Brookings: Topics - Growth through Innovation

Why Isn’t Disruptive Technology Lifting Us Out of the Recession?

Martin Neil Baily and James M. Manyika — Tue, 11 Jun 2013 13:34:00 -0400

The weakness of the economic recovery in advanced economies raises questions about the ability of new technologies to drive growth. After all, in the years since the global financial crisis, consumers in advanced economies have adopted new technologies such as mobile Internet services, and companies have invested in big data and cloud computing. More than 1 billion smartphones have been sold around the world, making it one of the most rapidly adopted technologies ever. Yet nations such as the United States that lead the world in technology adoption are seeing only middling GDP growth and continue to struggle with high unemployment.

There are many reasons for the restrained expansion, not least of which is the severity of the recession, which wiped out trillions of dollars of wealth and more than 7 million US jobs. Relatively weak consumer demand since the end of the recession in 2009 has restrained hiring and there are also structural issues at play, including a growing mismatch between the increasingly technical needs of employers and the skills available in the labor force. And technology itself plays a role: companies continue to invest in labor-saving technologies that reduce demand for less-skilled workers.

So are we witnessing a failure of technology? Our answer is "no." Over the longer term, in fact, we see that technology continues to drive productivity and growth, a pattern that has been evident since the Industrial Revolution; steam power, mass-produced steel, and electricity drove successive waves of growth, which has continued into the 21st century with semiconductors and the Internet. Today, we see a dozen rapidly-evolving technology areas that have the potential for economic disruption as well in the next decade. They fall into four groups: IT and how we use it; machines that work for us; energy; and the building blocks of everything (next-gen genomics and synthetic biology).

Wide ranging impacts

These disruptive technologies not only have potential for economic impact—hundreds of billions per year and even trillions for the applications we have sized—but also are broad-based (affecting many people and industries) and have transformative effects: they can alter the status quo and create opportunities for new competitors.

While these technologies will contribute to productivity and growth, we must look at economic impact in a broader sense, which includes measures of surplus created and value shifted (for instance from producers to consumers, which has been a common result of Internet adoption). The greatest benefit we measured for autonomous vehicles—cars and trucks that can proceed from point A to point B with little or no human intervention. The largest economic impact we sized for autonomous vehicles is the enormous benefit to consumers that may be possible by reducing accidents caused by human error by 70 to 90 percent. That could translate into hundreds of billions a year in economic value by 2025.

Predicting how quickly even the most disruptive technologies will affect productivity is difficult. When the first commercial microprocessor appeared there was no such thing as a microcomputer—marketers at Intel thought traffic signal controllers might be a leading application for their chip. Today we see that social technologies, which have changed how people interact with friends and family and have provided new ways for marketers to connect with consumers, may have a much larger impact as a way to raise productivity in organizations by improving communication, knowledge-sharing, and collaboration.

There are also lags and displacements as new technologies are adopted and their effects on productivity are felt. Over the next decade, advances in robotics may make it possible to automate assembly jobs that require more dexterity than machines have provided or are assumed to be more economical to carry out with low-cost labor. Advances in artificial intelligence, big data, and user interfaces (e.g., computers that can interpret ordinary speech) make it possible to automate many knowledge worker tasks.

More good than bad

There are clearly challenges for societies and economies as disruptive technologies take hold, but the long-term effects, we believe, will continue to be higher productivity and growth across sectors and nations. In earlier work, for example, we looked at the relationship between productivity and employment, which are generally believed to be in conflict (i.e., when productivity rises, employment falls). And clearly, in the short term this can happen as employers find that they can substitute machinery for labor—especially if other innovations in the economy do not create demand for labor in other areas. However, if you look at the data for productivity and employment for longer periods—over decades, for example—you see that productivity and job growth do rise in tandem.

This does not mean that labor-saving technologies do not cause dislocations, but they also eventually create new opportunities. For example, the development of highly flexible and adaptable robots will require skilled workers on the shop floor who can program these machines and work out new routines as requirements change. And the same types of tools that can be used to automate knowledge worker tasks such as finding information can also be used to augment the powers of knowledge workers, potentially creating new types of jobs.

Over the next decade it will become clearer how these technologies will be used to raise productivity and growth. There will be surprises along the way—when mass-produced steel became practical in the 19th century nobody could predict how it would enable the automobile industry in the 20th. And there will be societal challenges that policy makers will need to address, for example by making sure that educational systems keep up with the demands of the new technologies.

For business leaders the emergence of disruptive technologies can open up great new possibilities and can also lead to new threats—disruptive technologies have a habit of creating new competitors and undermining old business models. Incumbents will want to ensure their organizations continue to look forward and think long-term. Leaders themselves will need to know how technologies work and see to it that tech- and IT-savvy employees are included in every function and every team. Businesses and other institutions will need new skill sets and cannot assume that the talent they need will be available in the labor market.

Authors

Publication: Yahoo! Finance

Image Source: © Yves Herman / Reuters

Can Smartphones Help Improve Access To Medications?

Gregory W. Daniel — Fri, 07 Jun 2013 14:00:00 -0400

Undertreatment of common diseases and conditions contributes to critical gaps in the public health of the United States. While undertreatment is a complex problem that can result from a range of failures along the healthcare continuum, lack of access to and low usage of health services is widely recognized as a critical barrier. Addressing the undertreatment of common diseases and conditions will require innovative thinking about existing healthcare practices, medical technologies, and a commitment to testing promising solutions by all healthcare stakeholders, including providers, payers, manufacturers, patients, and regulators.

Advances in technology have brought about promising solutions for consumer self-care. In recent years, medical technologies have been utilized in many healthcare delivery settings and have demonstrated the potential to improve outcomes and decrease costs. Applications developed for smartphones, electronic devices, and the internet can assist patients in making complex health care decisions. Portable and wireless diagnostic technologies can collect valuable health information such as cholesterol levels, blood pressure, and measures of blood glucose control and transmit the data back to the consumer or to providers via direct input into electronic health records (EHRs) to inform and optimize treatment. As these consumer-oriented medical technologies continue to evolve, patients will have better tools to facilitate the safe and effective use of medications.

In addition, an increasing number of alternative and innovative practice settings have expanded the role of many health care providers. Acute care centers and retail medical clinics (e.g., CVS MinuteClinic) provide consumers with greater access to and options for medical care, typically through the use of nurse practitioners, physician assistants, and pharmacists. Collaborative practice agreements and medication therapy management programs have also enhanced communication and clinical care between healthcare providers.

Recognizing these emerging trends and opportunities, the U.S. Food and Drug Administration (FDA) is exploring how health care providers and innovative technologies might enable a broader range of medications to be made available in the nonprescription setting. This initiative, know as Nonprescription Safe Use Regulatory Expansion (NSURE), was launched by FDA to address one issue that may contribute to the problem of medical undertreatment: lack of access to appropriate medications. Through an expansion of the nonprescription drug class, FDA may support increased access to medications for undertreated diseases and conditions, particularly for underserved populations without regular access to a physician.

Establishing creative ways to utilize technologies and health professional expertise may help to overcome existing barriers in consumer self-care. In-store kiosks, mobile applications, and other technologies may help to guide consumers to the appropriate self-selection and self-treatment of medications. Similarly, pharmacists and other healthcare providers may provide consultation services to ensure the continued safe use. These mechanisms may permit certain prescription medications to be switched to nonprescription status for increased access.

In launching the NSURE initiative, FDA has begun to address one component of undertreatment of common diseases and conditions. Further development of the NSURE initiative will require a greater understanding of the health, economic, behavioral, and technological factors involved. In an effort to explore these key considerations, the Engelberg Center for Health Care Reform has initiated a series of expert workshops which address major factors in the NSURE initiative. These meetings have served to inform the NSURE initiative through broad stakeholder input on issues related to the role of health care providers, the innovative application of technology, and integration within the existing health care delivery systems. Additional topics to be explored in upcoming workshops include issues related to cost-shifting, third-party reimbursement, and economic considerations.

Ultimately, the NSURE initiative may promote the use of essential medications, and could serve as an important mechanism to bring undertreated patients into the healthcare system. For more information on these issues, including a description of the latest expert workshop, please visit the Brookings event page “Innovative Technologies and Nonprescription Medications: Addressing Undertreated Diseases and Conditions through Technology Enabled Self-Care”.

Authors

Gregory W. Daniel

Image Source: © Steve Marcus / Reuters

Why I'm A Long-Run U.S. Economy Optimist

George L. Perry — Mon, 03 Jun 2013 17:37:00 -0400

There is a lot of disagreement about the economy today. Some analysts focus on signs the recovery is quickening while others see new problems stemming from the end of a bond market bubble. My own view is that of a long-run optimist and I get there by remembering the history of postwar business cycles.

It is widely agreed that the present recovery has been disappointingly slow, in part because of the hangover from past excesses in home-building, banking and consumer borrowing. Initially, policy stimulus offset these headwinds, but when that ended the recovery slowed again.

What is less widely appreciated is that the recoveries from the last three recessions have all started slowly. In the first 8 postwar business cycles, spanning a period of 40 years, employment started rising right after the cyclical trough. Not so in the last three cycles. Employment continued to decline even after output began a gradual rise. It only got back to its trough level after 20 months in this recovery, and only after 27 months and 18 months in the two previous cycles.

One main reason for this is that the economy used to be more inflation prone in the earlier periods and recessions were generally the result of the Fed fighting inflation. As it pursued its dual mandate to maximize employment and fight inflation, the Fed raised interest rates when the economy boomed and lowered them when it slumped. Interest-sensitive demands, which had been suppressed in the tight money period, recovered promptly when the Fed eased again. In the recent cycles, while interest rates still moved countercyclically, they were not the main cause of the recessions.

