The Peace Dividends of Energy Infrastructure – North Korea, Iran and Beyond [feedly]

The Peace Dividends of Energy Infrastructure – North Korea, Iran and Beyond
https://www.globalpolicyjournal.com/blog/23/08/2018/peace-dividends-energy-infrastructure-north-korea-iran-and-beyond

Morgan D. Bazilian and Saleem H. Ali explore the possibilities of using pipelines, or other energy infrastructure, as a basis for peace.

The compelling possibilities of using pipelines, or other energy infrastructure, as a basis for peace has emerged again, this time on the Korean peninsula. The lucrative energy market of South Korea has become increasingly important to the United States as it becomes a major producer of liquefied natural gas (LNG). However, it would be much more economical for South Korea to also consider gas from its regional neighbors, particularly Russia. Only three days after the historic summit between President Trump and North Korean leader Kim Jong Un, Russian gas giant Gazprom announced that it was revitalizing talks of a pipeline to South Korea.  It is also interesting to consider the recent high level engagement between North Korea on Iran as the US continues a paradoxical deescalation of conflict with the former and an escalation of belligerence with the latter. In the case of Iran, energy infrastructure is adding an additional wrinkle in U.S.-Turkey relations as well since Turkey has an established pipeline with Iran. Yet the prospect for peace dividends in this fraught case was also evident when President Trump granted an Iran sanctions waiver to a Caspian gas pipeline project to Turkey and Europe in which Iran's national oil company has a 10% stake.

Gas pipelines and security were clearly on President Trump's mind at the NATO summit in late July where he brought up gas dependence of Germany on Russia, albeit in ambivalent terms when compared with his rapprochement rhetoric in the summit with President Putin. It could be tempting for the US to see this as a zero sum game with yet another issue of Russian rivalry and competition but there is ample demand in South Korea and other major economies for resilient multiple sources of energy to use this as an opportunity for diplomatic engagement. The realities of an increasingly interconnected world make this paradigm even more attractive, both at the State level, but also for sub-national or local levels of engagement. Indeed, pipelines are also an important dynamic of the regional geopolitics of Iran and could provide an opening for conversations beyond the U.S. withdrawal from the nuclear deal.

The Infrastructure Bargain

Many of the world's most conflict-ridden borders may benefit from beginning to lay the foundations for peace through the somewhat mundane exercise of shared infrastructure; roads, water lines, gas and oil pipelines, or wires for electricity. This infrastructure holds the potential to provide a useful win-win to both parties in terms of trade, security, and the initial phases of building trust. It is also often overlooked at a useful tool for diplomacy; either because it is seen as too technocratic an approach, or too large a hurdle in terms of legal or regulatory frameworks that both parties can agree. Still, the borders of: Pakistan and India; South Sudan and Sudan; Iraq and Kurdistan; North and South Korea; and Palestine and Israel offer five pressing examples where various infrastructure has been previously built, considered, or analysed.

As a recent example, in February of 2018, the TAPI natural gas pipeline began construction with the stated purpose of becoming a foundation for peace between the countries of Turkmenistan, Afghanistan, Pakistan and India. Still, it runs through highly conflict-ridden areas, with very different views of the rule of law, religion, and markets. There is also a proposed power line project passing through Afghanistan, and providing transit fees to the poor country, is the proposed high-voltage power cable, the CASA 1000. The power line is supposed to support regional power needs in Kyrgyz Republic, Tajikistan, Pakistan, and Afghanistan. Enormous challenges remain to the financial success of these projects, let alone their impact on inter-state relations.

From Grid-lock to Smart Grids

New ideas about large-scale shared power transmission has recently gained backing in the form of the Chinese-backed GEIDCO initiative. The idea of initially regional, then global, electricity interconnection is to help support sustainable development in the connected countries and regions. Transboundary dams and energy sharing arrangements are not new by any means. Examples of gargantuan hydroelectric energy sharing such as the Itaipu between Paraguay, Brazil and Argentina; or the Kariba dam between Zambia and Zimbabawe, have existed for decades. However, the strategic use of such electricity grid infrastructure for regional green growth and cooperation deserves greater attention and upscaling.

There is still massive potential worldwide for harnessing and trading energy and reaping peace dividends in return. For example, Nepal has exploited less than 1% of its hydro potential, even though brownouts and blackouts are a regular feature of life in the country.  Rather than importing some of its power from India, it has tremendous potential for exporting energy to its southern neighbor.  Bhutan too sits high in the mountains of Asia, and knows well the art of living with a big neighbor. The export of hydroelectricity to India constitutes 40% of Bhutan's national income. Many big hydro projects are now under construction with Indian assistance, and will likely be commissioned by 2018-19. The electricity export to India will then triple. For India, it is an excellent source of reliable, economical and clean energy. Such energy trade bodes well for a South Asian regional grid system that had previously been championed by USAID under the South Asian Regional Energy Initiative (SARI).

Resilient Peace?

