issue: Economy

Discussing the Future of U.S.-China Relations

Posted on by The Progressive Policy Institute

Watch a video of the event on C-SPAN

Next month, Chinese President Hu Jintao will be visiting Washington and Defense Secretary Gates will be visiting Beijing. Though the U.S. and China have had their disagreements of late – over North Korea, over human rights, over currency valuations – both have much more to gain from cooperation than conflict.

Such was the general consensus at a PPI Event today entitled, “China’s Choice: Regional Bully or Global Stakeholder?” The event featured: The Honorable Chris Coons, U.S. Senator (D-Del.), Member, Senate Foreign Relations Committee; The Honorable Wallace “Chip” Gregson, U.S. Assistant Secretary of Defense, Asian and Pacific Security Affairs; Joseph S. Nye, Jr., Harvard University; James Fallows, The Atlantic Magazine; Michael Chase, Naval War College.

Sen. Coons kicked off the event by relating the experiences of a newly elected Senator who had spent the last several months on the campaign trail listening to the ordinary Americans’ trepidations about China.

“I’ve seen and heard the growing frustrations of average Americans, and their perceptions, or misperceptions, about the rise of China,” Coons said. “Americans are deeply concerned we’ve lost our economic and manufacturing edge and Washington has taken its eye off the ball.”

But Coons also registered an optimistic note: “I don’t view it as a zero-sum game. China’s rise does not have to mean the decline of America.” The Senator expressed hope that the U.S. and China could overcome the short-term impasses over such issues as trade and intellectual property and could have a “long-term harmonious relationship”

Assistant Secretary Gregson followed Coons with a similar hope. “Together,” he said, “the U.S. and China can build a new century of global prosperity, and the time to begin is now…both countries have a great deal to gain from cooperation.”

Gregson highlighted the importance of the Pacific region, which is home to 15 of the world’s 20 largest ports, including nine in China. Five of the world’s seven largest standing armies (China, North Korea, South Korea, India, and Pakistan) are there as well. “China sits at a fulcrum,” said Gregson.

The Assistant Secretary outlined the three pillars of the U.S. approach to China:

  1. An effort to sustain and strengthen bilateral cooperation;
  2. An effort to strengthen relations with other Asian allies;
  3. And that a rising China should abide by global norms and international laws.

He noted that China’s military build-up, which has often been less than transparent, has raised real concerns. “This type of military build-up far exceeds China’s defensive needs,” he said. “We call upon China to become more transparent. We are not asking for an unreasonable degree of disclosure. Just enough to allow all parties to avoid miscalculation.”

Professor Nye, author of a new book entitled The Future of Power (about how power is transitioning from the West to the East, and from state to non-state actors), spent a few minutes musing on a question he posed: “Can the rise of China be peaceful?”

Referencing Thucydides’ history of the Peloponnesian War and the rise of Germany in the early 20th Century, Nye noted that the rise of a new power often provokes fear from rivals, and “if we fear too much it becomes a self-fulfilling prophecy.” Referencing FDR, Nye argued the more apt position to take with China was that “the greatest thing we should fear is fear itself.”

“There is a rise in Chinese power, but a mistake to over-estimate it,” said Nye. “The size of China’s economy and our economy may be equal in size by 2030, but they will not be equal in composition, and per capita income will only be 1/3 of our per capita income.”

Fallows, who spent four years living in China and has written about his experiences in Postcards from Tomorrow Square: Reports from China (and is writing another book about China), argued that in most respects, the fundamental arrangement and consensus between the U.S. and China has been remarkably stable for the last 30 years: It’s better to work together than as enemies; China’s prosperity need not be at the direct expense of the United States; and there are going to be real disagreements.

As for America’s perceived sense of decline in the face of a rising China, “The central thing here is that the issues that matter to America’s viability have nothing to do with China,” said Fallows. “They would be identical if China did not exist. The greatest concerns are the functionality of the political system.”

Chase, who has written three memos on China’s military for PPI, noted that one of the challenging things about assessing China’s military prowess is that the military hasn’t been involved in a hot war since 1979 (Vietnam). Chase recommended a path of working with China as well as building up our military capacity to match China’s possible threats.

The event concluded with a question about climate change, which will probably be the most pressing challenge that the U.S. and China will have to solve. Nye noted that China has now surpassed the U.S. in greenhouse gas emissions. Fallows put it simply: “There is either a collaborative strategy of the U.S. and China, or no hope at all.”

Our Aging Capital Stock

Posted on by The Progressive Policy Institute

If things feel more decrepit and worn-out these days, it’s because they are. The average age of the U.S.  capital stock is at a 40-year high in all three major categories:  nonresidential, residential, and government. Take a look at this chart:

One unpleasant surprise after another, from the top down.

  • The age of the residential stock is at its highest level in 40 years, despite the mammoth building boom of the 2000s.
  • The age of the government capital has steadily risen over the past 40 years, suggesting great underinvestment in public infrastructure.
  • The age of the private nonresidential capital stock has risen more or less steadily since the early 1980s, with a slight dip in the New Economy boom of the 1990s.

Let’s break it down by industry. This chart shows the change in the average age of the capital stock since 2000.

It’s kind of an odd and surprising picture. The sectors which got younger were mining, farming, and transportation. The information sector, which was supposed to be leading the economy, had the biggest rise in average age. That’s because we just weren’t investing enough in information technology over this stretch to make up for the aging of the old physical infrastructure.

This article is cross-posted at Innovation and growth

Senator Warner’s Smart Thinking on Red Tape

Posted on by The Progressive Policy Institute

With Congress about to enact a massive new tax package that may be the last attempt we make at any kind of fiscal stimulus anytime soon, what other approaches should we be looking to for the long-term changes we need to regain our economic vitality?