A second reason is the declining importance of manufacturing, which is inherently more cyclical than many sectors because demands are relatively postponable as well as interest sensitive. In the late 1960s, 32 percent of private sector jobs were in manufacturing industries. By 2006, it was only 12 percent.

The present resembles these recent decades more than earlier ones, and that tells us a lot about economic prospects for economic expansion. What happens from here will depend on how much room there is for further expansion. Because the inflation problems of the early postwar decades are not on the horizon, and because we know the Fed wants to keep it that way, the prospects for expansion will be shaped importantly by how far the economy is from its potential.

In 1992, the unemployment rate averaged 7.5 percent. There followed an 8-year expansion that reduced unemployment to 4.0 percent. In 2003 the unemployment rate averaged 6.0 percent. That expansion ended 4 years later when unemployment averaged 4.6 percent. Neither of these expansions ended because inflation had become a problem. And there is no reason to believe the economy cannot safely operate at such unemployment rates again.

Today, after four years of slow recovery, unemployment is at 7.5 percent, still well above where the 2003 expansion started, and just where unemployment was at the start of the long expansion of the 1990s. We have to hope that Europe's problems are not too big a drag on the rest of the world, and that policy paralysis does not tighten fiscal policy too much, too soon. But there is nothing on the horizon of normal U.S. economic prospects that indicates we cannot today be starting an expansion like that of the 1990s today.

Authors

George L. Perry

Publication: Real Clear Markets

Image Source: © Brendan McDermid / Reuters

Growing the Global Internet Economy by Ensuring the Free Flow of Data Across Borders

David Dreier and Joshua Meltzer — Thu, 23 May 2013 15:32:00 -0400

Digital connectivity is the most powerful driver of social and economic change the world has seen. The Internet will connect an estimated 5 billion people by 2020. That many already use cell phones. Connectivity is reshaping the landscape we inhabit, changing the ways we communicate, learn and do business. It is behind the world’s most transformative trends, including an unprecedented empowerment of the individual.

The free flow of data is a core element of the Internet that has underpinned this growth in connectivity, innovation and productivity. This freedom has been vital to the growth of digital trade in goods and services, a quickly growing share of global GDP. Its importance is evident every minute as citizens, businesses and governments access global services such as cloud computing, and health and education opportunities. Entrepreneurs in developing countries benefit from free flow as they sell their products globally over the Internet, using international financial data transfers to process transactions. It has also been a critical factor in the explosive growth of access to information and human opportunity.

We are, however, only at the beginning of the digital age. It is hard to grasp the enormity of what this advance portends. More data was created and exchanged last year than in all of human history. The growth in the use and exchange of data is accelerating exponentially--fueling massive new economic activity, enabling major advances in scientific research, analysis of big data, and providing tools to help address existential challenges to human well-being such as climate change.

There are, however, some major speed bumps that threaten this advance as governments around the world are increasingly seeking to restrict or control the flow of data.

No question about it, the Internet is disruptive. That’s why it’s not hard to understand the impulse to control it. But, as with everything, there is a balance to be sought. For example, efforts to prevent cyber crime, or maintain the privacy of personal data should avoid unnecessary restrictions on the free flow of data across borders. Attempts by government to limit data flows to restrict market access or provide unfair commercial advantages to domestic businesses reduces international trade. This is discriminatory and trade-distorting, and should be prohibited.

Many governments are already restricting the free flow of data. These attempts are most blatant in repressive and authoritarian countries, but evident even in open societies. Across the world governments are grappling with how to reconcile the freedom of the Internet with the need to address some of the harms associated with its use.

But as government interference in the free flow of data multiplies, we may be reaching an inflection point that could determine kind of Internet the world ends up with. It could become truly global, open and accessible to all. Or, the Internet could become increasingly balkanized and closed, with a loss of economic and social potential that harms all.

International trade forums are starting to discuss how to find the right balance between the free flow of data and action to address legitimate concerns about harmful use of the Internet. In fact, cross border data flow is quickly emerging as an important 21st century trade issue. It is not adequately regulated under the rules of the World Trade Organization and the Korea-U.S. Free Trade Agreement is the first trade agreement to try to address issues related to cross-border data flows. The issue is also part of negotiations under the Trans-Pacific Partnership and will figure prominently in talks for a projected EU-U.S. trade agreement.

It is vital we get it right in these agreements. To do so we need a deeper and wider understanding of the value and stakes associated with the free flow of data across borders. The Annenberg-Dreier Commission and the Brookings Institution are trying to build that awareness, so vital to the world. We are partnering in a meeting next week—the start of a larger project—that will gather some of the top experts from the Asia Pacific region to examine the interests in play.

The aim of this project is to build greater understanding in this region on the importance of the free flow of data as a driver of international trade, economic growth and innovation. The U.S. has developed a thriving Internet industry with regulation that balances the free flow of data and access to the Internet with the need to protect legitimate interests such as the protection of intellectual property, fighting cyber crime and maintaining the privacy of personal data.

Other countries are also trying to capture the gains from the Internet economy. And while this should be encouraged, doing so with regulation that is discriminatory and restricts access to the Internet will harm trade, impede growth and is will be harmful to all. On the contrary, an open Internet that encourages access to data and fosters competition will deliver the most economic benefits globally.

Developing a common understanding of these challenges and charting a way forward may ultimately be key to global stability, security, and growth—in short, to building the collaboration necessary to sustain a world we’d want to live in.

Authors

Image Source: © Kacper Pempel / Reuters

Going Global: Greater Houston’s Economic Future

Wed, 15 May 2013 13:30:00 -0400

Event Information

May 15, 2013
12:30 PM - 2:00 PM CDT

Baker Hall
Rice University, James A. Baker III Institute for Public Policy
6100 Main Street
Houston, TX 77005

As the United States emerges from the Great Recession, it is clear that the nation’s economy must be purposefully restructured from one focused inward and characterized by excessive consumption and debt to one that is globally engaged and driven by production and innovation. A growing chorus of leaders is calling for a new growth model, one that creates more and better jobs by engaging rising global demand and attracting global talent and capital. These leaders recognize that only by harnessing the power of cities and metropolitan areas can the country hope to foster job growth in the near term and restructure the economy for the long haul.

On May 15, the Metropolitan Policy Program at Brookings and JPMorgan Chase hosted a forum at Rice University, “Going Global: Greater Houston’s Economic Future,” the second in a series of domestic and international forums being convened this year by the Global Cities Initiative. This is the second year of the five-year initiative. The forum explores how metropolitan-led economic growth—including global trade and investment—are important for job creation, and how Metropolitan Houston can leverage its position in the global market.

Speakers and panels provided context on the region’s position in the global marketplace and offered insight into how area leaders can work together with international partners to expand global trade and enhance Houston’s economic prosperity.

Join the conversation on Twitter with hashtag #GlobalCities. Photos courtesy of John Everett.

Roundtable Presentations:

View Bruce Katz's presentation on Houston's next economy »
Download Marek Gotman’s presentation on workforce development (PDF) »
Download Amy Liu's presentation on regional export planning (PDF) »

Bruce Katz, Brookings Vice President & Founding Director, Metropolitan Policy Program

Gina Luna, Chairman of JPMorgan Chase for Houston

Bruce Katz, Brookings Vice President & Founding Director, Metropolitan Policy Program

Video

Event Materials

Participants

Moderator

Amy Liu

Co-Director and Senior Fellow, Metropolitan Policy Program

Panelists

Bruce Katz

Vice President and Director, Metropolitan Policy Program
The Adeline M. and Alfred I. Johnson Chair in Urban and Metropolitan Policy

Honorable Peter Ammon

Ambassador

Honorable Richard M. Daley

Former Mayor of Chicago
Chairman

Dr. David Leebron

President

Gina Luna

Houston Market President

Amy Liu

Co-Director and Senior Fellow, Metropolitan Policy Program

David McClanahan

President and CEO

World Economic Forum on Africa: Delivering Africa’s Promise

Mwangi S. Kimenyi — Mon, 06 May 2013 12:19:00 -0400

The World Economic Forum (WEF) on Africa was established in Davos, Switzerland in 1990. Since then, the Forum has brought together thousands of world leaders, government officials, business executives and policy experts to discuss the various opportunities and challenges that Africa faces in pursuit of improving the continent’s economy and quality of life of her inhabitants. Broadly, the WEF on Africa has provided a platform for high-level debates and an exchange of ideas on economic and political issues affecting the continent. The primary objective of the WEF is to improve the state of the world by engaging political, business and policy leaders in shaping regional and industry agenda. Annual forums have dealt with different themes that reflect the realities of the day consistent to the objective of the WEF. Naturally, with the major changes that have taken place in Africa’s political and economic landscape over the past 23 years, the themes of the annual forums have also varied significantly.

This year, the WEF on Africa will be held on May 8-10 in Cape Town, South Africa. The theme of the Forum is “Delivering Africa’s Promise.” This theme is informed by the good economic performance that African countries have recorded over the past decade but with the realization that the benefits of growth have not reached many of the people and that there are many forces that could reverse the growth trends in the future. Although the recent growth has resulted in a large and growing middle class, the benefits of growth have not been shared by the majority of the population. Growth has occurred amidst increasing inequality and joblessness, especially among youth. In essence, the good economic growth has not really made a difference to the livelihoods of millions of Africans. Furthermore, although it is expected that Africa will continue to record decent rates of growth over the near future, there are many potential risks to sustained growth, such as the volatile global situation, the limited diversification of the continent’s productive structures and associated dependence on commodities, the many barriers to competitive economies—such as the large infrastructure deficit—and leadership and skills shortfalls.

