Economics, Health Care, Pethokoukis

Some key principles for fixing Obamacare

Image Credit: shutterstock

Image Credit: shutterstock

I am on the record as being dubious about the “repeal and replace” approach to Obamacare. I think the politics are formidable, to say the least. Now that does not mean I am arguing for the status quo. Far from it. Avik Roy has an impressive reform plan that would “transcend” the Affordable Care Act. So do James Capretta and Lanhee Chen, who makes their case over at Politico. In Capretta and Chen’s very good piece, this may be the most important bit:

Returning to the pre-Obamacare status quo will not appeal to most voters because the problems were rampant. A Republican plan to replace Obamacare needs to provide secure insurance for the sick and put affordable coverage within the financial reach of all Americans. And it should not disrupt the employer coverage that most middle-income families have and like. These principles can form the basis of a practical strategy to replace Obamacare, and Republicans would be wise to rally around them to set the stage for the next presidential administration, rather than engaging in a protracted debate over the perfect reform plan.

No going back, and everybody gets affordable access to health, quality insurance — important principles for reform.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

Here’s a big thing that Janet Yellen got wrong in her inequality speech today


Fed Chair Janet Yellen spoke today at a Boston Fed conference on inequality:

The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then. It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.

While I could pick through her entire speech, the part I put in in boldface really jumped out. “Stagnant living standards for the majority” for the past few decades? Really?

I don’t think that is correct. According to the Congressional Budget Office, average real after-tax household income between 1979 and 2007, grew by 275% for the top 1%, by 65% for the next 20%, and by 40% for “the 60 percent of the population in the middle of  the income scale (the 21st through 80th percentiles).” Those numbers more or less match the findings of researcher Richard Burkhauser who finds a 37% increase in median incomes over that same span. Now, 40% isn’t 275%, but it is also not stagnation.

Here is Manhattan Institute’s Scott Winship on the same topic:

The story over the long-run is one of strong improvement in living standards, driven in part by greater work and higher wages among women, but in part by continued gains in male earnings, declining family size, lower taxes, and more federal and employer benefits. While the range of estimates is wide, a reasonable conclusion from the totality of the evidence is that poor and middle class households are at least 30 percent richer today than their counterparts from 35 years ago.

Of course, we all wish middle-class incomes had risen more — just like we all wish, for instance,  the US education system had better prepared a generation of Americans for success in a post-industrial economy facing intense global competition. But too often the stagnation argument is used as a cudgel against the beneficial tax and regulatory policies of the 1980s forward. President Obama has done this repeatedly. But I would expect a more careful,  data-driven analysis by the Fed chair.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


Meanwhile, the White House science office wants your ideas for ‘massless exploration and bootstrapping a Solar System civilization’

Well, you certainly can’t accuse the Obama administration of being obsessed with the day-to-day crises on hotspots. Tom Kalil, deputy director for Technology and Innovation at the White House Office of Science and Technology Policy, offers this blog post, “Bootstrapping a Solar System Civilization.”

In one of my meetings with NASA, a senior official with the space agency once observed, “Right now, the mass we use in space all comes from the Earth. We need to break that paradigm so that the mass we use in space comes from space.”

NASA is already working on printable spacecraft, automated robotic construction using regolith, and self-replicating large structures. As a stepping stone to in-space manufacturing, NASA has sent the first-ever 3D printer to the International Space Station. One day, astronauts may be able to print replacement parts on long-distance missions. And building upon the success of the Mars Curiosity rover, the next rover to Mars — currently dubbed Mars 2020 — will demonstrate In-Situ Resource Utilization on the Red Planet. It will convert the carbon dioxide available in Mars’ atmosphere to oxygen that could be used for fuel and air — all things that future humans on Mars could put to use.

There’s interest outside government as well, with various private companies that see a potential business in mining of asteroids and celestial objects for use in space.

Recently, I caught up Dr. Phillip Metzger, a former research physicist at NASA’s Kennedy Space Center who has recently joined the faculty of the University of Central Florida, to discuss the longer term goal of “bootstrapping a solar system civilization.” …

Have ideas for massless exploration and bootstrapping a Solar System civilization? Send your ideas for how the Administration, the private sector, philanthropists, the research community, and storytellers can further these goals at [email protected]

The post is certainly worth reading for that conversation between Kalil and Metzger, the NASA guy — even if you don’t have any ideas to offer for massless exploration and such.


