Archive - Actually Tax Cuts Don’t Seem to Have Much Impact on Economic Growth

It has been something of an article of faith among conservatives that the solution to America’s problems is in smaller government and lower tax rates. The argument on taxes goes something like: ‘We need to unleash the wealth creators, who stimulated by the prospect of more income (due to lower tax rates), will create wealth for all of us.’ And, that any tax increase — for even the wealthiest taxpayers — would have catastrophic consequences.

Actually the post World War II American economy provides a nice empirical test of this hypothesis — the maximum marginal income tax rate gradually declined from about 90% to about 35%. Shouldn’t this decline have lead to an explosion of economic growth as our wealth creators were unleashed? Sorry, Sarah Palin… it didn’t.

During the ultra high tax 1950s (top marginal income tax rate of 90%), the United States had some of its best real economic growth (over 4%/year). And, for the decade where we had our lowest marginal income tax rates — we had our worst real economic growth (about 1.5%/year). (See Table 1 below.)

So what happened? Well, first of all (Spoiler Alert! The following will upset ideologues!), the real world is complicated. Taxes are one part of the American economy, but by no means the only driver of our decision making process. People are motivated by lots of things — not just money. In all the recent discussions about Steve Jobs, I can’t recall a single quote, anecdote or story that suggested income tax rates had any influence on Steve Jobs’ behavior. Does anyone really believe that if US income tax rates had been slightly higher Bill Gates would have founded Microsoft in Singapore (or some other low tax center)? As another example — Warren Buffet, who has been an active investor from the 1950s to today, certainly could have moved offshore when tax rates were higher. He didn’t.

Also, keep in mind that economic growth is not driven just by entrepreneurs and their hard work (okay, I’ve now simultaneously infuriated both the left and the right). In the 1950s, the global economy was emerging from World War II and the United States was the only industrial economy relatively unscathed. With better policies (arguably, the then current 90% tax rate was too high), we might have had even higher economic growth rates in the 1950s. But, our strong economic growth throughout the 1950s was helped by a strong tail wind (from outside the US).

In the early 21st century, we suffered relatively anemic economic growth (despite much lower tax rates), but we also faced a far more competitive world and a disastrous real estate bubble. It is not clear that lower income tax rates would have had much impact. But higher income tax rates and other policy adjustments might have avoided the real estate bubble from which we are now recovering.

Finally and most importantly, it is not just how the money is raised, but how it is spent. Tax revenues that improve infrastructure, and pay for basic research and education are investments in our future, and will foster economic growth. Tax cuts that primarily favor high end consumers might stimulate the purchase of luxury goods (McMansion anyone?), but may not contribute much to overall economic growth.

My point, and I do have one — is that ideology is a poor substitute for pragmatic approaches to complicated problems. In fact the evidence that tax rates influence economic growth in any way is equivocal at best. A myriad of other factors are involved. Simply reducing tax rates, and primarily for the wealthy, may hinder — rather than enhance our economic recovery.

Table 1: Comparison of mean marginal tax rates and mean real GDP growth rate

2011-10-25-Screenshot20111025at4.50.07PM.png

Steven Strauss was the founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation. He will be an Advanced Leadership Fellow at Harvard University for 2011-2012. He has also worked as a management consultant for McKinsey and has a Ph.D. in Management from Yale University. You can follow him on Twitter @steven_strauss.

Sources: The real GDP growth rates are from www.wolframalpha.com; the income tax rates are from the National Taxpayers Union.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

A version of this post originally appeared at the Huffington Post: http://www.huffingtonpost.com/steven-strauss/tax-cuts-economic-growth-_b_1031376.html


A Disturbing Glimpse of GOP’s Low Tax/Limited Regulation Utopia

Recently, the US Chamber of Commerce (Chamber) ranked Tennessee No. 1 among our 50 states for its low taxes and limited regulatory environment, and recommended Tennessee as a role model for the nation.

The Chamber, Tea Party, GOP, Grover Norquist, Mitt Romney and Newt Gingrich tell us that low taxes and limited regulation will solve America’s economic problems, including giving us a balanced budget. Indeed, the Republicans are making a major push to eliminate or reduce state income taxes across the US. Norquist (and others) claim that government programs are a waste, no job is ever created by government, and so on. Tennessee, under their theory, should be a low tax/limited government utopia.

Instead, Tennessee’s results imply — ‘you only get what you pay for.’ Let’s benchmark Tennessee’s performance against the rest of the US.

  • Economic: Low taxes and limited regulation haven’t resulted in an economic boom for Tennessee. Among American states, Tennessee ranks 48th in median household income, and 35th for its high unemployment rate. Sadly, Chamber members aren’t flocking to hire people in Tennessee (see Appendix, below, for details).

Proponents of the ‘low tax/limited regulation strategy’ tell us it’s not just about money, but also about quality of life. So let’s see how Tennessee does on some basic metrics for Health, Personal Safety, and Education:

  • Health: Tennessee ranks 45th among American states for life expectancy, and infant mortality is 30% above the national average (Appendix below).
  • Personal Safety: Tennessee’s highway fatality rate is 30% above the national average. Its murder rate is 50% above the national average (Appendix below). Maybe hiring a few more police officers would help?
  • Education: Education is one of the core functions of local government, and as America moves towards a hi-tech future — preparing the next generation should be a priority. Instead, Tennessee does poorly on both quality and quantity metrics. Particularly alarming are Tennessee’s significantly lower percentages of high school, college and advanced degree graduates, relative to national averages (Appendix below).