The Cape Town forum will focus on issues that are key to unlocking Africa’s potential and sustaining high rates of economic growth that are also inclusive. These include strategies to accelerate investments in infrastructure and agriculture, building resilience, strengthening partnerships for growth through investments, enhancing technological innovation, managing natural wealth, nurturing leadership, and creating strategies to enhance jobs and skills, among many other pertinent topics. Special sessions by leaders and development experts including the Cape Verde President Emeritus Pedro Pires, Governor of the Central Bank of Nigeria Sanusi Lamido Sanus, Founder and Group Chief Executive of the Abraaj Group Arif Naqvi, Professor Calestous Juma and Mo Ibrahim promise a rich offering of perspectives and insights on delivering Africa’s promise to her citizens.

I will be participating at the Forum and I am privileged to be the Rapporteur of one of the key plenary sessions, “Mapping the African Growth Landscape,” scheduled for May 9. This session will feature African cabinet ministers, business leaders and international policy experts. After the session, I will record a video that will be posted as part of the WEF’s Insight Reporting.

In addition to the public events, I am looking forward to participating in a session on the role of African think tanks in policymaking. This important session will seek to expound on how African think tanks can better support policymaking in finding solutions to the challenges that the continent faces.

Follow me on Twitter @mwangikimenyi as I provide insights from Cape Town.

Authors

Mwangi S. Kimenyi

Image Source: © Pascal Lauener / Reuters

Africa Answers: Five Questions about Sustainable Inclusive Growth in South Africa

Julius Agbor — Tue, 23 Apr 2013 16:22:00 -0400

Last week, the Africa Growth Initiative at Brookings hosted an event with South African Finance Minister Pravin Gordhan. The goal of the forum was to explore ways to support inclusive growth in South Africa, where unemployment stands at nearly 25 percent.

After the forum, I discussed these issues with Haroon Bhorat, director of the South African think tank the Development Policy Research Unit. Below are Haroon’s answers to my questions. The DPRU, a partner think tank of the Africa Growth Initiative, is a great resource on employment and inequality in South Africa and across the region. Read more about the DPRU on their Web site and also follow them on Facebook.

Julius Agbor: During his recent visit to Brookings, the South African Finance Minister, Honorable Pravin Gordhan, underscored the challenges of inclusive growth in South Africa. In order of importance, what are these challenges and do you think they are surmountable in the short term?

Haroon Bhorat: The key challenges revolve around an insufficiently high level of economic growth and the extreme levels of income inequality and unemployment: South Africa has one of the highest levels of inequality in the world, and, in the sample of emerging markets, possibly the highest. The Gini coefficient for South Africa is currently 0.66. Unemployment, using the International Labor Organization’s definition of joblessness, currently stands at about 25 percent for the fourth quarter of 2012. Following the Great Recession where close to 1 million jobs were lost in South Africa and in an environment where economic growth has yet to breach the 3 percent level, solving these twin distributional problems in the short run will be extremely difficult.

This new growth path would necessarily require both a signficant increase in the levels of economic growth and a sharp departure from the current growth trajectory. The current trajectory is based on a dependence on heavy manufacturing, the resources sector and foreign equity to finance the current account deficit, while the retail sector is the key provider of long-run employment. Obviously, this deficit-financed, consumption growth model is not an optimal strategy for long-run welfare gains in South Africa.

Agbor: South Africa’s current macroeconomic fundamentals and microeconomic framework leave much to be desired. For instance, the yield on a South African 10-year government bond is at a record high of 6.2 percent while the high incidence of HIV/AIDS coupled with an acute shortage of skilled man-power is seriously undermining both the productive potential of the economy and its ability to attract foreign investors. Do you think that the South African government needs to respond differently to these challenges? If so, how would you recommend it respond?

Bhorat: Foreign investors, both in equity markets and in the real economy, are concerned in part about social instability in a society borne out of high levels of crime, unemployment and inequality. In addition, a vocal, strong trade union movement viewed as politically influential as well as a signficant skills constraint have caused foreign investors to remain coy about South Africa. On the other hand, those who have invested or are invested in the economy often note South Africa’s strong rule of law, globally leading financial sector, and transport and telecommunication infrastructure which rivals that found in the West. In turn, high dividend streams with a relatively high real interest rate differential keep foreign investors interested in South Africa. In the short-run then, these strong companies and other South African endowments will keep foreign investors interested in the economy. In the long-run, however, a more creative growth trajectory and policy environment is required from government. We need a strategy and an environment that makes those difficult decisions in order to shift the economy on to a more labor-intensive and competitive growth path. Supply- and demand-side policies ranging from improving the quality of schooling to anti-trust interventions are all necessary.

Agbor: For quite a while now, low wages seem to characterize South Africa’s labor market, which is consistent with the high level of unemployment in the country. At the same time, there is no evidence of marked improvements in labor productivity and competitiveness of the South African economy. What is going on in South Africa?

Bhorat: We are in a low-level equilibrium trap of tepid growth and signficant labor disequilibrium in the factor and product markets. Certainly a more competitive wage environment, as well as more deregulated product markets, must be part of the answer. Bold industrial policy that is narrowed to very specific sectors and provides some form of infant industry protection is essential. No country has managed to build prosperity without the growth of the light manufacturing sector—and South Africa will be no different. Building a light manufacturing sector will be critical to generating the levels of employment this economy desperately requires.

Agbor: Many believe that anti-trust legislation is weakly enforced in South Africa and that corporate bodies and unions are too strong. To what extent do you think a rebound of the South African economy depends on reforms in these key areas?

Bhorat: There is a view that strong business and strong labor are able to divide the rents from growth in some semi-consensual form. That view then extends to the notion that this situation has generated a growth path built essentially on high dividends and high wages to the exclusion of the unemployed. This is obviously an undesirable outcome yet the solution does not necessarily lie in lower wages, which would generate the kind of social instability South Africa cannot afford. Rather, an acceptable outcome would come from a conscious effort by the South African government at generating creative solutions that include the unemployed and those in the informal economy into the growth process.

Presently a social compact is assured through a highly redistributive state. Hence, this government spending on social assistance constitutes 10.4 percent of total expenditure and 3.4 percent of GDP, which is high by middle-income country standards. This is not fiscally sustainable nor incentive compatible with the requirements of a competitive developing country economy. Hence, a key part of the reform package is not only more aggressive anti-trust legislation, but also interventions designed to improve the opportunities and capabilities of the informal economy as well as the unemployed. These can range from re-engineering state procurement policies to reducing the search costs of the unemployed.

Agbor: Does South Africa have a particular economic role to play in Africa? Is it a faciliator of investment in the region and beyond?

Bhorat: As Africa’s largest economy, South Africa remains central to the region and the continent’s future. That being said, Africa’s largest economy remains locked into a low-growth trap within a continent with some of the world’s fastest growing economies. South Africa’s short-run opportunity is to utilize its strong physical, financial and telecommunication infrastructure as a platform to attract foreign firms seeking a foothold in Africa. The 20 percent purchase by the Industrial and Commercial Bank of China of Standard Bank of South Africa in 2008 is indicative of this type of indirect impact the growth of African economies is having on South Africa.

That being said, South African firms are dominant in retail, mining and telecommuncations on the continent. The long-run growth question is whether these companies are able to capitalize on their early mover advantage and become the dominant investors in a region where FDI flows from China, India, Malaysia and other emerging markets are expanding rapidly.

Authors

Julius Agbor

Image Source: © SIPHIWE SIBEKO / Reuters

Discussing the Global Investment in American Jobs Act of 2013

Martin Neil Baily — Thu, 18 Apr 2013 09:30:00 -0400

Introduction

I would like to thank Chairman Terry, Ranking Member Schakowsky and the members of the Committee for the opportunity to present my testimony today on the Global Investment in American Jobs Act. I have had the opportunity over the past twenty years or more to do research on issues of productivity, competitiveness and the impact of foreign investment, looking not only at the United States but also at Europe, Japan, Korea and many emerging markets.

The American economy today is improving but fragile. Real GDP growth is expected to be around 3 percent in the first quarter of this year but only about 1 percent in the second quarter and be well below 3 percent for the second half of the year because of the impact of payroll tax increases and the sequester. The number of jobs is increasing but too slowly. After flat-lining in the middle quarters of 2012, business investment picked up in the fourth quarter, but we need a lot more investment in order to create the jobs needed to raise living standards.

To a great extent, the performance of our economy over the next 10 years or so depends on the contributions here at home of U.S. workers and companies. The competitive position of this country in the global economy will play a vital role and I applaud the House for proposing a comprehensive review of how to make the U.S. economy a more attractive place to invest for foreign companies. In the years after World War II, it was American companies that went overseas, bringing with them technology and business expertise as well as capital. These companies helped spread prosperity to the rest of the world, a process that is still happening. But today successful, productive companies from around the world are investing in America, bringing jobs, capital and, in some cases, new technologies and business efficiencies. The auto company that exports the most outside North America is BMW. Toyota makes the bestselling cars in America in its factories here; and Siemens is helping fix the electric power grid.

The inflow of foreign direct investment slowed as a result of the Great Recession, not surprisingly, but there is tremendous potential to increase that flow now and in the future, bringing additional jobs and boosting the economic recovery. Making America a location that attracts good foreign companies is very important and, by the way, those same factors will also make it more attractive for U.S. multinational companies to locate more of their investment here at home.