Energy infrastructure also has the potential for creating greater resilience against disruptions in post-conflict contexts. One successful post-conflict example comes from the small, wet, island of Ireland. Despite energy not being part of the Peace Agreement between the Catholic South and protestant North, the "All-Island market" has become a symbol of political success, and a foundation for strong economies. After the electricity market, and all-island gas market and network was pulled together. There are likely lessons in these exercise—a technical issue able to be successfully transacted below the radar of religion and politics—for other borders.

Detractors of the energy-for-peace approach may point towards the Ukranian predicament of energy dependence which have left it vulnerable to Russian designs for the region. However, it may also be argued that the energy infrastructure provided a moderating influence over an escalating conflict which could have been far worse had their not been reciprocal incentives to keep the gas flowing between Russia and Ukraine. The same is true for the relationship between Turkey and Russia which has gone through a series of tumultuous turns in 2017. However, the Black Sea pipelines have kept both countries engaged with each other despite their disagreements over the war in Syria.

Ultimately, the potential peace dividends of energy infrastructure will require more international coordination for optimal realization. Institutions such as the Energy Charter Treaty have tepidly considered transit protocols for pipelines and the International Renewable Energy Agency (IRENA) is building capacity for greater cooperation, particularly for solar and wind energy infrastructure. The organization has also achieved greater political prominence recently by launching a new Global Commission on the Geopolitics of Energy Transformation. The Korean Peninsula should be considered as an important test case of how energy transformations can ben enabled through geopolitical initiatives towards peacebuilding and the consequent potential for energy for building trust and preventing reemergence of conflict.

However, these efforts are still largely marginal to high politics of war and peace. The U.S-North Korea summit provides an opportunity to consider a more integrated strategy for post-conflict energy diplomacy which transcends competitive posturing. The redevelopment of North Korea will require major energy infrastructure investment as the ageing infrastructure in the country from the Cold War era is highly inefficient and unreliable. The fabled "Six Parties" who have been involved in the peace process for the past several decades should also consider how they could have an energy delivery strategy for the country which is both ecologically and economically efficient. Such a concerted effort at providing energy, which is the most fundamental condition for development, can build positive interdependence that can ultimately provide a more resilient peace.

 

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Elizabeth Warren’s #EndCorruptionNow Blitz [feedly]

Elizabeth Warren's reforms are all worth of consideration. Corruption is a powerful block to fuller democratic participation by ordinary Americans. Where 'Pay-to-Play' political regimes flourish, disenfranchisement, decay and injustice follows. But fixing corruption, which prevails to varying degrees in every country, is closely linked to a) the levels of social class and income inequality; b) whether it has an effective method of collecting progressive INCOME taxes; c) the levels of professionalism, or conversely patronage,  of its civil  service, and d) the level of public trust in the courts ("Shall we sue?, Pay off the Judge? or get out the guns?"). One way to think about it: Keep everything the same except reduce the highest income to no more than 5 times the lowest, and most 'corruption' will evaporate no matter what laws are in effect. But -- I like Elizabeth Warren's reforms. One minor political challenge:  you have to politically overwhelm the 'corrupt' to get any of this passed

Elizabeth Warren's #EndCorruptionNow Blitz
http://prospect.org/article/elizabeth-warrens-endcorruptionnow-blitz

(Michael Brochstein/Sipa USA via AP Images)

Senator Elizabeth Warren speaks about her proposed Anti-Corruption and Public Integrity Act at the National Press Club on August 21, 2018.

Senator Elizabeth Warren made a powerful case for her new Anti-Corruption and Public Integrity Act Tuesday at the National Press Club in Washington, D.C. Her cheeks flushed as she launched into a full-throated condemnation of deep-seated corruption in government, especially under President Donald Trump. At one point, she lost her voice and had to stop for a sip of water, saying, "I get a little wound up on this."

"This" is what she called the "most ambitious" anti-corruption legislation since Watergate. Her proposal would make ethics—instead of profits—the guiding principle of the corporate world, a move that would drastically alter the relationship between government officials and business chieftains. Anticipating criticisms that the plan is naïve, over-optimistic, and unattainable, Warren said that she was "not giving in to cynicism."

Key features of the legislation:

• "Padlock the revolving door" that turns government officials into corporate players, and corporate players into government officials who, under Trump have eagerly dismantled regulations that once affected their sectors. Federal government officials would be subject to specific rules on transitioning into the corporate world after leaving an agency.
• "End lobbying as we know it" by devising stricter registration criteria for lobbyists, including registering anyone who uses money to influence the government. The legislation also proposes to make all lobbying activities (documents, meetings, bills, etc.) public and to tax excessive lobbying. Most importantly, Warren's legislation would place lifetime prohibitions on all lobbying activities by presidents, vice presidents, members of Congress, and cabinet secretaries once they leave government.
• "End corporate capture" by clarifying the identity of entities that have written, funded, and contributed to research submitted to agencies. An Office of the Public Advocate would be established to make sure that public interests of citizens—not just corporate interests—are considered before agencies act.
• "Restore faith in courts" by creating stricter codes of conduct for all federal judges (including Supreme Court justices) and making courts more open and transparent for individuals and small businesses.
• "Stop self-dealing by public officials" by requiring all public officials and candidates to disclose their tax records and financial interests. The proposed legislation would also ban government officials from owning or trading company stocks while in office, and require them to utilize "conflict-free" investments (like mutual funds), so that policy decisions are not tainted by personal interests.
• "Strengthen enforcement" by creating an Office of Public Integrity, a new anti-corruption agency (Warren called it a "new sheriff") that would enforce these ethics reforms.

