Labor and Employment

The transformation of the U.S. energy market created by the new extraction techniques for oil and gas has some predicting a renaissance for U.S. manufacturing based on lower, stable energy costs. In today's Policy Initiative Spotlight, Renewing America contributor Steven J. Markovich examines those claims and argues that the impact will likely be modest. The United States is experiencing a boom in oil and natural gas production. High global oil prices and new technologies have spurred the development of unconventional sources such as deepwater oil drilling and hydraulic fracking. The rapid adoption of these new extraction techniques has roiled energy markets, and the environmental effects are still being determined. But will they improve U.S. competitiveness? According to the Energy Information Administration (EIA), in the past three years domestic production increases have outpaced demand increases. Domestic crude oil production increased 5.9 percent, while demand only increased 0.2 percent. During this period, world oil prices rebounded after crashing with the start of the recession; oil futures are trading at more than double their price in January 2009. Oil trades on a global market, so a surge in domestic production is unlikely to shrink oil prices in the United States, or increase national competitiveness. Additionally, many unconventional U.S. sources of oil are only economical with high prices. Natural gas is a regional, not a global market. As a gas at normal temperatures and pressures, natural gas is difficult to trade overseas, so prices are more localized. According to the EIA, the United States produces over 90 percent of the natural gas it consumes, and imports most of the remainder by pipeline from Canada. Liquefied natural gas (LNG) does allow global trade, but that technology requires substantial infrastructure investment in specialized terminals to chill natural gas until it becomes a liquid. The United States currently has few LNG terminals, and LNG was responsible for less than 1 percent of the U.S. market. Domestic natural gas production rose by 11.6 percent, and demand rose 7.3 percent over the past three years; much of the growth in natural gas consumption is in new electrical plants. This growth in production was due to an explosion in the production of shale gas through hydraulic fracking. According to the EIA’s Annual Energy Outlook 2012 shale gas’ share of U.S. production doubled from 15 percent to 30 percent over that period; the EIA predicts the United States will become a net exporter of natural gas by 2021. Shale gas growth and this year’s mild winter have pushed U.S. natural gas prices have down by more than half since January 2009. Meanwhile, Japan’s idling of its nuclear plants has driven LNG prices in Asia to more than ten times U.S. prices. This may give the United States a competitive advantage in energy intensive industries. The size of this advantage—particularly for manufacturing—was the subject of a recent blog post by CFR’s Michael A. Levi. Levi cited reports that indicated only one tenth of U.S. manufacturing industries had energy as more than 5 percent of the cost component. Petrochemical manufacturing is one industry that could experience high growth, because natural gas could be used as a feedstock for many products. But this industry is relatively small and employs around 24,000 in the United States, according to the Bureau of Labor Statistics. It is a relatively high wage occupation, however, with an average annual pay of $103,000. Increased domestic production can also reduce the trade deficit by displacing imports. Over the past three years, the value of net natural gas imports fell from $10.3 billion to $7.2 billion, according to the EIA. Rising prices have caused the value of net oil imports to rise, even though the United States imports almost 12 percent fewer barrels of crude oil than it did in 2009, a $41 billion dollar savings at current prices. Greater domestic production could also spur job creation in supporting industries. Levi’s recent post pointed to an IHS-CERA report that argued that in 2010, shale gas supported a total of 71,000 ancillary jobs, and projected that would rise to 124,000 by 2020. Simply put, the expansion of domestic oil and gas production is not—itself—likely to lead to a manufacturing boom in the United States. While firms will enjoy lower electricity and heating bills from lower natural gas prices, few industries will see a substantial decrease in production prices because energy is usually a small portion of total costs. However, shifting from foreign to domestic fuel sources trims the trade deficit, and boosts related industries at home.