The Pattern of Foreign Direct Investment

Figure 1 below shows the inflow of foreign direct investment to the United States and the outflow of direct investment by U.S. companies overseas. The figure shows that the magnitudes of the inflow and outflows are comparable, although the outflow has been larger than the inflow for all but one year since around 2001. There was a surge of foreign investment into the U.S. market at the time of the technology boom in the 1990s, which dropped sharply when that boom subsided. The level of foreign inflows has not reached its 2000 peak since then. Is it a problem that the outflows exceed the inflows? The U.S. economy attracts huge amounts of capital from around the world every year. The McKinsey Global Institute estimated that between 2000 and 2007, 85 percent of the international capital available in the world (in the form of total current account surpluses) came to the United States, largely in the form of purchases of financial assets. Almost certainly, the U.S. economy became too reliant on foreign capital at that time. The capital inflows were the counterpart to the large current account and trade deficits and the easy access to funds contributed to the housing boom and subsequent bust. Direct foreign investment inflows are different, however, in that they are stable and brings jobs and production. Bringing in more foreign direct investment, even while we rely less on foreign purchases of U.S. financial assets, would be a plus for the economy.

Figure 1: Foreign Direct Investment in the United States and U.S. Direst Investment Abroad, Annual Flows, 1990-2011 (in billions of dollars)

Source: U.S. Department of Commerce

Figure 2 below looks at direct investment inflows to China compared to the United States. Over the entire period from 1995 to the present, direct investment in the United States was far greater than the flow into China. Of course, China traditionally put up barriers to foreign investment and even today many companies report that it is hard place in which to invest and do business. In 2012, however, based on the first three quarters of data, direct foreign investment into China exceeded the flow into the United States. Is this a matter of concern? Yes and no. China’s economy is growing rapidly and will likely become larger than the U.S. economy in the future. It is not surprising that multinational companies want to access China’s labor pool and its market. It is also notable that the direct investment flowing into China is not coming primarily from U.S. multinationals. Some American companies, like GM or Ford, have set up business in China, but most of the investment in China is from Taiwan, Korea and elsewhere, not from the U.S. On the other hand, the recent weakness in investment inflows in the past few years, visible in Figures 1 and 2, may be indicative of the lack of relative attractiveness of the United States to foreign investors.

Figure 2: Foreign Direct Investment into China and the United States

Source: World Bank, OECD. * Figures for 2012 obtained by annualizing the first three quarters.

Figures 3 below shows information about the stock of foreign direct investment located in the United States by industry and, below that, by country. Two points are notable. First, a disproportionate fraction of foreign investment coming to the United States is in the manufacturing sector. This important sector makes up less than 10 percent of the economy today but a much larger share of foreign investment stock. Over the past twenty years or more there has been concern that the U.S. economy is not devoting enough of its investment to manufacturing, having an adverse impact on competitiveness and contributing to the large chronic trade deficit. It is notable that foreign-based multinationals have shown greater willingness to invest in manufacturing operations and are adding to competitiveness. Second, by far the largest proportion of the foreign investment (71 percent) comes from European countries, with the next largest coming from Asia, notably Japan, but also Korea. The UK, Netherlands, Switzerland, Germany and France are the largest investors from Europe. This pattern of investment coming from Europe and Asia is not perhaps surprising since these economies are among the most developed with global leading companies, strong technologies and efficient business practices. These countries are also strong allies of the United States. The economic problems in Europe and Japan help explain the decline in the inflow of investment. When foreign companies are stressed at home they are less willing to invest here.

Figures 3: The Cumulative Stock of Foreign Investment in the United States by Industry and by Geography.

The Pros of Foreign Investment in the United States

1. Foreign companies can bring new technologies and efficient operations. Overall, the U.S. economy remains the global leader in both productivity and technology, but there are large variations by firm and by industry. We cannot expect to be the country that is the source of every innovation or every good business idea, and we are not. Research that compares productivity across countries has found that the biggest benefits of innovation come from its dissemination through the economy. American innovations in computers and semiconductors now contribute to economic growth around the world. German innovations in auto parts are used by the American auto industry. Foreign direct investment is crucial to distributing innovations and allows the U.S. economy to benefit from the global pool of new ideas.

2. Foreign direct investment provides capital for jobs in America. American corporations are on average very profitable, partly because they are well-run compared to companies world-wide, but also because they set high target rates of return before they are willing to invest. U.S. corporate strategy has emphasized being lean in the use of capital and avoiding making large, risky investments unless the expected returns are high. Without making any judgment on this practice, it means that there are opportunities in America for investment and job creation where projected returns are pretty good but where U.S.-based companies are reluctant to commit the necessary capital. Foreign companies based in Asia now own and operate much of the steel capacity based in the United States. As I will discuss shortly, the energy boom is attracting many foreign companies to build highly capital intensive new plants making petrochemicals in America. Infrastructure is an area where foreign investment could make a contribution to U.S. economic performance.

3. Foreign direct investment increases the competitive intensity of the U.S. economy. A basic tenet of economics since Adam Smith has been that competition benefits consumers. Markets with a dominant single producer or with an oligopoly of companies that reach tacit agreements to limit price competition will result in prices that are too high. More recently, economic research has stressed the dynamic benefits of competition in putting pressure on all market participants to cut costs and develop new and innovative products. Global companies that have established their positions in their own domestic markets can provide important competitive pressure to American industries where the domestic companies have become complacent.

The Cons of Foreign Direct Investment in the United States

1. Foreign investment can displace jobs and production in domestic companies. There is little question that the arrival of Asian and European auto companies producing in North America has resulted in a decrease in the number of jobs in the traditional American companies in the industry. Many of those jobs were unionized. Many Americans look back to a time in history when domestic companies dominated the economy and foreign competition was minor. Much of the apprehension is about imports and the trade deficit, but the changing identity of companies producing in the U.S. market is also a concern.

2. Foreign takeovers of American companies can be motivated by a desire to capture American technology. The fight among countries and companies to take advantage of technology is older than the industrial revolution. Alexander Hamilton orchestrated an effort to bring European technology to post-revolutionary America, while today China is doing its utmost to push its economy into the twenty-first century by grabbing as much technology from around the world as it can. One reason that American companies have been reluctant to invest more in China is because of concerns about violations of property rights. The U.S. government, of course, already has in place safeguards to prevent the capture of vital technologies by foreign entities and all foreign takeovers have to be vetted. The hard question is whether or not this process is striking the correct balance between protecting vital American interests and excluding foreign investors who could contribute positively to our economy.

3. In the event of an economic downturn, foreign-owned companies may protect home country workers and operations at the expense of their U.S. operations. Some multinational companies produce the same, or very similar, products in different locations around the world. These companies have a choice about how to allocate production in situations where they have overcapacity. If workers in their home country have reached agreements to protect their own jobs, the company may decide to keep full employment at home and cut production elsewhere. This concern is a legitimate one, but should not be overstated. Shifting production is costly and most foreign-owned companies with significant operations in the United States are concerned about the long term sustainability of their U.S. operations.

Balancing the Arguments

Although there are real concerns about foreign direct investment, the benefits greatly outweigh the costs. On balance, international trade is beneficial to Americans but the case for expanding trade is a hard one to make to skeptical voters. By contrast, the case for encouraging foreign investment is much easier to make. New green field investments clearly create jobs and benefit local communities. Takeovers of domestic companies by foreign companies are also generally beneficial, providing an infusion of capital and new management that can prevent established companies from failing and allow them to make investments.

How to Make the United States More Competitive

1. Get the macroeconomics right. Chronic U.S. trade deficits since the early 1980s have been sustained by an equal shortfall of domestic saving over investment. The best policies in the world will not restore American competitiveness in the long run as long as there is gap between national saving and investment. Reducing investment is not the right approach. Alternatively, national saving will need to increase once the recovery has taken a firmer hold. There are few if any tools by which government can influence private saving; thus, the increment to national saving will be achieved most effectively by reducing or eliminating the federal budget deficit over the next ten years. It is clear from the past that insufficient levels of national saving drove up the exchange rate, priced U.S. exports out of foreign markets and swelled the volume of imports.

2. Work for trade agreements. Balance in international trade needs to be a more focused objective of U.S. foreign policy. In past negotiations, the United States traded access to U.S. markets for foreign political support or access of U.S. financial firms to foreign markets, to the detriment of admittance for U.S. exports. A major German auto company is siting an assembly plant in Mexico because that country’s free trade agreements will allow it to use the plant as an export platform to Latin America and elsewhere. In addition to obtaining more trade agreements, there is also a need to develop greater international consensus on appropriate guidance for exchange rates.[1]

3. Improve the Corporate Income Tax. The mobility of capital, technology, and production facilities makes the national taxation of production as opposed to consumption increasing impractical. The marginal rate of corporate taxation in the United States is too high, particularly in relationship to the tax rates of other countries, inducing firms to locate overseas. The United States needs to follow the lead of other countries in shifting toward greater reliance on consumption-based taxation.[2]

4. Improve skills. Both American companies and foreign companies investing in the United States say that the skills of the U.S. workforce are comparatively weak. It lags behind many other countries in developing effective vocational education and job training programs, and the educational attainment of young workers is falling behind that of countries like Canada, Japan and Korea. Furthermore, U.S. 15-year-olds rank 25th in math and 17th in science in PISA scores among OECD nations. Germany is an example of a country that has used a high-quality vocational education system to improve the skills of its workforce. While there is no space here to elaborate on what changes should be made, greater attention needs to be paid to reversing the deterioration in workforce skills.

5. Repair and improve infrastructure. Similarly, the country suffers from a deteriorating physical infrastructure that raises the costs of production. The extraordinarily low level of current interest rates suggests that now is a good time to borrow funds to finance the repair and modernization of those systems. The adoption of such a program is constrained by a concern that it is simply an excuse for added deficit spending. That issue can be addressed within a capital budget framework in which each investment is financed with amortized debt for which a portion comes due in each year and is repaid with an explicit tax or dedicated revenue source over the duration of the bond issue. Such financing, if matched by a credible dedicated revenue source, would not add to concerns about an unmanageable level of general fund debt.