Warren described corruption as a "cancer" that has "infected" American government, "eat[ing] away at the heart of our democracy." She added that lobbying has been a longstanding problem that favors the wealthy and the well-connected, "kicking dirt in everyone else's faces," but recent excesses have culminated in the "nakedly corrupt" Trump presidency. Although she did target Republicans like Mick Mulvaney, the Office of Management and Budget director, and Gary Cohn, a one-time economic adviser who left in March, she indicated that she hoped her plan of "treatment" would attract "nonpartisan" support.

Warren's rhetoric, including a "willingness to fight for real change" recalled themes from Barack Obama's 2008 presidential campaign. She had an Obama-like optimism that change was possible, acknowledging that government can be a "powerful force for good." Her words echoed those of Franklin Roosevelt: When FDR introduced the New Deal, he called it a "battle" and a "crusade to restore America to its own people." American democracy, she said, is "worth fighting for." As the Prospect's Harold Meyerson has suggested, Warren 's proposals are tantamount to a second New Deal.

She emphasized that this "moment" in American needs to be named in order to harness the power of the American people to make change. The senator's anti-corruption legislation is the latest act in her #EndCorruptionNow drama, after last week's introduction of her Accountable Capitalism Act legislation and regular tweets about corruption.

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Krugman: Partisanship, Parasites, and Polarization [feedly]

Why the Trumpers like snake oil along with their swastikas

Partisanship, Parasites, and Polarization
https://www.nytimes.com/2018/08/21/opinion/partisanship-parasites-and-polarization.html

Parasites are a huge force in the natural world. For the most part they simply feed on their hosts. But there are a number of cases in which they exert a more insidious influence: they actually change their hosts' behavior, in ways that benefit the parasites but damage and perhaps eventually kill their victims.

And lately I've been wondering if that's what's happening to America. How much of our political sickness is the result of a parasitic infection? What I have in mind specifically is an infestation of direct-marketing scams that exploit and reinforce political partisanship, largely on the right, basically to sell merchandise.

If this sounds absurd to you, bear with me a bit. I'm not the first person to make this suggestion – Rick Perlstein, our leading historian of modern conservatism, made basically the same argument (without the biological analogy) back in 2012, and as I'll explain, a lot of things have happened since then to reinforce his point.What set me on this trail initially was learning that Ben Shapiro, the Young Conservative Intellectual du jour, is using his talk-show presence to market dietary supplements:

I'll come back to that. First, some notes on political economy.

When I try to understand political behavior, I, like many others, often find myself thinking about Mancur Olson's classic The Logic of Collective Action. Olson's simple yet profound insight was that political action on behalf of a group is, from the point of view of members of that group, a public good.

What do we mean by that? A public good is something that, if provided, benefits many people – but whoever provides it has no way to limit the benefits to himself or herself, and hence no way to cash in on the good's provision. The classic example is a lighthouse that steers everyone away from shoals, whether or not they've paid the fee; public health measures that limit disease are in the same category. As a result, the fact that a public good is worth providing from society's point of view is no guarantee that it will actually be provided; it has to be worth some individual'swhile.

As Olson pointed out, the same goes for political action. Just because a political candidate's victory would be good for, say, farmers doesn't mean that farmers will give him or her money; each individual farmer will have an incentive to free ride on everyone else's contributions. So political action is normally undertaken by individuals or small, organized groups that stand to benefit directly. Either that, or it's a byproduct of other activities that are advantageous for their own reasons and can also be harnessed for political action, like memberships in trade associations or unions.

But don't rich people give money to support the interests of their class? Actually, a lot of the money we see in politics ends up being money spent in the givers' own, personal interests. For example, you can think of the Koch brothers' political spending as an investment in themselves: they have benefited immensely from the recent tax cut, with a payoff that far exceeds the amount they spent promoting it.

So a lot of political action is driven by people trying to shape policy in a way that benefits them personally. But what the Shapiro/brain pills story drives home to me is that there's another important factor in our current political scene: the use of political action as a marketing ploy, by people out to make a buck selling stuff that has little to do with politics per se. 

As I said, Rick Perlstein has already written the basic text here. As he documents, right-wing websites largely act as marketing centers for stuff like this:

Dear Reader, I'm going to tell you something, but you must promise to keep it quiet. You have to understand that the "elite" would not be at all happy with me if they knew what I was about to tell you. That's why we have to tread carefully. You see, while most people are paying attention to the stock market, the banks, brokerages and big institutions have their money somewhere else . . . [in] what I call the hidden money mountain . . . All you have to know is the insider's code (which I'll tell you) and you could make an extra $6,000 every single month.