In this morning’s Post, Senator Mark Warner offers an answer that makes a lot of sense in the cash-strapped, post-stimulus world we find ourselves in: cutting regulatory red tape to invigorate the private sector.  Citing both the enormous compliance costs for businesses as well as the chilling effects regulation can have on  investment and innovation, Senator Warner outlines his legislative proposal for a “regulatory pay-as-you-go” system to curb the steady increase in regulatory burdens on our economy.

Senator Warner’s proposal, which he discussed at PPI’s infrastructure forum in September, is similar to the “one-in, one-out” approach recently adopted in Britain, requiring agencies imposing new regulations to identify existing regulations with the same amount of economic impact to be eliminated.  The idea is that if we are serious about wanting to let the private sector drive economic growth through new investment and innovation, we should at least try to hold the level of regulatory burden constant, rather than expanding it without any effort whatsoever to revisit potentially outdated or poorly designed rules already in place.

PPI has argued for the same idea that our regulatory system needs to be more responsive to the needs of the economy, most notably in recent policy memos by Michael Mandel, who has proposed his own approach of countercyclical regulatory policy.  Like Warner, Mandel suggests that one of the best ways we can encourage job growth and revive our economy is to recognize that government is generally better at choking off innovation than it is at actively promoting it, so the best thing we can do is to be cautious in imposing new rules on the innovative ecosystems in our economy, like the communications sector, that are the best sources of new growth.

Senator Warner is right to model his legislation on the steps taken in the U.K., but the trick is coupling good ideas with the right political leadership to force a cultural shift in the way we think about regulating the private sector.  As Warner points out, British reforms have been years in the making, and they are the product of institutional changes based on improving collaboration and input from business to craft policies that would make Britain more globally competitive.  This effort has crystallized in the last year under the coalition government led by Prime Minister David Cameron, whose dedication to bringing a “new economic dynamism” to his country offer a pretty good lesson in leadership for President Obama to study while he writes his State of the Union speech for January.

In his excellent speech in October, Cameron laid out an actual strategy (!) for growth that included fiscal discipline, increased investments in human capital and infrastructure, a renewed focus on exports and competitive advantage, and an effort to encourage new companies and innovation to drive growth.  Putting aside differences of opinion some may have about Cameron’s fiscal austerity, one thing this speech does offer that Warner and Mandel can both love, and that White House advisors can learn from, is Cameron’s attitude about government regulation:

Successful, high-growth economies are like ecosystems –they are organic, evolve through trial and error and depend on millions, billions, of individual preferences, choices and relationships. Governments can expect to intelligently design all this as much they can expect to intelligently design the Great Barrier Reef.  But what they can do is create an environment in which businesses are confident enough to invest. . . . If we are to get back to strong growth, these profits need to turn into productive investment – and my message to you today is that we are providing the stability for that investment.

PPI strongly supports Senator Warner’s pay-as-you-go proposal as a long overdue approach to modernizing our regulatory system.  Both Warner’s proposal and Mandel’s countercyclical regulatory approach are helpful starting points for a discussion about how to make institutional changes that create a consistent method of scrubbing stale and ineffective regulations out of the system to make way for new rules better tailored to today’s economy.

PPI has supported a number of structural reform proposals to our regulatory system, like creating a review board that periodically submits a list of regulations for repeal to Congress for an up-or-down vote, much like the BRAC base-closure process.  We have also recommended that OMB conduct “innovation impact studies” for new agency rules to measure the regulatory footprint imposed on innovative ecosystems in the economy, the same way we conduct environmental impact studies.  OMB’s Office of Information and Regulatory Affairs (OIRA) would be a natural fit to take charge of such an effort, not only because of its institutional competence in reviewing agency rules, but also because its current Administrator, Cass Sunstein, could seek advice from his friend and co-author of Nudge, Richard Thaler, who serves as a lead advisor to the British government in its regulatory reform efforts.

As usual, Warner brings an invaluable perspective and fresh thinking to the Senate, and Democrats would be smart to showcase his creative thinking the same way Republicans thrust younger members like Paul Ryan into the spotlight.

Senator Warner is right to propose this regulatory PAYGO legislation as a means to boost our economy when our other options for doing so effectively are starting to run thin.  Pointing across the pond for an example of smart reform policy is also dead-on, but perhaps he should also point President Obama to David Cameron’s October speech as an example of smart, strategic leadership.

Centrists of the World Unite

Posted on by The Progressive Policy Institute

It’s no secret that the relentless polarization of U.S. politics has left independent and moderate voters  politically homeless.  Today a bipartisan group of activists gathers in New York to launch an effort to organize this “radical center” and amplify its voice in Washington.

No Labels is the brainchild of Nancy Jacobson, a veteran Democratic activist and fundraiser.  Its organizers include veteran political players from both parties of a distinctly pragmatic, non-doctrinaire bent (including yours truly).  It aims to build an online network of Americans – imagine a MoveOn.Org for centrists  –  who are fed up with the nation’s dysfunctional political system and want to do something about it.

That won’t be easy, even with the Internet’s unprecedented power to connect virtual communities of like-minded people.  Unlike arch partisans and members of interest groups, independents and moderates are notoriously hard to mobilize.  They tend not to be impelled by passionate causes, and to pay fleeting attention to politics. “Liberals and conservatives have passion. Moderates and independents have lives,” observes political analyst Charlie Cook.

There’s little doubt, however, that voters across the broad middle of the spectrum have become more disenchanted with politics and government.  The midterm election was the third straight in which independents turned against the incumbent party.  This restiveness is grounded in what they see as the Obama administration’s failure to deliver, especially on the economy.  Independents don’t trust the Republicans either, and the last thing these voters want is an intensification of Washington’s zero-sum political game.

According to a new poll by Allstate/National Journal Heartland Monitor, only 10 percent of Independents welcome the GOP victory as a chance to roll back government.  Seventy percent said neither party’s agenda alone can solve the nation’s problems. This poll confirms other recent surveys in finding a strong preference for bipartisan cooperation over confrontation.  President Obama’s tax-cut deal shows he’s gotten the message.