At an overall level among American states, Tennessee was ranked 44th — where 50th is worst-performing — by the American Human Development Index (Index). The Index was developed:

'as an alternative to simple money metrics. It is an easy-to-understand numerical measure made up of what most people believe are the very basic ingredients of human well-being: health, education, and income.' Source: The American Human Development Project, 2012.

Correlation is not causality. But it appears that Tennessee residents receive fewer and lower quality services from their government and private sector — because they spend less money on their government and have a limited regulatory environment.

Oliver Wendell Holmes, Jr remarked, ‘Taxes are the price we pay for a civilized society,’ and the word ‘price’ is worth emphasizing. We are a free society and can choose how much government we want to buy, and how much regulation we’re willing to accept.

My point isn’t that the people of Tennessee have made bad choices, or that other states have made better choices. But when a politician tells you s/he can cut your taxes and reduce regulations — without increasing the budget deficit, and/or reducing the quantity (or quality) of services — that politician is likely a liar.

Americans pay ~$2,200/person per year in state taxes; Tennessee residents pay ~$1,700/year.

  • If you live in Tennessee, would you vote for a candidate who asked you to pay $500/year more in taxes, but would improve state results — with a combination of increased services and regulations — to, at least, meet national averages?
  • If you live in another state, would you vote for a politician who proposed cutting your taxes by $500/year, but would cut services and regulatory enforcement to make that happen?
  • Do you disagree with my analysis? Do you think other factors are affecting Tennessee’s performance relative to national averages?

I welcome your comments!

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University and over 20 years private sector work experience. You can follow him on twitter at: @Steven_Strauss.

Appendix with Sources
Economic:

  • Median Household Income: Tennessee’s ~$40,000 (ranked 48th). National average is (~$51,000), and best performing state (New Hampshire) is ~$66,000.
  • Unemployment Rate (December 2011): Tennessee’s ~8.7% (ranked 35th). National average is 7.7%, and best performing state (North Dakota) is only 3.3%.

Health

  • Life Expectancy: Tennessee’s is 75 years (ranked 45th). National average is 78 years, and best performing state (Hawaii) is 82.
  • Infant Mortality Rate (measured as deaths of infants under 1 year old per 1,000 live births): Tennessee’s is 8.9 (ranked 44th). National average is 6.9, and best performing (Washington State) is 5.1.

Personal Safety

  • Highway Fatalities Measured as Deaths per 100 Million Vehicle Miles Travelled: Tennessee’s is 1.4. National average is 1.1, and best performing state (Massachusetts) is .6.
  • Murder Rate per 100,000 of Population: Tennessee’s is 7.4. National average is 5.1, and best performing state (New Hampshire) is .9.

Education

  • Average Mathematics Scores for 8th Graders: Tennessee’s is 275. National average is 283, and best performing state (Massachusetts) is 299.
  • Educational Attainment for Persons 25 years and older: 83% of Tennessee residents at least graduated High School, 23% obtained Bachelors’ degrees, 8% went on to advanced degrees. Comparable national percentages are 85%, 28%, 10%.


Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on February 1st, 2012 as A Disturbing Glimpse of GOP’s Low Tax/Limited Regulation Utopia

It’s Time to Take the Anti-Norquist Pledge

Like all Americans, I yearn for a simplified tax code, and I stand second to no citizen in my passion for tax reform. My wife and I between us possess the following graduate degrees: Ph.D., M.Phil., two M.A.s and a J.D. from reputable institutions — so grant that we are of at least median intelligence. Yet we can’t manage to do our tax returns correctly without professional assistance. I assure you, I strongly believe in tax reform. But Grover Norquist’s misleadingly-named Americans for Tax Reform (ATR) has absolutely nothing to do with tax reform.

Norquist, president and founder of ATR, is famous for the polarizing ‘tax reform’ pledge (the ‘Norquist Pledge’) he badgers politicians into signing — under penalty of designating them anti-tax reform. The current version of this pledge states that signers will:

  • ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and
  • TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Norquist even emphasizes that the pledge has no exceptions for war, natural disaster, or other misfortunes. For example, a signer of the Norquist Pledge isn’t permitted to vote to increase tax rates on America’s 1% — even if such changes would be revenue neutral, and/or are desperately needed for a national emergency. Our current marginal tax rates reflect random political compromises, so why they should be set in stone for the coming decades is not clear to me.

At last count, 238 Members of the House of Representatives and 41 Senators committed to the Norquist Pledge. Republican Presidential candidates Mitt Romney and Newt Gingrich have also signed the pledge — which is binding for a politician’s entire term in office.

The Norquist Pledge has nothing to do with tax reform as understood by most American taxpayers. For example, the majority of Americans favor increasing — rather than capping — the marginal tax rates of the top 1%. (By the way, ATR — a tax-exempt institution — pays no taxes on its annual revenues of about $5 million per year, according to ATR tax forms.) Mr. Norquist’s real goal (explained in his other writings) is to substantially shrink the size of government.