And some of the most influential voices on the right haven't just sold advertising space to purveyors of snake oil, they've gotten directly into the snake-oil business themselves.

Thus:

• Glenn Beck in his heyday juiced up his viewers by telling them that Obama was going to unleash hyperinflation any day now; he personally cashed in by hawking overpriced gold coins.

• Alex Jones makes a splash by claiming that school massacres are fake news, and the victims are really actors. But he makes his money by selling diet supplements.

• Ben Shapiro writes critiques of liberal academics that conservatives consider erudite (remember Ezra Klein's lineabout a stupid person's idea of what a thoughtful person sounds like?), but makes his money the same way Alex Jones does.

Why should marketing scams be linked to political extremism? It's all about affinity fraud: once you establish a persona that appeals to angry, aging white guys, you can sell them stuff that will supposedly protect their virility, their waistline, and their wealth.

And at a grander level, isn't that what Fox News is really about? Consider it not as an ideological organization per se but as a business: it offers cheap programming (because there isn't much reporting) that appeals to the prejudices of angry old white guyswho like to sit on the couch and rant at their TV, and uses its viewership to help advertisers selling weight-loss plans.

Now, normally we think of individuals' views and interests as the forces driving politics, including the ugly polarization increasingly dominating the scene. The commercial exploitation of that polarization, if we mention it at all, is treated as a sort of surface phenomenon that feeds off the fundamental dynamic.

But are we sure that's right? The Alex Joneses, Ben Shapiros, and Fox Newses of the world couldn't profit from extremism unless there were some underlying predisposition of angry old white guys to listen to this stuff. But maybe the commercial exploitation of political anger is what has concentrated and weaponized that anger. In other words, going back to where I started this essay, maybe the reason we're in a political nightmare is that our political behavior has, in effect, been parasitized by marketing algorithms.

I know I'm not the only one thinking along these lines. Charlie Stross argues that "paperclip maximizers" – not people, but social systems and algorithms that try to maximize profits, market share, or whatever – have increasingly been directing the direction of society, in ways that hurt humanity. He's mostly focused on corporate influence over policy, as opposed to mobilization of angry people in the service of direct-order scams, but both could be operating.

Anyway, I think it's really important to realize the extent to which peddling political snake oil, whether it's about the economy, race, the effects of immigration, or whatever, is to an important extent a way to peddle actual snake oil: magic pills that will let you lose weight without ever feeling hungry and restore your youthful manhood.

Follow The New York Times Opinion section on Facebook and Twitter (@NYTopinion), and sign up for the Opinion Today newsletter.

Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography.

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Minimum wages and the distribution of family incomes in the United States

Minimum wages and the distribution of family incomes in the United States

Arindrajit Dube

The ability of minimum-wage policies in the United States to aid lower-income families depends on how they affect wage gains, potential job losses, and other sources of family income, including public assistance. In contrast to a large body of research on the effects of minimum wages on employment,1 there are relatively fewer studies that empirically estimate the impact of minimum wage policies on family incomes.

In my new paper, I use individual-level data between 1984 and 2013 from the Current Population Survey by the U.S. Census Bureau to provide a thorough assessment of how U.S. minimum wage policies have affected the distribution of family incomes.2 Similar to existing work, I consider how minimum wages influence the poverty rate. Going beyond most existing research, however, I also calculate the effect of the policies for each income percentile, adjusting for family size. This highlights the types of families that are helped or hurt by wage increases. I also calculate the effect on a broader measure of income that includes tax credits and noncash transfers. I quantify the offset effect of higher wages on the use of transfer programs and the gains net of the offsets by income percentiles, painting a fuller picture of how minimum-wage policies affect the U.S. income distribution and the overall well-being of U.S. families.

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New Working Paper
Minimum wages and the distribution of family incomes

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Overall, I find robust evidence that higher minimum wages lead to increases in incomes among families at the bottom of the income distribution and that these wages reduce the poverty rate. A 10 percent increase in the minimum wage reduces the nonelderly poverty rate by about 5 percent. At the same time, I find evidence for some substitution of government transfers with earnings, as evidenced by the somewhat smaller income increases after accounting for tax credits such as the Earned Income Tax Credit and noncash transfers such as the Supplemental Nutrition Assistance Program. The overall increase in post-tax income is about 70 percent as large as the increase in pretax income.

Effect of minimum wages on poverty

I use individual level data from the UNICON extract of the March Current Population Survey between 1984 and 2013. I focus on the nonelderly population under 65 years of age. I define family income following the official poverty measurement, using (pretax) cash income, and adjust for family size and composition using Census Bureau guidelines.3

I find that a 10 percent increase in the minimum wage reduces poverty among the nonelderly population by 2.1 percent and 5.3 percent across the range of specifications in the long run (three or more years after the policy change). There are also reductions in shares earning below 125 percent and below 75 percent of the poverty threshold. For my preferred model with the richest set of controls, the falls in shares below 75 percent, 100 percent, and 125 percent of the poverty threshold are 5.6 percent, 5.3 percent, and 3.4 percent, respectively, from a 10 percent increase in the minimum wage. (See Table 1.)