Thirty U.S. states projected budget shortfalls for FY 2013, and the options for bridging these gaps without major cuts to services such as education or transportation are dwindling. Dollars from the federal Recovery Act, which provided some fiscal relief for state treasuries over the past few years, largely ran dry at the end of 2011. So many statehouses looking for much-needed revenues, but loathe to hike taxes, are examining whether to legalize or expand existing gambling or "gaming" within their borders. Twenty-three states currently permit some form, whether a simple lottery, so-called "racinos" (gambling race-tracks), or full-fledged casinos. States often pursue them in this order. In March, New York Governor Andrew Cuomo reached a handshake agreement with legislators to legalize Vegas-style casinos in the Empire State. The proposed deal would amend the state constitution (Reuters), which currently only permits gambling at Native American establishments, such as Foxwoods, and designated racinos like the Aqueduct Racetrack in the borough of Queens. Cuomo, like many politicians pushing similar proposals, trumpeted the move as a victory for local economic development, "This is a process that will ultimately put thousands of New Yorkers to work, drive our economy, and help keep billions of dollars spent by New Yorkers on gaming in the state," he said. But many economists say such claims are contingent on a number of factors and come with several often understated offsets and costs. Casinos often "cannibalize" other forms of spending that contribute to state coffers (including other forms of gambling, like the lottery) and can divert money from more productive economic activity. For instance, money lost at the blackjack table could just as easily have been spent on a consumer good or other form of entertainment. It could also simply have been saved for investment. New casinos also typically entail higher state infrastructure costs and increases in funding for gambling regulatory bodies. Critics also assert that casino gambling constitutes a regressive tax (NYT) that takes money from the same citizens who can least afford it. Warren Buffett has referred to gambling as a “tax on ignorance.” Some, of course, may gamble away money that would have otherwise been spent on food or housing. Analysts encourage policymakers to know their local market before opening the doors to any new gambling facilities. A top international city like New York may stand to attract new gambling dollars from foreign tourists as well as capture revenues from locals that currently head across the border to Niagara Falls or Atlantic City. But a state like Kentucky, which is also looking at legalizing casinos, may not be so lucky. While Kentucky casinos may keep local gamblers from fleeing across the Ohio River to the craps tables in Indiana, they're unlikely to establish a gambling "destination" in the state. As more and more states legalize casinos, a zero-sum paradigm begins to emerge. States and localities that count on casino taxes will inevitably suffer, as the gamblers they once relied on are lured across borders.  A recent study by McKinsey & Co. says that the debt-ridden city of Detroit (WSJ) stands to lose some $30 million in annual casino tax revenue by 2015, as newly-legalized casinos in neighboring Ohio take root. New Jersey (Atlantic City) is experiencing a similar plight following Pennsylvania's decision to legalize casinos in 2010, and, of course, stands to suffer more as the roulette wheels begin to spin in New York.

Congress this week has been debating the growing debt burden faced by American college students. Today’s “Policy Initiative Spotlight” examines the recent expansion of free, online university education led by several elite institutions. Renewing America contributor Steven J. Markovich examines some of the newest endeavors, which could multiply the impact of America’s universities and help to control costs for students. Despite an underperforming K-12 education system—the subject of the CFR Independent Task Force on U.S. Education Reform and National Security—U.S. universities continue to lead world rankings; in 2011, fifteen American universities placed in the top twenty-five according to U.S. News and World Report. High performing universities improve U.S. competitiveness by strengthening the workforce and anchoring innovation clusters. Several premier institutions have launched initiatives to use online education to spread their lessons far beyond campus. In May 2012, Harvard and MIT debuted edX, an open source non-profit joint venture. EdX will offer free online classes and advance research on how technology can help on-campus and online students learn. Each university will contribute $30 million and course materials. While the coursework is free, the universities are contemplating charging for certificates of course completion. EdX is based on the technology of MITx, MIT’s online education platform launched in December 2011.  MITx was designed to enrich the education of full-time students, and allow millions more to learn online. EdX built upon this approach to create student-paced learning through video lectures, collaborative online labs, and online testing with real-time feedback and student ranked Q&A’s.  