So No Labels is tapping into something real.  On the other hand, it so far is defined more by what it’s against – incivility, partisan cant, rigid dogmas, special interest power and, above all, a paralysis in government’s ability to solve problems – than by what it’s for.  Can a movement organized by political insiders tap and channel grassroots anger in politically consequential ways?  Can it coalesce behind a positive agenda for governing?  We’ll see.

For now, it’s enough to say that the problems No Labels seeks to solve are real enough.  There’s no question we need a broad civic mobilization to bring intense pressure to bear on our political leaders to work together to solve the nation’s problems.  Independents and moderates may be an inchoate political force, but there are lots of them. If No Labels can get even a fraction of them mobilized for political action, Washington will take notice.

Needed: A ‘Global-Compatible’ Tax System

Posted on by The Progressive Policy Institute

President Obama is thinking about a broad overhaul of the income tax system, closing loopholes and lowering rates. (“Obama Weighs Tax Overhaul in Bid to Address Debt”).

But in today’s global economy, any attempt to ‘fix’ the U.S. income tax system is fundamentally doomed. Financial and product markets are so deeply globally integrated that multinationals and wealthy individuals can easily  recognize their income in lower-tax countries, if they choose.

One simple statistic: In 2009 40% of U.S. imports and exports was ‘related-party trade’ –”trade by U.S. companies with their subsidiaries abroad as well as trade by U.S. subsidiaries of foreign companies with their parent companies.” That means companies are effectively trading with themselves, so they can choose which side of the transaction books the profits.

To put it another way, the global economy is the biggest loophole of all, and it can’t be closed without layer after layer of intrusive rules and regulations.  In a global economy, you can’t have a simple income tax system.

What we need is a ‘global-compatible’ tax system: That is, a tax system which acknowledges the existence of a global economy, so it doesn’t continually need to be patched to close loopholes.

The best global-compatible tax system that I know of is the value-added tax. The value-added tax, as the name suggests, taxes the value added in a country, not the income. Equally important, A VAT  taxes imports but not exports.  As a result,  it offers far less chances for gaming the system.

Now, countries can still compete on their level of VAT. Moreover, there are a lot of controversial issues that can seriously affect competitiveness. These include: How to make the VAT progressive; whether medical care and housing should be exempt; how to treat capital investment and R&D spending; and so on. Big important questions, but ultimately solvable.

If you want tax simplicity and fairness, global-compatible is key.

This piece is cross-posted at Mandel on Innovation and Growth

A New Approach for STEM Education

Posted on by The Progressive Policy Institute

Most Americans appreciate the fact that the world is a very competitive place.  Policy makers and parents have long known that our kids, from grade school through college, need to step up their skills and understanding of science, technology, engineering and math – know in education circles as STEM studies – if they are going to compete successfully with their counterparts in China, India, Korea, and many European countries.  For this reason, for nearly 40 years there has been a lot of interest in improving STEM education.  While it is laudable that we are focusing on STEM education, we are running the risk of tethering ourselves to assumptions that might be a little faulty and outdated.  We can’t be truly innovative as a nation if we are not innovative in our thinking about STEM education.

The current assumption driving STEM education is that all students should get at least some STEM education at every step of their educational journey.  Supply students with high standards, great teachers and get as many kids excited about STEM as possible.  Call this the “some STEM for all” approach.  It sounds appealing, right?  Universal tech literacy for the 21st century.

Well, one problem with this is that most of us are not destined to be scientists and engineers – maybe five percent.  Some of us simply don’t have the acumen and the economy only needs so many engineers and scientists and actuaries.  So why should state and local governments, many of which are in deep financial peril, lavish resources on the “Some STEM for all” approach?  The answer is that they shouldn’t.

Another problem with this approach is that it wants to push young people into studying what might not necessarily interest them and deny the real STEM stars the resources they need to excel.  This is destined to fail.  A successful education experience begins with motivated, excited students pursuing what truly interests them and going where their talents can shine.  Forcing all students to take on AP physics or chemistry is going to have disappointing results during high school and beyond since these fields aren’t necessarily where the jobs are going to be.  Ironically, over 80 percent of the STEM jobs are in engineering and information technology but there is a paucity of courses in these fields at the high school level.  Therefore, the kids with the inclination are not getting access to what excites them – nor acquiring skills that employers actually need.

The time has come to try a more efficient and effective approach.  Flip the paradigm around.   Call it “All STEM for Some.”  It is based on identifying the kids with the most promise and interest in STEM areas early on and giving them the challenging, exciting educational experience. This  will allow them to move into advanced studies and then into the working world ready to contribute to a more dynamic U.S. economy.  Not everyone is going to be Bill Gates.  We don’t need everyone to be Bill Gates.  But we have to make sure we have at least a few Bill Gateses in the years ahead.

Gates’s case actually provides a good example of the wisdom of this approach.  As many of us have learned in the popular book “Outliers” by Malcolm Gladwell, Gates is a product of brains and hard work.  But just as important, he had the luck to go to fine private high school where a parent with vision and resources provided a computer lab.  This was a time when most universities had not computer lab.  For a kid like Gates, it was heaven.  He spent hours there.  And the rest, as they say, is history.

ITIF fleshes out the idea of “All STEM for Some” and offers up ideas that should be embraced as part of a broader education reform effort in a new report Refueling the U.S. Innovation Economy: Fresh Approaches to Science, Technology, Engineering and Mathematics (STEM) Education. Among the ideas in the report is placing a greater emphasis on making sure students can demonstrate skills rather than merely memorize content.  In addition, it would make sense to allow STEM-oriented students to spend more time in those courses and less time on other subjects.  Also, we need to make sure the resources are there beginning freshmen year so we don’t lose the kids who were STEM-inclined but instead nurture them with greater opportunities right away.

In addition, the report urges policy makers to get serious about creating entirely new institutions – STEM specialty schools – and develop the infrastructure to identify and recruit the most promising students to pursue their passions in exceptional world-class educational environments.