I oppose the Norquist Pledge for (at least) two reasons:

  1. ATR is a misleading, Orwellian assault on our language: ATR is entitled to a view that tax revenues should be capped, or that the ‘1%’ shouldn’t pay more taxes — but they should call themselves Americans for Flat Tax, Americans for Limited Government, or anything which describes their real goals.
  2. We need compromise, not gridlock: The Norquist Pledge was directly responsible for the near default of the U.S. government, and contributes to the acrimonious political atmosphere we all suffer from. The American Bill of Rights and the Constitution are core non-negotiable commitments every American has the right to insist our politicians pledge to defend and protect. But pledges to not raise marginal tax rates on the top ‘1%’ make normal compromise and negotiation impossible.

To counter this harmful situation, I propose the American Citizen’s Anti-Norquist Pledge:

As an American citizen, I hereby irrevocably commit that I will not support, contribute to or vote for any politicians who have signed the Norquist Pledge, unless they publicly renounce that pledge.
As a shareholder of any American corporation, I pledge to oppose any corporate contributions to ATR and to vote against any corporate management using corporate funds to support ATR.
As a consumer, I will not knowingly purchase goods and services from corporations that support the Norquist Pledge.


Finally, I would welcome your comments:

Do you agree the Norquist Pledge is harmful to our country?

If you agree that the Norquist Pledge is harmful, would you be willing to sign the Anti-Norquist Pledge?

What else could we do to reverse the Norquist Pledge?
If you would like updates on the creation of the Anti-Norquist Pledge, and other topics, please follow me on twitter: @Steven_Strauss.

Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University.


Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on January 22nd, 2012 as It’s Time to Take the Anti-Norquist Pledge

Government Action Is Key to Driving Innovation, Entrepreneurship and Economic Growth

A general theme of the Republican presidential debates is that government is a waster of resources, net destroyer of jobs, and stifler of innovation. Interestingly, these same candidates praise the private sector’s innovation and creativity (e.g., Apple, Facebook, Google, etc.).

The GOP ignores that most of our excellence in scientific innovation is attributable to government support for basic research. Currently 66% of research at American universities is funded by local, state and federal governments, with most of these funds coming from the federal government. This pattern has been consistent since WW II (1).

University research should be funded by the government — it is the classic public good. It produces broad benefits to society that no one institution can capture, has very uncertain benefits and has very long time spans, hence it is not suitable for private sector support.

Not one of the technology companies listed above (and many others not mentioned) would exist without the Internet. The Internet (and its predecessors) was originally a creation of the federal government. It was supported for the first 20+ years by our federal government before becoming commercially viable. It was ‘incubated’ with government support at our universities, with private sector involvement coming relatively late.

Yet, I can’t think of a single time during the debates when any Republican presidential candidate acknowledged the federal government’s highly important role in funding predecessors of the Internet (and other key technologies) — when the private sector lacked the vision and initiative to make these long-term investments.

Aside from anecdotal evidence, we have statistical evidence for university’s key role in economic development:

The concentration of great universities in a nation is extraordinarily closely related to its economic competitiveness. It is closely associated with economic output per capita ([correlation] .74), total factor productivity (.77) and overall competitiveness (.71) based on the Global Competitiveness Index … ‘Extraordinary Value of Great Universities’, Atlantic Magazine, Richard Florida, 2011

Higher education is an American strength. List 1 (below) names the world’s top 10 science and engineering universities. All these schools are American and most are State universities. I don’t know of any other global industry where all top 10 institutions are American. Significantly, the one global industry (higher education) where America retains unquestioned dominance is driven by Government and the not-for-profit sector.

America’s higher education and research sector is something all Americans can take pride in. But particular credit goes to the many politicians and bureaucrats who had the courage, and insight, to fund truly long-term projects and technologies too uncertain for a risk-averse private sector.

However, as with any success, we face challenges. Just when our political leadership lacks the courage and vision to make long-term investments in science — other countries seek to copy our success by improving their performance in higher education.

For example, it has been widely noted that China aims to significantly improve its higher education sector. On one level, we should applaud and support China’s pushing back the frontiers of knowledge because it benefits everyone (e.g., if a Chinese university cures cancer, we all benefit).

On another level, if we, as Americans, want to:
(a) continue to be a frontrunner in scientific knowledge and innovation, and
(b) benefit (economically and strategically) from being at the cutting edge of innovation (e.g., jobs and other benefits that would result from curing cancer ) — we will have to ‘up our game’.

I am happy to report that the spirit of creative government and willingness to make long-term commitments is still alive in America. Mayor Michael R. Bloomberg recently created Applied Science NYC, a city-sponsored initiative to build a new top tier science and engineering campus in NYC. This week it was announced that Cornell University with Technion was selected for the initiative. According to Mayor Bloomberg,

the campus is expected to spawn 600 new companies over 3 decades creating at least 30,000 permanent jobs

This initiative is a renewed commitment to the belief that government can, and must, play a creative role — as convener and provider of seed-funding — to keep America growing.

