Public Policy

Can Machines Think ?

Posted on by Joseph

In 1950, Alan Turing, theoretical mathematician responsible for breaking the Nazi Enigma code during World War II, who is considered the father of modern computer science and artificial intelligence (AI), posed a fundamental question: “Can machines think?”

Today we are on the verge of answering Turing’s question with the creation of AI systems that imitate human cognitive abilities, interact with humans naturally, and even appear capable of human-like thinking.  These developments have sparked a global discussion about the need for comprehensive and coordinated global AI regulation.

Implementation would be a tall order.  Even if regulations could keep up with the pace of technological change, passing a framework acceptable to countries that would view it through the lens of self-interest would be a daunting task.

Turning was just 41 when he died from poisoning in 1954, a death that was deemed a suicide. For decades, his status as a giant in mathematics was largely unknown, thanks to secrecy around his computer research and the social taboos about his homosexuality.  His story became more widely known after the release of the 2014 movie, “The Imitation Game.”

Alan Turing played a foundational role in the conceptual development of machine learning. For example, one of his key contributions is the Turing Test he proposed in his seminal 1950 paper, “Computing Machinery and Intelligence.”

The Turing Test is a deceptively simple method of determining whether a machine can demonstrate human intelligence.  If a machine can converse with a human without the human consistently being able to tell that they are conversing with a machine, the machine is said to have demonstrated human intelligence.

Critics of the Turing Test argue that a computer can have the ability to think, but not to have a mind of its own. While not everyone accepts the test’s validity, the concept remains foundational in artificial intelligence discussions and research.

AI is pretty much just what it sounds like—getting machines to perform tasks by mimicking human intelligence. AI is the simulation of human intelligence by machines. The personal interactions that individuals have with voice assistants such as Alexa or Siri on their smartphones are prime examples of how AI is being integrated into people’s lives.

Generative AI has made a loud entrance. It is a form of machine learning that allows computers to generate all sorts of content. Recently, examples such as ChatGPT and other content creating tools have garnered a whole lot of attention.

Given the rapid advances in AI technology and its potential impact on almost every aspect of society, the future of global AI governance has become a topic of debate and speculation.  Although there is a growing consensus around the need for proactive AI regulation, the optimal path forward remains unclear.

What is the right approach to regulating AI?  A market-driven approach based on self-regulation could drive innovation. However, the absence of a comprehensive AI governance framework might spark a race among commercial and national superpowers to build the most powerful AI system. This winner-take-all approach could lead to a concentration of power and to geopolitical unrest.

Nations will assess any international agreements to regulate AI based on their national interests. If, for instance, the Chinese Communist Party believed global AI regulation would undermine its economic and military competitive edge, it would not comply with any international agreements as it has done in the past.

For example, China ratified the Paris Global Climate Agreement in 2016 and pledged to peak its carbon dioxide emissions around 2030. Yet it remains the world’s largest emitter of greenhouse gases. Coal continues to play a dominant role in China’s energy mix and emissions have continued to grow.

It would be wise to be realistic about the development and implementation of global AI regulations.  Technology usually does not advance in a linear fashion. Disruptions will occur with little to no foresight. Even if a regulatory framework can keep pace with technological advancement, countries will be hesitant to adopt regulations that undermine their technological advancement, economic competitiveness, and national security.

Ford Motor Co. and Industrial Policy

Posted on by Joseph

The U.S. government is giving the Ford Motor Co. a $9.2 billion loan, by far the biggest infusion of taxpayer cash for a U.S. automaker since bailouts during the 2008 financial crisis, to build three battery factories in Kentucky and Tennessee.  Neither Ford nor the Energy Department (DOE), which provides loans at far lower interest rates than those available in the private market, have revealed details about the loan.

The U.S. is taking a page from Beijing’s playbook.  China has a top-down industrial policy, with serious government planning and support of target industries. China’s sustained industrial policy has yielded the world’s largest battery manufacturers.  Between 2009 and 2021, the Chinese government poured more than $130 billion of subsidies into the EV market, according to a report last year by the Center for Strategic and International Studies.  Today, more than 80 percent of lithium-ion battery cell manufacturing capacity is in China.

Simply put, industrial policy means that centralized agencies formulate national visions and programs to develop specific industries.  It has been a toxic phrase in American politics.