The edX platform is open-source and other institutions are invited to join. The universities say they believe that online education will “never replace the traditional residential model of undergraduate education.” They don’t perceive a significant brand and market cannibalization risk, which is understandable given their single digit acceptance rates. But EdX already faces competition from for-profit startups backed by Silicon Valley venture capitalists. Udacity has its roots in Stanford’s 2011 experiment to put its introductory computer science course online; 160,000 students signed up and 23,000 students passed. In-class attendance dwindled from 200 to around 30 students as on-campus students opted to learn online. Sebastian Thurn, who co-taught this course, left Stanford to co-found Udacity. Thurn’s intent is for Udacity to become a free premier online university: “The biggest problem [in higher education] is cost.  Student loans are going up 6 percent a year whereas the return on that education is going down. We’re clearly in a bubble.” Regarding Udacity’s potential impact, he said: “You could get an entire computer science education for free right now,” he said. “You could take your tablet with you, you learn on the bus, and take these minutes and learn how to learn for a lifetime.” Another for-profit startup is Coursera, which offers free access to course content from affiliated universities: Stanford, Princeton, University of Pennsylvania, and University of Michigan.  Coursera raised $16 million in venture capital investment in April 2012. Co-Founder Andrew Ng explained that “[Raising capital] “allows us to focus for a while on building an exceptional platform without having to worry about revenue.” While both Coursera and Udacity offer free course materials, neither has explained their ultimate revenue model. Observers have speculated that they could charge for access to supplemental learning materials or to provide certification of achievement. While these efforts will improve access to college and graduate level learning, there are also similar efforts to improve K-12 education. Since 2006, the non-profit Khan Academy has provided free online videos covering a wide range of topics, from algebra to the French Revolution. In March 2012, TED launched its educational initiative, TED-Ed, with original educational videos designed to spark curiosity. The initiative entered its second phase with a website that allows teachers to create customized online lessons. Using the free “Flip this Lesson” service, teachers create can custom lessons for any video on TED or YouTube. Teachers can track the performance of individual students through multiple choice quizzes and free response questions, and target classroom instruction to reinforce difficult concepts.

Statistics South Africa reports that the country’s unemployment rate rose to 25.2 percent during the first quarter of the year. That is up from 23.9 percent at the end of 2010 and 21.8 percent in 2008, the last year of the boom. If those no longer actively looking for work are included, Statistics South Africa states that the unemployment rate is 36.6 percent, up from 35.4 percent at the end of last year. In the short term, construction, manufacturing, and some public sector employment is down, reflecting a shrinkage in exports to the European Union that, in turn, reflects the ongoing economic crisis within the Euro zone. I have just returned from South Africa where I found unemployment to be a major concern for almost everybody, just as it is in the United States. But it is much worse there than here. According to Statistics South Africa, of those currently unemployed, 60 percent have no matric (roughly the equivalent of a high school diploma), 68 percent have been looking for a year or longer, and 44 percent have never worked. In South Africa, the labor market is particularly rigid. According to BusinessDay, the World Economic Forum ranks South Africa 139 out of 142 countries: 139 on hiring and firing practices, 138 on lack of flexibility in wage setting, and 138 in labor/employment relations. Labor inflexibility is a big subject, and many South Africans believe it is the root cause of the country’s high unemployment. After all, the trade unions were at the forefront of the anti-apartheid struggle, and the Congress of South African Trade Unions (COSATU) along with the South African Communist Party (SACP) is politically allied with the governing African National Congress (ANC). Also a drag on employment is the shortage of trained and skilled workers, itself a reflection of the shortcomings of apartheid-era education that has not yet been addressed successfully by the post-apartheid government. For example, under apartheid, apprenticeship programs were used to steer non-whites into certain occupations. In effect, such programs were associated with apartheid racial restrictions on job opportunities. Accordingly, Mandela’s government did away with apprenticeship programs, but did not replace them with an alternative. The result, so I was told, is a shortage of workers in most of the skilled trades. Patricia de Lille’s Democratic Alliance government in Cape Town has in fact inaugurated a city-based apprenticeship programs to develop the skilled cadre that the city needs. (The Democratic Alliance is the formal opposition in parliament to the governing African National Congress government led by Jacob Zuma.) South Africa is now a major immigration destination, not least from Zimbabwe. Many of these new arrivals do have the skills that are in short supply. Accordingly, they find jobs, but that can engender resentment among unemployed South Africans lacking the necessary education or training. Like so much else in South Africa, high unemployment owes much to apartheid but also to the unintended consequences of post-apartheid policies.

