Technology turns reality on its head

Over the last decade, Americans have witnessed a breakdown of traditional industry boundaries. New industries are being created and existing ones restructured by the accelerating pace of technological innovation.

This shift is taking place in the context of a larger economic transition from the Industrial Age that began in the second half of the 18th century to the Information Age, fueled by revolutionary technologies such as the digital computer, the internet, and related information technology.

The increasing pace of technological change impacts human capital markets. Today’s children will grow up in a world unlike that of their parents, as technology transforms media, medicine, transportation and every aspect of how people conduct themselves.

The nanotechnology revolution and gene sequencing, which is just beginning, promises significant upheaval for a vast array of industries ranging from tiny medical devices to new age materials for earthquake resistant buildings. Recent service innovations include social media and online search engines that respond to voice commands.

Reality is getting complicated. Dealing with it will require taking some of the wealth created from the new industries and reinvesting it in skills development for displaced workers and rethinking policies about work and education.

Two things are certain: technological progress is relentless and accelerating, and today’s technology becomes outdated almost as soon as it can be brought to market. Consider the multiple models of smartphones introduced each year.

Advances in technology are causing disruptive changes in mature industries by introducing substitutes or altering the industry landscape by opening up whole new frontiers. For instance, revolutionary change in self-driving technology has enabled even companies such as Alphabet, the parent of Google, to enter the motor vehicle market.

Every major car company is researching and building its own version of a driverless vehicle, and industry observers are predicting they will have autonomous vehicles, internet-connected driverless vehicles without a pedal and steering wheel, on the road in five-to-ten years. The vehicle may turn out to be the ultimate mobile device.

Cutting-edge advances in artificial intelligence will have an unequal impact on livelihoods depending on which industries and individuals can create or adapt to these breakthroughs and which are left behind. They could be as consequential for labor as the agricultural and industrial revolutions that preceded it.

Two-and-a-half million people in the United States make their living from driving trucks, taxis, or buses and all are vulnerable to displacement by driverless cars. These jobs are just the tip of the iceberg.

For example, it is likely that children born today will never drive a car and may have a job in a career that does not yet exist. Robots have displaced manufacturing jobs in electronics, metal products, plastics, and chemicals with activities such as welding, painting, packaging and even operating heavy machinery.

These changes are disorienting and more than a little scary for the ordinary American already dealing with a sense of economic insecurity. Meanwhile, recent developments in robotics, artificial intelligence, and machine labor are automating work that is cognitive and non-manual. Robots are increasingly being used for a variety of tasks from precision agriculture to robotic surgery jobs that were largely immune from technological advances.

Automation will not happen overnight. It will take years to play out fully and will vary across industries, firms, jobs, and activities. But the time is now to come to terms with the uncomfortable reality that in the future, just a fraction of the population may have the talent and education to work alongside machines, while everyone else will bear the brunt of the changes.

These discontinuities raise important public policy issues about the social framework that makes sure those who are losing their jobs are able to stay afloat long enough to pivot to new opportunities and force us to rethink issues such as providing a guaranteed universal basic income. The future is arriving sooner than we thought and our country is unprepared.

Originally Published: April 29, 2017

Private firms offer a route to financing infrastructure

President Trump and his advisors have identified recruiting private firms as active participants as one solution to the choking shortage of money to finance critical infrastructure needs. He’s right, but maximizing the private sector’s impact will require the administration to think outside the box.

If properly structured, public-private partnerships could tap into billions of dollars of private capital hungering for low-risk investment opportunities that offer decent returns. Piles of dough would be deposited on the front steps of city halls and state houses with the steely hand of the private sector at the tiller, minimizing the need for scarce taxpayer dollars to get infrastructure projects underway.

This means designing such partnerships as overtly commercial enterprises able to demonstrate reasonable prospects for earning reliable income streams large enough to pay consistent returns to their private investors. Not a simple challenge to be sure. But scarcely one that’s beyond the capabilities of Wall Street’s more innovative investment bankers.

Making this work on a sufficiently large scale would require significant rethinking of how government deals with private firms (which may be overdue anyway), since some of these partnerships may require user charges to generate the necessary income streams. If approached creatively, this could actually enhance the likelihood that the activities of these partnerships would meet environmental goals and other regulatory mandates that serve the public interest.

In many jurisdictions, the public may not sit still for turning over the responsibility to operate an infrastructure project to the private sector because they know a business’ natural instinct is to maximize profits. Government could set up some sort of regulatory commission to oversee the project like they do for utility companies. But a better approach might be to set up an independent commercial corporation fully funded by user fees to build, own, and operate the infrastructure asset so taxpayers can participate in any upside from the project.