We should also revise how we incentivize schools to make their STEM programs more effective.  The report explains this could be done with a combination of federal grant money, as well as corporate or philanthropic efforts.  Bolstering STEM education should be part of needed national strategy to make our national labs, universities and private employers act in a more coherent fashion when it comes to preparing students and workers in critical new fields.

We are not going to be able to develop the game-changing advances in biotechnology, robotics, energy and other fields unless we nurture the talent of our students effectively.  Many of us will want to become artists, teach history, develop real estate, or run our own small business.  That is fine.  But we should get serious – immediately – about how we educate those students who show the keenest interest in the emerging growth fields of the future.  Giving a smattering of science and math to them along with the aspiring novelists is not going to work.  We only have about ten years to make changes in our STEM education so we will have the talent to create the STEM jobs so and therefore compete globally in the years ahead.  The time to get started is now.

This article is cross-posted at Innovation Policy Blog

Photo credit: Michael Surran

An Ugly But Necessary Deal on Taxes

Posted on by The Progressive Policy Institute

The tax cut deal struck last night by President Obama and Congressional Republicans has only one thing going for it: urgent economic necessity. If unemployment weren’t stuck at just under 10 percent – possibly for years, warns Fed Chairman Ben Bernanke – there would be no way any self-respecting progressive could support it.

How ugly is this deal? Let us count the ways. First, it forces progressives to swallow the Bush tax breaks for the wealthiest Americans. President Obama’s undoubtedly painful decision to go back (for now) on his oft-repeated promise to repeal them reflects the post-midterm political realities of divided government.

Second, it’s hugely expensive. It could cost as much as $800 billion over the next two years, even as the federal government staggers under the weight of massive deficits. It’s an inauspicious start, to say the least, to the new era of fiscal discipline Republicans promised in the midterm elections. Let’s face it: they’d rather have tax cuts. In any case, the price tag makes you wonder if America can afford this kind of bipartisan compromise.

For all that, the deal was probably inevitable given the economy’s persistent weakness. To have failed to extend the middle class tax cuts would have withdrawn hundreds of billions of purchasing power from the economy at a time when demand is insufficient to trigger new business investment. To have not extended the cuts for upper-income taxpayers would have made it difficult if not impossible for Obama to get what he wanted from Republicans: namely, an extension of unemployment benefits, a payroll tax holiday workers next year, and a renewal of business tax breaks passed this year.

Waiving the payroll tax is an important creative addition, since by lowering labor costs it gives employers a direct incentive to hire workers. Also on the plus side, the deal keeps rates on capital gains and dividends low, and includes “direct expensing” of business investments.

President Obama clearly views his tax provisions as stimulus by the only political means available to him, given public – not just Republican antipathy – to more government spending. He raised the stakes yesterday, warning that America has arrived at another “Sputnik moment” and could be eclipsed by rivals if we can’t turn the economy around. The President also showed little patience with liberal purists who are loudly bewailing, for the umpteenth time, their “betrayal” by a Democratic President.

“Sympathetic as I am to those who prefer a fight over compromise, as much as the political wisdom may dictate fighting over solving problems, it would be the wrong thing to do,” he said. “The American people didn’t send us here to wage symbolic battles or win symbolic victories.”

It’s true that a majority of the public consistently has opposed tax breaks for the rich. But it’s also true that Americans, and especially the independents who propelled the Republicans’ midterm gains, have even less appetite for political brinkmanship designed to score partisan points. The U.S. left is always up for a bracing round of class warfare, but voters aren’t likely to reward tactics that could result in slowing down the recovery and raising their taxes at the worst possible moment.

The good news is that the extension is only for two years. That gives time for a reconsideration of the whole ungainly package in 2012, by which time the jobless rate presumably will have fallen back to earth. That allows room for a more constructive debate next year over a sweeping tax overhaul designed to promote growth, long-term fiscal stability, and fairness. It also puts the question of how to restore a progressive tax code smack in the middle of the next presidential elections, where it belongs.

Photo credit: David Reber

PPI EVENT – China’s Choice: Regional Bully or Global Stakeholder?

Posted on by The Progressive Policy Institute

China’s Choice: Regional Bully or Global Stakeholder?

***PLEASE NOTE UPDATED PROGRAM***

Introductory Remarks:
The Honorable Chris Coons, U.S. Senator (D-Del.)
Member, Senate Foreign Relations Committee

Keynote Address:
The Honorable Wallace “Chip” Gregson
U.S. Assistant Secretary of Defense, Asian and Pacific Security Affairs

Featured Panelists:
Joseph S. Nye, Jr., Harvard University
James Fallows, The Atlantic Magazine
Michael Chase, Naval War College

When:
Tuesday, Dec. 14, 2010
10:30 a.m.

Where:
University of California Washington Center
1608 Rhode Island Ave. NW
Washington, DC

View map

If you have any questions, please contact 202-525-3926.

Register for this event.

Space is limited. RSVP required.

 

MEDIA COVERAGE:
The event is open to the press. Media in attendance are required to register in advance of the event to Steven Chlapecka at 202.525.3931 or schlapecka@ppionline.org. Camera pre-set: 9:30 a.m.

Hosted in collaboration with the University of California Washington Center.

British Deal Shows Private Investment Demand for High-Speed Rail

Posted on by The Progressive Policy Institute

This week, the British government will formalize an agreement with two Canadian pension funds with enormous implications for passenger train development in the United States. In return for the right to operate a high-speed rail line linking London with the Channel Tunnel for 30 years, the Ontario teachers and municipal employee pension funds have agreed to pay the UK government $3.4 billion.

The sale not only represents a big vote of market confidence in the future of high-speed rail, but points to a route for building and operating new train lines in the U.S.

In the wake of the equities meltdown, U.S. pension funds are seeking “safe havens” to invest, while states and the federal government are looking for ways to build expensive rail infrastructure in the face of record budget deficits.