Here’s what Goldman Sachs is saying about Ebola

Image Credit: European Commission DG ECHO (Flickr) (CC-by-2.0)

Image Credit: European Commission DG ECHO (Flickr) (CC-by-2.0)

Don’t know if I would call this analysis from Goldman Sachs’ morning note “calming” necessarily but, well, see for yourself:

– News about the spread of the Ebola virus has been an increasing focus for market participants in recent days. Despite rising media coverage, Ebola seems to have had little discernible effect on consumer sentiment to date. However, the “fear factor” associated with Ebola appears more significant than in past instances of pandemic concern, in our view.

According to expert opinion, the likelihood of a significant outbreak of Ebola in the United States is very low. As such, any negative macroeconomic consequences are most likely to be transmitted through fear or risk-aversion channels. Past episodes of pandemic concern in the US—including SARS, bird flu, and swine flu—had very little effect on macroeconomic data. The aftermath of the September 11th terrorist attacks—which coincided with widespread avoidance of air travel—may be an instructive downside scenario. Finally, the example of the SARS outbreak in Hong Kong, which had very significant local economic effects, could be considered a worst-case tail risk scenarion.

– Direct disruptions to the global supply chain associated with the deteriorating situation in West Africa are likely to be limited.

So probably no contagion here. Now about that last bit, the “deteriorating situation in West Africa” part. Whatever the likely impact on the US economy or other OECD nations, the wildfire in West Africa must be stopped. Good stuff from Yuval Levin on this:

Allowing the disease to spread into densely populated parts of the world beyond the three nations now affected by it would ultimately be at least as dangerous to the United States as keeping passenger travel from those countries open at the moment. 

And all of this points to one further lesson that encompasses the rest, and which we probably haven’t really learned yet: not to underestimate this disease and this outbreak. This is really the original mistake, made by public-health officials throughout the world who worked to help the West African nations affected. It, too, was understandable. Past outbreaks of Ebola have all involved a very limited number of people in very contained zones. It was becoming apparent by the beginning of the summer that this one was different, but that’s much easier to see in retrospect than it could have been at the time. And no one really has any experience dealing with an outbreak of this particular disease that begins to grow exponentially as this one has. It is out of control in parts of West Africa, and is going to get much, much worse before it gets better.

Think about the nations with health systems ranked below 100 by the World Health Organization: India, Pakistan, Brazil, China. That’s a lot of people. Now this doesn’t mean those nations necessarily would have a poor public health response to an Ebola outbreak.  Still, scary and daunting nonetheless.

Economics, Pethokoukis, U.S. Economy

Stocks, shmocks | The US economy doesn’t look like an economy anywhere near a recession


What is the volatile stock market saying about the economy? Recall this analysis from economist Mike Darda in a post earlier this week:

If financial market turbulence is going to have broad-based macroeconomic repercussions (shocks to the money demand function not accommodated by the Fed), we would look for it to show up in confidence and jobless claims data. Claims will tend to rise 20% year-to-year on a four-week moving average basis heading into a recession whereas the Conference Board’s Present Situations Index tends to fall 15 Index points or more.

1.) The initial claims numbers report from yesterday showed a drop of 23,000 to 264,000 during the week ending October 11, reaching the lowest level reported since April 2000. That’s good.

2.) Today’s consumer confidence number, though from the University of Michigan survey not the Conference Board, was strong. From JP Morgan: “The survey’s current conditions index was unchanged at 98.9 in October while the more important expectations index popped up 3.0 points to 78.4, getting back up near its high for the expansion.” That’s good, too. Also, the Bloomberg Consumer Comfort Index, “climbed to 51 this month, the strongest since November 2012, from 41.5 in September,” with falling gas prices getting a lot of the credit.

So does the global market selloff mean anything? Here is Scott Sumner:

The global stock/oil/bond yield plunge is at least partly due to expectations of slower nominal GDP growth. I know of no other economic news could explain a sudden decline of this magnitude. One plausible theory is that investors are losing confidence in the ECB, and/or the slowdown in China. … With the S&P now trading around 1800, a recession in the US next year seems very unlikely, albeit slightly more likely than a month ago. More likely the Fed will once again be wrong about its 3% growth forecast for “next year” for the umpteenth consecutive time. … Monetary policy in all the major economies has tightened somewhat in the past month. However the degree of tightening may well be less than many people assume. Again, we simply don’t know, but could easily find out if we wanted to. Nobody (including the economics profession) seems to care.