Let me know if you agree about the role of government and universities in economic growth. More importantly, let me know whether you feel the Republican presidential contenders (e.g., Romney, Gingrich, et al) have shown any real vision about America’s economic future.

I look forward to your comments.

List 1: Academic Ranking of World Universities in Engineering/Technology and Computer Sciences - 2010 (Source: www.arwu.org)

  1. Massachusetts Institute of Technology (MIT)
  2. Stanford University
  3. University of California, Berkeley
  4. University of Illinois at Urbana-Champaign
  5. Georgia Institute of Technology
  6. The University of Texas at Austin
  7. University of Michigan - Ann Arbor
  8. Carnegie Mellon University
  9. Pennsylvania State University - University Park
  10. University of California, San Diego & University of Southern California (tied).

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University. Follow him on Twitter @steven_strauss.

Disclosure: Applied Sciences NYC was one of the initiatives Steven Strauss helped to create while working at NYCEDC.

Sources:
(1) National Science Foundation, National Center for Science and Engineering Statistics. 2011. Academic Research and Development Expenditures: Fiscal Year 2009. Detailed Statistical Tables NSF 11-313. Arlington, VA. Available at http://www.nsf.gov/statistics/nsf11313/.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss
This is cross posted from my blog, and originally published on December 20th, 2011 as Government Action Is Key to Driving Innovation, Entrepreneurship and Economic Growth

Actually, Corporations That Lobby and Make Campaign Contributions Get Special Benefits

Recent reports reveal that: GOP Presidential candidate Newt Gingrich received nearly $2 million for activities (not technically within the definition for lobbying) resembling lobbying, and former GOP Congressman Tauzin — the country’s highest paid lobbyist — received $11.6 million.

With rare bi-partisan consensus, all members of Congress assure their constituents that money spent lobbying them and campaign contributions to their campaigns does not influence their judgment. Yet, despite these assurances, 75% of all Americans believe money influences Congress.

Several recent academic studies support the public’s concern:

  • Tax Benefits: Recent research shows that, in expectation for every $1 a firm spends to lobby for targeted tax benefits, the benefit is between 6x and 21x. (See 1;2 below.)
  • Improved Cash Flows: On average, and controlling for other factors, firms that engaged in lobbying received more generous depreciation treatment. (2)
  • Increased Market Value: Another study demonstrates that firms which lobby ‘significantly outperform non-lobbying firms with respect to increased market value of equity’. This can be as high as adding another 2% per year to returns. (3)
  • Protection: A separate analysis found that “compared to non-lobbying firms, firms that lobby, on average, have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators.” (4)

These results are from research done by non-partisan academics — using rigorous statistical techniques — and are not anecdotes or rumors. Correlation is not causality, but basically it appears that lobbying and campaign contributions can confer special benefits to corporations, while corporations breaking the law can reduce the probability of getting caught.

If you doubt the value of lobbying or campaign contributions, consider that American corporations now spend about $3.5 billion/year on lobbying alone. The Cato Institute estimates the value of the resulting corporate welfare at about $90 billion/year.

The recent Supreme Court decision (Citizens United) held that corporations are people for First Amendment purposes (and thus entitled to make unlimited investments supporting or opposing candidates). To our nation’s detriment, large corporations may consequently decide that investments in lobbying and campaign contributions (i.e., investments for preferential treatment at the expense of the rest of society) — are safer and more lucrative than producing innovative goods and services.

If a firm decides not to participate in the lobbying game (or doesn’t have the money ‘to pay to play’) — when its competitors do — the non-lobbying firm will likely be strategically disadvantaged (e.g., pay higher taxes, receive unfavorable depreciation treatment, inappropriate treatment of intellectual property, etc.) compared to its competitors. One might ask (in this context) what the difference is between paying for lobbying and paying protection money. Good question!

While all the GOP presidential candidates have spoken eloquently about small businesses, entrepreneurs, and start-ups — these are exactly the persons/entities least likely to be able to afford access to Gingrich et al.

The Securities Industry and Financial Markets Association (SIFMA) reported that its member firms collectively lost pre-tax $34 billion in 2008 (an amount equal to the prior 2 years’ profits). Despite massive and unprecedented losses, the financial industry did not reduce its expenditures on lobbying and campaign contributions. Instead, it increased lobbying and campaign spending by about 40% over the prior presidential cycle — from $690 million in 2004, to $956 million in 2008.

This investment in political advocacy appears to have paid off handsomely! In 2008-2009, the Federal government made up to $7 trillion available to support America’s banks — and on such generous terms — that the banking industry’s 2009 recorded profits were double those of its best prior year. All while many American small businesses (unable to afford such generous campaign contributions to their elected officials) suffered record losses/layoffs.

If (like me) you are appalled, consider reading Lawrence Lessig’s Republic, Lost: How Money Corrupts Congress—and a Plan to Stop, and join the fight.

I welcome your thoughts and comments.

Much of the above analysis is derived from the Lessig book, but I am solely responsible for any errors and opinions in this essay.

Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation. He is an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University. Follow him on Twitter @steven_strauss.

Sources: All campaign and lobbying data is from www.opensecrets.org, unless otherwise noted.