Here’s a solution: Structure high-speed rail projects to attract pension funds and other institutional investors through operating concessions and other long-term cash-generating instruments.

Making Money While Generating Jobs

Consider the $133 billion Florida State Board of Administration, currently winding down its loss-generating equities portfolio and concentrating on core fixed income.

If the Florida State pension fund invested just 3 percent of its portfolio in the state’s high-speed rail line, that would generate $4 billion. That’s enough to cover both the $500 million shortfall in the high-speed segment between Tampa and Orlando (the Obama administration has already allocated $2.05 billion for this project) and the state’s portion of a Miami-Orlando route with excellent ridership potential.

Similarly, the California Public Employees’ Retirement System (CalPERS) has adopted a new investment policy with a targeted 3 percent allocation of assets, or about $7 billion, in infrastructure.

The proposed bullet train between Los Angeles and San Francisco is expected to generate as much as $3 billion in profits by 2030. By allocating some of its funds to the $40 billion rail project, CalPERS could enjoy a stable return while providing the Golden State with an enormous job-generating public work.

Other institutional investors, such as labor unions, could be attracted to rail partnerships and concessions that diversify their pension portfolios while providing direct economic benefits to their members.

Such new-style financing would require a marketplace with transparent trading and timely data, amounting to a new source of opportunity for the investment community. In a sense, Wall Street could come full circle to its origins as the exchange place for European capital seeking profit in American railway construction in the 19th century.

High Level of Investor Interest

Back to the Brits, it is crucial to note that the $3.4 billion interest in High Speed-1, the London-Channel link, exceeded the highest hopes of David Cameron’s coalition government, which inherited the initiative from Gordon Brown’s Labor government.

In the words of one commentator, the asset sale “came as a pleasant surprise” to observers who believed the UK government “would have to settle for knock-down prices” because of the world recession.

The auction also attracted many more bidders than expected. The Ontario Municipal Employees Retirement System and Ontario Teachers’ Pension Plan, allied with Borealis Infrastructure, beat a long list of potential buyers, including insurance giant Allianz and investment bank Morgan Stanley.

Borealis already operates the Detroit River freight rail tunnel between the U.S. and Canada on behalf of the pension funds. The Borealis group will receive a revenue stream from access charges paid by train companies using HS-1. In return, it will be responsible for preserving the line as a high-speed railway and to periodically improve track and structures to state-of-the-art standards.

Eurostar fields trains between London and Paris and London and Brussels. Deutsche Bahn, the German rail carrier, has announced plans to operate from London to Frankfurt and London to Amsterdam.

In addition to these services, the Borealis group has the right to sell access to other passenger carriers and to develop freight traffic.

Setting a Monetary Value on High Speed

The British approach marks a turning point. Prior to now, high-speed lines, such as France’s TGV and Spain’s AVE, were built and operated by government or government-directed entities. The profits or losses from high-speed trains were part of the financial profile of the larger rail systems.

Nearly all experts agree that fast trains earn higher per-mile revenues than conventional-speed trains and substantially more than commuter and branch-line services.

The British concession puts a monetary value on high-speed rail that can serve as a basis for a market in future railway concessions and stock sales in equipment and infrastructure-building companies.

HS-1 was one of the most expensive rail projects in the world due to extensive bridging, tunneling and station construction. Opened in November 2007, the 68-mile line cost $8.3 billion.

The concession sale returns 40 percent of the build cost to the British treasury. When the concession ends in 2040, the railway will revert back to the government, which expects to re-bid the property for an equal or higher price.

By this means, HS-1 will continue to return a dividend to taxpayers and, over the course of its 150-year-plus lifecycle, repay its construction cost, probably several times over.

This prospect differs from the scary scenario presented by U.S. critics (including the Republican governor-elects of Wisconsin and Ohio) who charge that high-speed rail is a money pit requiring long-term government subsidies to operate.

Summing up the rap against rail as “high-speed pork,” Washington Post columnist Robert J. Samuelson recently complained, “If private investors concurred [that fast rail was profitable], they’d be clamoring to commit funds; they aren’t.”

The high-speed chase by investors for High Speed-1 shows just how off track these critics are.

photo credit: Jason Pier

Genachowski Walks the Tricky Path

Posted on by The Progressive Policy Institute

FCC Chairman Julius Genachowski should be given a measured round of applause for his proposed “rules of the road” for Internet openness. Genachowski addressed the core issues including a basic no-blocking rule and giving telecom providers the right to “reasonable network management.”  And he did so without putting an excessively heavy new regulatory burden on the communications sector.

The truth is, the FCC is walking a tricky path. The broad communications sector that the agency oversees, long-maligned, has turned into a crown jewel in today’s domestic economy—vibrant and dynamic. Yet the FCC has come under pressure to impose strict net neutrality rules—a nutty move that would have been the equivalent of doing invasive surgery on a healthy patient.

Instead, Genachowski and the FCC are following the basic principle of countercyclical regulatory policy — the government should stay away from imposing onerous new regulations on growing and innovative sectors such as communications while the economy is still sluggish.

Between now and the December 21st meeting of the Commission, Genachowski needs to make sure that his rules of the road stay as ‘minimally invasive’ as possible.  Attempts to broaden them, no matter how well-meaning, will have the effect of putting the communications sector on notice that any commercial negotiation, technical decision, or investment strategy could be second-guessed by regulators—not the best way to have rapid innovation or job creation.

Why Some States are New Economy States

Posted on by The Progressive Policy Institute

When it comes to innovation-based growth, not all states are equal. Certain states are on the front lines, and are accordingly most likely to lead the way to economic recovery. According to a new report from the Information Technology and Innovation Foundation, the most leading New Economy states all excel at supporting a knowledge infrastructure, spurring innovation, and encouraging entrepreneurship.

The new report, The 2010 State New Economy Index, uses 26 indicators to assess states’ fundamental capacity to successfully navigate economic change. It measures the extent to which state economies are knowledge-based, globalized, entrepreneurial, IT-driven and innovation-based – in other words, the degree to which state economies’ structures and operations match the ideal structure of the New Economy.  Indicators include percent of the population online, fastest growing firms, exports, industry and state R&D among others.