Of course, a contrarian might find the headline of this post to be unsettling.

Economics, Pethokoukis, Society and Culture, U.S. Economy

‘The Bell Curve’ 20 years later: A Q&A with Charles Murray

The Bell Curve and Charles Murray

October marks the 20th anniversary of “The Bell Curve: Intelligence and Class Structure in American Life,” the extraordinarily influential and controversial book by AEI scholar Charles Murray and Richard Herrnstein. Here, Murray answers a few questions about the predictions, controversy, and legacy of his book.

It’s been 20 years since “The Bell Curve” was published. Which theses of the book do you think are the most relevant right now to American political and social life?

American political and social life today is pretty much one great big “Q.E.D.” for the two main theses of “The Bell Curve.” Those theses were, first, that changes in the economy over the course of the 20th century had made brains much more valuable in the job market; second, that from the 1950s onward, colleges had become much more efficient in finding cognitive talent wherever it was and shipping that talent off to the best colleges. We then documented all the ways in which cognitive ability is associated with important outcomes in life — everything from employment to crime to family structure to parenting styles. Put those all together, we said, and we’re looking at some serious problems down the road. Let me give you a passage to quote directly from the close of the book:

Predicting the course of society is chancy, but certain tendencies seem strong enough to worry about:

  • An increasingly isolated cognitive elite.
  • A merging of the cognitive elite with the affluent.
  • A deteriorating quality of life for people at the bottom end of the cognitive distribution.

Unchecked, these trends will lead the U.S. toward something resembling a caste society, with the underclass mired ever more firmly at the bottom and the cognitive elite ever more firmly anchored at the top, restructuring the rules of society so that it becomes harder and harder for them to lose. (p. 509)

Remind you of anything you’ve noticed about the US recently? If you look at the first three chapters of the book I published in 2012, “Coming Apart,” you’ll find that they amount to an update of “The Bell Curve,” showing how the trends that we wrote about in the early 1990s had continued and in some cases intensified since 1994. I immodestly suggest that “The Bell Curve” was about as prescient as social science gets.

But none of those issues has anything to do with race, and let’s face it: the firestorm of controversy about “The Bell Curve” was all about race. We now have 20 more years of research and data since you published the book. How does your position hold up?

First, a little background: Why did Dick and I talk about race at all? Not because we thought it was important on its own. In fact, if we lived in a society where people were judged by what they brought to the table as individuals, group differences in IQ would be irrelevant. But we were making pronouncements about America’s social structure (remember that the book’s subtitle is “Intelligence and Class Structure in American Life”). If we hadn’t discussed race, “The Bell Curve” would have been dismissed on grounds that “Herrnstein and Murray refuse to confront the reality that IQ tests are invalid for blacks, which makes their whole analysis meaningless.” We had to establish that in fact IQ tests measure the same thing in blacks as in whites, and doing so required us to discuss the elephant in the corner, the mean difference in test scores between whites and blacks.

Here’s what Dick and I said: There is a mean difference in black and white scores on mental tests, historically about one standard deviation in magnitude on IQ tests (IQ tests are normed so that the mean is 100 points and the standard deviation is 15). This difference is not the result of test bias, but reflects differences in cognitive functioning. The predictive validity of IQ scores for educational and socioeconomic outcomes is about the same for blacks and whites.

Those were our confidently stated conclusions about the black-white difference in IQ, and none of them was scientifically controversial. See the report of the task force on intelligence that the American Psychological Association formed in the wake of the furor over “The Bell Curve.”

What’s happened in the 20 years since then? Not much. The National Assessment of Educational Progress shows a small narrowing of the gap between 1994 and 2012 on its reading test for 9-year-olds and 13-year-olds (each by the equivalent of about 3 IQ points), but hardly any change for 17-year-olds (about 1 IQ-point-equivalent). For the math test, the gap remained effectively unchanged for all three age groups.

On the SAT, the black-white difference increased slightly from 1994 to 2014 on both the verbal and math tests. On the reading test, it rose from .91 to .96 standard deviations. On the math test, it rose from .95 to 1.03 standard deviations.