6.Take advantage of the energy boom. U.S. natural gas resources have nearly doubled since 2003, driven by the development of shale deposits nationwide. The United States has the second largest recoverable shale gas reserves in the world at 24 tcm (trillion cubic meters), after China’s reserves of 36 tcm. However, the United States is substantially ahead of the rest of the world in having started to tap these reserves at increasing scale. By 2020, shale gas is expected to add 10-15 billion cubic feet per day over current levels and grow to over 25 percent of total gas production. Along with shale gas, light tight oil (LTO) production has also developed rapidly. Current LTO production estimates for 2020 are between 5 and 10 million incremental barrels per day, although even higher numbers are possible. There are environmental dangers involved in this new wave of energy production but with the right regulation it should be possible to develop the oil and gas fields responsibly. It is expected that natural gas will be priced in the United States at $4-6 per million BTUs, well below the $12 price range in Europe and $16 in Asia. Oil prices are set globally, but it is likely that U.S. domestic prices will carry a differential below imported oil and the greater security of domestic supply will be an attraction for users. Cheap natural gas will also keep electricity prices down.

The energy revolution is already making America more competitive. Global companies are investing in new plants here to take advantage of the low price of energy and natural gas as a feedstock. For example, in 2012, Shintech Louisiana LLC, a Japanese company, invested an additional $1.3 billion in a PVC plant in Louisiana.[3] Methanex Corp. (Canada) invested $550 million in the United States in summer 2012 to construct a methanol production facility in Louisiana. This was the corporation’s first U.S.-based facility in over a decade.[4] Sasol Ltd. (South Africa) agreed in December 2012 to build an “integrated gas-to-liquids (GTL) and ethane cracker complex” in Louisiana. This project alone is estimated to create 1,253 jobs directly, “with salaries averaging nearly $88,000, plus benefits,” and thousands of additional indirect job gains. Total investment is estimated to be between $16 billion and $21 billion, with ultimate value approximated at $46 billion by a Louisiana economic impact study.[5] Foreign direct investment is thus making an important contribution towards exploiting new energy sources for the benefit of the economy.[6]

Conclusion

The Obama Administration has been working to make it easier for foreign companies to build new plants and create jobs here. An interagency effort is underway to create one-stop-shopping for companies and I applaud the effort by this subcommittee to seek out ways to make America a more attractive location for foreign companies to invest. More needs to be done to coordinate federal agencies and states and localities in terms of permitting and meeting environmental requirements. Companies also report that the process of obtaining permits is much too slow and too complex.

On balance, foreign direct investment coming to the U.S. economy has been beneficial, generating jobs, making-capital intensive investments and diffusing technology developed in other countries to our economy. There are legitimate concerns about protecting our technology and workers, but these challenges can be met. America is already an attractive place for foreign companies to invest and policymakers should make sure our competitiveness is sustained and enhanced.

[1] A greater reliance on market-determined exchange rates would be preferable in most cases, but countries differ widely in their stages of development and ability to rely on such mechanisms.

[2] The United States also attempts to tax the foreign income of U.S. companies, albeit with a deferral. Most other countries use a territorial-based system in which income is taxed only in the country in which it is earned.

[3] Mark Crawford, “Hot United States FDI Sectors: Advanced Manufacturing,” Area Development Online, http://www.areadevelopment.com/LocationU.S.A/LocationU.S.A2012/U.S.-FDI-sectors-advanced-manufacturing-262000987.shtml.

[4] “At the Epicenter of the U.S. Industrial Rebirth,” Louisiana Economic Development,” http://www.louisianaeconomicdevelopment.com/led-news/articles/at-the-epicenter-of-the-us-industrial-rebirth.aspx.

[5] “Sasol Announces Largest Manufacturing Investment In Louisiana History, Creating More Than 7,000 Direct And Indirect Jobs,” Louisiana Economic Development, December 3, 2012, http://www.louisianaeconomicdevelopment.com/led-news/news-releases/sasol-announces-largest-manufacturing-investment-in-louisiana-history,-creating-more-than-7,000-direct-and-indirect-jobs.aspx?c=News%20Releases&id=39.

[6] There are exaggerated claims being made about the extent to which the energy boom will improve U.S. competitiveness and create manufacturing jobs. The discovery of new ways to extract natural gas and oil may make the U.S. self-sufficient in energy and reduce the trade deficit, but it will also increase the value of the U.S. dollar, partially or fully offsetting the cost advantage of cheap energy. This is an example of the “Dutch Disease” that afflicted Dutch manufacturing some years ago when large gas reserves were discovered.

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Testimony Prepared for the Hearing: Discussion of the Global Investment in American Jobs Act, 2013

Authors

Martin Neil Baily

Publication: United States House of Representatives, Subcommittee on Commerce, Manufacturing, and Trade, Committee on Energy and Commerce

Image Source: © Paul Vernon / Reuters

Small Business, Innovation and Tax Policy: A Review

William G. Gale and Samuel Brown — Fri, 05 Apr 2013 12:25:00 -0400

Introduction

Small businesses occupy an iconic place in American public policy debates. Numerous and diverse public policies subsidize small businesses, and political leaders of both parties routinely voice their support for the sector. At least part of this support is based on the notion that a healthy small business sector leads to innovation, jobs, and a healthy overall economy.

Not surprisingly, however, the economic issues surrounding small businesses and innovation are more complex and nuanced than any iconic designation would suggest. At the core of these issues are the questions of whether and how public policies should subsidize small businesses. On the one hand, economic theory prescribes that well-designed tax and spending programs, in the absence of externalities or public goods, should be neutral among types of investments and forms of business organization, leaving a free market to allocate resources efficiently between small versus large business. On the other hand, small business owners may face special barriers to entry or to firm expansion and many people assert that the small business sector is our principal engine of jobs, growth, and innovation. Either or both of these situations might justify preferential treatment for the small business sector. Recent proposals by Representative Dave Camp (R-MI), the chair of the House Ways and Means Committee, address a number of issues regarding the tax treatment of partnerships and S corporations.[1]

Against this backdrop, this paper aims to provide a clearer understanding of how the federal tax code affects small business. In section II, we provide background information on the small business sector, including alternative definitions of small businesses, the tax and income characteristics of small business owners, and the allocation of small businesses across different legal forms of business.

In section III, we examine evidence suggesting that being small, in and of itself, does not confer a special advantage to businesses in job creation or innovation. Rather it is in young firms, which by definition start as small businesses, where job growth and innovation tend to occur. Focusing on young and innovative firms likely implies a different focus for policy interventions than focusing on small businesses per se.

Section IV describes various tax policies and other public programs that are aimed at helping small businesses. We document the panoply of existing tax incentives and the significant credit and lending programs that encourage small businesses to hire, expand, and innovate. At the same time, we note that when pro-small business subsidies or policies are phased out as firm size expands, they may unintentionally discourage businesses from expanding because expansion will lead to loss of those subsidies.

Section V analyzes the existing literature on the impact of tax policies on small business behavior, including entry, exit, duration of entrepreneurial firms; the impact on employment, investment, and firm growth; the effect on research and experimentation spending, which presumably leads to innovations; the effect on organizational form; and the effects of taxes on the financing of new ventures. Section VI offers concluding remarks.

[1]See http://waysandmeans.house.gov/uploadedfiles/small_biz_summary_description_03_12_13_final.pdf.

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Small Business, Innovation and Tax Policy: A Review

Authors

William G. Gale
Samuel Brown

Image Source: © Carlo Allegri / Reuters

U.S. Productivity Growth: An Optimistic Perspective

Martin Neil Baily, James M. Manyika and Shalabh Gupta — Fri, 29 Mar 2013 00:00:00 -0400

ABSTRACT

Recent literature has expressed considerable pessimism about the prospects for both productivity and overall economic growth in the U.S. economy, based either on the idea that the pace of innovation has slowed or on concern that innovation today is hurting job creation. While recognizing the problems facing the economy, this paper offers a more optimistic view of both innovation and future growth, a potential return to the innovation and employment-led growth of the 1990s. Technological opportunities remain strong in advanced manufacturing and the energy revolution will spur new investment, not only in energy extraction, but also in the transportation sector and in energy-intensive manufacturing. Education, health care, infrastructure (construction) and government are large sectors of the economy that have lagged behind in productivity growth historically. This is not because of a lack of opportunities for innovation and change but because of a lack of incentives for change and institutional rigidity.

Download the full paper »

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U.S. Productivity Growth: An Optimistic Perspective

Authors

Publication: International Productivity Monitor

Going Global: Boosting Metro Atlanta's Economic Future

Wed, 20 Mar 2013 11:30:00 -0400

Event Information

March 20, 2013
11:30 AM - 2:00 PM EDT

Historic Academy of Medicine
Georgia Institute of Technology
875 West Peachtree Street NW
Atlanta, GA 30309

On March 19, the Metropolitan Policy program at Brookings and JPMorgan Chase hosted a forum at the Georgia Institute of Technology, “Going Global: Boosting Metro Atlanta’s Economic Future,” the first in a series of domestic and international forums being convened this year by the Global Cities Initiative. This is the second year of the five-year initiative. The forum explored how metropolitan-led economic growth—including global trade and investment—are important for job creation, and how Metropolitan Atlanta can leverage its position in the global market.

Roundtable Presentations:
View Bruce Katz's presentation on Atlanta's next economy »
View Adie Tomer's presentation on global aviation »
View Amy Liu's presentation on global trade »

Other Resources:
For more information on the Global Cities Initiative, please visit the project's homepage.

Read the forum's press release » (PDF)
Read the forum's program » (PDF)

Video

Participants

Panelists

David Balos

Market Manager, Middle Market Banking

Mobile Money: A Technology Game Changer for Tackling Global Poverty?