The top five states – Massachusetts, Washington, Maryland, New Jersey, and Connecticut —are at the forefront of the nation’s movement toward a global, innovation-based economy.  Massachusetts has been the top ranked state in all iterations of the report (1999, 2002, 2007 and 2008). The Bay State boasts a concentration of software, hardware, and biotech firms supported by world-class universities such as MIT and Harvard in the Route 128 region around Boston. It survived the early 2000s downturn and was less hard hit than the nation as a whole in the last recession. And it has continued to thrive, enjoying the fourth-highest increase in per-capita income. Washington State  (which ranked fourth in 2007 and second in 2008) scores high due not only to its strength in software (in no small part due to Microsoft) and aviation (Boeing), but also because Puget Sound region has emerged as entrepreneurial hotbed.

Maryland remains third (as it was in 2007 and 2008, as well), in part because of the high concentration of knowledge workers, many employed in the District of Columbia suburbs and many in federal laboratory facilities or companies related to them.  These and the other top ten New Economy states (New Jersey, Connecticut, Delaware, California, Virginia, Colorado, and New York) have more in common than just high-tech firms. They also tend to have a high concentration of managers, professionals, and college educated residents working in “knowledge jobs” (jobs that require at least a two-year degree). With one or two exceptions, their manufacturers tend to be more geared toward global markets, both in terms of export orientation and the amount of foreign direct investment.

All the top ten states also show above-average levels of entrepreneurship, even though some, like Massachusetts and Connecticut, are not growing rapidly in employment.  Most are at the forefront of the IT revolution, with a large share of their institutions and residents embracing the digital economy. In fact, the variable that is more closely correlated with a high overall ranking is jobs in IT occupations outside the IT industry itself. Most have a solid “innovation infrastructure” that fosters and supports technological innovation. Many have high levels of domestic and foreign immigration of highly mobile, highly skilled knowledge workers seeking good employment opportunities coupled with a good quality of life.

The two states whose economies have lagged most in making the transition to the New Economy are Mississippi and West Virginia. Other states with low scores include, in reverse order, Arkansas, Alabama, Wyoming, South Dakota, Kentucky, Louisiana, and Oklahoma. Historically, the economies of many of these and other Southern and Plains states depended on natural resources or on mass production manufacturing, and relied on low labor costs rather than innovative capacity, to gain advantage. But innovative capacity (derived through universities, R&D investments, scientists and engineers, and entrepreneurial drive) is increasingly what drives competitive success.

While lower ranking states face challenges, they also can take advantage of new opportunities. The IT revolution gives companies and individuals more geographical freedom, making it easier for businesses to relocate, or start up and grow in less densely populated states farther away from existing agglomerations of industry and commerce. Moreover, notwithstanding the recent decline in housing prices, metropolitan areas in many of the top states suffer from high costs (largely due to high land and housing costs) and near gridlock on their roads. Both factors may make locating in less-congested metros, many in lower ranking states, more attractive, particularly if their metropolitan areas offer high-quality schools, high-quality and efficient government, and a robust infrastructure.

Perhaps the most distinctive feature of the New Economy is its relentless levels of structural economic change.  The challenges facing states in a few years could well be different than the challenges today.  But notwithstanding this, the keys to success in the new economy now and into the future appear clear:  supporting a knowledge infrastructure (world class education and training); spurring innovation (indirectly through universities and directly by helping companies); and encouraging entrepreneurship.  In the past decade a new practice of economic development focused on these three building blocks has emerged, at least at the level of best practice, if not at the level of widespread practice.  The challenge for states will be to adopt and deepen these best practices and continue to generate new economy policy innovations and drive the kinds of institutional changes needed to implement them.

photo credit: Chantal Wagner

 

Obama and the Independents: Round Two

Posted on by The Progressive Policy Institute

The debate about how Obama can win back Independents continues, and in my mind the big question is this: other than hoping that the economy starts recovering, is there anything Obama and the Democrats can do to win back the true swing voters among the Independents?

Over at The Monkey Cage, John Sides is skeptical that anything other than economic conditions will make a reliable difference:

Here is the bottom line. Voters don’t want style. They want results. Even independents.

Indeed, as Sides shows, the data are pretty clear that “Pure Independents” (the 10-15 percent of the electorate who are truly independent, and not closet partisans) are highly responsive to economic conditions. When the economy is doing poorly, their voting strategy is solidly of the “throw the bums out” variety.

John Judis makes a similar point in The New Republic:

Yes, Obama does have to pay attention to those white working-class voters who shift uneasily from one party to the other, but the way to win them over is to get them jobs—and if that fails because of Republican obstructionism, to make sure that these voters blame the Republicans not the Democrats and his administration for the result. If he can’t do that, his only recourse may be to get on his knees and pray that unbeknownst to most voters and many economists, a strong and buoyant recovery is about to begin.

But new polling from Third Way provides a counter-point, suggesting that it may not be just economic conditions driving the Independents’ swing:

The economy was not the only reason that switchers opted for a Republican candidate this year. For one thing, switchers are solidly middle class (median income range: $50,000-$75,000) and have a fairly positive view of their own personal circumstances—personal impacts from the downturn did not seem to be a driving force behind their votes. 82% of switchers, for example, rate their personal economic circumstances as “excellent” or “good” and 71% say they have suffered no major personal impacts from the recession.

The Third Way poll finds that “switchers” were concerned about the size and scope of government, are “cautious capitalists,” and have genuine concerns about spending and deficits.

Other polling, which I’ve detailed in an earlier post, suggests that Independents are also interested in moderation and compromise:

By a 63-26 margin, Independents want Democrats to move to the center, and by a 50-40 margin, they want Republicans to move to the center. By a 61-32 margin, they agree that “Governing is about compromise” more than “leadership is about taking principled stands.” That puts them a little closer to Democrats (who lean towards compromise 73-21, than Republicans, who are split 46-46 on the question.)

