Obama Seeks to Curb Outsourcing

With 2012 being an election year, President Obama set out to frame his re-election bid in November around the economy. Having cited employment and productivity gains of late, he then targeted his ire on tax incentives offered to multinational companies for outsourcing business activities overseas.

The following is an excerpt from his State of the Union Address:

If you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it. That money should be used to cover moving expenses for companies...that decide to bring jobs home.
Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go toward lowering taxes for companies that choose to stay here and hire here.
Third, if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.
It’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America. Send me these tax reforms, and I’ll sign them right away.

 Just as he decried the uneven playing field that countries like China have created by undervaluing their currency, he advocated the use of the tax system to provide credits and government subsidies to industries (particularly in the clean energy and advanced technology sectors) as a way of ensuring that America was "built to last". All this was part of the solution in addressing what he called "the defining issue" of his presidency--keeping the American dream alive.

Well, well, well, it seems that Washington is no longer enamored with the Washington Consensus. As it pushes for free trade agreements across the globe to lower trade barriers for its products and to enforce the intellectual property rights of its companies, it is clear that the administration has no qualms about engaging in market interventions at home to boost the competitiveness of its local industries.

Is Too Much Regulation or Too Much Innovation Responsible for Killing Jobs?

Earlier this year, Tyler Cowen suggested that the Great Stagnation in productivity and incomes observed recently in the West primarily in the United States has been occurring since the 1970s and is a result of it having exhausted the "low-hanging fruit" of innovation.

An opposite case can also be made that too much innovation has led to this slowdown. The Economist through its science and technology blogger comments on the practical advances occurring in the field of Artificial Intelligence or AI:

Today, automation is having an impact not just on routine work, but on cognitive and even creative tasks as well. A tipping point seems to have been reached, at which AI-based automation threatens to supplant the brain-power of large swathes of middle-income employees.

The pace of technological progress rather than having slowed down, appears to be speeding up. So much so that as "capital becomes labor" in many industries, leading to cheaper goods and better products, income growth for workers has stagnated while corporate profits have soared.

Advanced manufacturing, financial engineering, creative industries and even mining no longer require as much labor as their first wave cousins might have. Yet to attract such industries, governments have had to cut taxes, lower regulatory hurdles and so forth. This in turn has led to more constrained fiscal spending on their side.

The one area in which more regulation has led to greater innovation is that of climate change and environmental policy. The White House under the Democrats has elected to shelve its proposed cap-and-trade scheme in favor of greater powers for its Environmental Protection Authority to promote greater air quality for the health of its citizens.

The increased restrictions on the carbon emissions of power generators is causing a shift away from carbon intensive coal fire plants in favor of gas fired stations. The adjustment into a low carbon economy is creating just about as many jobs as it destroys according to economists.

Whether or not regulation encourages or discourages jobs however is beside the point, as one Stanford policy expert was quoted by the Washington Post as saying. The adoption of regulation should be based on whether it benefits society, he says. I couldn't agree more.

Reframing the Climate Debate

The Climate debate has proven to be a diabolical policy problem for politicians in Australia, a country with one of the highest carbon dioxide emissions per capita in the world having an economy heavily dependent on the export of coal and other carbon intensive commodities.

It was partly responsible for the sacking of a once popular PM by members of his own party during his first term. It was dragging down the popularity of the lady that replaced him. Even a coalition between the Greens, Labor and a few independents representing country-based electorates could not provide a consensus in the debate.

Then came the proposal of an economist to offset a carbon tax with an income tax cut. The idea is hardly new. Even the Prophet of an Inconvenient Truth advised the scrapping of payroll taxes in lieu of a carbon tax a few years ago. The idea was to lighten the burden of productive activity (labor) while increasing it for environmentally destructive ones (pollution).

The advocacy of this tax cut approach as part of an overall principle of making the polluter pay while compensating vulnerable members of the community has stemmed the bleeding of support as expressed in the poll numbers and restored this government's legitimacy at least for now.

The re-framing of the debate is something that has eluded previous proposals for a carbon pollution reduction scheme. The use of a tax to price carbon rather than a synthetic market (read: emissions trading scheme) is much simpler and straight-forward. It also avoids much of the costly transactions costs involved in setting a complex trading system.

The use of tax cuts to offset additional living costs on households to whom polluting energy firms would pass on any tax burden does away with the notion that the "little man" would be the hardest hit by the tax. It also reduces the disincentive to work without creating budget pressures.

Indeed the Opposition will wish that it had proposed the Carbon tax with the accompanying income tax cuts ahead of the government as what a conservative think tank had earlier done. Having been outflanked by Labor on this issue, it now has to reconcile its carbon abatement policies which opts to use government regulation rather than a market mechanism something that economic liberals are not known for. Being the party that invented "middle class welfare" it will now find it difficult to counteract the middle and lower income tax cuts now being considered.

The Ecological "Arc" of the World Economy

The following entry contains nothing new about carbon emissions that hasn't already been picked up by the media; instead, it seeks to present the facts differently. 

The map below shows the total size of CO-2 emissions over five decades where each bubble represents total emissions by a country. If you hit the play button, you will see the gradual growth of emissions over time. Quite striking is the rise of China over the past decade dislodging the US as the biggest emitter with 6 million kilo tons (kt) of emissions compared to 5.7M for the US. Russia and India follow suit with about 1.5M kt each, and Japan ranks fifth with 1.3M kt.

The next chart plots the CO-2 emissions per capita of each country along the vertical axis with  average incomes (gross national income per capita) on the horizontal axis based on purchasing power parity (or PPP) measuring income in terms of what citizens can afford based on the cost of goods and services relative to wages. The bubbles represent the population size of each country.

One sees clearly an "arc" that gradually slopes upwards such that as countries get richer, each citizen consumes more resources and generates more pollution. From 1980, this arc gradually moves rightwards reflecting technological advances that have made industries more efficient in their use of resources, i.e. it takes less carbon to produce a dollar's worth of goods. In 1980, the point at which emissions per capita started to rise was at $1,000. In 2006, it was close to $4,000.

For the world economy to grow in a sustainable way, rapid technology development is needed to make production less reliant on carbon so that as poorer countries move up the income scale, they do not cause environmental damage at a rate similar to that of rich countries in the past. The arc needs to be flattened and pushed rightwards. It is not viable to prevent the rise of affluence in poorer nations as poverty tends to be correlated with faster population growth.

China with its 1.3 billion people earning $4,700 on average is already on the upward sloping part of the arc. Displacement of industries from rich countries that have stringent environmental policies is largely responsible. Egypt which has about the same level of income per person as China, emits 3-kt per capita compared to China's 5-kt reflecting a different mix of industries. India with an average income of $2,500 per person still lies on the flat portion of the arc and has a relatively low carbon footprint of 1-kt.

For the arc to flatten and shift rightwards, incentives are needed to encourage investments in new technology that will shift production away from carbon intensive methods and into cleaner ones. The rate of technological progress has to be faster than economic progress of poorer nations. The arc has to be bent downwards faster to accommodate the bigger but poorer nations who are "catching up" with the smaller but richer ones. If not, the future well-being of all those who live on the arc could be at-risk. 

For a discussion on the history of the science behind global warming, I found the following source quite illuminating: http://www.aip.org/history/climate/ from the American Institute of Physics.