Table 1

Since minimum wage policies are not randomly assigned across states, it is important to account for any bias that may arise from differences across states raising the minimum wage as compared to those which do not. For instance, there is a strong regional clustering of minimum wage policies.4 Economists disagree, however, on the best way to account for such biases. For this reason, I report results using eight different specifications with alternative controls for state-level controls that subsumes most of the approaches used in the current economics literature on minimum wages. Starting with the classic model that assumes all states are on parallel trends (known as the two-way fixed effects model), I progressively add regional controls (division-period effects), state-specific linear trends, and state-specific business cycle effects. This exercise allows the evolution of family income distribution to differ across states in many different ways.

Moreover, all of these controls have been shown to be important in the existing minimum-wage literature.5 Importantly, all of these specifications find that increases in the minimum wage reduce the nonelderly poverty rate.6 At the same time, as I show in the paper, the specification with all three sets of controls (the last column in Table 1) performs the best in a variety of falsification tests, meaning they do not spuriously suggest an effect much earlier than the policy change or suggest effects much higher up in the income distribution. This is why I consider it the preferred specification.

Effect of minimum wages on family-income distribution

In my paper, I use the shift in the cumulative distribution of family income to calculate income changes by percentiles. I find that the largest increases occur between the bottom 10th and 15th percentiles. A 10 percent increase in the minimum wage raises pretax cash incomes in this range anywhere between 1.5 percent and 4.9 percent depending on control sets. (See Table 2.)

Table 2

Some of the increase in pretax cash incomes among these families at or near the bottom of the income distribution is offset by reduced tax credits and noncash transfers. Losses in tax credits (such as the Earned Income Tax Credit and the Child Tax Credit) and noncash transfers (such as the Supplemental Nutrition Assistance Program) offset some of these gains. For the bottom quartile, the income gains are approximately $370 after accounting for these offsets due to reduced tax credits and noncash transfers—or around 70 percent as large as the pretax cash income gains. The offsets appear to be particularly pronounced between the 13th and 17th percentiles of the income distribution.

These findings are consistent with some individuals losing eligibility for benefits as a result of increased income. Typically, eligibility for supplemental nutrition assistance, for example, requires income to be less than 130 percent of the federal poverty threshold, which for this population binds just under the 15th percentile. On average, those in the bottom quartile of the income distribution can expect an approximately $525 increase in annual income from the minimum-wage policy; the gains are largest around the 15th percentile. (See Figure 1.)

Figure 1

Policy implications

To put the policy implications of these estimates in perspective, I calculate the impact from an increase in the federal minimum wage from the current $7.25 per hour to $12 per hour. One could use the same estimates in this paper to project the impact of alternative policies—such as raising the minimum wage to $10 per hour or $15 per hour. The caveat is that when considering inflation-adjusted minimum-wage levels much larger than those used in the study, the projections may be less reliable.

Taking into account the state minimum wages as of January 2017, an increase in the federal minimum wage to $12 (in 2017 dollars) would raise the effective minimum wage—meaning the maximum federal or state standard—by 41 percent. The long-run estimates from the paper and a 13.5 percent poverty rate among the nonelderly population in 2016 suggests a 2.45 percentage point reduction in the poverty rate from this minimum wage increase. Given the roughly 270 million nonelderly Americans in 2016, this translates into 6.6 million fewer individuals living in poverty.

We can also expect the same minimum-wage increase to raise family incomes by 14.5 percent at the 10th percentile of the family-income distribution in the long run. For the average family near the 10th percentile in 2016, this translates into an annual increase of $2,538, and after accounting for the offset due to reduced tax credits and noncash transfers, this amounts to an increase of $2,140.If we take the range of estimates from all specifications, the proposed minimum wage changes can be expected to reduce the poverty rate among the non-elderly population by 1.00 and 2.53 percentage points, hence reducing the number of non-elderly individuals living in poverty by somewhere between 2.7 and 6.8 million. For the 10th percentile of family incomes, this translates to an annual income increase ranging between 5.2 and 16.8 percent, or between $905 and $2,937. After accounting for offsets due to lost public assistance, the income increases would range between $657 and $2,790.
To put these changes in context, the Earned Income Tax Credit reduces the nonelderly poverty rate by around 1.7 percentage points, and cash transfers (means tested and nonmeans tested) reduce it by around 3.8 percentage points, while noncash transfers (other than Medicaid) reduce it by around 0.9 percentage points. In other words, a substantial increase in the minimum wage would likely have a positive impact on the nonelderly poverty rate comparable to means-tested public assistance programs.

These calculations did not factor in how minimum-wage increases may affect overall consumer prices, though such price increases are very small compared to the income gains for those in the bottom of the income distribution. The expected price increase from raising the federal minimum wage to $12 per hour would be less than 1 percent.7 Therefore, netting out any price increases does not substantially affect the real income gains for the bottom quarter of the income distribution. Price increases do mean, however,  that a sizeable portion of these income gains at the bottom are likely to be borne by middle- and upper-income consumers through small increases in prices.