In the competition to attract and retain global corporate investment, tax policy is often seen as one of the most immediate and potent levers that legislators can pull. This is especially true given the ability of multinational companies to move business and capital across borders. These transnational flows often take with them the jobs, the R&D, and the innovations that drive and sustain long-term growth. Intellectual property (IP)—including copyrights, trademarks, and patents—is particularly mobile as an intangible asset. In April of next year, the United Kingdom will become the latest country to introduce a corporate tax incentive known as a “patent box,” a policy that grants companies a significant tax break on profits attributed to IP. The policy's name refers to the box that is physically checked on the tax form. The UK patent box, which hopes to attract innovative industries and all their economic fruits, will allow corporations to apply a reduced 10 percent rate to income from patents- versus a headline rate of 23 percent. Patent box policies have also been deployed recently in Holland and Belgium (2007), as well as in Spain and Luxembourg (2008). The Dutch “innovation box” goes even further by including a broader class of IP and a lower rate of 5 percent. As other nations jockey for position, the United States has slipped well behind. The current U.S. corporate tax regime hasn’t undergone a major facelift since 1986. And the current system is doubly flawed, combining the highest top tax rate in the world, at 35 percent, with a host of complex subsidies and loopholes that add to inefficiency. While both parties have acknowledged a need to cut the top rate and end many of the tax subsidies, one incentive that most policymakers—including President Obama and Mitt Romney—would like to preserve is the Research and Experiment (R&E, sometimes R&D) tax credit. Most economists agree that unlike many other corporate tax incentives, the R&D credit deserves special treatment because it provides a wellspring of growth and has social returns that are not captured by businesses—a market failure. But despite the near consensus, Washington has proved unable to make the R&D tax credit a permanent fixture of the U.S. code. It has expired and been renewed thirteen times (often retroactively) since 1981, sunsetting yet again last January. The impermanence of the credit in the U.S., as with many tax policies, has made it less effective as businesses are reluctant to change behavior given uncertainty. "What’s happened traditionally every year is that in the fourth quarter or maybe even beyond the fourth quarter, the R&D credit is enacted and we have to then figure out the deduction for the whole year’s credit," said Bruce Lassman, vice president of international tax at IBM. "So that’s kind of a nerve-wracking thing. It’s difficult to manage your affairs when you have a legislative situation like that.” While there is broad consensus that the R&D tax credit should be made permanent, the  idea of adding a patent box tax incentive has not been part of the debate in the United States. If adopted in concert with the R&D credit, a U.S. innovation box could supply a back-end incentive in the so-called innovation value chain. In other words, it would target the back end, the income from innovations, while the R&D credit incentivizes the front end, or the underlying research. While the latter is more important because the R&D provides spillover social benefits, the revenue incentive provided by an innovation box would likely sweeten the deal and encourage companies to maintain or expand IP-intensive activities in the United States. There are big questions, however about the costs of such an approach.  An innovation tax incentive, depending on the reduced rate and a host of other specifics, would certainly hit the Treasury hard if it's not implemented as part of broader reforms to the tax code.

