.

There are large benefits to modernizing. New research from economists Douglas Holtz-Eakin and Michael Mandel for the McGraw Hill Financial Global Institute (which I run), “Dynamic Scoring and Infrastructure Spending,” shows that infrastructure investment has a spending multiplier that yields a significant contribution to gross domestic product, ranging from a conservative estimate of 0.8 to 1.6 times the original amount invested. A survey of existing studies shows that $100 billion in infrastructure spending would contribute between $62.5 billion and $165.5 billion over 20 years, with $12.5 billion to $33.1 billion in new tax revenue receipts.RoadsAreDeteriorating

Investments in public infrastructure projects consistently produce stable, long-term returns on capital. Institutional investors, looking to match these qualities with their own long-term liabilities, are eager to leverage low interest rates and an economic upswing to invest in U.S. infrastructure. By one estimate, there could be as much as $7 trillion available around the world for long-term investment in U.S. infrastructure. With new financial products like Build America Bonds and the proposed Qualified Public Infrastructure Bonds, this untapped capital reserve is waiting to close the U.S. infrastructure deficit.

Given the critical importance of rebuilding U.S. infrastructure, the significant returns on investment and the contribution to national output, restarting the Highway Trust Fund is a good first step. But let’s be clear-eyed about the large funding gap and the potential sources for filling it.

This piece was cross posted from U.S. News & World Report.