Conclusion

A substantial increase in the federal minimum wage can play an important role in reducing poverty and raising family incomes in the United States at the bottom of the income ladder while reducing the use of public assistance. The loss in cash and noncash transfers and tax credits among those who would benefit the most from minimum-wage increases is likely to dampen some of the benefits, especially among those around the poverty line, yet the resulting public savings could be ploughed back into further shoring up the safety net—in turn increasing the complementarity between minimum wages and income support for raising the incomes of families at the bottom of the income ladder.

—Arindrajit Dube is an associate professor of economics at the University of Massachusetts, Amherst

Download FileMINIMUM WAGES AND THE DISTRIBUTION OF FAMILY INCOMES IN THE UNITED STATES

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END NOTES

1 Dale Belman and Paul J Wolfson, "What does the minimum wage do?" (Kalamazoo, MI: WE Upjohn Institute, 2014).

2 Arindrajit Dube, "Minimum Wages and the Distribution of Family Incomes." Washington Center for Equitable Growth Working Paper (Washington Center for Equitable Growth, 2017).

3 At the same time, I assess the validity of various specifications using a host of falsification tests, including estimating effects higher up in the income distribution, as well as analyzing leading effects (pre-existing trends) across specifications. I find that the model with all three of these control sets tends to have the best performance on falsification tests, in the sense of showing no spurious changes in the shares earning below various thresholds prior to the actual minimum-wage increase, and no spurious changes in shares earning less than three or four times the federal poverty threshold, where there are few minimum-wage workers. Therefore, the model with the full set of controls is my preferred specification, but the paper shows the key results with the full range of specifications.

4 See Sylvia A. Allegretto and others, "Credible Research De- signs for Minimum Wage Studies: A Response to Neumark, Salas and Wascher." In Industrial & Labor Relations Review (forthcoming).

5 See Sylvia A. Allegretto and others, "Credible Research Designs for Minimum Wage Studies: A Response to Neumark, Salas and Wascher." In Industrial & Labor Relations Review (forthcoming); Ben Zipperer, "Did the minimum wage or the Great Recession reduce low-wage employment? Comments on Clemens and Wither," Washington Center for Equitable Growth Working Paper (Washington Center for Equitable Growth, 2016).

6 There is disagreement among economists about how best to construct the "counterfactual," or what would have happened if minimum wages had not risen in a particular state. I use a variety of approaches, including using regional comparisons, and controls for differences in income trends and variability in how business cycles affect incomes—some of these approaches are appropriate—and show the key estimates using a wide set of models. At the same time, I find that the model with a rich set of controls tends to perform best in the sense of avoiding spurious conclusions—such as a minimum-wage increase causing a supposed impact substantially prior to the policy change or supposed effects higher up in the distribution where there are few minimum-wage workers.

7 Thomas MaCurdy, "How Effective is the Minimum Wage at Supporting the Poor?" Journal of Political Economy 123 (2) (2015): 497–545. MaCurdy calculated that the bottom quintile faced a 0.5 percent increase in prices from the 21 percent increase in the minimum wage in 1996.

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John Case
Harpers Ferry, WV

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Mark Thoma Links (8/21/18) [feedly]

All worth reading today!

Links (8/21/18)
http://economistsview.typepad.com/economistsview/2018/08/links-82118.html

• The G.O.P.'s Climate of Paranoia - Paul Krugman
• The biggest economic policy mistake of the last decade - mainly macro
• The Slippery Slope of Complicity - Paul Krugman
• The IT revolution and the globalisation of R&D - VoxEU
• Sources of Finance: Internal versus External - Cecchetti & Schoenholtz
• Framing Turkey's Financial Vulnerabilites- Brad Setser
• The making of the Federal Open Market Committee - VoxEU
• Central bank digital currency: Why it matters and why not - VoxEU

 -- via my feedly newsfeed

The IT revolution and the globalisation of R&D | VOX, CEPR Policy Portal

Moderator: Evidence that advanced infrastructures are strengthening internationalism over nationalism

https://voxeu.org/article/it-revolution-and-globalisation-rd#.W31KqBQKxy4.gmail

The IT revolution and the globalisation of R&D

Lee Branstetter, Britta Glennon, J. Bradford Jensen 21 August 2018

US firms have begun shifting R&D investment towards non-traditional destinations such as China, India, and Israel. The column argues that this is a response to a shortage in software and IT-related human capital within the US. When US multinationals are able to import talent or export R&D work, this reinforces US technological leadership. Conversely, politically engineered constraints on this response will undermine the competitiveness of US-based firms.

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• The global race for inventors
  Carsten Fink, Ernest Miguelez, Julio Raffo

Despite rising globalisation after WWII, corporate R&D spending remained highly concentrated in the same small group of advanced industrial countries that dominated it for decades – until recently. Since the 1990s, the distribution of US multinational R&D investment across countries and industries has shifted dramatically toward non-traditional R&D destinations like China, India, and Israel (Kerr and Kerr 2018). Today's leading US multinationals have developed a global innovation system that increasingly relies on emerging market talent to propel innovation for the global frontier. 