Today's "Policy Initiative Spotlight" focuses on the sweeping education reforms taking place in the state of Louisiana, which is fast becoming a kind of national laboratory for proponents of choice-based school reforms. Renewing America contributor Steven J. Markovich looks at the initiative, and what's at stake for the larger debate over school reform. The greatest long term threat to U.S. economic vitality may be the failure of the K-12 educational system to prepare students to compete in the global economy. While underperforming K-12 schools are a national concern, most control is exercised at the state and local levels. On April 18, Louisiana Governor Bobby Jindal signed legislation into law overhauling Louisiana’s educational system. Prominent aspects include creating a statewide voucher program, empowering superintendents to deploy “merit pay,” and allowing a majority vote of parents to transfer control of poor performing schools to the state, called the “parent trigger." The most hotly debated issue is vouchers. The legislation will extend the New Orleans voucher program statewide and raise the income threshold to include more middle class families; families of four earning roughly $57,000 or less should qualify. While 1,800 New Orleans students are attending schools with vouchers, an estimated 380,000 Louisiana students could be eligible, though state leaders expect only a few thousand to apply initially. The Friedman Foundation for Educational Choice and other proponents argue vouchers improve educational opportunities for children by giving parents the freedom to choose their child’s school and encouraging competition among public and private schools. Parents of voucher students seem to agree; 93 percent said they were satisfied in a survey by the voucher supporting Louisiana Federation for Children. Not everyone is so sanguine. Andrew Vanacore of The Times-Picayune argues that while parental support is strong, there are not enough data to judge the impact on student performance. He cites mixed results from Louisiana test data, and studies of other voucher programs. Education pundit Diane Ravitch—who participated in Renewing America’s Expert Roundup on Education Reform and U.S. Competitiveness—recently wrote a blog entry on the legislation at EducationWeek, in which she stated that “[Louisiana State Superintendent John White] had no substantive response to my research review showing that charters, vouchers, and merit pay don't produce better education.” There is considerable debate on the other measures of the Louisiana legislation. Proponents of merit pay—paying teachers according to performance or marketable skills—argue that it allows schools to reward the best teachers, and to attract people to the teaching field in subject areas such as science where there is greater competition in the general economy. Washington DC’s merit pay program is touted as an important way to keep excellent young teachers teaching. The major public teacher unions, such as the American Federation of Teachers, generally oppose merit pay in favor of traditional salary schedules. Opponents of merit pay often claim that student test scores—an important component of most merit pay formulas—do not accurately capture student achievement and teacher performance. The Louisiana legislation also gives parents the power to hand over operation of a failing school to the state controlled Recovery School District (RSD) with a majority vote. Governor Jindal argued for the “parent trigger” by stressing how it empowers parents: "This is about making sure all parents have an opportunity to get a quality education for their children." Detractors are concerned that charter operators may coax parents into voting for a takeover to create a business opportunity, because most RSD schools become public charters. The Louisiana experience will be closely watched by the rest of the nation. The enactment of these policies may help provide data to better inform the debates over school choice and is likely to influence the reform efforts of other states.

As dozens of towns and cities across the country—from Stockton, CA, to Providence, RI—stare down the precipice of insolvency, some states are taking bold action to protect their prized bond-ratings and keep their municipalities out of chapter 9 bankruptcy. The budgets of local governments nationwide have been squeezed in recent years through a convergence of weak tax revenues, declining state dollars, and runaway entitlements. In an excellent piece for Vanity Fair, Michael Lewis documents the trend and details the acute plight of some of California's most distressed municipalities— namely Vallejo and San Jose. A common thread is the cities' losing battle to meet the pension obligations of city workers. "Our police and fire-fighters will earn more in retirement than they did when they were working," said San Jose Mayor Chuck Reed. In March of last year, the State of Michigan took the initiative on this front and passed a controversial piece of legislation—known as Public Act 4 (aka the "local government and school district fiscal accountability act")—that enhances the state's power to intervene in local fiscal matters. Most notably, the law allows the governor, Rick Snyder (R), to appoint an emergency financial manager (EFM) with the power to depose local officials and void union contracts, if a municipality meets certain criteria of financial stress. Five local governments in the state are currently administered by EFMs, with one expected to exit receivership this year. The specter of EFM intervention has loomed most prominently over the beleaguered city of Detroit. The Motor City "has come to redefine urban collapse," according to some observers, crumbling under the weight of a $200 million budget deficit and over $13 billion in structural debt (The Atlantic). On Wednesday, city officials narrowly beat a deadline set by Gov. Snyder to reach a "consent agreement" regarding the management of Detroit's finances. The eleventh-hour deal will stave off a Lansing-appointed receiver (Detroit Free Press), at least for now, but requires the city to renegotiate union contracts and share decision-making on all budget matters with a financial advisory board picked jointly by the governor, mayor, and city council. The agreement also clears the road for the cash-strapped city to refinance its massive debt. Critics of the law have denounced EFMs as a threat to democracy and a dangerous precedent, while proponents see them as necessary "tools to keep [the state's] school districts and cities from wallowing in financial trouble." (The Week) Governor Snyder, for his part, has indicated his reluctance to impose an EFM on Detroit, but has also stated that "bankruptcy shouldn't be on the table." While it seems the threat of an EFM has helped Lansing gain the upper hand in its fiscal dealings with municipalities like Detroit, it remains to be seen whether Public Act 4 (NYT)—in its helping create interim political bodies like the financial advisory board—is really forging progress or just helping to delay an inevitable state takeover or chapter 9 bankruptcy. At a recent conference on municipal distress, Robert G. Flanders, who ushered Central Falls, RI, through its bankruptcy, spoke on how best to cut through the gridlock of union contract renegotiations. "All of that leverage shifts once you have the gumption to pull the Chapter 9 trigger (NYT)," he said, "that produces agreements quicker and more effectively than otherwise."