Clearly, the economy is going to be the most important factor in winning back the true independents, and in this I completely agree with Sides and Judis. But the problem remains that there is only so much Obama can do to change the economic fundamentals.

At this week’s PPI forum on “The Restless Independents,” Bill Galston suggested that Obama’s best strategy was to publicly offer an outstretched hand. If the Republicans accept, Obama will look like the post-partisan leader many swing voters hoped he would be; if Republicans spurn him, Obama will still look like the bigger man. I think Galston is mostly right.

But the two obvious challenges with such a pose are that 1) it’s unclear whether there is any realistic compromise Obama can have with Republicans and if he’ll just look pathetic trying; and 2) it’s unclear whether the economic conditions will always trump any perceived moderation, and if so, why bother to compromise when Republicans are clearly in no mood to do so?

My current thinking is that, yes, clearly, economic conditions matter a great deal. If the economy recovers solidly, Obama will be a two-term president. But it’s not the ONLY thing that matters. My guess is that there are at least a few persuadable voters who can be won on some mix of substance and policy, and if recovery is ambiguous (as it’s likely to be) something else might make the difference in 2012. So it’s worth trying to figure out what makes them tick.

I’m increasingly inclined to think that the Democrats would be smart to come up about some wedge issues where they could split the Republican caucus and draw out the crazies who will scare moderate swing voters into voting Democrat again, all while pursuing solid progressive issues that the American public supports and on which Independents look a lot like Democrats. I’m thinking here about issues like immigration reform (supported by 61 percent of Independents), and “Don’t Ask, Don’t Tell.”  which is also supported by a majority. Independents tend to look a lot like Democrats on the social issues, and the Republican leaners among Independents tend to be more libertarian than your typical Republican. If the nativist, fundamentalist voices dominate the public image of Republican Party, that’s going to be very good for Democrats.

So, yes, if the economy recovers, Obama will win in 2012. But that’s far from a guarantee at this point. For my money, it’s also good to have a Plan B.

Photo credit: oaphoto

Reviving Jobs and Innovation: The Role of Countercyclical Regulatory Policy – Part I

Posted on by The Progressive Policy Institute

Since the Great Depression, the tools of choice for fighting economic downturns have been countercyclical monetary policy and countercyclical fiscal policy. That is, when the economy slowed, economists would recommend cutting interest rates, reducing taxes, and boosting government spending to pump up demand. And for 75 years, those policy measures were enough.

But in the aftermath of the financial crisis, we seem to have almost exhausted the limits of monetary and fiscal policy to create jobs. The Federal Reserve has pushed interest rates down to near zero, although it appears ready to try another round of quantitative easing.

Meanwhile, the federal budget deficit hit $1.3 trillion in fiscal year 2010. In the aftermath of the midterm election victories of candidates who ran against federal spending, it seems politically unlikely that there will be another round of fiscal stimulus.

Under the circumstances, it may be time to try something new: Countercyclical regulatory policy. That means following a very simple rule: Don’t add new regulations on innovative and growing sectors during economic downturns.

 

The goal: To encourage innovation and job creation by temporarily abstaining from additional regulation on innovative sectors, and perhaps even temporarily abating some existing regulations on innovative sectors (what I call innovation ecosystems).

The keyword here, of course, is ‘temporarily.’ Like countercyclical monetary and fiscal policy, countercyclical regulatory policy is designed to provide a short-run stimulus to the economy by making decisions that can be reversed when the economy improves—the equivalent of a temporary investment tax credit. In other words, countercyclical regulatory policy is not the same as deregulation. It presupposes that regulators stay alert and take care of abuses.

Read the entire memo

Decoupling Taxes on Capital

Posted on by The Progressive Policy Institute

The president will meet with leaders from both parties on Thursday to discuss Congress’s unfinished business for the lame-duck session, and the only thing that is clear going into that meeting is that item number one on the agenda (for right or wrong) will be the Bush tax cuts.  Speculation is running high this week that the White House is considering a compromise approach that would extend all of the Bush tax cuts temporarily, most likely for two years.  This comes in place of the previous round of speculation that the president’s strategy was focused on “decoupling” the tax breaks, meaning he would push for Congress to vote separately to permanently extend lower tax rates for all households making less than $250,000 per year, while allowing another vote on a temporary extension of the cuts for the two percent of taxpayers earning more than that.

As both sides prepare to dig in their heels for the coming tax fight, the possibility of policy alternatives has given way to a pure tug-of-war exercise, in which compromise is limited to questions of how long to extend the cuts or whether to draw the line at $1 million rather than $250,000.  The rare occurrence of a fresh approach is too quickly ignored, such as Senator Mark Warner’s op-ed last week calling for the high-income tax cuts to be redirected as targeted tax incentives for business to boost investment and jobs.

Warner’s proposal would likely be a far more effective way to put lost tax revenues into the most productive hands for lifting our economy, but it’s probably not on the table.

Both parties appear hell-bent on confining this battle to the provisions of the original Bush tax cuts, with the winner to be determined by which provisions do or do not get extended.  It’s an unfortunate corner we have painted ourselves into, but there are still important policy issues within this narrow debate that deserve greater attention and vigilance.

In a new memo released today, PPI Senior Fellow Michael Mandel acknowledges that the current tax debate has totally missed the most important big-picture questions about the need to modernize our outdated tax code for what he calls the “supply-chain world” of the 21st-century global economy.  However, Mandel points out specific elements of the Bush tax cuts that could actually help move us closer to the type of tax code we need for today’s economy: namely, the lower rates on dividend income and capital gains rates.