If you want to say that the NAEP and SAT results show an academic achievement gap instead of an IQ gap, that’s fine with me, but it doesn’t change anything. The mean group difference for white and African American young people as they complete high school and head to college or the labor force is effectively unchanged since 1994. Whatever the implications were in 1994, they are about the same in 2014.

There is a disturbing codicil to this pattern. A few years ago, I wrote a long technical article about black-white changes in IQ scores by birth cohort. I’m convinced that the convergence of IQ scores for blacks and whites born before the early 1970s was substantial, though there’s still room for argument. For blacks and whites born thereafter, there has been no convergence.

The flashpoint of the controversy about race and IQ was about genes. If you mention “The Bell Curve” to someone, they’re still likely to say “Wasn’t that the book that tried to prove blacks were genetically inferior to whites?” How do you respond to that?

Actually, Dick and I got that reaction even while we were working on the book. As soon as someone knew we were writing a book about IQ, the first thing they assumed was that it would focus on race, and the second thing they assumed was that we would be talking about genes. I think psychiatrists call that “projection.” Fifty years from now, I bet those claims about “The Bell Curve” will be used as a textbook case of the hysteria that has surrounded the possibility that black-white differences in IQ are genetic. Here is the paragraph in which Dick Herrnstein and I stated our conclusion:

If the reader is now convinced that either the genetic or environmental explanation has won out to the exclusion of the other, we have not done a sufficiently good job of presenting one side or the other. It seems highly likely to us that both genes and the environment have something to do with racial differences. What might the mix be? We are resolutely agnostic on that issue; as far as we can determine, the evidence does not yet justify an estimate. (p. 311)

That’s it. The whole thing. The entire hateful Herrnstein-Murray pseudoscientific racist diatribe about the role of genes in creating the black-white IQ difference. We followed that paragraph with a couple pages explaining why it really doesn’t make any difference whether the differences are caused by genes or the environment. But nothing we wrote could have made any difference. The lesson, subsequently administered to James Watson of DNA fame, is that if you say it is likely that there is any genetic component to the black-white difference in test scores, the roof crashes in on you.

On this score, the roof is about to crash in on those who insist on a purely environmental explanation of all sorts of ethnic differences, not just intelligence. Since the decoding of the genome, it has been securely established that race is not a social construct, evolution continued long after humans left Africa along different paths in different parts of the world, and recent evolution involves cognitive as well as physiological functioning.

The best summary of the evidence is found in the early chapters of Nicholas Wade’s recent book, “A Troublesome Inheritance.” We’re not talking about another 20 years before the purely environmental position is discredited, but probably less than a decade. What happens when a linchpin of political correctness becomes scientifically untenable? It should be interesting to watch. I confess to a problem with schadenfreude.

Let’s talk about the debate over the minimum wage for a moment. You predicted in the book that the “natural” wage for low-skill labor would be low, and that raising the wage artificially could backfire by “making alternatives to human labor more affordable” and “making the jobs disappear altogether.” This seems to be coming true today. What will the labor landscape look like in the next 20 years?

Terrible. I think the best insights on this issue are Tyler Cowen’s in “Average Is Over.” He points out something that a lot of people haven’t thought about: it’s not blue-collar jobs that are going to be hit the hardest. In fact, many kinds of skilled blue-collar work are going to be needed indefinitely. It’s mid-level white-collar jobs that are going to be hollowed out. Think about travel agents. In 1994, I always used a travel agent, and so did just about everybody who traveled a lot. But then came Expedia and Orbitz and good airline websites, and I haven’t used a travel agent for 15 years.

Now think about all the white collar jobs that consist of applying a moderately complex body of interpretive rules to repetitive situations. Not everybody is smart enough to do those jobs, so they have paid pretty well. But now computers combined with machines can already do many of them—think about lab technicians who used to do your blood work, and the machines that do it now. For that matter, how long is it before you’re better off telling a medical diagnostic software package your symptoms than telling a physician?

Then Cowen points out something else I hadn’t thought of: One of the qualities that the new job market will value most highly is conscientiousness. Think of all the jobs involving personal service—working in homes for the elderly or as nannies, for example—for which we don’t need brilliance, but we absolutely need conscientiousness along with basic competence. Cowen’s right—and that has some troubling implications for guys, because, on average, women in such jobs are more conscientious than men.

My own view is that adapting to the new labor market, and making sure that working hard pays a decent wage, are among the most important domestic challenges facing us over the next few decades.