As Gary Becker, who won the Nobel Prize for Economics in 1992, said, “The best industrial policy is none at all.” It has long been associated with pork barrel politics, picking winners, and crony capitalism.  The political rhetoric has been that the free market works best and is closely associated with freedom and democracy. The history of the U.S. does not square with this perspective.

On the surface, Ford would seem an unlikely party to receive the largest loan ever extended by the Department’s Loans Programs Office.  Just last month, Ford touted having almost $29 billion of cash on its balance sheet and more than $46 billion in total liquidity.  It is worth nothing that one of the best known loans made by the DOE was $465 million to Tesla in 2010 to support manufacturing of the Model S.

Ford aims to close the gap with Tesla on electric vehicles, just as the U.S. aims to close a similar gap with China. Ford told investors early last year that it would put $50 billion into its EV manufacturing efforts. By the end of 2026, the company wants to make two million EVs a year.

Starting with Alexander Hamilton, the first Secretary of the Treasury, who outlined a strategy for promoting American manufacturing both to catch up with Britain and provide the material base for a powerful military.  Hamilton’s “Report on the Subject of Manufacturers” promoted the use of subsidies and tariffs.  Similar practices have been expressed in various forms throughout American history.

During the 19th and 20th centuries, the government played an active role in promoting economic growth, using policies such as high tariffs to protect strategic industries, federal land grants, and subsidies for infrastructure development. The federal government has sometimes backed failures, but it also has remarkable success stories, such as nuclear energy, computers, the Internet, and building the interstate highway system

These days, industrial policy is viewed more positively, spurred by bipartisan concerns about the competitive threat China poses.  U.S. programs are now underway to cover semiconductor production, development of critical technologies, to secure key domestic supplies and support industries that are considered strategically important.

For example, subsidies from the Inflation Reduction Act and Infrastructure Investment and Jobs Act are spread across the EV value chain and are carpet bombing the entire automobile industry.  There are tax credits for sourcing critical minerals within the U.S. or friendly countries, for manufacturing or assembling the batteries and EVs they go into, for the consumers who buy the vehicles, and even for anyone building the public chargers needed to keep those vehicles moving.

The debate over industrial policy will continue because it gets to the longstanding controversy over the role of the government in our economy.  One thing is clear: the rosy rhetoric about the U.S. not engaging in industrial policy is contradicted by the country’s history.

It’s time to hold social media accountable for what appears on their platforms

Posted on by Joseph

Large social media platforms such as Alphabet (Google), Facebook (now Meta) and Twitter like having it both ways when it comes to taking responsibility for the content on their platforms.

On one hand, they say they are merely platforms for people who post content, and as platform providers are not responsible for what appears. On the other hand (isn’t there always), they actively determine what appears on their platforms, in the same way newspapers decide what stories to run.

Can social media platforms really say with a straight face that they are not responsible for what appears on their platforms when they determine what constitutes suitable content?

Internet social media platforms are granted broad safe harbor protections against legal liability for any content users post on their platforms. The arguments these platforms make for escaping legal liability are spelled out in one sentence in Section 230 of the 1996 Communications Decency Act: “No provider of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” In essence, Section 230 gives websites immunity from liability for what their users post.

As Congress considers amending or repealing Section 230, perhaps one immediate step should be to give the Federal Communications Commission oversight of the platforms’ content decisions.

The Communications Decency Act passed in 1996 when the Internet was in its infancy and Congress was concerned that subjecting hosting platforms to the same civil liability as all other businesses would retard their growth. It was written before Facebook and Google existed.

In effect, big tech companies benefit from a federal law that specifically protects them. The same sweetheart deal is not available to traditional media companies and publishers. When you grant platforms complete immunity for the content their users post, you also reduce their incentives to remove content that causes social harm.

Congress’s expectation in enacting Section 230 was at least two-fold. First, it hoped protection from civil suits would provide an incentive for websites to create a family-friendly online environment that would shield children, hence the Good Samaritan title of this section. Second, Congress hoped it would promote the growth of the fledgling Internet economy by giving it partial protection from federal and state regulation.