Mandel explains that keeping rates low on income from capital is critical for encouraging investment in critical innovative industries over the long-term, and that raising these rates right now would be a particularly bad idea, because our economy is still languishing in what he calls a “business investment drought.”  Compared to the data on consumer demand, government spending, and even the collapse in housing, Mandel concludes that the real hole in the economy is nonresidential investment, which has plummeted even more sharply than housing.  So while the tax debate has so far focused on the economic impact marginal tax rates would have on consumer spending, Mandel makes the case that we should be looking at the impact that upcoming tax votes will have on investment:

It doesn’t make sense to raise the tax rate on corporate dividends and capital gains in the middle of a U.S. investment drought. That’s true, whether you believe in Keynesian economics, supply-side economics or anything in between.

Taxing capital at too high a rate impairs the environment for innovation, especially in this world of permeable borders and mobile money. In particular, raising the tax rates on dividends is likely to hurt innovative industries such as telecommunications and pharmaceuticals, which tend to pay out dividends at a higher level than other industries.

I have raised similar issues about this potential problem of dividend rates before (mainly here, but also here), but Mandel’s analysis of investment brings the question into much sharper relief.  Unfortunately, the positions of the White House and Congress have been much less clear in this issue.   This year’s tax debate has been an exercise in gamesmanship more than a battle of ideas, so both the president and Democratic leaders have remained a little ambiguous about their proposals for these rates, largely because they don’t fit well with the line-drawing fight over whether the wealthiest Americans should have any of their tax cuts extended.

President Obama has said he supports keeping rates on dividends capped at 20 percent, in line with what the rate will be for capital gains income (both are currently taxed at 15 percent, but the dividend rate is scheduled to more than double in 2011 to 39 percent for taxpayers receiving the bulk of these payments).  Secretary Geithner has said the same.  Both men stopped short of saying outright that the 20 percent rate would apply to all taxpayers, even those making above $250,000, even though the president’s budget for 2011 spells it out explicitly.  The 20 percent rate has also been endorsed by Senate Finance Committee Chairman Max Baucus, who called it “good policy” to keep the rates in line with capital gains rates:

Changing dividends to 20 percent as opposed to ordinary income rates and keeping it the same as capital gains, I think, is good policy. I’m going for policy. Twenty percent on dividends and capital gains is the right policy.

Senator Baucus and President Obama both deserve enormous credit for “decoupling” good policy from the political gamesmanship over the Bush tax cuts, and Baucus should continue to advocate for the lower dividend rate to be included in whatever compromise proposals get thrown around in the coming days and weeks.  As Mandel writes in today’s memo, “the best we can hope for may be small steps in the right direction” from this Congress toward a smarter tax code that encourages sustainable growth and innovation.  Hopefully Obama and Baucus can avoid taking a step backward on this one.

Taxing Capital in a Supply-Chain World

Posted on by The Progressive Policy Institute

 

The post-election wrangle over extending the Bush tax cuts will take place in the worst possible environment for making good policy: A lame-duck Congress facing an artificial deadline to deal with a highly contentious issue after a nasty election. Even from a substantive policy perspective alone, the debate is a bad one, because there’s no consensus among reputable economists about the impact of lower marginal tax rates—the empirical literature is murky, at best.

The fundamental problem underlying this debate is that the U.S. tax code is an outdated and overgrown morass of bad policy. Our current tax system was designed for a primarily domestic economy. But now we live in a world where the unit of economic value creation is now the supply chain, which crosses multiple national borders and cannot be easily divided into domestic and foreign components. And the whole tax system is increasingly perceived as unfair and complicated, with more and more preferences and loopholes added in. What we really need is a sweeping tax reform aimed at promoting growth and innovation, designed for today’s supply-chain economy and simplified for the benefit of all taxpayers. But we’re not going to get this in the 2010 lame-duck session.

So how can we think about the upcoming tax debate in constructive terms that focus on fostering the kind of meaningful growth and innovation that lead to good jobs and long-term prosperity? We can start by identifying broad principles of what our tax system should look like in order to encourage growth, innovation and jobs, and attempt to apply those principles to the choices Congress must make about extending the Bush tax cuts. In doing so, we can hopefully encourage Congress to take steps that will move us closer to the kind of tax system we need, rather than farther away.

One such principle is the idea that the rates on income from capital investment should be kept low, because it is an important element of the kind of broader tax system we need: one that attracts and encourages capital investment, rather than reducing investment options by raising the cost of capital.

Read the entire memo here

Help wanted: One second-chance job

Posted on by The Progressive Policy Institute

Back in March, I stepped out of my comfort zone and wrote this op-ed for the Local Opinion page in the Washington Post. For the first time in a good long while, I wasn’t writing about national security, foreign policy, or the military.  Rather, I penned a piece on a mentoring relationship I have with Tim Cofield, a 55 year old bipolar-schizophrenic with serious substance abuse and housing issues.  This weekend, the Post published an update to that piece about the last eight months of Tim’s life.  Here’s an excerpt:

Tim Cofield needed his public defender again way too soon.  After his release from jail in March, I wrote on this page that Tim would soon be back in front of a judge if he did not get consistent access to substance-abuse counseling, mental health care and stable housing. Tim, who turned 55 on Wednesday, is a bipolar-schizophrenic who has rotated in and out of jail, usually for narcotics and parole violations, for most of his adult life.

Eight months later, Tim still isn’t receiving the care he needs. The result has hardly been surprising. His latest incarceration was from mid-October, when he submitted “dirty urines” at substance tests, until last week. It was the cognac Courvoisier, he told me.

…

It might be unrealistic to think that counseling, mental health services or the long public housing list will be improved overnight, but they don’t have to be. The past eight months convince me that Tim needs to catch one simple break to have a chance at turning his life around immediately: a job.

…
[A] job would mean much more than a few extra dollars in his pocket. A job would give him a stake in his own life. It would build a sense of accomplishment, occupy time otherwise spent with questionable associates and create a reason to save money for long-term goals. Moreover, as Michelle Singletary wrote in The Post just this month, a job would reduce Tim’s and others’ recidivism and crime throughout the community.

Read the entire piece here.

Photo  credit: Rob