The state or local government could solicit bids from private investors to buy shares of equity ownership in return for annual dividends paid by the corporation. That brings private equity capital to the corporate balance sheet, reducing the amount of debt capital it has to issue.

In theory, government’s incentive is to offer the most service for the lowest cost. Private investors, on the other hand, have the opposite incentive: to charge the highest user fees the market can bear while providing the least service it can get away with.

But a second class of private investors would likely purchase equity shares in the enterprise mainly because they have a vested interest in assuring better roadways or other transportation infrastructure in the area. These investors might be private utility companies, local banks, and other local firms whose future revenue growth depends heavily on rising levels of economic activity. This class of owners would push for user fees that make sense from a financial standpoint and service levels that meet public needs in a financially responsible manner.

This model may be a reliable way to ensure that, for example, the original cost of every facility is evaluated on a lifecycle basis so customers and operators alike don’t wind up being confronted by expensive ongoing maintenance nightmares. There would also be the certainty of long-term financial commitments so taxpayers never have to deal with orphaned facilities displaced by disruptive technologies such as autonomous ride sharing vehicles.

This model holds owners responsible for sound asset management in a clear and unambiguous way. Opportunities for abuse by limited-life warranties, guarantees written by “paper companies” that melt into the woodwork when push comes to shove, and the kind of multi-party finger pointing that only ends up enriching the legal profession would be minimized. These realities are unlikely to be lost on the relevant parties.

Alternative models based on elaborate legislative mandates might accomplish the same thing. That is, if you believe the necessary legislation could be passed without being riddled with compromises, trade-offs, escape clauses and weasel language.

originally published: April 15, 2017

No easy or cheap fix for America’s infrastructure

Earlier this month, the American Society of Civil Engineers’ “2017 Infrastructure Report Card,” which looks at 16 categories of infrastructure from schools to airports to dams, gave the nation an overall grade of D+. Creative approaches can be used to finance some of the needed improvements, but others will need to be paid for the old-fashioned way.

The report is yet another in a series of reports making the case that America has under invested in infrastructure for decades. Such chronicles of wretched conditions are a national sport that is nearly as popular as the Kardashians. But although much of the material is familiar, infrastructure is a gift that keeps on giving; there always seems to be something new to chew on.

The report card projects that $4.59 trillion will be required to bring America’s infrastructure to a grade of B. That is more than the nation’s annual budget of about $4 trillion.

Americans can quibble about the actual size of these projections, just as maritime historians quibble about the size of the iceberg that sank the Titanic. But it scarcely matters whether the estimates are off by 5 or 10 percent (give or take). What matters are the general proportions of these needs and the risks for the U.S. economy if they are not addressed. The longer we wait, the bigger the problem becomes.

Most who deal with this issue agree that the country’s infrastructure is in a bad way, but there is much partisan disagreement over how to pay for the fix.

Using public-private partnerships to invest in infrastructure was one of President Trump’s major campaign promises, but fiscal conservatives in Congress are reluctant to back massive spending that exacerbates the federal budget deficit and skyrocketing federal debt.

Democrats, on the other hand, are for more direct federal spending. By reducing taxes on overseas profits, they believe some of the estimated $2-$3 trillion companies have kept outside the U.S. could be repatriated. The result is that the political hills come alive with the sound of heated debates over proposals to address the infrastructure gap.

The permanent political aristocracy’s failure to deal with infrastructure reflects the simple fact that talking about balancing the budget is easy, but doing the things you have to do to balance it is hard. By the very nature of the process, politicians are focused on the very near term.

Upcoming elections, like hangings, have a way of focusing the mind on the here and now. That is why the federal gasoline tax of 18.4 cents per gallon and the diesel tax of 24.4 cents per gallon, the most important sources of federal transportation funding, have not risen since 1993. During that time, they have lost about 40 percent of their purchasing power due to inflation. Fuel tax revenues can no longer keep pace with needs.

This is not just a problem with politicians, it’s also a problem with voters, who say the deficit is a major concern, yet favor lower taxes, more benefits and fixing our infrastructure. Put simply, they don’t want to pay for the government they want.

It’s time to get real. Nothing works without a funding source and we will need hard cash to correct our under-investment in infrastructure. The feds, state and local governments, and the private sector have plenty of access to capital markets to finance infrastructure; the real issue is identifying revenue sources such as user fees or taxes to repay the debt.

A partial solution is to minimize the need for scarce government dollars by recruiting private firms as partners to help start, fund, and run infrastructure projects that have predictable revenue streams, like toll roads. But a larger universe of projects such as schools, dams, and local roads, for example, cannot be monetized.

Infrastructure’s biggest challenge is funding. In the real world, that comes down to a choice between taxes and user fees. There is no free lunch.

originally published: April 1, 2017