Fast forward 25 years and things look a whole lot different than they did in 1996. The Section 230 protections are now desperately out of date. The largest and most powerful companies today are big tech companies that have enormous resources and advanced algorithms they use to help them moderate content. It is time to rethink and revise the protections.

There is growing consensus for updating Section 230. Both Democrats and Republicans apparently agree that these companies should not receive this government subsidy free of any responsibility and that they should moderate content in a politically neutral manner to provide “a forum for a true diversity of political discourse”.  During his presidential campaign, President Biden said Section 230 should be “revoked, immediately.” Senator Lindsey Graham (R-SC) has said: “Section 230 as it exists today has got to give.”

Before amending Section 230, Congress should make sure that changing it won’t do more harm than good. While lawmakers argue about whether Section 230 should be amended or indeed repealed, one simple and immediate step toward making big tech companies more transparent would be to require them to submit to an external audit conducted by the Federal Communications Commission.

Such an approach is not perfect, of course, but it would force the network platform companies to have to prove that their algorithms and content-removal practices moderate content in a politically neutral manner, not partisan instruments and prioritize truthfulness and accuracy over user engagement.

This would be consistent with one of Congress’s findings when it enacted Section 230: “The Internet and other interactive computer services offer a forum for a true diversity of political discussion, unique opportunities for cultural development, and myriad avenues for intellectual activity.”

Sausage making and the President’s Build Back Better legislation

Posted on by Joseph

The legislative process is rarely pretty in the best of times, never mind in times like these.  Many people console themselves with this reality by quoting Otto von Bismarck, the pragmatic Prussian politician who, among other things, was the first chancellor of the German Empire from 1871 to 1890.

He is often erroneously quoted as saying “Laws are like sausages.  It is best not to see them being made.”  There has been a lot of sausage making going on in full view at the White House and in Congress over the last several months on the President’s Build Back Better legislation.

When a big bill makes its way through Congress, it highlights political divisions and can seem disconnected from the average American’s life. The Biden administration’s quest for a legislatively viable version of its Build Back Better agenda is an example.

Several of the administration’s promises have been abandoned in the new package, such as free community college and instituting a clean electricity standard with penalties for utilities that don’t comply.  Senator Joe Manchin, D-West Virginia, kneecapped the provision to retire coal and natural gas plants.

Other programs that were initially going to be permanent will instead be set to expire in a year or two or five, like the expanded child tax credit and expanding Medicaid in the 12 states that have not already done so.  It merits noting that once entitlement programs are established, they are famously difficult to repeal.

Still, the $1.75 trillion package contains a wide-ranging set of programs such as universal preschool for all 3- and 4-year olds, subsidized child care that caps what parents pay at 7% of their income, expanded Medicare to cover the cost of hearing benefits, and expanded tax credits for 10 years for utility and residential clean energy to reduce pollution, including electric vehicles.  Also notable is that although an overwhelming majority of Americans favor government action like Medicare negotiating with drug companies to reduce drug prices, that policy in not in the proposed legislation.

While the White House claims the legislation would not add to the deficit because of tax increases on corporations and the affluent, finding the taxes to pay for this package is proving difficult.  For example, Sen. Kyrsten Sinema, D-Arizona, is opposed to increasing the corporate tax to 25% or 26% and raising personal income tax rates. The progressive wing of the Democratic Party is now proposing annual taxes on billionaires for unrealized capital gains on stocks that have not even been sold and received as income.

According to an analysis from the University of Pennsylvania’s Wharton School of Business, the proposed new taxes and tax increases to pay for the $1.75 trillion bill would raise nearly $470 billion less than the White House claims.

With the President out of the country, Democrats are arguing among themselves over the details of the legislation.  House progressives are adamant about requiring the bill to be a done deal before they will vote for the $1.2 trillion bipartisan infrastructure bill that has been passed by the Senate because they don’t trust moderate Democrats to keep their word.

As the late, great New York Yankee catcher Yogi Berra said: “It ain’t over till it’s over.” So, the public sausage making, also known as lawmaking, will continue on Capitol Hill over the President’s Build Back Better legislation. As always, the devil is in the details.

Strategy and the COVID-19 pandemic

Posted on by Joseph

Residents and workers at U.S. nursing homes and long-term care facilities have accounted for a staggering proportion of COVID-19 deaths. The prognosis is particularly poor for elderly individuals who contract the virus. Around 80 percent of U.S. COVID-19 deaths have been among people 65 and older, according to the Centers for Disease Control and Prevention. These numbers highlight the failure of government officials to think strategically.

The disease is particularly lethal to older adults with underlying health conditions and can spread easily through facilities where many people live in a confined environment and workers move from room to room. Because of residents’ close proximity, these places are alike petri dishes for the coronavirus. At least 50,000 residents and workers have died from the virus at U.S. nursing homes and other long-term care facilities for older adults.

This figure may be understated because states differ in how they report deaths of residents in long-term facilities. For example, some do not include incidents of a resident dying in a hospital.

The lack of a national strategy to ramp up COVID-19 testing in congregate care facilities and to provide protective equipment to staff made it easier for the virus to spread in these densely populated settings. State decisions to transfer recently recovered COVID-19 patients back into long-term care facilities also increased the risk to this population. New York State, for example, mandated that nursing home facilities admit actively ill COVID-19 patients.

Despite early warnings based on fatality rates in China and Italy that people over 65 were the most vulnerable to the novel coronavirus, the national and various state strategies for dealing with the pandemic had major shortcomings.

Successful business people understand that strategy is about making choices, such as who is the target customer they wish to serve. Additionally, they understand that a firm’s resources represent the critical building blocks of a successful strategy. They determine not what an enterprise wants to do but what it can do.

Equally important, they recognize that resources are finite. Resources don’t spring full-blown out of Zeus’ forehead. Put simply, a key responsibility of leadership is to identify, build, and deploy resources in pursuit of business goals to provide value to the target customer and adjust as market conditions change.

Brand-obsessed leaders at every level of government have to be honest about clearly defining at-risk populations and allocating scarce resources to protect those people. In the case of COVID-19, that means the elderly and those with underlying conditions. For example, knowing that nursing home and long-term care residents and workers are most at risk, a targeted strategy would have allocated finite resources such as testing, protective equipment and other medical supplies to this vulnerable population.

Strategy is about making hard choices with imperfect information. Anyone running a successful enterprise understands that trade-offs matter. Leaders have to make choices about what they will do and what they will not do based on facts and the reality of limited resources. This requires them to choose carefully among available resources and sensibly allocate them to the problem at hand.

Another challenge when it comes to developing a successful strategy in a competitive environment is not to confuse means with ends. You can’t have everything at once, so your goals should be realistic and feasible, not pipe dreams. Words to live by.

You would be right to conclude that U.S. political leaders could have done a better job of protecting the seniors who are most vulnerable to the coronavirus. They were left exposed by the failure to develop an intelligent strategy. Americans can only hope those leaders have developed a realistic strategy to protect seniors if a second wave of the virus comes in the fall. It’s better to go too far than not far enough when it comes to protecting the most vulnerable in society.

Demography is destiny

Posted on by Joseph

The world is undergoing a dramatic transition due to the confluence of disruptive forces such as accelerating technological change and globalization. But another important factor that often gets overlooked will shape society and the global economy over the coming decades: The life expectancy of humans is increasing. Fertility rates are falling, and the world’s population is growing gray.

This unprecedented demographic shift has major implications for U.S. fiscal policy. Entitlement programs will be increasingly strapped as the number of beneficiaries increase and the number of working people who pay for the benefits shrinks.

Due to advances in medical science and technology, people – especially the well to do – expect to live longer, better lives than they might have imagined even three decades ago. According to the Census Bureau, the average American born today can expect to live to about 80, up dramatically from the average of 68 in 1950.

Additionally, the Census Bureau notes that whereas the average American woman in 1950 had 3.5 children during her lifetime, the figure today has fallen below two. The causes of declining fertility include the rising social status of women, widespread availability of birth control, and the growing cost of raising children.

French sociologist and philosopher Auguste Comte coined the aphorism “demography is destiny” with dubious finality almost 200 years ago. But that does not suggest that destiny is immutable, nor is it inevitable. Just as aging individuals must adjust their lifestyles to maintain personal vitality, societies with aging populations must adjust policies to preserve and promote their economic prosperity.

Demographic trends can have big implications. This shift from a predominantly young to predominantly older population has both broad macro-economic implications and important financial consequences. Consider that many U.S. entitlement programs were created with the assumption that there would be a relatively small group of old people and a large number of working-age people, followed by an even bigger cohort of children.

According to the Census Bureau, 47.8 million Americans are 65 and over. This figure is projected to nearly double to 83.7 million by 2050. Just 10 years ago, 12.5 percent of the population was 65 and over. Today, it is 15 percent, and is projected to reach 21 percent in just 20 years. By 2030, one in every five U.S. residents will be over 65. For decades this was the age when people were expected to end their careers and embrace a life of leisure, following Andrew Carnegie’s advice to spend the first third of life getting educated, the second third getting rich, and the last third giving money away.

As the baby boomer generation retires, fertility rates keep falling and life expectancy continues to increase, there will be too many beneficiaries and too few taxpayers. In 1950, the American economy had 8.1 people of working age for each person of retirement age. Recent figures indicate that this “dependency ratio” as the demographers call it, has shrunk to just over 5-1. By 2030, the Census folks estimate it will have fallen to 3-1.

Caring for large numbers of elderly people will put severe pressure on government finances. More specifically and painfully, the U.S. may be facing major tax increases, significant budget cuts, or most likely some combination of the two to secure the future stability of old age entitlement programs. In particular, Social Security and Medicare, which provides health insurance to the aged, will rise as a share of gross domestic product as baby boomers retire.

With the retirement of baby boomers and the rising number of elderly in the population, the nation will face a slow-motion train wreck absent changes in government fiscal policy. The good news is the slow motion part, which gives Americans enough time to take on the challenge of real entitlement reforms that will allow the country to successfully navigate this demographic transition.

Labor Unions And Inequality

Posted on by Joseph

In the wake of the Great Recession, economic inequality – the extent to which income and wealth are distributed unevenly across a population – has emerged as a major issue in the United States.

Since the late 1970s, there has been enormous change in the distribution of income and wealth in the U.S. The gap between the “haves” and the “have-nots” has widened, with a small portion of the population reaping an increasingly larger share of the country’s economic rewards. Warren Buffet got it right when he said, “There’s been class warfare going on for the last 20 years and my class has won.”

The average American has lost. Since the mid-1970s, wages have remained stagnant and middle-class earnings have lagged the cost of living.

There are a number of factors contributing to economic inequality, downward mobility among working-class Americans and the dangerous fissures it has caused American society. These include government tax and regulatory policies, the acceleration of finance capitalism, culture, immigration, globalization, and the rate of technological change.

Frequently overlooked is the declining strength of private-sector labor unions. In 1979, unions represented 24 percent of the private sector labor force; today only 6.5 percent of private-sector workers are unionized.

The effects of this decline are fiercely debated. Conservatives argue that labor unions decrease competitiveness and business profitability. Progressives say that in an era of globalization, companies threaten to ship jobs to factories offshore to extract concessions from unions with impunity. For sure, unions raise wages, but that doesn’t necessarily mean they reduce profitability or diminish competitiveness. Consider the success of unionized firms such as Southwest Airlines and UPS.

American manufacturing and wages suffered as U.S. companies engaged in extensive offshore outsourcing of decent-paying domestic jobs to China and other low-wage countries under the banner of free trade, prioritizing short-term profits over long-term investments and the public interest. For example, from 2000-2016, the U.S. shed five million manufacturing jobs, a fact that supporters of free trade and globalization rarely mention.

The loss of traditional manufacturing jobs has contributed to income inequality and declining union membership. According to a report by the Washington-based think tank the Economic Policy Institute, if unions had the same presence in the private sector today as in 1979, both union members and non-members would be making about $2,500 more each year.

Many companies have built their business models around offshoring manufacturing to reduce costs without passing the savings on to consumers. They view the wages and benefits that once underpinned a middle-class lifestyle as obscenely excessive. That’s why they support free trade and use their political power to garner the support of both major political parties, helping accelerate the demise of labor unions. Government turned a blind eye as corporations packed up good jobs and send them overseas, weakening private-sector unions.

The American public has repeatedly been told that policies that restrain foreign competition are a form of protectionism that subsidizes inefficient domestic industries and raises prices. The issue of job losses is ignored. The benefits of free trade allegedly exceed the costs of lost jobs, especially for those who work with their hands. Assumed consumer benefits should be considered when it comes to trade policy, but so should giving working-class people a fair shot at the American Dream. Americans need a more balanced way of thinking about free trade and the offshoring of American jobs.

Is it any wonder that President Trump’s campaign slogan – “Make America Great Again” – resonated with ordinary Americans? This rhetoric is reminiscent of 1988 Democratic Presidential candidate Rep. Richard Gephardt’s slogan “Let’s Make American First Again.”

Writing over 2400 years ago, the Greek philosopher Aristotle captured the importance of inequality when he wrote, “A polity with extremes of wealth and poverty is a city not of free persons but of slaves and masters, the ones consumed by envy, the others by contempt.”

Capping retirement accounts is a worrisome tax-cut notion

Posted on by Joseph

Tax cuts often look like free lunches for taxpayers. Such is the case with the recent federal tax reform proposal. But tax cuts eventually have to be paid for with tax increases, closing of tax loopholes, or spending cuts, and that’s why average Americans need to pay attention to the unfolding debate on Capitol Hill.

The first red flag came several weeks ago when it was reported that House Republicans were thinking of drastically slashing the tax deduction for 401(k) contributions from the current annual $18,000 or $24,000 for workers over 50 to as little as $2,400, and mandating the use of after-tax Roth accounts for retirement savings.

Retirement income in the United States comes primarily from three sources: Social Security, pension plans sponsored by public and private employers and individual savings in taxable and tax-advantaged accounts. There are generally two types of employer-sponsored pension plans: defined benefits and defined contributions.

Back in the day, workers could depend on defined benefit pensions in which retirees received a predetermined monthly annuity, either for the rest of their lives or those of their spouses. The benefit amount was usually based on an employee’s wage, years of service and age at retirement. The employer was responsible for contributing assets sufficient to fund the promised benefits.

But employers claimed these plans left them overburdened by pension obligations and that defined contribution plans were much less expensive.

Now defined-contribution pensions are the most common employer-sponsored plans.

Around 54 million American workers participate in about 550,000 so-called 401(k) plans, named after the section of the tax code that created them in 1978. These plans hold more than $5 trillion in assets. Tax-deductible contributions to defined contribution plans are predetermined, but the amount of benefits received upon retirement is not guaranteed.

Workers pay taxes when they withdraw the funds, manage the money themselves and hope the market doesn’t crash just when they retire. While in a defined benefit plan the employer bore the risks associated with investing assets in the plans, the employee is responsible for bearing those risks un-der defined contribution.

When news filtered out that the deduction for 401(k) contributions might be slashed, retirement experts, Vanguard, Fidelity and other large mutual fund companies that manage assets in the lucrative 401(k) business joined together and howled like a pterodactyl. President Trump tweeted, “There will be NO change to your 401(k). This has always been a great and popular middle-class tax break that works, and it stays!”

Fortunately, the long-awaited GOP tax plan unveiled last week leaves current contribution limits in place and abandons the notion that American workers are saving too much for retirement.

What were these Mighty Mendicants thinking? Cooking up a raiding party on workers’ 401(k) plans was a way to pay for the middle-class tax cuts lawmakers claim they want to provide. They also want to significantly cut corporate taxes to catch up with the rest of the world, which has already done so.

The proposal was pure budget chicanery. Capping what the average American can place in these pension plans would force workers to pay more in taxes now rather than when they make withdrawals from their pension account. In effect, the proposal would have helped pay for tax cuts by pulling future tax revenues forward.

Equally important, it would have undermined workers’ retirement security since the up-front deduction is an important incentive for workers to participate in retirement plans. Mil-lions of Americans depend on the favorable tax treatment of 401(k)s, IRAs and other savings vehicles to build long-term financial security.

The fate of House Republicans’ tax proposal is uncertain; the twists and turns ahead will surely provide first-rate entertainment. And taxpayers had best pay close attention to the tax legislation as it makes its way through Congress to ensure that the notion of capping 401(k) contributions is not resurrected as lawmakers scramble to find ways to pay for the tax cuts.

 

Technology turns reality on its head

Posted on by Joseph

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

Posted on by Joseph

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