Renewing America is launching a new feature today called the “Policy Initiative Spotlight.” We will identify and highlight important policy innovations, noteworthy experiments, or little-noticed success stories that could play a positive role in rebuilding U.S. economic strength. Many of these will be state or local efforts, though at times we will also write about international developments that have direct relevance for the United States. Our first post, written by Renewing America contributor Steven Markovich, who holds an MBA from the University of Chicago’s Booth School of Business, focuses on Chicago Mayor Rahm Emanuel’s announcement this week of an ambitious $7 billion infrastructure plan for the city. “The program integrates investments in Chicago’s roads, pipes, airports, parks, schools, public buildings, and mass transit systems. It’s a striking commitment at a time when states and cities are cutting infrastructure budgets and Congress continues to debate a successor to the transportation infrastructure spending bill that expired over two years ago. Emanuel says the projects will be paid for through user fees, cost cutting, and energy and other savings rather than through higher property or sales taxes. Chicago’s plan is expected to create 30,000 jobs, nearly 6,000 from a $1.4 billion project at O’Hare International Airport—a hub for United and American Airlines—to add two new runways and cut delays by 80 percent in 2015. Another $1.4 billion would go to water systems; 900 miles of water pipes responsible for 3,800 leaks in 2011 would be replaced, along with 750 miles of sewage pipe, while two water filtration plants would receive upgrades. U.S. water systems earned “D-” scores in 2009 from the American Society of Civil Engineers and are in critical need of upgrading. Other major projects include $1 billion for the Chicago Transit Authority (CTA). These funds would be used to establish rapid transit bus lines and to repair over 100 elevated train stations. While a good start, currently there are no plans to fund extensive station modernization or to extend major lines; these CTA proposals would cost $3.4 to $5.4 billion more. Remaining programs include creating new parks, and renovations to K-12 schools and Chicago’s community college system. A program to retrofit municipal buildings to reduce energy costs by 25 percent within three years will cost $225 million. This last program is particularly interesting because it is the first to be funded by the Chicago Infrastructure Trust, a signature initiative of Emanuel’s administration. Announced earlier this month by Emanuel and former president Bill Clinton, the trust is designed to use private capital to help fund  public infrastructure projects. The trust will tailor a financing structure for specific programs, using a mix of taxable and tax-exempt debt, equity investments, bond issues and other means. This approach would break with past Chicago efforts to involve the private sector in infrastructure. Under Mayor Richard M. Daley, Chicago leased public goods such as the Chicago Skyway and all street parking to private operators under long-term deals. These leases freed up city funds, but proved unpopular with the public, and a $2.5 billion deal to lease Midway Airport fell apart. The trust, in contrast, would ensure that ownership and control remained with Chicago. The trust is cooperating with five major financing organizations, which collectively have an initial investment capacity above $1 billion. However, those funds will only be deployed if projects’ financial structure meets the approval of investors. Once a project is constructed, its returns will be used to pay back the trust and private investors. Similar initiatives to deploy private capital are under development elsewhere. Three bills to establish a national infrastructure bank have been introduced in Congress. In New York, Gov. Cuomo is promoting a state infrastructure bank to be capitalized with over $232 million in state and $917 million in federal funds that will leverage private investment to fund a proposed $15 billion infrastructure plan.”