Laurence Chandy — Tue, 12 Mar 2013 13:00:00 -0400

Mobile money—the ability to store and transfer money using cell phones—is one of the most talked-about technologies in global development. Proponents believe it could redefine what it means to be poor by giving poor people access to basic financial services.

In Kenya, where two-thirds of the population live on less than $2 a day, mobile money is now ubiquitous and has enjoyed outstanding adoption rates among low-income customers. Early evidence indicates it is already changing lives. For Safaricom, the leading provider of the service in Kenya, mobile money—or M-Pesa, as its product is called—has contributed directly to the company’s bottom line, while strengthening its market share.

Mobile phone operators are now tripping over each other to roll out similar services in other developing countries, from Afghanistan to Zambia. Intuitively, we would expect these to match, if not better, M-Pesa’s record of success by learning from M-Pesa’s experiences. So far that hasn’t happened. While a number of offerings in different countries are now taking root, none have so far matched the speed and scale of M-Pesa in Kenya. Others have failed miserably.

The video above chronicles M-Pesa’s pioneering story in Kenya and delves into the question of why its success has not been easily replicated elsewhere. We discussed this and other technological innovations for development last year at the Brookings Blum Roundtable—a high-level conference held each summer to discuss solutions to global poverty. To read more about the challenges of replicating M-Pesa, and the propagation of other innovations in the developing world, please read the 2012 conference report.

Authors

Laurence Chandy

The American Airlines-US Airways Merger in an Evolving Airline Industry

Clifford Winston — Tue, 26 Feb 2013 00:00:00 -0500

Introduction

In a 1995 book, The Evolution of the Airline Industry, Steven A. Morrison and I assessed the effects of various hypothetical changes in airline competition on air travelers’ fares. An extreme scenario that we considered was that Alaska, Continental, America West, Northwest, TWA, and USAir exited the industry, leaving Southwest, United, American, and Delta as the only major carriers in the U.S. domestic market. At the time, we thought this large scale exit would be a tremendous shock to industry competition—note, we did not assume that the carriers exited by merging with other carriers. We found, however, that fares increased modestly, about 8 percent, which preserved most of the decline in fares due to deregulation. We attributed our finding to the ability of Southwest to enter additional markets and discipline fares.

Today, this extreme scenario no longer seems so extreme because if American’s proposed merger with US Airways is approved, then, with the exception of Alaska, all the carriers that we assumed would exit the industry would have done so. My testimony provides some perspective on this scenario, indicates why its effects on fares would differ from the prediction that we reported in our book, and assesses U.S. airlines’ merger activity in the broader context of the industry’s eventual evolution to a highly competitive, global airline industry.

The Scenario and Reality

The scenario we posited in our book differs from an actual post American-US Airways merger environment because we assumed that carriers would simply exit the industry and would not merge and because we accounted for competition among only four remaining carriers.

In our scenario, when a carrier was assumed to exit a market, all of its assets exited with it. This assumption ignored the potential benefits of a merger and overstated the exiting carrier’s effect in raising fares because its assets could have been put to more effective use if that carrier merged with another carrier, thereby creating a more efficient competitor. Indeed, retrospective empirical assessments of airline mergers have generally found that the presence of a merged air carrier in a market does not lead to higher fares. At the same time, travelers benefit from the merged carrier’s more extensive network and from more opportunities to use frequent flier miles.

Our scenario also did not account for the fact that in addition to American, Delta, United, and Southwest, the carriers that would still compete in the industry include Alaska, JetBlue, Spirit, Frontier, Virgin America, Allegiant, and Hawaiian Air among others.

Accordingly, even though for the last decade or so the U.S. airline industry has been evolving in a way that is consistent with the extreme scenario in our book, as shown in Borenstein and Rose’s recent paper reporting U.S. airline industry operating characteristics through 2011, real yields have continued to decline since deregulation in 1978; real yields have been consistently below the Standard Industry Fare Level (SIFL) that was used by the Civil Aeronautics Board to determine regulated fares; low-cost carriers’ market share has steadily increased; route level concentration on hub and non-hub routes has stabilized during the past ten years; and the industry average load factor (the percentage of seats filled by paying passengers) has steadily increased. And, as reported in Tomer, Puentes, and Neal’s Brookings study, travel in U.S. international markets has more than doubled between 1990 and 2011 as U.S. carriers have taken advantage of open skies agreements to expand their international networks and increase flight frequency.

Similar to the mergers that preceded it, the merger of American Airlines and US Airways would preserve those positive long run trends. Carrier competition would continue to be intense and low-cost carriers would continue to put downward pressure on fares. Entry and exit would continue to be fluid in airline markets as a merged American and US Airways would optimize its network by exiting some routes and entering others, while other carriers would adjust their networks by entering some of the routes that American exited and exiting some of the routes that they entered. The merged American and US Airways would also strengthen its international network and benefit travelers by serving more foreign destinations.

In retrospect, the extreme scenario depicted in our book previewed a natural evolution of the industry in response to deregulation with the critical caveat that instead of completely exiting the industry, certain carriers have merged with others, which has enabled the industry’s capital stock to become more productive as, for example, merged carriers have been able to retire their least efficient aircraft more quickly and has enabled the merged carriers to strengthen their international networks.

Toward a Global Airline Industry

A proposed merger between large firms is often accompanied by concerns that the consolidation would reduce competition and raise prices. If policymakers are concerned that the proposed American-US Airways merger may have anti-competitive effects, notwithstanding any gains in operating efficiency, then an effective way to address those concerns, obtain the efficiency gains, and significantly benefit travelers would be to take steps to stimulate additional competition by creating a deregulated global airline industry.

In fact, U.S. and foreign policymakers have already begun that process by negotiating open skies agreements, which give U.S. and foreign carriers the freedom to enter and set fares in U.S. international markets. As expected, air travelers have benefited. In a recent paper, Jia Yan and I estimated that the reduction in fares and increase in flight frequencies in markets that are governed by open skies agreements has raised travelers’ welfare $5 billion annually. If the United States negotiated agreements with foreign countries so that all U.S. international routes were governed by open skies, we estimate that travelers would gain an additional $5 billion annually.

The final step to create a highly competitive global airline industry would be for the United States to allow foreign airlines to serve U.S. domestic markets. (Other countries should also allow foreign carriers, including U.S. carriers, to serve their domestic markets.) Clearly, competition would be even more intense in U.S. markets and travelers would benefit from lower fares and service improvements if their choice of carriers were expanded to include discount carriers like Ryanair and global players like Qantas and British Airways. Such airlines have never posed a threat to national security or to the safety of air travelers.

Whether it was part of their grand design, U.S. carriers have been preparing for decades for a truly competitive global airline industry. As part of this process, they decided that mergers would help them develop more efficient operations and networks. No evidence exists to question the effectiveness of that strategy; hence, policymakers have been wise to allow consolidation to move forward and they should allow American Airlines and US Airways to continue the process. Policymakers should also accelerate the airline industry’s contribution to globalization by creating a truly competitive deregulated environment that would benefit travelers in the United States and throughout the world.

Authors

Clifford Winston

Publication: Subcommittee on Regulatory Reform, Commercial and Antitrust Law, Committee on the Judiciary, United States House of Representatives

Let's Have More Immigrants, Not More Babies

Isabel V. Sawhill — Wed, 20 Feb 2013 12:04:00 -0500

Fertility has fallen in all advanced countries and will almost surely continue to fall in the future. In the United States, the fertility rate is now 1.93 children per women, a little below the replacement level of 2.1. It waxes and wanes with the state of the economy and other factors, but the long-term trend is pretty clear: women have fewer children as their own opportunities, along with their ability to control their reproductive destinies, expand.

Bear in mind that right now roughly a quarter of all childbearing in the U.S. is unintended. As women's employment opportunities continue to grow, as marriage rates continue to decline, and as the promise of newer and more effective long-acting contraceptives is realized, women will almost surely have even fewer children than they do today with some ,opting out of childbearing altogether. As one indicator of where we may be headed consider the data on the number of women who have remained childless by the age of 40-44. It was 18 percent in 2008, up from 10 percent in 1976, an increase of 80 percent.

Should this be a concern?

Most definitely, says Jonathan Last, in his new book, What to Expect When No One's Expecting. In his words, we can "forget the debt ceiling. Forget the fiscal cliff, the sequestration cliff and the entitlement cliff. Those are all just symptoms. What America really faces is a demographic cliff: The root cause of most of our problems is our declining fertility rate." These problems, according to Last, include not just an aging population but less innovation, lower productivity, slower growth, and less ability to project our military power around the world. Just look at Japan, he says, where consumers bought more adult diapers than baby diapers last year!

But is Last right? It's certainly true that the aging of the population is a big fiscal problem in Japan, and to a lesser extent, in the U.S. Spending on pensions and health care are rising sharply as the number of working age adults per elderly person shrinks. But the solution does not need to be more babies. We can solve the problem by allowing more immigrants to enter the country -- legally. What we need is a new immigration system that not only creates a path to citizenship for the 11 million who are here illegally now, but creates a reformed system that increases the numbers allowed to come into the country in the future in a way that is better aligned with our economic interests.

The fact is that immigration, done the right way, is good economic policy. It may also be good social policy as well.

The key point from an economic perspective is that the 7 billion people in the world are a potential pool of talent that any advanced country should want to attract. Ignoring that pool is the equivalent of General Motors recruiting all of its workers from Michigan while ignoring the other 49 states.

Fears that immigrants replace or undermine the wages of American workers are, for the most part, unfounded. They may have hurt the job prospects of some of our least skilled workers, such as high school dropouts, but they have become the backbone of many sectors of the economy from construction to agriculture, thereby producing jobs for Americans in businesses that would otherwise be unable to flourish.