  1. Raquel M. Alexander, Stephen W. Mazza, and Susan Scholz, “Measuring Rates of Return on Lobbying Expenditures: An Empirical Case Study of Tax Breaks for Multinational Corporations,” Journal of Law and Policy (2009).
  2. Brian Kelleher Richter, Krislert Samphantharak, and Jeffrey F. Timmons, “Lobbying and Taxes,” American Journal of Political Science (2009).
  3. Matthew D. Hill, G. W. Kelly, G. Brandon Lockhart, and Robert A. Van Ness, “Determinants and Effects of Corporate Lobbying,” [Unpublished working paper] (2011).
  4. Frank Yu and Xiaoyun Yu, “Corporate Lobbying and Fraud Detection,” Journal of Finance and Quantitative Analysis (2011).

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on December 12th, 2011 as Actually, Corporations That Lobby and Make Campaign Contributions Get Special Benefits

Actually, Despite GOP Claims — the U.S. Isn’t Over-regulated

The GOP presidential candidates believe, as an article of faith, that the United States is an overly-regulated society. They want to eliminate “unnecessary” regulations and even entire regulatory agencies to, in their view, unleash the growth potential of American business. Governor Perry wants to eliminate 3 federal regulatory agencies (2 he named; one whose name he couldn’t remember), Ron Paul wants to eliminate 5 agencies, and so on (Republican Presidential Debate, November 9th 2011).

The GOP candidates claim that the U.S. regulatory environment is not competitive with that of our peer group, and risks losing jobs to other countries. Still another article of faith among GOP candidates is that the regulatory scheme has worsened under President Obama.

I describe these as “articles of faith”, because to my knowledge — they have not shown any non-partisan research, or international benchmarks, to demonstrate that our overall regulatory environment is particularly burdensome.

Leaving aside the GOP candidates’ anecdotal views, it is helpful to examine real data that compares the U.S. regulatory burden with that of our peer group. The World Bank conveniently prepares an Ease of Doing Business Index (Index) whereby:

'Economies are ranked on their ease of doing business, from 1 - 183. A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm. This index averages the country's percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings for all economies are benchmarked to June 2011.'

As with any index of this nature, this Index is not a perfect proxy for each country’s actual level of regulatory burden. Nonetheless, it is a good indicator of how the U.S. compares to its peer group and to a list of 183 other countries. The Index examines: starting a business, protecting investors, enforcing contracts, among other relevant topics. The Index data can be sorted three ways:

  1. Large Countries (List 1 below): I view this as our peer group. In this category, the U.S. is the easiest country where one can do business.
  2. High Income Countries (List 2 below): In this category, the U.S. is the fourth easiest for doing business, behind several much smaller high-income countries.
  3. All Countries (List 3 below, including many under-developed countries): Again, the U.S. ranks fourth.

The World Bank Index samples 10 regulatory categories, so is not exhaustive across all regulations. But it clearly shows that overall — we are among the easiest of countries in which to conduct business, particularly when compared with our peers.

As for the Obama administration’s performance, a recent General Accounting Office study found no particular increase in the regulatory burden by comparison with the preceding Bush administration (Bloomberg News, ‘Obama Wrote 5% Fewer Rules Than Bush’, October 25, 2011).

Finally, an additional interesting piece of data comes from a recent survey of high net worth entrepreneurs in China — 60% of which are considering emigrating, most to the U.S. The reasons cited include: the strength of the American regulatory system — and the resulting safety of our food, environment, workplace, etc. (Bloomberg Business Week,’China’s Super-Rich Buy a Better Life Abroad’, November 22, 2011).

Not every regulation or law in the U.S. is perfect; not every regulator is a paragon of virtue. We can all name individual failures. Certainly, we should strive, as a country, to be the best we can be, and compare ourselves against international standards. But we cannot make our economy stronger or more competitive by making judgments and major structural changes based on faith — rather than reality.

The data collected for the U.S. and its peer group — over several years — does not show that the U.S. has a systematically bad regulatory environment. But if we eliminate several major regulators (e.g., EPA) we:

a) Will likely make our country significantly less safe, less healthy, and more unpleasant,
b) Won’t improve our international competitiveness, and
c) May actually dissuade foreign investors from coming to the U.S.

What do you think?

List 1: Large Countries Ranked for Ease of Doing Business (Top 5)

  1. U.S.
  2. UK
  3. Republic of Korea
  4. Saudi Arabia
  5. Canada

List 2: High Income Countries Ranked for Ease of Doing Business (Top 5)

  1. Singapore
  2. Hong Kong
  3. New Zealand
  4. U.S.
  5. Denmark

List 3: All Countries Ranked for Ease of Doing Business (Top 5)

  1. Singapore
  2. Hong Kong
  3. New Zealand
  4. U.S.
  5. Denmark

Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation. He will be an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University. Follow him on Twitter @steven_strauss.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on November 29th, 2011 as Actually, Despite GOP Claims — the U.S. Isn’t Over-regulated

Let’s Stop Forcing Real Wealth Creators to Leave the U.S.!

No, I don’t mean the so-called 1% — for various reasons, they aren’t leaving. I mean the immigrant entrepreneurs and foreign students at our best universities.