Why these emerging markets – and why now? In new research, we argue that the rising importance of software and information technology as drivers of innovation and new product development across a wide range of industries led to a shortage in software/IT-related human capital within the US (Branstetter et al. 2018a). This has driven US multinationals abroad in a search for talent. 

To support this argument, we show:

• the extent of globalisation of R&D by US MNCs,
• the growing importance of software and IT in firm innovation across industries, 
• the rise of new R&D hubs, and 
• the differences in the type of activity done there. 

We also document that IT-intensive and software-intensive firms were more likely to conduct R&D abroad, and that foreign R&D is most pronounced in IT-intensive and software-intensive countries. 

The increase in demand for an IT and software workforce

Software and IT patents have been growing in importance since the 1990s; Figure 1 shows the share of all USPTO patents that are based on software. The share grew from 5% in 1990 to nearly 40% by 2015, and from 10% to 45% for IT. This growth in the IT intensity of invention was explored by Arora et al. (2013) and Branstetter et al. (2018b), who interpret the rise in IT intensity as the emergence of a 'general purpose technology' in new production development that applies across manufacturing industries. 

The advent of powerful microprocessors, memory chips, sensors, and digital control systems has enabled new generations of devices to become smarter and more responsive to their environment. Improvements in product functionality can often be achieved through better software alone. This has made IT, and especially software engineering, more central to success in innovation and new product development, increasing demand for IT and software engineering talent.¹

Figure 1 The growing IT/software intensiveness of US MNC invention

Importing talent from abroad

According to the National Survey of College Graduates, the IT/software workforce – made up of programmers, computer scientists, and electrical engineers – grew by 112% between 1993 and 2010, while the overall workforce grew by 70%. The foreign share of IT workers grew from 16% in 1993 to 32% by 2010. This phenomenon has been documented by Bound et al. (2015). These changes suggest an extremely large increase in demand that was partially met by importing talent from abroad, through mechanisms like the H-1B programme. 

Wage comparisons provide evidence that the foreign talent supply did not meet demand in the software and IT sectors. Figure 2 shows average compensation per worker for US multinationals across different countries, using publicly available Bureau of Economic Analysis data [https://www.bea.gov/iTable/index_MNC.cfm]. 

Figure 2 Average compensation per employee at US MNC foreign affiliates

Source: Bureau of Economic Analysis.

For average compensation per employee in aggregate, the US is in the middle of the country distribution. If we consider IT-specific industries² like Electrical Equipment Appliances and Components, or Computers and Electronic Products, however, the average compensation per employee at US headquarters was much higher than pay for employees at a foreign affiliate. Average compensation represents many functions within US parents and affiliates, the wages of skilled R&D personnel are likely to be relatively high in both the US and in other countries. Nevertheless, these numbers are clearly consistent with the view that:

• demand has outpaced supply of IT and software workers in the US, and
• raw engineering talent of high quality is available in large quantity and at relatively low prices in emerging markets – especially India and China. 

Interviews with the R&D managers of leading US multinationals both inside and outside the US supported the perception that there is a global shortage of IT and software talent. We also confirmed the need to move abroad to gain necessary access to large foreign supplies of skilled engineers. 

New R&D destinations have an abundant supply of human capital 

The supply of technically skilled workers is abundant in many of the same countries in which we found an increase in US MNC foreign R&D activity – notably India and China. Applications for Indian and Chinese high-skilled workers made up 85% of H-1B visa applications in 2017 (US Department of Homeland Security 2016), and Indian and Chinese students combined made up 18% of doctorates in science and engineering from US universities in 2016.³ This share was even larger in some key disciplines. 

If we view the large number of Indian and Chinese students pursuing graduate education at American research universities as the extreme right tail of a distribution of science and engineering talent, most of which remained at home, then this suggests a massive amount of software- and IT-trained human capital available in China and India. Indeed, Arora and Gambardella (2005a and 2005b) record an abundant supply of engineering and technology graduates in emerging economies. 

The types of activity done in new R&D destinations like China, India, and Israel suggests why they have been chosen as R&D hubs. Bureau of Economic Analysis data shows that R&D-performing affiliates in China, India, and Israel are concentrated in computer and electronic production manufacturing and professional, scientific, and technical services. In more traditional destinations like Germany, Japan, Canada, the UK, and France, R&D is concentrated in traditional manufacturing. 

This suggests the need for human capital to meet the demand of software- and IT-intensive US multinationals has motivated US MNC decisions to do R&D in these locations. Figure 3 shows that patenting and the R&D investment of US multinationals outside the US has grown disproportionately in those regions where IT and software skills are well developed. 

Figure 3 US patenting and R&D investment growth is increasingly concentrated in regions specialising in IT and software

In the two graphs, the horizontal axis measures the degree to which local inventors in a country tend to specialise in IT and software invention, as measured by their USPTO patent grants. This obviously tends to be places in which local IT and software skills are well developed. Regression analysis also implies this positive relationship, which is robust to the inclusion of control variables. 