In the book you ask, “How should policy deal with the twin realities that people differ in intelligence for reasons that are not their fault and that intelligence has a powerful bearing on how well people do in life?” How would you answer this question now?

I gave my answer in a book called “In Our Hands: A Plan to Replace the Welfare State,” that I published in 2006. I want to dismantle all the bureaucracies that dole out income transfers, whether they be public housing benefits or Social Security or corporate welfare, and use the money they spend to provide everyone over the age of 21 with a guaranteed income, deposited electronically every month into a bank account. It takes a book to explain why such a plan could not only work, but could revitalize civil society, but it takes only a few sentences to explain why a libertarian would advocate such a plan.

Certain mental skillsets are now the “open sesame” to wealth and social position in ways that are qualitatively different from the role they played in earlier times. Nobody deserves the possession of those skillsets. None of us has earned our IQ. Those of us who are lucky should be acutely aware that it is pure luck (too few are), and be committed to behaving accordingly. Ideally, we would do that without government stage-managing it. That’s not an option. Massive government redistribution is an inevitable feature of advanced postindustrial societies.

Our only option is to do that redistribution in the least destructive way. Hence my solution. It is foreshadowed in the final chapter of “The Bell Curve” where Dick and I talk about “valued places.” The point is not just to pass out enough money so that everyone has the means to live a decent existence. Rather, we need to live in a civil society that naturally creates valued places for people with many different kinds and levels of ability. In my experience, communities that are left alone to solve their own problems tend to produce those valued places. Bureaucracies destroy them. So my public policy message is: Let government does what it does best, cut checks. Let individuals, families, and communities do what they do best, respond to human needs on a one-by-one basis.

Reflecting on the legacy of “The Bell Curve,” what stands out to you?

I’m not going to try to give you a balanced answer to that question, but take it in the spirit you asked it—the thing that stands out in my own mind, even though it may not be the most important. I first expressed it in the Afterword I wrote for the softcover edition of “The Bell Curve.” It is this: The reaction to “The Bell Curve” exposed a profound corruption of the social sciences that has prevailed since the 1960s. “The Bell Curve” is a relentlessly moderate book — both in its use of evidence and in its tone — and yet it was excoriated in remarkably personal and vicious ways, sometimes by eminent academicians who knew very well they were lying. Why? Because the social sciences have been in the grip of a political orthodoxy that has had only the most tenuous connection with empirical reality, and too many social scientists think that threats to the orthodoxy should be suppressed by any means necessary. Corruption is the only word for it.

Now that I’ve said that, I’m also thinking of all the other social scientists who have come up to me over the years and told me what a wonderful book “The Bell Curve” is. But they never said it publicly. So corruption is one thing that ails the social sciences. Cowardice is another.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


Why are there still so many Americans on food stamps?


The number of Americans using food stamps usually goes up when unemployment rises and goes down when unemployment falls. But this economic recovery has been a weird one. The number of food stamp recipients kept rising even after the Great Recession ended and is only now slowly receding from its December 2012 peak. As AEI’s Robert Doar explains: “If this recent recovery had behaved like that of the 1980s, by 2013 only 11.5 percent of the population would have been receiving SNAP benefits: 36 million individuals as opposed to 47.6 million.”

So why has the number of food stamp recipients remains so stubbornly high? Doar offers several possible reasons:

A common answer is that the economy is still very weak. And there may be some truth to that, but it can’t explain the whole difference because the unemployment rate has dropped too far — indicating that jobs are much more available. Or perhaps the jobs which are coming back don’t pay enough to allow many workers to earn enough to no longer be eligible for SNAP benefits? For some time now, many social services leaders including myself have promoted SNAP benefits as a “work support” which can help shore up low wages or limited hours for families with at least one adult worker.

But even that explanation isn’t entirely sufficient for one very important reason – a lot of SNAP recipients, who could be working at least a little, aren’t. Government data show that as many as 10 million working age adults are getting SNAP and reporting no income from earnings. A program can’t be a “work support” if the recipients aren’t working.

Or are they? My experience and many studies of low-income communities suggest that at least some of the SNAP recipients who report no earnings have earnings which they receive off the books.