'The great competitive advantage of India is that it draws on the entrepreneurial and creative energy of 1.2 billion people. The great strength of America is that it draws on the entrepreneurial and creative energy of almost 7 billion people.' Indian Media and Tech Entrepreneur, Mumbai India, Spring 2011


In the U.S., our leading companies and universities routinely have teams composed of the best and the brightest from around the world. In America, a typical research team could be composed of (for example) a Pakistani Muslim, an Israeli Jew, a Hindu from India and a Christian from Iowa. In China or India, this would be unusual or impossible.

The U.S. faces increasing competition from other countries, and has relatively few natural competitive advantages that cannot be duplicated elsewhere. One of our few sustainable competitive advantages has been our openness to immigration, but that great American tradition has recently been under assault.

We literally have a situation where the world’s best and brightest are educated at our finest schools — but our immigration policy makes it unnecessarily complicated for them to stay — precisely when the U.S. most needs highly educated, highly skilled workers to expand its economy.

To cite a few statistics for the U.S., keeping in mind that immigrants are around 15% of the population:

  • Immigrants are twice as likely as non-immigrants to form a new business (In 2010, about 30% of new business formation was by immigrants).
  • For the period 1995 to 2005, over half of Silicon Valley startups had one or more immigrants as a key founder.
  • In 2005, immigrant-founded companies employed 450,000 workers.
  • According to statistics collected by the National Science Foundation, foreign students received nearly 60% of all engineering doctorates awarded in the US and over 50% of all doctorates in engineering, mathematics, computer sciences, physics, and economics.
  • The future belongs to knowledge workers, who are the real creators of wealth. The US has a structural shortage of high educational attainment workers and can’t afford to lose talent. (Unemployment for this group is under 5%, and has been as low as 2%. We need the world’s best talent to continue to grow!)

But, as has been widely reported, we don’t make it easy for these wealth creators to stay in the U.S.

One proposal aimed at this problem is the ‘startup' visa, championed by a group of leading venture capitalists and entrepreneurs. The proposal would modify the existing EB-5 visa to enable non-U.S. entrepreneurs (with funding support from a U.S. investor) to get a visa to start a U.S. company.

For those of you who don’t follow the esoteric minutia of our immigration system, the EB-5 program currently allows wealthy foreign investors to receive a green card for themselves and their families by investing in the U.S. Generally, the program is structured to invite passive investment by the foreign investor, but not active participation (i.e., we welcome and reward foreign investors, but not foreign-born entrepreneurs who could use their education, talents and energy to create jobs here).

To remedy this situation, legislation for a ‘startup’ visa was proposed in the House in December 2009 (i.e., the Employment Benefit Act of 2009). This proposal was joined in February 2010 by the Senate’s Startup Visa Act of 2010.

Instead of the visa going to a passive investor — the proposed legislation allows a startup company founder or entrepreneur (i.e., a job creator, and potentially, the creator of a new industry) to qualify as a visa recipient with a minimum equity investment of $250,000 (at least $100,000 of which must come from an American investor).

This legislation is widely supported by the venture capital industry and high tech entrepreneurs — some of the major underwriters of growth for our economy.

Leaving aside the specifics of the ‘startup’ visa, we as Americans should support legislation that: (1) stops the brain drain of American-educated entrepreneurs and researchers, and (2) encourages the creation of high-tech companies (and the founding of potentially new industries) here — in the U.S. — rather than overseas.

Sources: The Kaufman Foundation, www.startupvisa.com, BLS, Statistical Abstract of the United States, United States Census Bureau.

Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation. He will be an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University. Follow him on Twitter @steven_strauss.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on November 09th, 2011 as Let’s Stop Forcing Real Wealth Creators to Leave the U.S.!

America: Slouching Towards Third World Status

Will Truthiness Destroy America?

"The best lack all conviction, while the worst
Are full of passionate intensity” — “The Second Coming”, William Butler Yeats

Yeats’ lines aptly describe our current age of political mediocrity. As we consider our politicians, we can hardly say that they’re our best. And the worst of them are full of passionate intensity, with passions driven by ideology, rather than fact-based analysis.

The United States has been in decline relative to other countries for the last 30 years. On key metrics, we’ve fallen behind our peer group of industrialized countries, such as the UK, France, Germany, and Japan.

Am I exaggerating? Well, according to the Corruption Perception Index, we rank 24th in the world (only slightly better than Qatar) for public sector corruption. We rank 25th (way behind our peer group) in the OECD for math scores among 15-year-olds.

Over the past 30 years, our national debt has grown from about 30 percent of GDP to over 100 percent, and will become much worse based on current trends. In a recent survey of 10,000 Harvard Business School Alumni, “66 percent of respondents see the U.S. falling behind emerging economies.” It is difficult to find many encouraging metrics.

If the above statistics don’t convince you, visit the New Delhi International Airport, then compare it with our JFK or Newark International Airports. In many areas, our infrastructure is an embarrassment, already inferior to that of many third world countries.

These facts (and many others) have escaped Romney, Santorum and our current group of Republican leaders. Obama and the Democrats aren’t doing significantly better at confronting these challenges.