Conclusions and implications

Our analysis suggests that the increasing reliance on IT and software in innovation, and the growing endowments of specialised human capital in countries like India and China, have induced US MNCs to conduct more R&D in these locations. This has important implications: 

• It suggests that there is a constraint on the supply of IT and software human capital in the US, and that these human resource constraints limit the invention possibilities for US-based multinational firms, even for those firms in which innovative activity and technological opportunity seem to be at the highest levels.⁴ 
• Global flows of investment, people, and ideas can help relax these constraints through open immigration policies and liberal trade and FDI policies. When successful, these flows raise growth, productivity, and consumption possibilities around the world. When US multinationals are able to import talent or export R&D work to the regions in which talent resides, this reinforces US technological leadership. Conversely, politically engineered constraints on this response clearly undermines the competitiveness of US-based firms.

We do not directly explore the impact of immigration policy in our paper, but existing evidence suggests that the openness of the US' labour market to immigrants in the 1990s allowed US-based firms to quickly adapt to the software-biased shift in technological opportunity. This created an unexpected and sharp increase in demand for software engineers, met at the height of the internet boom by importing more software engineers than the US was training in its own universities.⁵ 

Since the early 2000s, however, the US labour market has become more closed to immigration. Caps on high-skilled visas like the H-1B visa programme have grown more restrictive, and evidence from Glennon (2018) shows that these restrictive high-skilled immigration caps drove US MNCs to shift some high-skilled activity abroad in an effort to address these constraints. 

Relatively liberal trade and FDI policies have allowed MNCs to address their human resource constraints by sourcing from abroad, but an open immigration regime for highly skilled workers would further ease this constraint. 

• Finally, in addition to open immigration and liberal trade and FDI policies, the constraint on the supply of IT and software human capital in the US could be addressed with education policies that expand the supply of domestic IT and software human capital. 

Authors' note: We gratefully acknowledge financial support from the National Science Foundation through two grants: 1360165 and 1360170. The statistical analysis of firm-level data on US multinational companies was conducted at the Bureau of Economic Analysis (BEA), United States Department of Commerce under arrangements that maintain legal confidentiality requirements. The views expressed do not reflect official positions of the US Department of Commerce or the NSF.

References

Arora, A, L G Branstetter, and M Drev (2013), "Going Soft: How the Rise of Software-Based Innovation Led to the Decline of Japan's IT Industry and the Resurgence of Silicon Valley", Review of Economics and Statistics 95(3): 757–75.

Arora, A and A Gambardella, eds (2005a), From Underdogs to Tigers: The Rise and Growth of the Software Industry in Brazil, China, India, Ireland, and Israel, Oxford University Press.

Arora, A and A Gambardella (2005b), "The Globalization of the Software Industry: Perspectives and Opportunities for Developed and Developing Countries", Innovation Policy and the Economy 5: 1–32.

Bloom, N, C Jones, J Van Reenen, and M Webb (2018), "Are Ideas Getting Harder to Find?", working paper, Stanford.

Bound, J, B Braga, J M Golden, and G Khanna (2015), "Recruitment of Foreigners in the Market for Computer Scientists in the United States", Journal of Labor Economics 33(S1): S187–223.

Branstetter, L, B Glennon, and J B Jensen (2018a), "The IT Revolution and the Globalization of R&D", in Innovation Policy and the Economy, Volume 19, edited by J Lerner and S Stern, University of Chicago Press.

Branstetter, L, M Drev, and N Kwon (2018b), "Get With the Program: Software-Driven Innovation in Traditional Manufacturing," Management Science.

Glennon, B (2018),How Do Restrictions on High-Skilled Immigration Affect MNC Foreign Affiliate Activity?, working paper.

Jones, B (2009), "The Burden of Knowledge and the Death of the Renaissance Man: Is Innovation Getting Harder?" Review of Economic Studies 76(1): 283–317.

Kerr, S P and W R Kerr (2018), "Global Collaborative Patents", The Economic Journal 128(612).

US Department of Homeland Security (2016), "Characteristics of H-1B Specialty Occupation Workers", Fiscal Year 2016 Annual Report to Congress.

Endnotes

[1] Arora et al. (2013) presented evidence that superior access to software engineering human resources enabled US IT firms to out-innovate their Japanese rivals in the 1990s and 2000s. Branstetter et al. (2018b) found evidence that firms better positioned to exploit technological opportunities realise higher returns to their R&D investments.

[2] Classified using the industry of the foreign affiliate.

[3] National Science Foundation, National Center for Science and Engineering Statistics, Survey of Earned Doctorates.

[4] This is consistent with research by Jones (2009) and Bloom et al. (2018), documenting the rising human resource requirements of innovation.

[5] Arora et al. (2013) argue that Japanese firms were constrained in their ability to respond to this shift, as a result of their rigid and closed-off labour market, and that part of Silicon Valley's evident resurgence vis-à-vis their Japanese competitors was based on American firms' greater access to immigrant talent.