Then there is the Casey Mulligan effect, named that after the University of Chicago economist who has shown that various safety net programs – absent a work requirement – are allowing people to stay out of work longer than they otherwise would if no benefits were available. In the past, I have been skeptical of this position when it is directed at SNAP benefits alone. It is difficult to see how a voucher for food with an average household benefit of less than $230 per month could provide enough aid to make someone decline looking for work. But if that benefit is combined with other benefits — such as housing assistance, Medicaid or Unemployment Insurance benefits — it is then possible, even predictable, that this layering of programs may lead some to decide that full time, on-the-books employment is not worth the effort.

To some, this is a positive outcome. Layered safety net programs, taken together, provide a minimum level of income that may free families from taking jobs they would rather not have. But there are at least three problems with that position. First, one of the contributors to the slow recovery is a declining labor force participation – the economy won’t grow as fast as we would like if people are increasingly disconnected from it. Second, many studies have shown that having adults in full time work is positive for families in myriad ways beyond the increased income work provides. Third, and most important, families which rely on benefits and not work are almost always still poor and have little chance of moving up.






Want to be CEO of a big company? Being really smart really helps. Also being tall

“CEOs possess considerably higher cognitive and non- cognitive ability and are much taller than the population on average” is the big finding from Match Made at Birth? What Traits of a Million Swedes Tell Us about CEOs by Renée Adams (University of New South Wales), Matti Keloharju (Aalto University School of Business), and Samuli Knüpfer (London Business School) for the Sweden’s Research Institute of Industrial Economics.

And the summary:

This paper analyzes the role three personal traits — cognitive and non – cognitive ability, and height — play in the market for CEOs. We merge data on the traits of more th an one million Swedish males , measured at age 18 in a mandatory military enlistment test, with comprehensive data on their income, education, profession, and service as a CEO of any Swedish company. We find that the traits of large – company CEOs are at par or higher than those of other high – caliber professions. For example, large – company CEOs have about the same cognitive ability, and about one – half of a standard deviation higher non – cognitive ability and height than medical doctors. Their traits compare even more favorably with those of lawyers. The traits contribute to pay in two ways. First, higher – caliber CEOs are assigned to larger companies, which tend to pay more. Second, the traits contribute to pay over and above that driven by firm size. We estimate that 27 − 58 % of the effect of traits on pay comes from CEO’s assignment to larger companies. Our results are consistent with models where the labor market allocates higher – caliber CEOs to more productive positions.

This paper was passed along to me by Tino Sanandaji, a research fellow at the institute, who adds this commentary on how the result relate to the inequality debate:

CEOs of large Swedish companies have an average IQ little above 130 (the average I.Q of Harvard students is estimated a little below 130 as a comparison). They are even more extreme in terms of estimated psychological strength by the military. CEOs of smaller firms are also above average, with an average IQ around 115. To me, this indirectly proves that the CEO-market is highly competitive and driven by skill, not just nepotism and contacts as [French economist and inequality researcher Thomas] Piketty and many on the left claim.

The charts below  from the paper show the distributions of personal traits of CEOs from different size companies and the population at large. The light bars indicate the population whereas the grey and black bars show the distributions for CEOs in firms with less than 100 million and more than 10 billion in total assets, respectively.

Match Made at Birth? What Traits of a Million Swedes Tell Us about CEOs

Match Made at Birth? What Traits of a Million
Swedes Tell Us about CEOs

Match Made at Birth? What Traits of a Million Swedes Tell Us about CEOs

Match Made at Birth? What Traits of a Million
Swedes Tell Us about CEOs

Match Made at Birth? What Traits of a Million Swedes Tell Us about CEOs

Match Made at Birth? What Traits of a Million
Swedes Tell Us about CEOs

Pethokoukis, Economics, U.S. Economy

Atlanta Fed’s Lockhart: The ‘second machine age’ is here, and workers better get ready for massive automation

Image Credit: Shutterstock

Image Credit: Shutterstock

The Federal Reserve has been behind the curve on the issue of automation and jobs. When Fed chairman Ben Bernanke mentioned “robotics” in a June 2013 commencement address, he was the first central-bank boss to use the word in a speech since Alan Greenspan in 2000. But the Fed is catching up. Back in January, economists John Fernald of the San Francisco Federal Reserve and Charles Jones of Stanford’s business school wrote a paper, “The Future of U.S. Economic Growth,” that offered some fascinating speculation on how artificial intelligence and machine learning will affect workers.