In the 19th century, America aggressively compared itself against the world, and aspired to be “best in class.” We were an early adopter of kindergarten because we saw evidence that it would improve educational outcomes. In 1862, the U.S. was suffering through the Civil War, but Congress still had the foresight to pass the Land Grant Colleges Act, which created some of our finest universities. This investment was made because it was important for our country’s growth, and the U.S. clearly lagged behind Europe in college and university education.

Today, many of us suffer from what Thorstein Veblen called “trained incapacity" and John Dewey described as "occupational psychosis.” We filter the world through our own ideological training, believing only what fits our story. Or, as Stephen Colbert, cultural commentator and 2008 Peabody Award winner commented:

It used to be, everyone was entitled to their own opinion, but not their own facts. But that’s not the case anymore. Facts matter not at all… What is important? What you want to be true, or what is true?… Truthiness is ‘What I say is right, and [nothing] anyone else says could possibly be true.’

Many Americans still have an almost cult-like belief that America is the greatest nation on earth. They systematically reject evidence suggesting we have significant room for improvement.

Sounds overly-dramatic? When opposing President Obama’s health care reform proposals, Speaker of the House John Boehner repeatedly proclaimed (with passionate intensity) that America has the “best health care system in the world.” Boehner is correct only if you exclude the entire developed world from the comparison. The U.S. ranks 50th for longevity and 49th for infant mortality, where we’re barely ahead of Belarus, Croatia and Lithuania.

I defy anyone to name a single important health care metric where the U.S. is considered a best-practice example as a nation. The only thing we lead the world in… is cost of health care. We have the world’s most expensive health care system. For example, our health care system costs almost twice Canada's, but we produce inferior results.

For Boehner to say we have the best health care system in the world, and not be laughed out of office, is at best ‘trained incapacity’ or ‘occupational psychosis.’

Boehner doesn’t have to support Obama’s health care reform plan. Obama’s reforms might make things worse. But, let’s have an actual debate grounded in facts, without inventing (and propagating) falsehoods about the current system.

China has been one of the most successful countries economically of the last 30 years. It’s fitting then to quote the architect of its economic renaissance Deng Xiaoping: “It doesn’t matter whether a cat is white or black, as long as it catches mice.” For too many Americans, what matters is not whether the policy works, but whether it fits our preconceived ideologies.

It’s the ultimate irony that we need to take the advice of a communist hardliner to put aside ideology, and focus on fact-based pragmatic solutions. Otherwise we’ll continue our slouch towards Third World status.

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years’ private sector work experience. You can follow him on twitter at: @Steven_Strauss.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on May 20th, 2012 as America: Slouching Towards Third World Status

The Claustrophobic Digital Village

Privacy in the future will resemble that in asmall village.  As with any small community, dissent from the prevailing conventional wisdom will be easy to spot and punish.  Welcome to the world of social conformity enforced by hashtags.

According to Eric Schmidt (Executive Chairman of Google), in our digital present and future: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”  For most of the 20th Century, our personal histories and actions could easily be hidden, particularly if you lived in a large urban area.  Neighbors and colleagues would only know what you decided to disclose about your past and present.  You could walk away from past behavior and social class, and reinvent yourself - by a move from one city to another (or one country to another).      

Those possibilities for reinvention - or maturing in your views and behavior, without baggage from the past - are disappearing.  Pervasive rating and reputation systems record and punish bad behavior.  And digital footprints follow us everywhere for our entire lives.

Transportation service Uber lets you rate the driver, but the driver also rates you (drunken misbehavior in an Uber car could affect that next ride).  TripAdvisor provides consumer feedback on restaurants, among other things, in most major cities.  So running a tourist trap (with high prices, bad food) will be an increasingly difficult business model.  If you don’t play nice on Ebay, or have been a bad (or good) guest/host at an Airbnb - that will be noted.  So Santa’s not the only one with a list of who’s been naughty or nice - it’s increasingly anyone who does business with you. 

But this isn’t really new - for most of recorded history, we lived in small villages with limited ability to reinvent ourselves.  The 20th Century was the exception, not the norm, in human history.  Traditionally most people lived, married and died within a few miles of where they’d been born, and everyone knew everyone else’s business.  Their pasts (and those of their friends and family members) remained with them all their lives - just as our digital histories now follow us.  

Some friends, living in an isolated town, find it idyllic in many ways.  Residents are friendly, courteous and generously support each other in times of need.  But that’s largely because everyone knows and remembers who provided help and who didn’t, and few actions remain hidden.  Locals know which merchants are honest, and which you have to watch out for. 

This snapshot of a small town reveals some of the strengths and weaknesses also found in the world of radical transparency.  It will resemble life in a small intimate village, but on a global scale.  Our future will be more polite and honest, but also duller.  Few would consciously court the role of village fool, knowing embarrassing moments will follow anywhere in the world, for the rest of their lives. 

In a small village, straying from political or social norms can be quickly crushed with boycotts or ostracism.  Similarly, in a world with radical transparency, self-proclaimed thought police can quickly assemble a virtual mob to punish non-conformists. 