If we move to a more employment-based immigration system in which the needs of the economy are given much greater weight and family reunification a smaller role, immigration can become a dynamic force for growth and a partial solution to our fiscal problems. Countries, such as Canada and Australia, in which skills-based immigration is the norm, have benefitted from such a system.

Immigration is often feared because immigrants are "different," because they place a burden on local social services, and fail to assimilate by learning English and the other hallmarks of our culture. Yet, we have been a nation of immigrants from the beginning with each new wave raising such fears and later becoming almost fully accepted into society.

With a more rational and controlled immigration system, one based more on employer needs, any short-run problems of adjustment would be far easier to deal with and the resulting longer term diversity would be a potential source of strength for the nation as a whole. In the meantime, if fertility does decline, and there are fewer American children to support, whatever resources parents and governments have to invest in the education and health care of the next generation will go much further.

Expecting women to rededicate themselves to producing children is not in the cards, even with the kind of family-friendly policies that Last and some others support. One only has to look at what is going on in Europe where such policies have been tried at great expense to see that they are not likely to be very effective. At 1.6 children per woman, the fertility rate in these countries is well below U.S. levels.

So no, Mr. Last, we don't need more babies; we just need more immigrants.

Authors

Isabel V. Sawhill

Publication: Real Clear Markets

U.S. Tax Reform: Reducing the Tax Code’s Bias for Debt

Robert C. Pozen — Mon, 18 Feb 2013 00:00:00 -0500

To begin with, let me summarize the specifics of my proposal, which I detailed in Tax Notes. My proposal would reduce the U.S. corporate tax rate from 35% to 25%. I would finance such a rate reduction by limiting deductions for the gross interest expense of corporations (I call this provision the “interest cap”). Non-financial corporations would be allowed to deduct 65% of their gross interest expense, while financial corporations would be allowed to deduct 79% of their gross interest expense. There would also be special rules for corporations that would have reported a loss for tax purposes, but for these restrictions on interest deductions.

My piece in Tax Notes was not intended to set a specific proposal in stone, but rather to illustrate the general strategy: reducing the corporate tax rate while limiting interest deductions. I believe that such a combination would reduce the tax code’s bias in favor of debt, while making the U.S. a more attractive location for discrete, profitable investment projects.

With that said, let me address the main objections to my proposal.

Winners and losers

The most common objection to my proposal is that it would create winners and losers. While that objection is true, it is true because my proposal would substantially correct a significant distortion within the tax code in favor of debt finance. As a result, some corporations that are taking advantage of this bias in the tax code might see a higher tax burden under my proposal.

However, any revenue-neutral tax reform is mathematically guaranteed to create winners and losers. So, in my view, the primary criterion for evaluating a tax reform proposal should be whether it would reduce economic distortions.

I believe that my proposal would meet this criterion by moving the tax code closer to a neutral position between debt- and equity-finance. Under my proposal, corporations would no longer issue debt mainly because interest payments are deductible and returns to equity (dividends or share appreciation) are not. This means that corporations would make financing decisions for economic reasons rather than tax reasons—leading to a more efficient allocation of resources.

Transition relief

Other commentators in the International Tax Review article objected to the idea of applying the interest cap to pre-existing debt. I share this concern: corporations have made decisions about issuing debt based on good faith beliefs that the current treatment would continue.

I had been hesitant to allow for a broad grandfathering of existing debt. If the tax reform legislation allowed such grandfathering—effective on the enactment of the legislation—then corporations could rush to issue long-maturity debt shortly before the enactment of the legislation. In my piece, I proposed instead a 10-year, linear phase-in of rate reductions and restrictions to interest deductions.

However, I would accept an alternative approach: grandfathering existing debt effective as of January 1 of the year in which the legislation was first introduced (rather than at the date of enactment). That could substantially reduce any rush to issue debt shortly before the enactment of the legislation. The corporate tax rate could then be gradually reduced in a revenue-neutral manner.

Net interest versus gross interest

Observers frequently argue that my interest cap should apply solely to net interest expense, rather than gross interest expense. I disagree for two reasons.

First, applying the interest cap to net interest expense would raise only a small amount of revenue—enough to finance a reduction in the corporate tax rate by about 1.5 percentage points, based on estimates by the Congressional Research Service. As a result, the U.S. corporate tax rate could not be reduced to a level competitive with most industrialized countries.

Second, restricting net interest deductions would (by itself) increase effective marginal tax rates (EMTRs) on debt-financed investment to nearly the same extent as restricting gross interest deductions (though average tax rates on debt-financed investment would be substantially different).

Consider a hypothetical non-financial corporation that has $300 million in gross interest income and $500 million in gross interest expense. Imagine it is considering a marginal investment that would cause it to incur an additional dollar in interest expense. Under my proposal, that corporation could deduct 65 cents of that additional dollar. If I instead applied the restrictions to net interest expense, that corporation could still deduct 65 cents of that additional dollar. This corporation’s incentives—on the margin—essentially do not depend on whether the interest cap applies to net or gross interest expense.

Yet, as mentioned above, applying the interest cap to gross interest raises much more revenue, and thus can finance a much more significant reduction in the corporate tax rate. The reduced corporate tax rate mitigates the increase of EMTR on debt-financed investment and sharply reduces the EMTR on equity-financed investment. According to the model developed by the Congressional Budget Office, the average EMTR facing non-financial corporations would be roughly unchanged under my proposal.

By contrast, applying the interest cap to net interest expense could not finance a reduction in the corporate tax rate sufficient to offset the increase in EMTR associated with the interest cap. Thus, financing a corporate tax rate reduction by restricting net interest expense would cause the average EMTR facing corporate investment to increase.

Alternative approaches

Lastly, some commentators argue that we should reduce the distortions to financing decisions by cutting shareholder-level taxes on dividends and capital gains, rather than imposing an interest cap. While there are many good reasons to support lower dividend and capital gains taxes, such tax relief would in fact work against the goal of raising revenue to reduce the corporate tax rate. If corporate executives wish to reduce shareholder-level taxation, then they must put forward specific revenue or spending proposals to offset the revenue loss.

In fact, though most corporate executives want a 25% corporate tax rate, they have not been willing to eliminate or restrict the large tax preferences built into the tax code—such as the deduction for domestic production activities and the research and development credit. The items usually identified for repeal—such as accelerated depreciation for corporate jets or credits for green energy—are too small to finance any meaningful reduction of the corporate tax rate.

In these times of tight budgets, any proposal for tax reform must be at least revenue-neutral. And while I support “comprehensive” tax reform, this seems to be a long-shot.

A continuing process

I want to thank International Tax Review for giving me the opportunity to respond to the earlier article. But it is equally important to thank all those who commented on my proposal for that article. The thoughtful comments will help me refine the proposal—both to bolster the U.S.’s global competitiveness and to reduce the distortive effects of the tax code.

Authors

Robert C. Pozen

Publication: International Tax Review

A Cheerful Welcome to the Robots, Our Future Work Overlords

Scott Winship — Mon, 18 Feb 2013 00:00:00 -0500

A surprising number of people seem to be freaking out about an imminent takeover by robots. It’s true that only at the fringe is anyone suggesting a Matrix-style dystopia where the machines rise up and enslave us. But the commonly-expressed conviction that technological innovation will immiserate broad segments of society is only somewhat less irrational.

A number of major news outlets and commentators have raised the specter of a doom-like “rise of the robots.” These alarmist speculations allege that technology will leave behind a large portion of the U.S. labor force. One recent piece goes so far to insist that taking on the robots “now poses the central economic dilemma of the Obama era.” The central economic dilemma? Does not compute.

There are two blind spots at work among the neo-Luddites. The first is the tendency to see economic stagnation or decline everywhere, which, it is said, will only worsen. The amount of economic insecurity—and the extent of its increase—have been greatly overstated, as I have argued in the pages of National Affairs. Median income has fallen notably since the onset of the financial crisis, but it was increasing before the recession, and it has been rising again for several months.

It is true that in recent decades, the rate of income growth has been much slower even in good times than in the Golden Age following World War II. However, CBO data indicate that during the expansion of the last decade median income growth rates were no worse than in the 1990s and better than in the 1980s. And as I argue in the latest issue of Breakthrough Journal, we get absolute economic gains today comparable to those of the 1950s and 1960s despite having lower growth rates, because we are so much richer than in the past.

Even if growth rates never return to their glory days, we are on the verge of realizing absolute annual gains that will be permanently larger than in the Golden Age. How those gains are distributed is an important consideration, but the situation is less dire than many believe. Median income has risen by at least one-third since 1979, and the evidence that the labor market is polarizing has been, in the words of Urban Institute and Georgetown economist Harry Holzer, “overblown.”

The second blind spot among the neo-Luddites is their failure to consider the gains we will receive as consumers from technological advances even as they misunderstand the reduced demand for labor technology may create. Technology makes us more productive—it allows us to produce the same stuff, but more cheaply. Too many people hear “producing the same stuff more cheaply” as “producing the same stuff with fewer workers” and see mass unemployment as our fate. Rising productivity actually means “producing the same stuff with fewer hours worked.” That can be achieved by having fewer workers do the same amount of work, but it is also consistent with the same number of workers all scaling back their hours.

It hardly seems worth arguing that most Americans would work less per week and for less of their lifetimes if they could. One hundred years ago essentially all men in their early 60s worked; today just six in ten do, and the typical retirement age has steadily declined (while life expectancy has increased). During their working years, men now have more leisure time than in the past. Work has increased markedly for women, but consistent with their rising education levels, longer delays in marriage and childbearing, and reduced fertility, this is mainly reflective of greater opportunities to balance work and family. Unpaid time doing housework has declined more among women than work has increased, meaning that they too have more leisure time than in the past.

Of course, people will only choose to work less if they can afford to. But technological advance will radically increase productivity—reducing demand for labor—only insofar as it also radically reduces the prices of what we buy. Ignoring this connection leads to absurd fears about the future. Some, apparently, believe we may have a robot economy down the road where machines produce everything, but few humans can afford the output.

Technological development will surely eliminate some specific jobs. But there is little reason to think that the future will look any different from the past in this regard. Productivity gains in manufacturing and other sectors will lower the cost of goods and produce more discretionary income, which people will use to pay other people to do things for them, creating new jobs. Mass leisure will also create other kinds of jobs, such as those devoted to entertaining and informing each other. To the extent that the least-skilled need help, we will be in a much better position to afford safety nets, and our main concern will be the age-old one of discouraging dependency. To the extent that technology increases inequality much of it will be to reward innovators for finding ways to drive our workweek and retirement age down or to induce some to keep working 40-hour weeks.

I, for one, welcome our future robot overlords.

Authors

Scott Winship

Publication: Forbes

The United States After the Great Recession: The Challenge of Sustainable Growth

Joshua Meltzer, David Steven and Claire Langley — Fri, 15 Feb 2013 11:58:00 -0500

“Never before has our nation enjoyed, at once, so much prosperity and social progress with so little internal crisis and so few external threats,” President Clinton argued in January 2000 in his final State of the Union address.

Despite this optimistic prognostication, the millennial decade was one of profound crisis, with serious consequences for the United States’ economy and society, and for the environmental sustainability of the American dream.

This paper starts from the following assumptions:

First, though the United States’ economic model has many strengths, its resilience has been weakened. Acute economic, social and environmental challenges will need to be addressed in either the short or long term.
Second, the United States’ response to this era of crisis will be an important factor influencing how other countries react, given the size of its economy, its position as a “necessary but not sufficient” actor on most global issues and its potential for innovation.
Third, it is necessary to gain an understanding of the drivers of and obstacles to change in American society to draw conclusions about its response to crisis.

We identify four trajectories (scenarios) the U.S. could take over the coming decades:

The United States could continue to try and muddle through, reacting to the external environment, rather than trying to shape it.
It might aggressively focus on going for growth in order to meet the aspirations of its growing population, with only limited regard for environmental consequences.
Alternatively, intelligent design would lead the U.S. to place greater value on sustainability at national and global levels, adopting reforms that begin to push its economy onto a new trajectory.
Finally, shocks could drive an emergency response, as renewed breakdown in global financial systems, serious conflict or state failure, or a series of extreme weather events dominate the government’s agenda.

All trajectories are plausible, but the intelligent design scenario is most desirable. This paper makes recommendations that, although challenging to implement, are politically feasible and if implemented would place the U.S. growth model on a new sustainable trajectory at an acceptable cost.

To reach this goal this paper focuses on four areas for action:

Increasing employment, which is the most urgent priority to accelerate recovery from the Great Recession, while addressing underlying structural issues that have led to a decade of poor economic outcomes for most citizens.
Investing in the future, as the key marker of whether the United States is prepared to make farsighted decisions to improve education, build new infrastructure and increase innovation.
Maximizing an increased energy endowment in a way that grows the economy, while reinforcing the trend towards reducing resource demand and reducing greenhouse gas emissions.
Fiscal rebalancing, where the United States must insulate economic recovery from the process of fiscal reform while reducing and stabilizing debt over the long term.

Finally, we argue that President Obama can re-energize America’s global leadership if he builds on a platform of domestic actions that enhance the sustainability of America’s society and economy.

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Clicks into Bricks, Technology into Transformation, and the Fight Against Poverty

Laurence Chandy, Kemal Derviş and Steven Rocker — Tue, 12 Feb 2013 09:42:00 -0500

The last century has witnessed dramatic global improvements in the quality of life. Many of these improvements can be attributed to the discovery and spread of new technologies and ideas, ranging from vaccines and antibiotics, to improved hygiene, to the agricultural reforms of the Green Revolution. Today there is growing excitement about a new set of technologies that could further improve the lives of poor people around the world. Mobile technology is giving poor people the capacity to use their cell phones to send, receive and store money. Connection technologies such as open source software have allowed people in Haiti and Pakistan to collect and analyze information about, and then respond to, violence, corruption and natural disasters. “Green growth” innovations are expanding access to electricity and increasing agricultural yields around the globe while also reducing harmful emissions.

The 2012 Brookings Blum Roundtable was convened to discuss how the role of technology and innovation in global development can be promoted. Development practitioners and thought leaders from the public, private and non-profit sectors came together to examine the constraints that prevent the take up of creative technologies and how these constraints can be lifted. A critical question for the roundtable was what role the U.S. government should play in this agenda and how it can crowd in greater private sector activity.

This report highlights 10 issues raised at the roundtable where either particular proposals were advanced and debated, or new perspectives and analyses were shared. In each case, we summarize the roundtable discussion or explore the issues raised.

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The video below chronicles M-Pesa, the leading mobile money service in Kenya, and delves into the question of why its success has not been easily replicated elsewhere. For more information on M-Pesa, read Chapter 2 of this report.

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Do Republicans Stand a Chance on Immigration Reform?

Ron Haskins — Thu, 07 Feb 2013 00:00:00 -0500

After its failure to defeat a vulnerable President Obama and to retake the Senate in the 2012 elections, leading Republicans and conservative thinkers have conducted a searching critique of their Party. National Review, Commentary, and the Weekly Standard, three of the most important voices of conservative thinking, devoted nearly entire issues to dozens of penetrating and often scathing critiques of the Party by major right-leaning thinkers.

Although it would be a stretch to say that a consensus developed about any single factor accounting for the Party’s poor electoral performance, a prominent culprit was what might be called right-wing absolutism. In Rule and Ruin, Geoffrey Kabaservice gives an insider’s view of the cleansing of moderates from the Republican Party since the Goldwater/Johnson presidential election of 1964. The cleansing of moderates has in turn resulted in Republicans who win House and Senate seats being, on average, well to the right of the American public. On issue after issue, including taxing the rich, budget compromises that include spending cuts and tax increases, the Dream Act and general immigration reform, and increasing the debt ceiling, polls show that Republicans have been out of step with the public. Indeed, the intransigence and rhetoric of some Republicans on these issues have contributed greatly to public polls showing that a majority of the public blames Republicans for the gridlock in Washington. In a New York Times/CBS poll, for example, 60 percent of those surveyed say the president is attempting to negotiate with Republicans to work things out while only 27 percent said Republicans are making the same effort.

Perhaps chastened by defeat and their standing in the polls, Republicans so far in the 113th Congress appear to be presenting a more reasonable public persona. Speeches on poverty and opportunity by Rep. Paul Ryan and Sen. Marco Rubio were thoughtful and well received. The decision to avoid a showdown and instead to compromise on the debt ceiling is another sign of new Republican thinking. But the biggest opportunity of all is presented by immigration reform.

A Bipartisan Issue

It would be difficult to overstate the advantages to our economy of immigration reform. A key part of reform should be adjusting the basis for admitting immigrants from the current overemphasis on family relationships to immigrants already in the country, to a greater emphasis on the education, skills, and experience of those we admit. Other nations are attracting well-educated immigrants by giving them preferences for admission and a clear path to citizenship. We’re losing out. We should make it especially easy for students to enter and stay in the U.S. According to a recent Brookings study, immigrants are 30 percent more likely to found a business than native Americans. A study by the Kauffman Foundation reported that immigrants were involved in the founding of a quarter of engineering and technology companies created between 2006 and 2012. There is also evidence that immigrants who work in science and technology substantially increase employment among native-born Americans.

Another reason so many conservative thinkers are recommending that Republicans support immigration reform is that Hispanics are an increasing portion of the American population and are a critical part of the electorate in many states. One number shows the Republican problem: Romney received 27 percent of the Hispanic vote. With nearly a quarter of all children (and rising) now being Hispanic, the Hispanic share of voters is sure to increase in the future. Immigration reform gives Republicans a chance to overcome the perception that they are anti-immigrant and anti-Hispanic.

What About Illegal Immigration?

Thus, Republicans have every reason to support immigration reform. But there are two problems. The first is that our borders are not secure. While it is true that the number of undocumented immigrants in the U.S. has declined in recent years, the reason is that our economy has lost some of its sheen. But when the economy starts humming again, illegal immigration is certain to rise. Violating the nation’s laws is not a good way to begin a path to becoming an American citizen. So tightening border security is a real issue.

But the barn door has been open for many years and we have around 11 million undocumented immigrants already in the country. What should happen to them? Again, Republicans are justifiably concerned that creating a path to citizenship for those who violated our laws to get in is tricky business. The common Republican argument that if we once again allow illegal entrants to become citizens, as we did in the immigration reform legislation of 1986, why would any future illegal entrants not think they can violate U.S. laws and still eventually become citizens?

It's Time for Compromise

A reasonable Republican response to the twin issues of containing illegal immigration and dealing with undocumented immigrants already in the U.S. begins with the realization that Republicans are the minority party and must compromise to get a deal. Further, Republicans should enter the debate understanding that there will not be a bill unless the issue of undocumented immigrants is addressed. So Republicans must find political tradeoffs between increasing border security, especially by strengthening measures to prevent undocumented entrants from getting jobs, and creating a path to citizenship for those already here. In a perfect world, adults who enter the U.S. illegally should not be able to stay and become citizens. But we don’t live in a perfect world and both humanitarian and political considerations overmatch the reasonable desire to keep illegal entrants from becoming citizens. Achieving a compromise on immigration will be the most important test of whether Republicans are now willing to get things done by compromising with Democrats and the president.

Authors

Ron Haskins

Publication: Yahoo! Finance