Along those lines, Atlanta Fed President Dennis Lockhart has this to say in a new speech:

A recent McKinsey article entitled “The Great Decoupling” starts with the statement, “As machine learning advances at exponential rates, many highly skilled jobs once considered the exclusive domain of humans are increasingly being carried out by computers.” The same article quotes from a recent book by Erik Brynjolfsson and Andrew McAfee called The Second Machine Age.

That’s a useful phrase, so I’ll borrow it. We can quibble about the meaning of highly skilled, middle skilled, and low skilled, but I’ll argue that the second machine age has seen the automation of many middle-skill jobs. It has contributed to the phenomenon of job polarization and middle-class income stagnation. Job polarization refers to the decline of mid-level positions relative to higher-level and lower-skilled jobs.

We are seeing a wide range of relatively low- and middle-skill vocations under siege. As examples, I would point to production-line manufacturing positions, waiters, retail checkout clerks, hotel check-in personnel, and customer service staff. Maybe, before long, the list will include drivers.

The process of substitution will likely be gradual, but I find it hard to believe the trend will reverse. If you accept as reality the persistence and growth of automation, robotics, production algorithms, and digitization in general, I don’t think it’s difficult to imagine what jobs will increasingly require as hard skills and consequently what strategic workforce development will entail.

Here are some thoughts: Most workers will deal with a digital interface device of some kind. Familiarity with technology and the literacy and numeracy skills to operate such a device will be essential.

In a world where much that is routine and repeatable is done by machine, human work will call for problem analysis and troubleshooting, critical thinking where judgment and discretion are required, and fine, customized work involving customer or colleague interaction and communication. Making emotional connections is human work. Workers will need lifelong learning skills to adapt to changing job requirements dictated by the pace of substitution of technology for what they used to do.

Education is an important policy response. But this new machine age will also mean a rethink of tax, regulatory, and welfare policy, too. At least some policymakers are starting to recognize this. And how will automation affect monetary policy? Lockhart didn’t say, unfortunately.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Economics, Pethokoukis, Taxes and Spending

Bill Gates has a big idea for tax reform — and it’s excellent

Image Credit: Jay Wescott

Image Credit: Jay Wescott

On his gatesnotes blog, Microsoft cofounder and philanthropist Bill Gates offers his thoughts about inequality, particularly concerning economist Thomas Piketty’s Capital in the Twenty-First Century. Among his insights: (a) extreme inequality is a societal problem, and government has a ameliorative role, (b) Piketty underplays how much of American superwealth comes from entrepreneurs rather than passive rentiers, (c) inequality analysis need to look at consumption data, not just wealth and income, (d) Piketty understates the many forces that decay wealth. Gates:

Take a look at the Forbes 400 list of the wealthiest Americans. About half the people on the list are entrepreneurs whose companies did very well (thanks to hard work as well as a lot of luck). Contrary to Piketty’s rentier hypothesis, I don’t see anyone on the list whose ancestors bought a great parcel of land in 1780 and have been accumulating family wealth by collecting rents ever since. In America, that old money is long gone—through instability, inflation, taxes, philanthropy, and spending.

Gates, perhaps not surprisingly, also disagrees with Piketty’s inequality fix: extremely high wealth taxes:

I agree that taxation should shift away from taxing labor. It doesn’t make any sense that labor in the United States is taxed so heavily relative to capital. It will make even less sense in the coming years, as robots and other forms of automation come to perform more and more of the skills that human laborers do today.

But rather than move to a progressive tax on capital, as Piketty would like, I think we’d be best off with a progressive tax on consumption. Think about the three wealthy people I described earlier: One investing in companies, one in philanthropy, and one in a lavish lifestyle. There’s nothing wrong with the last guy, but I think he should pay more taxes than the others. As Piketty pointed out when we spoke, it’s hard to measure consumption (for example, should political donations count?). But then, almost every tax system—including a wealth tax—has similar challenges.

Spot on. Under one version of a progressive consumption tax, individuals would pay tax on their wages only, not on any income from saving. And companies could immediately write off their investments, rather than depreciating them over a period of years. A progressive consumption tax could boost GDP by around 6% in the long run. As AEI’s Alan Vaird explains, consumption taxes promote economic growth because they avoid a central flaw of income taxes, the penalty on saving and investment. A progressive consumption tax would a vast, pro-growth improvement over the current code. And given that some folks on the left like the idea, too, it might actually have some political legs if given a big push in Washington.

Update: Here is Bill Gates at AEI making a similar point on the consumption tax: