Many critics of the Affordable Care Act warn that that the expansion of subsidized coverage has the potential to reduce labor force participation. The bill’s champions, in contrast, often characterize this as a feature and not a bug. Ezra Klein’s 2011 remarks on the subject are representative:

If you make health-care insurance cheaper and make it harder for insurance companies to deny people coverage, then a certain number of people who would like to leave the labor force but can’t afford or access health-care insurance without their job will stop working.

To understand why, imagine a 62-year-old woman who works for IBM and beat breast cancer 10 years ago. She wants to retire. She has the money to retire. But no one will sell her health care under the status quo. Under the health-reform law, she can buy health care in an exchange because insurers can’t turn her away due to her history of breast cancer. So she’ll retire. Or imagine a 50-year-old single mother who wants to home-school her developmentally disabled child but can’t quit her job because they’ll lose health care. The subsidies and the protections in the Affordable Care Act will give her the option to stop working for awhile, while under the old system she’d need to stick with her job to keep her family’s health-care coverage. That’s how health-care reform can reduce the labor supply. If either case counts as a destroyed job, then so does my winning the lottery and moving to Scotland in search of the perfect glass of whiskey.

Moreover, this would happen for any health-care reform that reduced costs and improved access. So when Republicans say that they want a better health-care reform bill that does even more to reduce costs, they’re calling for legislation that, according to them, would “destroy” even more jobs than the Affordable Care Act. If they’re against all legislation that might destroy jobs in this way, then they’re against making health care cheaper. In fact, by that logic, we could just jack the price of health-care insurance up and make it easier for insurers to turn individuals away. Then even more people would have to stick with their employers. Job creation!

One distinction that Ezra neglects is that right-of-center health reformers tend to emphasize reducing costs while the ACA places a great deal of emphasis on reducing the net prices paid by low- and middle-income households, and in particular the net prices paid by older individuals earning modest incomes, by increasing subsidies. The wedge between costs and net prices matters insofar as subsidies are financed by taxes, and there is a broad consensus that taxes have at least some impact on the labor market. That said, Ezra’s larger point is well-taken. Some observers have (controversially) suggested that one reason why male labor force participation has declined is that the cost and the net price of various important goods, like food and entertainment, are quite low by historical standards, and at least some native-born less-skilled men who’ve seen their labor market position deteriorate have thus chosen not to pursue the limited private employment options available to them. Mike Konczal of the Roosevelt Institute has derisively referred to this as the “Great Vacation” theory of employment decline. 

Whether or not we think declining labor force participation in response to the expansion of subsidized coverage represents a moral advance, the extent of the decline obviously matters, as a larger decline will tend to reduce tax revenues by a larger amount than a smaller decline. Andrew Biggs of the American Enterprise Institute has called for eliminating or reducing the Social Security payroll tax for workers over the age of 62 on the grounds that doing so will encourage an increase in labor force participation among older workers, and that the resulting revenue gains will come close to making up for the reduction in Social Security payroll tax revenues. Ezra references a 62-year-old woman who suffered from breast cancer a decade ago, but of course the expansion of subsidized coverage might prompt other workers with less compelling personal stories to retire or reduce their work hours earlier than they might choose to otherwise, and this will tend to reduce revenues that might be devoted to, for example, anti-poverty programs.

A number of scholars have sought to estimate the labor market impact of the expansion of subsidized coverage under the ACA. Last year, three scholars at Emory University’s Rollins School of Public Health offered the following assessment, drawing on evidence from state-level public health insurance expansions:

The Affordable Care Act aims to substantially increase public health insurance eligibility among low-income childless adults. The literature suggests that public health insurance may have important implications for labor market participation. With data from the March supplement to the Current Population Survey, difference-in-difference multivariable regression modeling is used to examine the association between state-level public health insurance expansions and the likelihood of full-time employment, part-time employment, and not working among eligible childless adults. Results indicate that public health insurance eligibility is associated with a 2.2 percentage point decrease in full-time employment, a 0.8 percentage point increase in the likelihood of part-time employment, and a 1.4 percentage point increase in the likelihood of not working. These associations were greatest among those with worse health and those aged from 50 to 64 years. This analysis provides important insights into the potential labor market repercussions of health insurance expansions under the Affordable Care Act. 

And more recently, the economists Craig Garthwaite, Tal Gross, and Matthew Notowidigo released a working paper based on the experience of Tennessee, a state that saw a sharp decrease in the extent of subsidized insurance coverage in 2005:

We study the effect of public health insurance eligibility on labor supply by exploiting the largest public health insurance disenrollment in the history of the United States. In 2005, approximately 170,000 Tennessee residents abruptly lost public health insurance coverage. Using both across- and within-state variation in exposure to the disenrollment, we estimate large increases in labor supply, primarily along the extensive margin. The increased employment is concentrated among individuals working at least 20 hours per week and receiving private, employer-provided health insurance. We explore the dynamic effects of the disenrollment and find an immediate increase in job search behavior and a steady rise in both employment and health insurance coverage following the disenrollment. Our results suggest a significant degree of “employment lock” – workers employed primarily in order to secure private health insurance coverage. The results also suggest that the Affordable Care Act – which similarly affects adults not traditionally eligible for public health insurance – may cause large reductions in the labor supply of low-income adults.

But the employment decline they anticipate is relatively modest, but potentially greater than the employment decline anticipated by the CBO:

In 2011, approximately 8.9 million Americans with incomes below 139 percent of the poverty line were covered by employer-provided health insurance. If all states implement the Medicaid expansion, our estimates suggest that approximately 4.2 million of these privately insured individuals will move into public coverage. To place this number in perspective, the Congressional Budget Office estimated that if all states implemented the ACA Medicaid expansion, there would be 16 million additional Medicaid enrollees (CBO, 2010a). In an earlier analysis, the CBO estimated that only 10 percent of the new Medicaid enrollees will previously have had private coverage (CBO, 2009). Our results suggest much larger crowdout among childless adults, which may result in a 16 percent increase in public health insurance enrollees under the ACA.

Our results also speak to the potential for the ACA to decrease aggregate labor supply. In a 2010 Budgetary Outlook, the CBO estimated that all of the combined features of the ACA will result in an approximately 0.5 percentage-point decline in the aggregate employment rate (CBO, 2010b). This amounts to approximately 800,000 individuals leaving employment. The CBO based this estimate on a number of different factors, but the empirical evidence available to the CBO could not fully account for how lower-income Americans without children would respond to the availability of free or heavily subsidized health insurance.

Our estimates suggest that the labor supply consequences for this population could be substantial. In particular, our estimates demonstrate substantial “employment lock” – that is, individuals working primarily to secure private health insurance through an employer. Using CPS data, we estimate that between 840,000 and 1.5 million childless adults in the US currently earn less than 200 percent of the poverty line, have employer-provided insurance, and are not eligible for public health insurance. Applying our labor supply estimates directly to this population, we predict a decline in employment of between 530,000 and 940,000 in response to this group of individuals being made newly eligible for free or heavily subsidized health insurance. This would represent a decline in the aggregate employment rate of between 0.3 and 0.6 percentage points from this single component of the ACA. One must exercise considerable caution when directly applying our results to the ACA, but our results appear to indicate that the soon-to-be-enacted health care reform may cause substantial declines in aggregate employment. [Emphasis added]

There are many ways to interpret the “employment lock” phenomenon. We could see it as an important way to keep people attached to the labor force. Yet we might also see it as a barrier to productivity-enhancing labor market churn, as some workers might be more inclined to take a leap on a promising job opportunity if they are less concerned about having access to affordable health insurance. In a similar vein, low-wage employers might be obligated to offer more attractive employment options that they might under conditions of employment lock, assuming labor demand is robust (a big assumption). 

Karein Weise of Bloomberg Businessweek identifies four proposals for revamping student loans:

1. Right now, many colleges and universities target financial aid resources to attract high-performing students, many of whom are affluent, rather than to students from low-income households. The goal, presumably, is to improve yield and selectivity. And the result is that schools are essentially using Pell Grants to substitute for their own resources. Weise draws on ”Rebalancing Resources and Incentives in Federal Student Aid,” a comprehensive proposal from the New America Foundation’s education policy team, which offers the following correctives: 

Enact a Pell Grant matching requirement for four-year public and private non-profit colleges that enroll a relatively small share of low-income students but charge them high net prices. The goal of the proposal is to put an end to colleges’ financial aid arms war by pushing schools to reallocate their existing institutional aid from merit to need-based aid.

New America also calls for Pell Grant bonuses for four-year colleges and universities that enroll a substantial share of low-income students while graduating at least half of them, as well as Pell Grant bonuses for community colleges that have a high graduation and transfer rate. The goal of the bonus payments is to encourage schools to further reduce the net price paid by low-income students. Among other things, New America also calls for limiting eligibility for Pell Grants to 125 percent of program length, to discourage students from prolonged enrollment. 

2. In “Managing Risk, Reaping Reward: Redesigning Federal Student Loan Policy to Improve Performance in Higher Education,” Stephen Crawford and Robert Sheets describe how federal student loan reform can encourage U.S. colleges and universities to better align the net price of higher education with future incomes. Rather than devote federal student loans solely to broadening access and improving completion rates, Crawford and Sheets call for an emphasis on improving labor market earnings for graduates relative to the cost of attending college, including the opportunity cost. To that end, per Weise, they call for new choice architectures to guide students as they make decisions about how much debt to take on in light of their career aspirations:

[Crawford and Sheets] say current IBR [income-based repayment] options focus too much on the “back end” of student debt—helping students after they have taken on heavy debt. They say federal policy could instead take into account the likely future income of a student when determining how much he or she can borrow in the first place. Australia does this by dividing academic programs into four different “bands” that have different loan limits based on the expected income of graduates and the importance of the studies to national priorities.

The reform agenda outlined by Crawford and Sheets depends on the creation of “a national, open-data platform that can support the large-scale data analytics needed to calculate risk and underwrite loans, provide easy access to the relevant consumer information, and enable effective student-institution matching,” a step that has met with strong resistance from U.S. colleges and universities. 

3. Weise also makes reference to income-based repayment more broadly, a concept that Dylan Matthews ably explored last week in discussing Oregon’s new “Pay It Forward” pilot program.

4. And more radically, she also cites a paper by Sara Goldrick-Rab, Lauren Schudde, and Jason Stampen, all of whom are based at the University of Wisconsin-Madison, which calls for shifting away from student loans and towards direct federal financing of higher education institutions, which would vary according to the need of the student population. Traditionally, the objection to blanket financing of this kind has been that taxpayers at large, including the non-college-educated, would be obligated to subsidize higher education for a relatively privileged population, despite the fact that graduates capture the lion’s share of the benefit. Goldrik-Rab et al. argue that as higher education enrollment becomes more common (the authors suggest that 80 percent of children can expect to be users of higher education in the future, though of course a smaller share will complete their degrees), financing it through taxes becomes a more equitable proposition. The goal of the proposal appears to be to strengthen accountability mechanisms (the federal government would have more leverage over how recipients go about pursuing their educational mission) and also to strengthen the relative position of public higher education institutions and to foster more egalitarian campus cultures. 

My impression is that while options 1, 2, and 3 are broadly compatible, option 4 implies a somewhat different direction for higher education policy. The New America concept of a Pell Grant bonus bears a passing resemblance to the Wisconsin proposal, yet it is more of a supplement to a system still built around individual students. 

Charles Kenny offers an amusing litany of seemingly extravagant expenditures in the course of calling for the abolition of the U.S. Department of Homeland Security, including the following:

The DHS also runs the U.S. Secret Service, an agency that just spent an estimated $100 million guarding a weeklong presidential trip to Africa. That would be more than the entire economic output of Tanzania during Barack Obama’s visit. The Secret Service traveled around the continent with 56 vehicles, including three trucks full of bulletproof glass. The cancellation of a planned Obama family safari at least meant there was no need for the assault team armed with high-caliber rounds against the threat of Taliban-sympathizing cheetahs.

But of course the cost of the president’s visit to Tanzania is a broader reflection of the fact that it is relatively expensive for firms in affluent countries to engage in labor-intensive endeavors in less-affluent countries, like diplomacy or (a far more extreme case) counter-insurgency operations. The harder question to answer is whether the benefits outweigh the costs. Would U.S. influence erode in East Africa if the president of the U.S. did not make occasional in-person visits to the region, or if we thinned the number of diplomatic personnel? And if U.S. influence did indeed decline in East Africa, should we care? My inclination is to think that it would and that we should, but this is definitely not a no-brainer. I would be delighted if there were some stats guru toiling away in the White House, working on identifying the lowest-cost diplomatic missions that promise the highest return. Given the limits of our knowledge, such an endeavor would probably amount to little more than voodoo. (Or perhaps we should replace the U.S. Department of Homeland Security with the U.S. Department of Voodoo Studies.)

And though Kenny’s case against security theater is well-taken, it’s not clear to me that we would yield significant dividends from a deconsolidation of DHS. Though there is a compelling case that we should never have created the agency in the first place, striking a symbolic blow against a culture of fear is not quite enough to merit the expense of yet another reorg. 

Ramesh Ponnuru’s latest Bloomberg View column sketches an alternative immigration reform measure that, among other things:

(a) offers unauthorized immigrants who arrived in the U.S. as minor children a path to citizenship;

(b) strengthens immigration enforcement, with an emphasis on visa overstayers;

(c) and allows for an increase in skilled immigration while cutting back on immigration that aims to reunite extended families.

Ramesh’s bill would not include a guest worker program, and it would not grant a path to legalization or citizenship for immigrants who arrived in the U.S. as adults. But there would be an implicit agreement that if immigration enforcement proves successful, a broader amnesty for unauthorized immigrants is a possibility. (Josh Barro has argued that an informal deal along these lines could prove successful.) I see Ramesh’s proposal as an enormous improvement over the Senate immigration bill, and I hope that the House embraces it as a starting point. 

Yet I am most interested in how we might address the problem of visa overstayers. One model that I find intriguing, yet which might prove a problematic barrier to commerce and a source of resentment, would be a system in which residents of various countries would be obligated to pay visa bonds that would vary according to individual characteristics. That is, while visitors from some countries are unlikely to become visa overstayers, visitors from other countries are far more likely to do so. Moreover, among visitors from a given country, some might pose more of an overstaying risk than others. Sliding-scale visa bonds would account for these differences. Theresa May, Britain’s Home Secretary, has proposed a visa bond pilot program targeting “high-risk” individuals from six countries (India, Pakistan, Bangladesh, Nigeria, Ghana and Sri Lanka), which has attracted strong criticism. The most compelling criticism, albeit a difficult one to evaluate, is that a visa bond risks creating an “a fine is a price” dynamic. Visitors might decide that once they’ve paid the visa bond, they are essentially welcome to stay. This, of course, would defeat the purpose of the visa bond. There are other visa bond models to pursue, e.g., the bond might escalate over time (though this would be difficult to put into practice, and it doesn’t deal with the “a fine is a price” issue), the U.S. government might demand recompense from the home country of the visa overstayers (but it is hard to imagine other countries cooperating with U.S. authorities in this regard), visitors might need to identify sponsors (either individuals or organizations) who will be on the hook financially for visa overstayers, etc., but the problem is fundamentally very hard to solve.  

And then there is the fact that a visa bond contradicts another important U.S. economic policy goal, namely increasing international tourism, an industry that has enormous potential for growth. The World Tourism Organization has found that the U.S. share of global travel and tourism spending has declined from 17.5 percent to 11.2 percent since 2000, a response both to the emergence of other attractive tourist destinations around the world and, perhaps, to a post-9/11 tightening of U.S. borders. Some countries, like China and Brazil, are a source of tourist dollars spent by affluent travelers and of visa overstayers, and threading the needle of not offending the former while deterring the latter is a difficult proposition. 

I’m a fan of Jacob Vigdor’s “assimilation bond” — a fee that immigrants would pay on arriving in the country, yet which would be (partially) paid back in increments in the form of a federal tax credit as they earn income — but one wonders how it would interact with the visa program. It would be impractical to require an assimilation bond of all visitors, whether they intend to settle in the U.S. or not, as doing so would greatly reduce travel and tourism expenditures. But creating a wedge between tourist visas and assimilation bonds will presumably give visa overstayers an advantage over those who go through appropriate legal channels to work and settle in the U.S. I’d be eager to read any bright ideas.

Three times a year, the American Medical Association convenes the Specialty Society Relative Value Scale Update Committee, a group that is charged with determining the value of various medical procedures. And as Haley Sweetland Edwards reports in the Washington Monthly, this committee has enormous power over the U.S. health system, as it essentially sets the prices the public sector pays for medical care — and private insurers in turn use these prices as their baseline for negotiating with medical providers. Edwards concludes by arguing that there are two alternatives to the current arrangement, in which the AMA is given outsized power: the federal government can create an independent, government-sponsored group that represents the interests of taxpayers rather than the medical profession, though even the most public-spirited group would find central planning on this scale difficult if not impossible; or Medicare can abandon fee-for-service medicine (FFS) entirely:

Reformers have been complaining for years that paying providers per procedure creates incentives for gaming and overuse that are difficult, if not impossible, to overcome. Under Obamacare, the CMS is already taking modest steps away from fee-for-service billing by expanding experiments in “bundled payments,” whereby providers are paid a lump sum to take care of patients with certain conditions, like diabetes or heart disease. The AMA, aware of the growing backlash in Washington against fee-for-service, has endorsed some of Medicare’s bundling initiatives.

But we need to go much further. It’s no coincidence that numerous studies have found that the best-quality and lowest-cost health care in America can be found in systems like Veterans Affairs and Utah’s Intermountain Healthcare where doctors are on salary and paid for keeping their patients well, not according to a fee-for-service system. As this magazine has argued (see Phillip Longman, “The Cure”), the federal government should set a certain date at which Medicare will pay only for health services provided by integrated systems.

Such a move would be fiercely resisted by organized medicine, and specialist societies in particular. But it would be the surest way to control the nation’s health care costs while improving health outcomes. And it would have a delightful side benefit: with fee-for-service eliminated, there would be no need to have thirty-one doctors sit in a ballroom in Chicago and centrally plan the pricing minutia of thousands of medical services and procedures. The RUC, in other words, would be made obsolete.

Edwards’ discussion reminded me of James Capretta’s writing on how Medicare FFS has shaped the broader health system:

Employers have been trying for years to move away from Medicare-style FFS in favor of steering patients to higher-quality, lower-cost ­networks of service suppliers. The private sector is also well ahead of the federal government when it comes to disease management and wellness efforts. But employers can only do so much when Medicare, the dominant payer in most health-care markets, pushes in exactly the opposite direction. Because Medicare will finance unlimited use, many individual practitioners and institutions see no reason to give up their autonomy and join an organized delivery model. All manner of ancillary service providers — labs, home health agencies, hospices, and others — also survive as stand-alone operations because of Medicare’s open network and provider-centric payment systems.

One way to facilitate the move from Medicare-style FFS to organized care delivery might be to adopt a competitive bidding approach to Medicare reform, as proposed by Roger Feldman and Bryan Dowd of the University of Minnesota and Robert Coulam of Simmons College. Under competitive bidding, a government plan and private plans compete offer bids to deliver a defined Medicare benefit, and the federal contribution’s premium contribution is pegged to the second-lowest risk-adjusted bid. Medicare beneficiaries would be free to pay more for a higher-priced plan or to pay less for the the plan offering the lowest risk-adjusted bid, in which case they’d be eligible for a rebate. As beneficiaries turn to lower-cost plans, plans would have a strong incentive to embrace organized care delivery models that yield savings relative to FFS. There are, to be sure, legitimate concerns about adverse selection, which Feldman et al. are careful to address.

One of the central arguments for increasing less-skilled immigration is that as the native-born workforce grows more educated, the demand for less-skilled workers is outstripping supply. Michael Clemens has made this argument on a number of occasions, most recently in Foreign Policy magazine. To Clemens’ great credit, he has acknowledged the potential role of technological change in shaping the future U.S. labor market:

People who acquire higher skills create less-skilled jobs that they themselves aren’t suited for. Less-skilled immigrants fill that gap. Machines may be able to take over a few of these jobs; that’s why you’re seeing more self-checkout registers in retail stores. But no machine we’ll have anytime soon can help the elderly bathe safely, clear tables at restaurants, or profitably pick cucumbers. People who do less-skilled essential jobs make skilled work in America possible, and together they make American competitiveness possible. You might never see the people who clean Google’s offices, but the company’s massive contribution to U.S. competitiveness would not exist without them.

We have discussed the limits of Clemens’ examples. The elderly share of the U.S. population is increasing, which will increase the demand for caregivers. But as we make progress in the fight against dementia, a growing number of older Americans will be in a position to meet their own bathing needs. Moreover, as technological change reduces the demand for professionals in other demands, there may well be a shift of native-born workers, including mid-skilled native-born workers, into eldercare. Clearing tables in restaurants is a labor-intensive activity, yet one can easily imagine the business model of restaurants changing in ways that reduces the demand for less-skilled labor. The picking of cucumbers has been resistant to automation in the past, offshoring has long been an option. A large share of cucumbers consumed in the U.S. are grown and picked in southern Mexico.

And recently, as Gosia Wozniacka and Terence Chea of the Associated Press report, we’ve seen a number of breakthroughs in agricultural mechanization. Wozniacka and Chea describe a “Lettuce Bot” that is capable of thinning a field of lettuce in the same time that it would take approximately 20 workers to do the same job by hand. In the past, research into agricultural mechanization had been less of a priority, as there was a large supply of less-skilled laborers. But as this supply has grown smaller, the incentives to invest in mechanization have grown commensurately stronger. Wozniacka and Chea quote a representative of the United Farm Workers of America, who suggests that machine-picked agricultural produce might prove less safe than human-picked produce. Yet there is reason to believe that machine-picked produce will, at the technology matures, prove substantially less expensive. Moreover, farmers can yield substantial benefits by reshaping their fields to accommodate machines. Right now, agricultural fields are optimized for human pickers, but “farming in single rows, raising the beds and even growing varieties with fewer clusters” can greatly facilitate machine-picking. 

Note that agribusiness firms have been among the most vocal and influential constituencies for increasing less-skilled immigration, and that the Senate immigration bill allows for 112,333 temporary work visas for the agricultural sector. The bill also includes a separate path to legalization for workers who have spent 100 days or 575 hours engaged in agricultural labor in the two years prior to enactment, and permanent residence for those who’ve worked at least 100 days a year in the previous five years or 150 days a year for three years. That is, workers who will likely find it extremely difficult to transition from agricultural work to other kinds of work as agricultural mechanization proceeds apace will be granted a fast track to permanent legal residence, and the various benefits it entails. 

Suffice it to say, agricultural mechanization isn’t the only kind of mechanization that is changing the U.S. labor market. David Rotman of MIT Technology Review draws on the work of Erik Brynjolfsson and Andrew McAfee to suggest that robots, automation, and software will have a significant impact on employment levels in law, financial services, education, and medicine as well as in manufacturing, retail, and clerical work:

The contention that automation and digital technologies are partly responsible for today’s lack of jobs has obviously touched a raw nerve for many worried about their own employment. But this is only one consequence of what ­Brynjolfsson and McAfee see as a broader trend. The rapid acceleration of technological progress, they say, has greatly widened the gap between economic winners and losers—the income inequalities that many economists have worried about for decades. Digital technologies tend to favor “superstars,” they point out. For example, someone who creates a computer program to automate tax preparation might earn millions or billions of dollars while eliminating the need for countless accountants.

New technologies are “encroaching into human skills in a way that is completely unprecedented,” McAfee says, and many middle-class jobs are right in the bull’s-eye; even relatively high-skill work in education, medicine, and law is affected. “The middle seems to be going away,” he adds. “The top and bottom are clearly getting farther apart.” While technology might be only one factor, says McAfee, it has been an “underappreciated” one, and it is likely to become increasingly significant.

It is easy to imagine that while total employment levels continue to increase, the composition of the workforce will change over time. The classic model is that less-skilled employment will decline while skilled employment will increase. It is also possible, however, that skilled employment in many domains will be under pressure while less-skilled employment in eldercare and fields like it will remain highly resistant to automation. (The fact that a large share of eldercare expenditures are financed by the public sector adds an interesting wrinkle to this latter scenario.) If this is the case, one assumes that many skilled workers will shift into sectors that had traditionally been dominated by less-skilled workers, undermining the notion that there are jobs that native-born workers simply won’t undertake. In January, the Center for College Affordability and Productivity issued a report on “underemployment” among college-educated U.S. workers, which includes the following observations:

• About 48 percent of employed U.S. college graduates are in jobs that the Bureau of Labor Statistics (BLS) suggests requires less than a four-year college education. Eleven percent of employed college graduates are in occupations requiring more than a high-school diploma but less than a bachelor’s, and 37 percent are in occupations requiring no more than a high-school diploma;

• The proportion of overeducated workers in occupations appears to have grown substantially; in 1970, fewer than one percent of taxi drivers and two percent of firefighters had college degrees, while now more than 15 percent do in both jobs;

• About five million college graduates are in jobs the BLS says require less than a high-school education.

One shouldn’t discount the possibility that a dramatic increase in less-skilled immigration would create employment opportunities for skilled workers. But in light of technological change, it also seems premature to dismiss the possibility that mechanization will reduce employment levels in some domains that have traditionally been limited to less-skilled workers (like the picking of produce) while skilled workers will grow increasingly willing to work in others, like eldercare and food preparation.

Anthony Dent, a graduate student at the University of North Carolina, writes in to share his thoughts on recent controversies in North Carolina, where conservative Republicans have been pursuing an ambitious agenda that has met with intense resistance from public sector workers, liberal activists, and a growing number of moderate, middle-income voters. Dent argues that while North Carolina Governor Pat McCrory, a former mayor of Charlotte with a pragmatic reputation, was well-positioned to be a leader among reform conservatives, the McCrory administration has needlessly antagonized potential allies, thus putting the GOP coalition in the state at risk.

North Carolina’s governing class has a history of trying to strike a balance between economic growth and maintaining a social safety net, and Gov. Pat McCrory intended to continue in that tradition. He sought to reform the state tax system to create jobs and keep the state competitive while fortifying the state’s community college system to better serve vocational students. To achieve his goals, however, McCrory needed to build and sustain a coalition of middle- and working-class voters — the kind of coalition envisioned by reform conservatives. But McCrory’s tax reform proposal has proven controversial, as have new abortion and voter ID regulations. Had McCrory’s middle- and working-class coalition remained intact, he’d be in decent shape. A new PPP survey of North Carolina voters demonstrates that it has not. I think this outcome was avoidable—if the GOP hadn’t dropped the federal unemployment benefits and had reframed the debate over public education, this coalition could have stayed together. However, that would have required recalibrating the agenda to focus on the needs of working and middle class families along the same lines as the reform conservative proposals for the party writ large. While GOP elected officials may not be open to the policy prescriptions from the reform conservative camp, it’s worth rethinking the key decisions that led to Wisconsin-like protests and overwrought New York Times editorials.

Unemployment benefits: The first shoe to drop was the expiration of federal unemployment benefits July 1st in an effort to start paying off the third-highest unemployment insurance debt in the country. (The John Locke Foundation has a great summary of the background and justifications for the reform here.) Approximately 170,000 people This caused a firestorm across the state. I think a reform conservative agenda would be hesitant to end benefits since the reality on the ground is so complex. North Carolina is an example of the divergence Enrico Moretti observed between communities with concentrations of highly-educated workforces employed by innovative companies (Raleigh-Durham or Charlotte) and the rest of the state which is less educated , less densely-populated, and older. County-by-county unemployment data bear this out. The underperforming regions are largely still grappling with the departure of textile mills and other manufacturing jobs , possible victims of the mortgage crisis when the housing boom was temporarily able to employ former manufacturing workers meaning workers didn’t have to receive retraining or vocational degrees. But the housing boom proved to be a mirage and only temporarily masked the dramatic changes in the manufacturing sector since the 1990s. Basically, this suggests that the current prolonged unemployment is structural, not cyclical. From that standpoint, on net, the federal unemployment benefits were worth the short-term, per employee cost of the UI tax burden on businesses (especially since the state legislature will most likely cut funding for community colleges), since other jobs may simply not exist in certain communities.

K-12 education: And while no final budget for 2013 has been passed, both budgets moving through the General Assembly include cuts to public education public education. Opponents have protested everything from the reforms to teacher pay to the introduction of school choice to cuts in preschool.

For the teacher pay and school choice reforms, Republicans have been unable to articulate the positive consequences of either measure. With the reform conservative framework in mind, Republicans should point to the evidence evidence that strongly indicates that neither advanced degrees nor seniority are correlated with teacher effectiveness. Republicans could then implement a proposal proposal by Duke economist Jacob Vigdor to front-load teacher pay to compensate early gains in expertise and expedite the amount of time it takes for teachers to reach their “peak pay” (which currently lags one to two decades behind doctors and lawyers). This reform would reward teacher effectiveness and better attract top talent to educate the state’s children.

I was disappointed that the General Assembly didn’t make school choice a priority because the evidence suggests that introducing school choice—coupled with increases, not decreases in funding for pre-K education—would improve educational outcomes and address weakened social mobility from the bottom.

Higher education: Since 2008, the 17 campus UNC system has experienced more than $1.5 billion in operating cuts and reversions and is set to face another $96 to $150 million in cuts for the next fiscal year (depending on which version of the budget gets passed). The depth of these cuts led a few senior Republicans to consider campus closures or consolidations.

A reform-minded conservative should recognize that a college education is still the dream for most working and middle class voters—and I know first-hand that threatening to close a nearby campus will not endear the GOP to voters in that region. Nor do these cuts address the one concern on parents’ minds: rising tuition costs. The primary driver of these rapid increases is administrative bloat. At UNC-Chapel Hill, for example, the number of administrators grew 48.4% from 1993 to 2007 (above the 39.0% average growth for all public institutions). By 2009, UNC-Chapel Hill’s organizational chart was ten layers deep with over 50% of supervisors managing one to three employees. From 2009 to 2012 , the number of administrators only declined by 2.5% in the face of $235 million in cuts over a four-year period and through implementation of modest reforms (i.e., reducing the number of organizational layers to seven and ensuring that each supervisor had three or more reports).

Yet none of the GOP’s proposals touch the out-of-control administration. The GOP could even explore privatizing UNC-Chapel Hill and devoting that money to the other UNC system schools that serve the students most in need of those resources.

It’s clear that those three policy decisions forced McCrory and state legislators to expend valuable political capital which could have been otherwise been employed to credibly defend the tax reform package that McCrory wanted to be his administration’s signature accomplishment. The conceptual framework behind the reform acknowledged the trade-off between volatility and regressivity—analysts on the right and left wanted to avoid a repeat of the Great Recession when North Carolina’s tax receipts plummeted by over $1.5 billion from 2008 to 2009 . By shifting away from the corporate and individual income taxes to a tax portfolio more reliant on consumption (and equal treatment of services and physical goods) , McCrory and state legislators sought to stabilize revenues and craft a more growth-friendly tax policy. Given the evidence, the GOP will accomplish both tasks when the final package passes. Although necessary items like groceries are still exempt under both reform proposals, the administration’s critics are right when they argue that consumption taxes are inherently regressive.

The GOP did have opportunity to more than offset the increase in the tax burden on families in the lowest 40% of incomes by making the temporary earned income tax credit permanent. Instead, legislators chose to let that provision sunset which increased the tax burden on approximately 900,000 low-income taxpayers, a decision that only saved the state $105 million.

With the governor’s office and both houses of the General Assembly for the first time since Reconstruction, the North Carolina GOP had an opportunity improve governance in North Carolina which I think, on net, it has. But certain policy decisions have robbed the GOP of long-term credibility in the eyes of the very North Carolinians who elected them in the first place: working and middle class families. Going forward, I hope McCrory and the state legislators adopt that reform conservative mentality to avoid electoral defeat—and because it’s the right thing to do.

Joel Kotkin calls for a truce between public sector workers and local governments. The recovery hasn’t been strong enough to allow state and local governments to sustain the rising burden of pension and health benefits without putting enormous pressure on other core local government functions, like public safety and K-12 education. So either public sector workers have to restrain some of their wage and benefit demands, at least in the short term, or they must risk driving local governments to bankruptcy. Kotkin references the fact that a number of state governments have been devolving a number of responsibilities to cash-strapped local governments. And as Daniel DiSalvo has explained in a report for the Manhattan Institute, there has been a structural decline in retail sales tax revenues, due to a shift from goods to services and from physical to online retail, as well as in revenue from taxes on gasoline, alcohol, and tobacco. One way or another, local governments are going to have to go through some kind of serious restructuring. 

After recounting the drift of the New York GOP, which has utterly failed to offer an attractive alternative to the agenda of Democratic Gov. Andrew Cuomo, Nicole Gelinas of the Manhattan Institute recommends that the party focus on freeing local governments from crippling state-imposed unfunded mandates:

Republicans would be better served if they turned their attention to one major issue: Cuomo’s apparent unwillingness to help local governments control their costs as they stagger under the weight of unfunded mandates. At a downstate conference presented in June by the newspaper City & State, executives from Erie, Rensselaer, and Ulster Counties—two Democrats and a Republican—joined Syracuse mayor Stephanie Miner, a Democrat, in pleading for help. Yet on this critical and politically promising issue, Skelos punted and waved through Cuomo’s “financial structuring board,” allowing the governor to maintain the fiction that he’s helping local governments.

The GOP leadership could make easing mandates on local governments the highlight of its autumn agenda. It could start with repealing the Triborough Amendment, which forces local governments to adhere to the terms of bad labor contracts even after the contracts have expired. Republicans should also push for a bill empowering local governments to set health-care premium requirements for their workers separately from their collective-bargaining agreements with unions—enabling the governments to increase the employees’ premiums as costs rise.

Easing mandates on local governments isn’t exactly the most scintillating agenda. And as David Schleicher has observed, Republicans in blue states face serious constraints:

Most votes in state legislative elections turns on impressions we develop about national politics — we punish and reward state officials largely for what Congress and the president do, rather than for what they do themselves. The same is true in city council elections in big cities. High-profile state and local candidates can successfully develop a brand for themselves that permits them to outperform their party (like Dave Freudenthal, the recent Democratic governor of Idaho, and Michael Bloomberg, who became mayor of New York City as a Republican), but down-ballot results are almost entirely determined by national party preference.

But Gelinas’s proposed agenda has the virtue of being coherent, substantive, and relevant to New York state voters.

Reuben Abraham, executive director of the Centre for Emerging Markets Solutions at the Indian School of Business, defends the work of Columbia University economist Arvind Panagariya, who claims that the World Health Organization approach to measuring child malnutrition might overstate the extent of extreme deprivation.

It assumes that identical nourishment leads to identical average heights and weights in different populations, regardless of differences in race, culture, geography and physical environments between them. In other words, the WHO approach is premised on the assumption that given proper nutrition, on average, a five-year-old Keralite girl reared in Kerala will soon attain the same height and weight as a five-year-old Dutch girl reared in Holland. Panagariya argues that this is a false premise and leads to overestimation of stunted (low height for age) children in India relative to, say, sub-Saharan Africa.

Panagariya recognizes that improved diet and reduced incidence of disease can lead to improvements in height and weight, yet he argues that it is foolish to discount the possibility that there might be some genetic component to height and weight as well. Abraham cites height differences among affluent countries:

[T]he critics have been unable to explain the persistent height difference of 12.5 centimetre (cm) between a Japanese male and a Dutch one (the two countries that have both been rich and free of malnourishment for decades), or a 9.5cm difference between a Portuguese male and a Dutch male. For that matter, the critics haven’t explained the persistent height difference between children of Moroccan extraction born in Holland and native-born Dutch children of 6cm among men and 7.9cm among women.

This latter observation strikes me as particularly interesting. If relative social position contributes to height differences, the fact that Dutch children of Moroccan origin tend to live in households with below-avergae incomes might be a contributing factor. But I am inclined to agree with Panagariya and Abraham on the basic question of whether persistent height differences can be attributed to genetic differences. One wonders if the growing use of human growth hormone (HGH) treatments for children of below-average height in the U.S. and other affluent countries might alter this landscape — it might mitigate height differences across groups, or it might spark an arms race among parents looking to give their children a boost.

Sallie James discussion of House GOP efforts to split farm subsidies from SNAP into separate bills reminded me of Charles Lane’s recent call for phasing out SNAP while bolstering the EITC:

About 2.7 million households, or 13 percent of all households that received food stamps at any time in 2011, consisted of single, childless, non-elderly, non-disabled adults who did not work. It’s not clear if or how food stamps discouraged them from working, as the program’s rules limit able-bodied working-age individuals to only three months’ worth of food stamps in any 36-month period.

Nevertheless, my plan would aim a powerful work incentive at this group by applying the earned-income tax credit fully to single, childless workers — which, perversely, is not the case at present. A new bill co-sponsored by Sens. Sherrod Brown (D-Ohio) and Dick Durbin (D-Ill.) includes that very suggestion, albeit not as a substitute for food stamps.

An obvious objection to my plan is that food stamps would no longer be there to bolster incomes in a recession. But that shouldn’t matter. Remember — part of the funding would go to an expanded and more generous unemployment insurance program.

Another obvious objection is that my plan would never work politically. That’s probably true. But, really, what’s not to like? For Republicans, there’s a stronger work incentive. For Democrats, there’s no reduction in the overall size of the safety net.

Lane’s approach might become more feasible if SNAP is separated from farm subsidies, as James recommends. And if it is linked to reforming unemployment insurance, e.g., moving to lump-sum payments, Lane’s proposal could do even more good.

In the Wall Street Journal, Phil Gramm, the former Republican senator from Texas, insists that tax reform not make the tax code more progressive than it is at present, but his analysis rests on a misconception:

First, under no circumstances should Republicans agree to make the tax system even more progressive than it already is, or to increase the number of people who do not pay income taxes. In 1980, the top 1% and 5% of income earners in America paid 19.1% and 36.9% of total federal income taxes. Today, the top 1% and 5% pay 37.4% and 59.1%. Meanwhile, 41.6% of American earners now pay no federal income taxes.

The more progressive the tax system becomes the more unstable the country’s public finances get. High-income Americans earn a large share of their income in bonuses, dividends and capital gains, all of which are highly sensitive to the business cycle. This means wide swings in tax collections that play havoc with government budgets. The removal of large numbers of people from the tax rolls makes the political system more unstable. Individuals and households that pay no income taxes have a diminished stake in limited government.

Gramm’s point about how a steeply progressive tax code generates a more volatile revenue stream than a relatively flat tax code is well taken. Yet this is precisely why it is important that the federal tax code be more progressive, as the federal government is able to smooth spending across the business cycle while state and local governments are severely constrained in their ability to do so. State and local governments are thus obligated to rely on revenue sources that are both stable and regressive, like retail sales taxes and property taxes. When state and local governments rely more heavily on progressive taxes, like taxes on capital income, they find themselves in dire straits. (See California.) The federal government, in contrast, is well-suited to handling volatility. 

And as Ramesh Ponnuru has argued on numberous occasion, the notion that “the removal of large numbers of people from the tax rolls makes the political system more unstable” is problematic. Among other things, it ignores life cycle effects. Individuals who earn low incomes during one phase of life may earn higher incomes later on. Removing parents of young children from the tax rolls by expanding the child tax credit won’t necessarily create a constituency for state expansion, as these parents recognize that they will lose their tax-advantaged status once their children are adults. Individuals who earn low incomes throughout their lives are subject to a relatively low federal income tax burden, payroll taxes aside, yet these individuals have limited political influence, and it is not at all clear that not forcing these individuals to pay federal income taxes contributes to political instability. Indeed, one could argue that increasing the federal income tax burden on the least affluent would do more to increase political instability than decreasing it, as it might foster resentment. Gramm is making a specific claim that seems difficult to justify. 

All that said, I don’t think we need a tax code that is substantially more progressive than the current tax code. It’s just that Gramm’s arguments tilt in the direction of a tax code that would be substantially less progressive, and that would be a mistake.

What happens is the federal budget deficit shrinks dramatically between now and 2015? The White House projects that the deficit for this fiscal year will be $759 billion, or 4.7 percent of GDP, an estimate $200 billion less than the estimate it released three months ago. Yet the OMB estimate of cumulative deficits over the coming decade increased from $5.3 trillion to $5.8 trillion. My concern — which I articulated back in May — is that if the deficit continues to shrink between now and the end of the Obama presidency, as seems plausible, Republicans will find themselves in an awkward position, having emphasized deficit reduction over economic growth and job creation in the policies they’ve advanced since the financial crisis. Shifting gears from a narrow fixation on short-term fiscal consolidation towards a broader growth and reform agenda is really important not just because it is more responsive to the most pressing challenges facing the country, but because it is a more robust political strategy in a changing fiscal policy environment. Demographic change all but guarantees that deficits and debt will continue to be a serious challenge until the 2030s or so, when the the bulk of the baby boom generation will have expired. But oblique approaches — higher growth, increasing public sector efficiency, tax reform, etc. – are far more politically attractive than “root-canal economics,” and there is reason to believe that they will also prove more effective. 

For example, entitlement reform efforts tend to emphasize spending reductions. As Andrew Biggs argues, however, one can address actuarial imbalances in a program like Social Security while also making it more “user-friendly” and responsive to the needs of vulnerable populations, like low lifetime earners and the oldest old. Similarly, higher education reform can yield savings while also better meeting the needs of students and parents. Andrew Gillen, the head of Education Sector and formerly of the Center for College Affordability and Productivity, has proposed the automatic conversion of student loans into income contingent loans in the event that a student is unable to meet an initial repayment schedule, thus sparing students from heavy penalties and impaired credit. Coupling this reform with Richard Vedder’s recent call for banning colleges and universities from soliciting detailed family financial information (apart from household income, which would be reported by the IRS) would represent a boon to households with children. And a similar logic can be applied to other domains as well. Eric Cantor, the House Majority Leader, has tried to move in this direction with his “Making Life Work” agenda, but he has faced intense resistance from a minority of congressional Republicans. What the rebels need to understand is that we’ve seen this movie before. The GOP failure to address the deficiencies of the individual health insurance market contributed to the political deluge of 2006 and 2008, which in turn led to the Affordable Care Act. 

Ross Eisenbrey of the Economic Policy Institute argues that government and not the private sector has been the chief driver of what he calls “breakthrough innovation,” and he draws on the life of Douglas Englebart to make his case:

Englebart was a visionary, but his ground-breaking work was not supported by venture capital and his innovations were not the result of the private market or corporate enterprise. His innovations were not spurred by the prospects of incredible income and wealth, all lightly taxed. Rather, the work was funded and organized by a visionary bureaucracy in the U.S. government. As the Times describes it, “during the Vietnam War, he established an experimental research group at Stanford Research Institute (later renamed SRI and then SRI International). The unit, the Augmentation Research Center, known as ARC, had the financial backing of the Air Force, NASA and the Advanced Research Projects Agency, an arm of the Defense Department.”

Mariana Mazzucato, a professor of economics at the University of Sussex, has been making the point very effectively in lectures and a new book, The Entrepreneurial State, that the real innovation engine in the global economy is not business, nor the market, but the government.

Among other things, Mazzucato observes that the core technologies that power the iPhone (“capacitive sensors, solid-state memory, the click wheel, GPS, internet, cellular communications, Siri, microchips, touchscreen”) have their origins in research efforts financed by the U.S. military. And so Mazzucato favors a tax-financed, state-led approach to innovation:

Mazzucato suggests that, given the extent to which tech companies like Apple and Intel owe their great good fortune to the federal government’s investment in R&D, they should share more of their profits with the taxpayers. Instead, of course, Apple has been offshoring profits to avoid taxation and most of the tech industry is contributing to the efforts of the U.S Chamber of Commerce and the rest of the organized business lobby to cut corporate taxes and shrink the government. As Mazzucato makes clear, cutting taxes and the government is no recipe for an innovative, competitive future—just the opposite. 

Not surprisingly, I disagree with the general thrust of Eisenbrey and Mazzucato’s take. Consider, for example, the extraordinary success of Samsung, the Korean multinational that, among other things, has developed a series of successful iPhone competitors. Samsung has a long history of entanglement with the Korean state, which might to reinforce Eisenbrey and Mazzucato’s basic point. It is also true that Samsung — which represents as much as one-fifth of South Korean GDP — makes use of capacitative sensors, solid-state memory, the click wheel, GPS, internet, cellular communications, Siri, microchips, and touchscreens, much like Apple. But this presumably doesn’t mean that Samsung ought to pay the U.S. federal government some kind of tribute. As Amar Bhidé often notes, an Englishman pioneered the World Wide Web under the auspices of the government-financed CERN laboratory in Switzerland, yet the U.S. has been the main source of consumer internet innovation. U.S. internet firms do not, however, pay the Swiss and other European governments a formal innovation bounty. Part of the reason is that everyone profits from the free flow of knowledge, which is why excessive patents are such an economic scourge. The U.S. government devised the technologies Mazzucato identifies for its own, usually defense-oriented reasons. Mazzucato implicitly suggests that in a counterfactual universe in which the Cold War had never taken place, and in which defense expenditures hadn’t diverted spending from other domains or forced higher tax levels, etc., innovations in information technology would not have taken place either. The decades that preceded the Cold War, during which there was considerable private sector innovation in early information technologies, suggests that this is not the case, but of course we can’t really say. What we do know is that in our world, incremental innovations by private firms made the defense-oriented technologies that power smartphones more useful over time. What we are dealing with is a complex innovation ecosystem, in which the government undoubtedly plays a role. Yet to characterize the government’s role as more important or more essential strikes me as a mistake.

To explain why, it’s important to first think through what exactly we mean by “breakthrough innovation” and whether or not breakthrough innovations are what matter most for economic development. Bhidé offers a useful framework for differentiating among different kinds of innovation:

Innovation involves the development of new products or processes and the know-how that begets them. New products can take the form of high-level building blocks or raw materials (for example, microprocessors or the silicon of which they are made), midlevel intermediate goods (motherboards with components such as microprocessors), and ground-level final products (such as computers). Similarly, the underlying know-how for new products includes high-level general principles, midlevel technologies, and ground-level, context-specific rules of thumb. For microprocessors, this know-how includes the laws of solid-state physics (high level), circuit designs and chip layouts (midlevel), and the tweaking of conditions in semiconductor fabrication plants to maximize yields and quality (ground level).

Technological innovations, especially high-level ones, usually have limited economic or commercial importance unless complemented by lower-level innovations. Breakthroughs in solid-state physics, for example, have value for the semiconductor industry only if accompanied by new microprocessor designs, which themselves may be largely useless without plant-level tweaks that make it possible to produce these components in large quantities. A new microprocessor’s value may be impossible to realize without new motherboards and computers, as well.

New know-how and products also require interconnected, nontechnological innovations on a number of levels. A new diskless (thin-client) computer, for instance, generates revenue for its producer and value for its users only if it is marketed effectively and deployed properly. Marketing and organizational innovations are usually needed; for example, such a computer may force its manufacturer to develop a new sales pitch and materials and its users to reorganize their IT departments.

Government-financed technological innovations in one country or region, in other words, can travel to another, provided the second country or region has th\e requisite amount of ”absorptive capacity”:

The willingness and ability of lower-level players to create new know-how and products is at least as important to an economy as the scientific and technological breakthroughs on which they rest. Without radio manufacturers such as Sony, for instance, transistors might have remained mere curiosities in a lab. Maryland has a higher per capita income than Mississippi not because Maryland is or was an extremely significant developer of breakthrough technologies but because of its greater ability to benefit from them. Conversely, the city of Rochester, New York—home to Kodak and Xerox—is reputed to have one of the highest per capita levels of patents of all US cities. It is far from the most economically vibrant among them, however.

In a similar vein, many of the government-backed technologies identified by Mazzucato did remain “curiosities in a lab” for long periods of time — it took entrepreneurs looking to solve specific problems to drive their commercialization, and this commercialization process entailed a series of process innovations that made these technologies far more valuable than they otherwise might have been. 

And the government-financed U.S. industrial policy Mazzucato invokes was, as Stephen S. Cohen Brad DeLong suggest in The End of Influence, an artifact of the swollen defense budgets of the Cold War era.

On its own turf—competing with other militaries, especially the Soviets—DoD was unbeatable, but it was not aiming at producing products and firms that were well adapted to competition in civilian markets vigorously contested by the agile. For rockets, satellites, jet engines, aircraft, mainframes, and supercomputing (the latter two now quaint terms), this was not a problem. It became a problem, a serious one, in electronics. By the 1980s, spin-off was losing the race to “spin-on” (i.e., sourcing from the commercial sector) in electronics, the critical defense technology. The commercial sector innovated, embodied innovation, and made it reliable much faster than did the defense sector; commercial entities produced at vastly greater volumes and at far lower prices. DoD increasingly had to source vital components of military systems—semiconductors, lasers, flat panel displays, optical storage, etc.—from the civilian economy. Increasingly, this meant relying on Japanese, not American, mass producers.

In 1986, DoD went public in its Defense Sciences Board report, “The Use of Commercial Components in Military Equipment.” The document revealed that commercial electronics such as computers, radios, and displays were just as durable, even in harsh environments, one to three times more advanced, two to ten times cheaper, five times faster to acquire, and more reliable than their military equivalents. For the foreseeable future, the report concluded, “commercial-to-military ‘spin-ons’ are likely to boom while military-to-commercial ‘spin-offs’ decline.” Even beyond electronics, DoD’s spin-off industrial policy was beginning to show its structural defects or, more precisely, the commercial ironies of its successes. In the 1950s and 1960s, DoD had sponsored the creation of very advanced, numerically controlled machine tools for use in aircraft production. And it got them. But, in doing so, it had also shaped the American machine tool industry. By the 1980s, the defects of this unrivaled excellence were becoming apparent in the steep decline of that industry in the face of foreign competition. Do D-inspired technology was proving to be too expensive and far too complicated to operate under normal industrial conditions than the simpler, cheaper machines that came out of Japan’s industrial policy, which focused precisely on tools for ordinary industrial applications, or German high-end, factory-friendly machine tools.

Like an intelligent military recognizing the limits of its forces, DoD has continued to push ahead on the spin-on, going so far as to establish its own venture firm in Silicon Valley to monitor, access, and assist interesting new technologies in start-up companies. Truly new technologies such as computing, biotechnology, or even, long ago, electric motors take considerable time to move, at scale, from laboratory to market; twenty years is rather a norm. It is possible that spin-offs from relatively recent Do D projects will find important, driving roles in the American economy in the near future. But the contrast between the commercial successes of spin-offs from DoD projects of the 1950s and 1960s and those of the 1980s and 1990s brings American assertions that we don’t do industrial policy a lot closer to God’s honest truth.

This transition from “spin-off” to “spin-on” doesn’t demonstrate that government doesn’t have an important role to play in financing basic research, particularly basic research with potentially useful military applications. It does, however, suggest that much has changed since the the days of DARPAnet, and that the lessons of that era might no longer apply. 

Eisenbrey’s reference to Douglas Englebart reminded me of Ashwin Parameswaran’s recent discussion of why Englebart’s approach to computing failed to take hold. As Ashwin explains, Englebart believed that computing should aim to “augment human intelligence”:

Engelbart was dismissive about the need for computing systems to be easy-to-use. And ease-of-use is everything in the mass market. Most people do not want to improve their skills at executing a task. They want to minimise the skill required to execute a task. The average photographer would rather buy an easy-to-use camera than teach himself how to use a professional camera. And there’s nothing wrong with this trend.

But why would this argument hold for professional computing? Surely a professional barista would be incentivised to become an expert even if it meant having to master a difficult skill and operate a complex coffee machine? Engelbart’s dismissal of the need for computing systems to be easy-to-use was not irrational. As Stanislav Datskovskiy argues, Engelbart’s primary concern was that the computing system should reward learning. And Engelbart knew that systems that were easy to use the first time around did not reward learning in the long run. There is no meaningful way in which anyone can be an expert user of most easy-to-use mass computing systems. And surely professional users need to be experts within their domain?

The somewhat surprising answer is: No, they do not. From an economic perspective, it is not worthwhile to maximise the skill of the human user of the system. What matters and needs to be optimised is total system performance. [Emphasis added]

The extraordinary economic benefits created by computing flow from the ways in which they allow unremarkable people to accomplish what had once been enormously difficult, cognitively-demanding tasks. Englebart developed the mouse, yet it took a highly decentralized process to yield user-friendly technologies that actually put the mouse to good use. In a similar vein, the steam engine had been devised in ancient Rome, but it failed to spark an Industrial Revolution in the ancient Mediterranean. 

Basically, I think it’s fair to say that government has a role to play in financing basic research. But it is important to recognize that U.S. firms and workers won’t necessarily capture the lion’s share of the benefit, nor should we expect them to do so, as higher-level knowledge tends to travel well. If our goal is to make U.S. workers and firms more successful, we really ought to focus on the “absorptive capacity” of the U.S. economy, e.g., raising the skill level of the workforce, facilitating firm entry, which will in turn facilitate process and product innovation, etc. 

My recent conversation with Business Insider’s Josh Barro on Louisiana Gov. Bobby Jindal’s future political prospects was well-timed — Jindal has just published an op-ed on immigration reform here at NRO that reflects his desire to raise his national profile.

And though I share many of his misgivings about the Senate immigration bill, I find many aspects of his op-ed rather strange. For example, Jindal calls for securing the border before we regularize the status of unauthorized immigrants currently residing in the U.S. Only when the border is secure — that is, only when Congress and border state governors formally verify that the border is secure — will we regularize the status of unauthorized immigrants currently residing in the U.S. by granting them guest worker status. Rather than bar unauthorized immigrants from citizenship, he recommends that those who’ve registered as guest workers “gain proficiency in English, pay a fine, and demonstrate a willingness to assimilate” and work and pay taxes for a “substantial period of time” be allowed to apply for citizenship. On regularization, Jindal’s position appears to be indisinguishable from that of Florida Sen. Marco Rubio, the leading Republican champion of the Senate immigration bill. The only difference, as far as I can tell, is that Jindal refers to “guest workers” and not to “registered provisional immigrants.” And finally, Jindal calls for a dramatic increase in less-skilled immigration:

Increase legal immigration, by a lot. Letting folks into our country who want to work, get an education, and improve their lives is good for them and good for us. We should increase legal immigration not only for unskilled laborers, but also for skilled workers from all over the world. We need to stop educating the world’s best and brightest engineers and scientists and then upon graduation kick them out of the country so they can compete with us and create growth and wealth in other countries. [Emphasis added]

The Senate immigration bill, per the Congressional Budget Office, increases legal immigration “by a lot.” So does Jindal believe that it doesn’t increase immigration enough? One possibility is that he believes it does not allow for enough skilled workers, which is fair enough — I’m inclined to agree. But does he also believe that it doesn’t allow for enough less-skilled workers? Jindal isn’t clear on this point. 

The critics will also say that conservative Republicans, even once the border is secured, will still oppose a pathway for turning illegal immigrants who are already here into legal immigrants. I disagree. Sure, some small minority may take that view, but the vast majority will not. I believe that virtually all Americans will gladly embrace and deal compassionately with those currently here illegally . . . once they are assured that our borders are secure.The critics will also say that conservative Republicans, even once the border is secured, will still oppose a pathway for turning illegal immigrants who are already here into legal immigrants. I disagree. Sure, some small minority may take that view, but the vast majority will not. I believe that virtually all Americans will gladly embrace and deal compassionately with those currently here illegally . . . once they are assured that our borders are secure.

The main problem with immigration enforcement rests not at the border, but rather with visa overstayers, i.e., with individuals who arrive in the country legally, yet who choose to overstay their visas to pursue employment opportunities, etc. I assume that Jindal is positing that we must first find a solution to this problem before we certify that the border is secure, which is fair enough. I’d be curious to know how he intends to address this thorny problem. But then Jindal fails to address why conservatives ought to embrace not just a path to legalization but a path to citizenship. Is he suggesting that conservatives who believe that a path to citizenship implicitly rewards unauthorized immigrants are not sufficiently compassionate? And does he believe that this is only the view of a small minority? Jindal doesn’t bother to make the case that unauthorized immigrants ought to be granted legal status. Rather, he seems to assert that almost everyone, conservatives included, already agree with him. 

Granted, the survey data seems to bolster Jindal’s case:

A Gallup poll conducted June 15-16 found that 86% of Republicans – the same percentage as that of Democrats, said they would back legislation allowing immigrants living illegally in the U.S. to become citizens after a long waiting period if they paid taxes and a penalty, passed a criminal background check, and learned English. The New York Times [i.e., Micah Cohen] noted that polls that describe the many requirements an unauthorized immigrant would have to satisfy before gaining citizenship find higher GOP support than polls that do not mention the requirements in detail, or at all. [Emphasis added]

But what happens if this position is contrasted with a path to normalization without citizenship?

Micah Cohen writes the following in the post cited by Pew:

Republican support nearly doubles, on average, in polls that specify the citizenship requirements compared with those that do not.

In surveys that do not specify more than one requirement, just 37 percent of Republicans support a path to citizenship. (Most polls have released partisan breakdowns, but those that have not are not included in the average.) In contrast, 72 percent of G.O.P. respondents favored citizenship in polls that laid out the obstacles immigrants here illegally would have to navigate. In other words, Republican support increased by an average of 35 percent.

That is, before the deck is rhetorically stacked, a large majority of self-identified Republicans oppose a path to citizenship. What would happen to the survey results if the polling question also explained that the various obstacles most commonly invoked — paying back taxes and a penalty, passed a criminal background check, and learned English — are problematic for the following reasons: (a) as the Migration Policy Institute reports, the unauthorized population is extremely poor, and so back taxes would likely be negligible; (b) immigrants who fail to pass a criminal background check would presumably not be granted “registered provisional immigrant” or “guest worker” status, and characterizing a decision not to commit a felon as an “obstacle” seems somewhat eccentric; and (c) creating an immigration enforcement apparatus designed to assess English language proficiency will be an expensive process, and it is unlikely that immigration enforcement authorities will deport large numbers of immigrants on the grounds that they didn’t get a sufficiently high TOEFL score. 

Or leave aside an assessment of the obstacles. Might the numbers on a path to citizenship change if survey respondents were simply told the poverty and near-poverty rates among unauthorized immigrants? Note that I favor regularizing unauthorized immigrants. But I find Jindal’s argument, if you can call it that, extremely unconvincing. 

The approach backed by Rubio and Jindal would bar immigrants from means-tested transfers for some unspecified period. Jindal writes:

We should bar those seeking public assistance from receiving welfare or unemployment benefits for a substantial period of time.

Given the extremely low income levels in this population, this implies allowing hunger to persist in mixed-status households. That is, many households headed by registered provisional immigrants or guest workers will include native-born children, who will be barred from programs like SNAP. This may or may not be a wise public policy decision. It will most assuredly spark opposition from Americans concerned about extreme deprivation. 

If this is the kind of policy thinking we can expect from the Louisiana governor, I’m disappointed. Jindal has done admirable work on education reform, and he is clearly exceptionally sharp. But his latest op-ed strains credulity — he embraces positions that are essentially identical to those embedded in the Senate immigration bill, including a path to citizenship, yet he seems to want more less-skilled immigration and a border enforcement process that rests on a pro forma decision by Congress and border state governors. Why wouldn’t he just call for a trivial amendment to the Senate immigration bill? 

Margot Sanger-Katz reports that the Obama administration has been aware of obstacles to the implementation of the state-based insurance exchanges for months:

In an ideal world, the exchange websites need to be able to talk to several federal agencies—IRS to verify an applicant’s income and employment status, the Department of Homeland Security to determine her citizenship, and the state government to see if she qualifies for Medicaid, to name a few—all in real time, so a person could fill out a form and purchase insurance in one sitting.

Each of those departments has its own computer system and its own means of tracking information. Creating a “data hub” to share them has been a challenge, as a recent Government Accountability Office report highlighted. It is increasingly clear that the kind of Amazon.com, one-stop shopping that was once described – and that Obama himself referenced in a speech on Monday — will not be available in most parts of the country.

“It’s the joyous, simultaneous, nonlinear equation from hell,” said Kip Piper, a former top official at HHS and OMB who is now a consultant in close contact with IT vendors. Piper said it’s no surprise that the administration has given up on certain functions given the technological complexity needed and the short time-frame.

But the long-term nature of the bad news could be good news for those who hope that the new marketplaces will launch in some form on time. The struggles with technology and administrative complexity have not come as a recent surprise to administration officials; they’ve been negotiating them for months already. By eliminating non-essential tasks, they may be violating the letter of the health reform law, with its rigorous timetables and multiple requirements, but they may be more likely to get the core functions right.

In a similarly optimistic vein, Ezra Klein argues that the recent decisions to delay the employer mandate and to relax income verification requirements make it easier rather than more difficult to implement the Affordable Care Act.

There were two noteworthy changes to Obamacare in the last seven days. The first is that the employer mandate, which tells businesses with more than 50 employees to provide affordable insurance or pay a per-employee penalty, won’t be enforced until 2015. The second is that people applying for low-income subsidies in the exchanges will face fewer audits in 2014.

Both changes make the same trade-off: They raise the law’s first-year costs in order to reduce its first-year problems.

The poorly designed employer mandate was perhaps the most serious threat the law faced in its first year. Only about 10,000 of the economy’s 5.7 million firms were expected to face the mandate, but that’s still a lot of angry business owners. And while some of those business owners would respond by grudgingly offering insurance, others would respond by cutting back on hours for their employees, or even firing some of their employees.

For Obamacare, the resulting headlines would be lethal. Add in that even businesses that were already complying with the mandate would have to follow annoying reporting requirements to prove they offered insurance and the law had a real problem among a politically powerful constituency.

Now, it doesn’t. At least not until 2015, assuming the mandate actually begins then. That isn’t to say the delay is costless: The federal government will lose billions in penalty revenues, and some employers who would’ve begun offering health care will simply let their employees drift into the individual marketplaces instead. But in terms of implementation, Obamacare just got a lot easier to implement, if a bit pricier.

The consumer-information delay is a similar story. The question here is how the insurance marketplaces verify the income and insurance status of the people who come to them looking for help. If they don’t scrutinize the claims closely enough, some people who don’t qualify for subsidies may receive them anyway. But if they require reams of documentation, various parts of the process can break down as computer systems prove unable to talk to each other or people struggle to come up with the required paperwork. The result would be that people who do qualify for help don’t get it — a problem that bedeviled the first year of the Medicare Prescription Drug Benefit.

On Friday, the Obama administration said that in the law’s first year, they would accept the testimony of consumers when they applied for health insurance. That means that if you tell the government you make $10,000, the government simply believes you. There will be random audits, much as there are when you pay your taxes, but that’s about it. In 2015, the requirements will tighten further, and the federal government can claw back subsidies that were improperly awarded. [Emphasis added]

Ezra’s analysis helps clarify a number of issues. But a few thoughts immediately come to mind:

1. Ezra knows that though only 10,000 out of 5.7 million firms were expected to face the mandate, 71 percent of all U.S. employees work for firms with 50 or more employees. (See the CBO’s March 2012 report on “Small Firms, Employment, and Federal Policy.”) And though virtually all firms with 50 or more employees offer health insurance coverage to their employees, the percentage of workers at those firms covered by health benefits varies considerably — some workers choose to waive employer-sponsored coverage, either because they are covered via a spouse or because they’d prefer not to pay for it (a group that might shrink if the individual mandate is enforced); and some workers, particularly part-time or temporary workers, are not offered coverage. Many firms that offer coverage offer health insurance plans that fall below what ACA deems an acceptable threshold. So anger aside, the employer mandate does create real challenges for many large employers. To his credit, Ezra acknowledges that the employer mandate might have a labor market impact — a story that Jed Graham of Investor’s Business Daily has been covering for much of the last year.

2. Leaving aside the broader rule of law question, my sense is that the claim many (I can’t say if it’s most) of those claiming that the ACA is indeed facing implementation difficulties is that the ACA is facing implementation difficulties as drafted. 

3. Ezra treats the likelihood that delaying the employer mandate and relaxing income verification will raise the law’s first-year costs as relatively minor, yet it raises important questions. Much of the debate surrounding the ACA concerned its cost, and its advocates touted the fact that the CBO found that it would be deficit-improving. The pricier the legislation becomes as various provisions are delayed or abandoned — Ezra wisely doesn’t take for granted that the employer mandate will be enforced in 2015, though he does take for granted that income verification requirements will tighten — the more critics who claimed that the law as drafted was too rickety to yield such substantial savings are vindicated. Vindication plus a bag of chips will get you a bag of chips, as we used to say on the playground. But going forward, other elements of the ACA also look doubtful, e.g., the excise tax and the cap on ACA exchange subsidies, which IBD’s Graham described as follows:

Under a cost-control inserted during reconciliation, a greater share of premium payments would steadily shift to individuals and families after 2018 if exchange subsidies top 0.5% of GDP — as CBO projects they will.

In a report trying to clarify this aspect of the law that has bamboozled Medicare’s actuaries and respected health care analysts across the political spectrum, CBO said subsidies would not merely fail to keep up with inflation but would shrink in nominal terms for single policyholders between 350% and 400% of the poverty level once cost curbs are triggered.

If the employer mandate is administratively delayed beyond 2015, or if it is legislatively repealed, it is easy to imagine efforts to repeal the excise tax gaining momentum. And if the cap on exchange subsidies leads to sudden surge in premium payments for middle-income households, one assumes that the political pressure to repeal it will be considerable. Granted, this is all speculative. The point is to demonstrate that many of the law’s cost control elements are vulnerable, as demonstrated by the developments of last week. 

We have good reason to believe that while the ACA architecture was well-suited to securing substantial deficit reduction in a CBO analysis, the unrealistic assumptions embedded in the law mean that the ACA in practice will cost more than anticipated and raise somewhat less revenue than the ACA as drafted. Would the ACA in practice have gained the support of the various moderate Democrats who backed the ACA as drafted only reluctantly? I doubt it. 

I’ve often discussed Michael Clemens of the Center for Global Development, in part because I admire his highly original contributions to the study of labor migration and because I strongly disagree with his normative framework and the policy recommendations that flow from it. In Foreign Policy, he makes the case for a dramatic increase in less-skilled immigration, criticizing the Senate immigration bill on the grounds that it doesn’t go far enough to meet demand for less-skilled labor.

According to the U.S. Bureau of Labor Statistics (BLS), the United States will need 3 million additional workers over the next decade to fill the least-skilled jobs — jobs that do not require a high school degree — in order to achieve projected economic growth. These include jobs in home health, food preparation, freight, child care, cleaning, landscaping, and construction. Over the same period, the total number of U.S. workers entering the labor force at all skill levels, between the ages of 25 and 54, will be 1.7 million. (At younger ages, 24 years and below, the labor force will actually shrink.)

Think on that a moment. Even if every single young American dropped out of college and high school now, so that at the end of the coming decade they would be performing essential less-skilled jobs, they could only fill about half of these new openings. And of course all those kids won’t and shouldn’t stop getting educated. Around 10 percent of those new labor-force entrants will have less than a high school education; around 30 percent will have high school only.

Bottom line: At least three out of four of these new, essential jobs will be filled by workers coming to the United States from abroad, or they won’t be filled at all. This has nothing to do with laziness. It’s about numbers. It’s not only that there aren’t enough less-skilled Americans to do these jobs. There aren’t enough Americans period.

First, Clemens characterizes the BLS projections in a very unusual way. The BLS has not devised its ideal portrait of what the U.S. economy ought to look like a decade from now — targets that we must meet by, for example, dramatically increasing less-skilled immigration. If the less-skilled population grows by less than the BLS anticipates, firms and households will adjust. The following is drawn from the BLS:

Occupations that require some postsecondary education are expected to experience slightly higher rates of growth than those which require high school diploma or less. Occupations in the master’s degree category are projected to grow the fastest, about 22 percent; occupations in the bachelor’s and associate’s degree categories are anticipated to grow by about 17 percent and 18 percent, respectively, and occupations in the doctoral or professional degree category are expected to grow by about 20 percent. In contrast, occupations in the high school category are expected to grow by just 12 percent, while occupations in the less than high school diploma or equivalent category are projected to grow by 14 percent (Chart 7).

Nevertheless, because many of the occupations require a high school diploma or less, they will account for the majority—63 percent—of new jobs between 2010 and 2020 (Chart 8). [Emphasis added]

Note the use of the word “require” — jobs that require a high school diploma or less are not necessarily limited to workers with a high school diploma or less. The slack labor market of the past half-decade has seen many jobs that do not require a high school diploma filled by individuals who have a high school degree or more. This is not an ideal outcome. Yet skilled workers will have a more difficult time climbing the economic ladder as jobs that can take greater advantage of their skills emerge, while less-skilled workers will have a more difficult time doing the same. It is not at all obvious that every job should be held by the worker with the lowest possible skill level. Moreover, it is not obvious that jobs in home health, food preparation, freight, cleaning, landscaping, and construction can’t become more capital-intensive and less labor-intensive over time. Child care might be an exception, yet if the various other sectors evolve in such a way that labor demand increases, one assumes that there will be more workers available to work in child care. A number of affluent market democracies face shrinking populations in the near future, including countries widely regarded as fairly successful, like Taiwan, Germany, South Korea, and Japan, the last of which is facing a population collapse in the coming decades. The U.S., in contrast, will have a steadily growing population. Labor-saving innovations devised in these and other societies in the coming decades will travel across borders, allowing U.S. firms to deploy them as necessary as the supply of less-skilled workers shrinks. 

And of course the BLS is making assumptions about the medium-term economic future that may well be proven false, as has been the case with BLS projections in the past that assumed, for example, that manufacturing employment wouldn’t decrease as sharply as it has, etc. Economic growth reflects both productivity increases and increases in the size of the workforce. To observe that a smaller increase in the size of the workforce will yield a smaller increase in economic growth isn’t in itself terribly compelling. One can easily imagine a scenario in which the size of the workforce increases by less than the BLS projects, yet a higher proportion of the workforce consists of workers with a high school diploma or more. A more important consideration is GDP per capita or GDP per worker hour. And while better labor matching might yield somewhat higher GDP per capita — the CBO projects a 0.2 percent increase in GNP per capita after two decades and a slight decrease after one — technological change, discussed below, might yield a different result, and immigration policy is essentially irreversible. That is, if it turns out that labor-saving innovation does not completely grind to a halt in 2013 and the labor market position of less-skilled workers continues to deteriorate, we can’t decide 20 years hence that allowing for a substantial influx of less-skilled immigrants was a terrible mistake and that we ought to expel less-skilled immigrants who arrived after that date and their dependents, as a large number will be citizens. 

Clemens never mentions the unemployment rate for U.S. workers with less than a high school diploma, which is 10.7 percent as of June. Note that the unemployment rate reflects the share of workers with less than a high school diploma who are actively looking for work. I agree with Clemens — laziness is not the issue. Rather, less-skilled natives face a number of challenges, one of which is geographical mismatch. That is, less-skilled natives are often priced out of high productivity regions, due to restrictive land-use policies. Addressing restrictive land-use policies might greatly facilitate labor matching, while yielding other economic and environmental benefits as well. Another serious challenge is that a disproportionately large share less-skilled U.S. workers suffer from drug and alcohol dependence, a challenge that U.S. firms are disinclined to address. Sharply increasing the supply of less-skilled immigrants greatly reduces the costs of drug and alcohol dependence in the native-born population for firms. This in turn presumably makes it somewhat less likely that steps will be taken to mitigate drug and alcohol dependence. 

Clemens’ article continues:

The Senate’s recently passed bill would create relatively small numbers of work visas for low-skilled jobs. (The House has no bill yet.) The Senate bill would create only a few hundred thousand temporary work visas at a time — the “W” visa — with a floating cap that could rise to a hypothetical maximum of 600,000 people in the country at any one moment. And it creates a negligible number of low-skill permanent work visas.

Who will staff the millions of new low-skilled jobs the U.S. economy will create in the next decade, jobs American workers will not fill? There are the current undocumented workers in the country who may be regularized under immigration reform — but they’re already in the United States, so the BLS’s estimates of new jobs already account for the jobs they fill. Perhaps some of these jobs will be filled by people who come on family-reunification visas, but no one knows how many of them there will be, and it will almost certainly be too few. Family-based immigrants have not been filling many of the low-skilled jobs currently filled by unauthorized workers, and the Senate bill will reduce the number of family-based visas.

Who will staff the millions of new low-skilled jobs the U.S. economy will create in the next decade, jobs American workers will not fill? There are the current undocumented workers in the country who may be regularized under immigration reform — but they’re already in the United States, so the BLS’s estimates of new jobs already account for the jobs they fill. Perhaps some of these jobs will be filled by people who come on family-reunification visas, but no one knows how many of them there will be, and it will almost certainly be too few. Family-based immigrants have not been filling many of the low-skilled jobs currently filled by unauthorized workers, and the Senate bill will reduce the number of family-based visas.

Note that Clemens is characterizing “a few hundred thousand temporary work visas” as a small number, and that the W visa program allows workers to bring spouses and children with them to the U.S. In contrast, the Canadian guest worker program forbids workers from bringing spouses and children, to deter workers from overstaying their visas. Many observers, including Matt Yglesias, like Clemens a supporter of increasing less-skilled immigration, have suggested that the structure of the W visa program will lead to unauthorized immigration. And this is actually Clemens’ strongest argument — restricting the size of the less-skilled influx will tend to increase unauthorized immigration:

All this implies that even if the United States regularizes millions of immigrants now, it is likely to have another unauthorized immigration crisis several years ahead. The last mass regularization, under President Ronald Reagan in 1986, barely altered the stock of unauthorized immigrants in the medium term. Before the regularization there were around 3 million unauthorized immigrants; just five years later there were once again around 3 million. The main reason was that the reform was a political showpiece built around the politics of “amnesty” and “security,” rather than the needs of the U.S. economy. It was never designed to fill America’s economic needs for low-skilled labor, but instead was a rickety political compromise among farmers, labor and Hispanic groups, and other interests. In the aftermath, employers had an awful choice: either turn to the black market for labor or face the consequences of a low-skilled labor shortage — stunted businesses, closed farms, infants and grandparents without proper care. The latest efforts at reform might be the best that can be hoped for from Capitol Hill. But they will similarly herald a new wave of unauthorized immigration unless their low-skill work visa caps are made much more flexible, starting from the essential labor needs of U.S. employers. And that’s unlikely.

But the consequences of a less-skilled labor shortage can be viewed through another lens. Stunted businesses might be the product of environmental regulation, closed farms might be the result of the elimination of farm subsidies or the imposition of more broad-based inheritance taxes, and infants and grandparents might go without proper care due to higher minimum wages. Yet we might nevertheless endorse environmental regulations, the elimination of farm subsidies or the imposition of more broad-based inheritance taxes, and minimum wage laws on the grounds that these policies have other benefits. The rejoinder might be that less-skilled immigrants from the developing world are better off even if they labor under conditions that natives, including less-skilled natives, would find intolerable, and that is entirely true. But if our primary interest is in global poverty alleviation, the set of potential policy options grows considerably — we’re no longer having a debate about the policies that best serve the interests of U.S. workers. 

Finally, Clemens addressing matching:

How can that MBA launch a new product? Only by depending critically on a small army of essential low-skilled workers. She needs someone to clear the table after a client lunch, empty the garbage at her office, and run the lot where she parks. She needs someone to pick the vegetables she eats and resurface the road she drives home on. She might need someone to care for her child, or grandfather, so she can work late. All of that is just the beginning.

This other form of teamwork is less obvious because it’s often invisible. Apart from the care workers, this MBA might never meet or only briefly glimpse the rest of these less-skilled workers. Yet every step of her daily life critically depends on them as much as it depends on her skilled co-workers. They make her more productive, and she them.

This is simultaneously the reason that there are so many less-skilled jobs in America’s future and the reason that fewer Americans do those jobs. People who acquire higher skills create less-skilled jobs that they themselves aren’t suited for. Less-skilled immigrants fill that gap. Machines may be able to take over a few of these jobs; that’s why you’re seeing more self-checkout registers in retail stores. But no machine we’ll have anytime soon can help the elderly bathe safely, clear tables at restaurants, or profitably pick cucumbers. People who do less-skilled essential jobs make skilled work in America possible, and together they make American competitiveness possible. You might never see the people who clean Google’s offices, but the company’s massive contribution to U.S. competitiveness would not exist without them.

Assuming it really is true that not increasing the size of the less-skilled immigrant influx will make it impracticable for knowledge-intensive service workers to hire workers to clear tables, empty garbage cans, operate parking lots, resurfacing roads etc., one assumes that new technologies will emerge — disposable food containers, automated trash removal and automated parking lots, autonomous vehicles that can resurface roads – and that other functions can be offshored, e.g., the U.S. could import more vegetables from abroad. Child care and eldercare can be provided by skilled natives in some cases, or in nurseries or senior centers to increase efficiencies. Clemens acknowlesgt that automation might play a role — and so his argument rests on the notion that we need tens of millions of less-skilled immigrants to bathe the elderly, to clear tables, and to pick cucumbers. Again, cucumbers can be imported; the elderly might benefit from promising biomedical innovations that delay the onset of dementia, and also from the scale afforded by eldercare facilities; and restaurants in countries like Denmark, Switzerland, and Australia continue to exist despite relatively low levels of less-skilled immigration — they happen to be somewhat more expensive. 

I prefer New York city to Copenhagen, and I’m sure many other Americans would agree with me. But Copenhagen is not an economically unviable or unpleasant city, despite the fact that professionals outsource food preparation somewhat less. There are many things I’d like to be cheaper. The question is whether driving down the cost of labor-intensive services is worth some of the downside risks associated with sharply increasing the number of Americans who are not likely to earn enough to lead what citizens of affluent countries define as dignified lives in the absence of mean-tested transfers.

One of the reasons automation is so attractive to employers is that it has the potential to lower labor costs. For example, a machine might allow one worker to do a job that had previously been done by ten. Another aspect of automation, however, is that more sophisticated machines often demand less skill from their operators, and so employers can hire less-skilled workers who are more easily trained and more easily replaced. So not only are we reducing labor costs by reducing the number of workers — we are reducing them by shifting from hiring workers with scarce skills to workers with widely available skills. Ashwin Parameswaran observes that this dynamic obtains even in the knowledge-intensive financial services sector:

From an economic perspective, it is not worthwhile to maximise the skill of the human user of the system. What matters and needs to be optimised is total system performance. In the era of the ‘control revolution’, optimising total system performance involves making the machine smarter and the human operator dumber. Choosing to make your computing systems smarter and your employees dumber also helps keep costs down. Low-skilled employees are a lot easier to replace than highly skilled employees. …

Since the advent of the assembly line, the skill level required by manufacturing workers has reduced. And in the era of increasingly autonomous algorithmic systems, the same is true of “information workers”. For example, since my time working within the derivatives trading businesses of investment banks, banks have made a significant effort to reduce the amount of skill and know-how required to price and trade financial derivatives. Trading systems have been progressively modified so that as much knowledge as possible is embedded within the software.

But Ashwin notes a major downside of deskilling:

Although computers do most tasks, we still need skilled humans to monitor them and take care of unusual scenarios which cannot be fully automated. And humans are uniquely unsuited to a role where they exercise minimal discretion and skill most of the time but nevertheless need to display heroic prowess when things go awry. As I noted in an earlier essay, “the ability of the automated system to deal with most scenarios on ‘auto-pilot’ results in a deskilled human operator whose skill level never rises above that of a novice and who is ill-equipped to cope with the rare but inevitable instances when the system fails”.

In other words, ‘people make poor monitors for computers’.

This progressive deskilling of the labor force helps explain why many U.S. business enterprises are so keen to increase less-skilled immigration, a subject I’ll revisit in the next post.

Late last month, I wrote a Reuters Opinion column which argued that while the obstacles to carbon pricing are very high, energy innovation reform holds great promise. The federal government already invests a substantial amount in energy innovation programs, much of it clustered in the U.S. Department of Energy, yet a new report (“Putting Energy Innovation First“) argues that these programs are not as cost-effective as they ought to be. Among other things, the report recommends that DOE’s be energy innovation programs be restructured. Rather than organize applied research efforts around technology-specific “stovepipes,” the report calls for organizing them around end uses, e.g., power and grid technologies, transportation and fuel technologies, and energy efficiency technologies. The report also recommends that the DOE-sponsored national laboratories be granted a greater deal of autonomy. I asked one of the authors of the report, Samuel Thernstrom, executive director of the Energy Innovation Reform Project, to elaborate on why the approach outlined in the report is the best way to go, and he kindly agreed to do so.

How do we know reorganizing around energy innovation research around stages of distribution as opposed to energy source will create fewer coordination problems on net?

All policy innovations are, by definition, experiments. But as you say, the question is which institutional arrangement is least bad—or, conversely, what organizational structure is most likely to produce the desired outcomes.

Our recommendations aren’t based upon complex or abstract theories; they reflect insights into the agency that come from people who have had extensive experience with the department and its strengths and weaknesses. By identifying the obstacles to DOE’s success, we can begin to see logical avenues for improvement. There’s no rule that says these changes will produce the desired effect, but it is reasonable to expect bureaucracies to respond to their institutional incentives.

Today, with applied energy programs organized around individual technologies—different offices for nuclear, fossil, renewables, etc.—each office has a natural incentive to become a cheerleader for its own technology. If those offices were reorganized around functional needs—electric generation, for example, or transportation fuels—the new office would have a stronger incentive to take a technology-neutral perspective when analyzing different options for achieving its mission.

Simply reorganizing the offices in that fashion won’t get rid of the rent-seekers and political interests that exist around every technology, but it will deprive them of their own high-level institutional advocate within the DOE structure and force them to face an evaluation of how their technology compares to a competitor’s—whether, for example, the nation’s electric generation needs would be better served by new nuclear or solar (or any other options). Having one office evaluate all the options to meet our needs, rather than individual offices cheerleading for each technology, is no guarantee of a better outcome—but it can only improve the odds.

We also recommend that the planning, budget, analysis and congressional/public affairs functions be transferred from individual applied energy program offices to an Under Secretary for Energy and Science. This would create an analytical entity to evaluate programs that would be more insulated—albeit imperfectly—from political and policy pressures. Again, this is not a silver bullet but it would mean that those offices would no longer be able to conduct entirely self-serving self-evaluations, and would expose them to scrutiny from a supervisor with a less parochial perspective on these questions.

How do we know that “freeing” the national labs won’t result in more self-indulgent projects?

There are no guarantees when it comes to reorganizing government, and history teaches us that bureaucratic tendencies often reassert themselves despite institutional reforms. Nevertheless, the national labs are clearly hamstrung by the Department of Energy today, and it’s logical to think that they could be a lot more productive if we took a few simple steps to help them: We should give the labs clear missions that are written into their contracts; we should give their contractors the freedom to pursue that mission efficiently, and we should hold the contractors accountable for their performance.

The national labs were designed to be operated under a “Go-Co” (Government Owned, Contractor Operated) model that gives the contractor operational control and holds it accountable for performance. But over time that model has been degraded as DOE headquarters has increasingly micromanaged the labs. The result was that DOE focused more attention on reviewing and approving the labs’ activities and adherence to its directives, and less attention on the labs’ productivity. T

These problems have been documented for years, going back to the 1995 Galvin Commission and a 2003 DOE Blue Ribbon Commission, among others, but little has been done. Reforms that would provide the lab contractors with greater freedom to innovate while demanding greater accountability for performance are no guarantee of success—but they seem like a good bet.

At the same time, we also recommend that the labs be tasked with meeting clearly defined, strategic energy innovation challenges, which should be written into the labs’ mission statements and contract objectives. And we recommend steps to increase the public-private partnerships that help ensure that DOE’s basic and applied research programs are closely tied to real-world commercial markets.

Freeing the labs from DOE micromanagement, clarifying their mission, bridging the gaps between basic and applied energy research and between the public and private sectors—none of these measures is any guarantee of success, but each of them does seem likely to contribute to the department’s productivity over time.

The most attractive aspect of Thernstrom’s energy innovation reform agenda is that it doesn’t require a new infusion of funds, which is very important in light of long-term budget constraints. 

Richard Vedder describes financial aid practices at U.S. colleges and universities as a “stealth tax on savings.” Thanks to the Free Application for Federal Student Aid (FAFSA) form, colleges have access to detailed personal and financial information about the families of aid applicants (“income, debts, alimony payments, number of other dependent children and their age, and so on”) and this information greatly aids price discrimination. Expensive private colleges will tend to grant more aid to households with heavy debt burdens than households that have accumulated savings to pay for college, even if said households earn the same income. Vedder proposes that the federal government abolish FAFSA, and that it make it illegal for colleges and universities to solicit private family-financial information — the only thing colleges could do is consult overall income, as reported by the IRS. It’s a clever idea, and I’d be curious to hear the case against. One could argue that Vedder’s approach is unfair, as households that save really do have a greater ability to pay. But of course that is precisely his point: colleges are exploiting savers, and this in turn may well reduce the number of savers and (perhaps) the amount of aggregate savings. I would be open to one slight tweak in the Vedder approach: perhaps colleges could also inquire as to the number of children in a given household, as this information might also be of interest. I’d be comfortable with a scenario in which the parents of only children were obligated to pay more than the parents of, say, three or four children.