The recent forced resignation of Mozilla’s CEO (over a political contribution he made in 2008 to ban gay marriage) is a warning to us all.  Our political contributions, blog posts, pictures or comments will be kept forever, and can be used against us when past views/actions aren’t the currently accepted norm.  Imagine the damage Senator Joseph McCarthy could have done if he’d had access to the Internet during his 1950’s witch hunts for Communists.  So before you contribute to Move-On.org (or the Tea Party), or to a pro-life (or pro-choice) advocacy group - remember that your actions could be used against you if the accepted wisdom becomes a view you opposed. 

In the future, we’ll encounter fewer tourist traps on our vacations - in exchange for increased pressure for social and political conformity.   Isn’t technological progress grand? 

Euro Crisis: If We’re Heading Towards a 1930s-Style Depression — Why Is the Stock Market So Bullish?

We seem to be heading towards an economic downturn equivalent to the Great Depression of the 1930s. This isn’t a secret. The synthesis below is derived from: Lawrence Summers, Nouriel Roubini, Simon Johnson, Niall Ferguson, Paul Krugman to name just a few. This crisis is not happening quickly. It’s more of a slow-motion train wreck — Greece’s crisis started in 2009. But that leaves a puzzle — why is the American stock market not reacting to obvious warning signs?

Greece and Spain already have unemployment rates exceeding 20 percent. If that isn’t a depression — what is?

Greece is in very deep trouble. Spain (the Euro’s fourth largest economy) just needed a $125 billion bank bailout. The weaker economies (Portugal, Ireland, Italy, Greece, Spain) face severe credit crunches as local banks lose deposits (withdrawn because of credit concerns and fear of forced devaluations following a Euro exit).

Serious discussion is already taking place about the demise of the Euro, or even worse the break-up of the European common market — in which case unemployment rates across Europe will exceed 20 percent. National incomes will decline sharply, resulting in large-scale corporate insolvencies, with the crisis spilling over into the U.S. and Asia.

Arguably, the Germans have a sufficiently healthy economy to avert the crisis. But they are reluctant to act — without clear structural changes in the European Union/member states to prevent future problems. Amidst a crisis, it’s difficult to make structural changes quickly. The Germans (with some legitimacy) fear that a bailout lacking agreement on structural changes will result in some combination of a larger financial disaster later, and/or the German economy permanently subsidizing some of the weaker economies.

Europe’s economies provide little reason for optimism.

The U.S. faces a recession next year if the Budget Control Act takes effect, which is likely if Obama wins and partisan gridlock continues. House Speaker Boehner already announced that if Obama’s re-elected, the GOP will treat us to another debt ceiling confrontation. If Romney wins, the Democrats (having learnt their lesson from the Republicans) would be as disruptive as possible. If the U.S. faces a major economic crisis triggered by the Euro’s collapse, bipartisan consensus on how to resolve it is unlikely.

China’s growth model may be reaching its limit. If the rest of the world’s problem is too much ideology, China’s is arguably the absence of any ideology except kleptocracy. China lacks a functioning legal system. Its officials are disciplined by shadowy communist party entities, rather than accountable to a transparent legal system. Nominally ruling in the name of the proletarian vanguard, China is governed by princelings and kleptocrats, with friction escalating among the kleptocrats.

Internationally, another regional war appears increasingly likely in the Middle East. The U.S. and/or Israel might have a military confrontation with Iran, over Iran’s nuclear ambitions. The Syrian situation has the potential to become a regional conflict (Syria, Iran and Russia fighting Syrian dissidents supported by some coalition of Saudi Arabia, the U.S., Turkey and other countries). A Middle Eastern war would lead to significant oil price increases, and trigger a global recession (at a minimum).

Compared to the financial crisis of 2008, governments everywhere are far more constrained by weaker balance sheets, loss of public trust and crisis fatigue.

I’m not saying everything listed above will go wrong (though if that happens, it would be a "global perfect storm"). However, even 1-2 of these plausible misfortunes would make 2013 a really bad year, and the world will have other challenges we cannot foresee (e.g., another nuclear accident, major earthquakes, etc.).

Depressed yet?

So why is the stock market trading as though all’s well? The S&P 500 closed on June 15th at 1343. Based upon stock price divided by earnings (P/E ratio), the market now trades at about 21 times the prior 10 years’ average earnings. The long-term 10 year P/E ratio is about 16, so today’s premium over that long-term average is difficult to explain, considering the risks listed above. At the top of the bubble in October 2007, the S&P was at 1565. Currently, we’re only about 15 percent below that peak, and (again) the market isn’t reflecting the referenced risks.

Is it a case of short-term delusions, leading to later major stock market debacles? If so — is it time to go short?

Or does the market know something we don’t? Are the risks outlined above really not so bad? Is the market assuming losses will be paid by the government, so let’s party like it’s 2006? Or could it be that all investments at this stage have poor prospects — so there’s no place to hide?

Stay tuned: 2013 will be an interesting year!

I invite you to follow me on twitter at: @Steven_Strauss or on Facebook at: https://www.facebook.com/Steven.Strauss.Updates.

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years’ private sector work experience. You can follow him on twitter at @Steven_Strauss or on Facebook at https://www.facebook.com/Steven.Strauss.Updates.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss
This is cross posted from my blog, and originally published on June 19th, 2012 as Euro Crisis: If We’re Heading Towards a 1930s-Style Depression — Why Is the Stock Market So Bullish?