Reports

Was JFK Wrong? Does Rising Productivity No Longer Lead to Substantial Middle Class Income Gains?

December 16, 2014
| Reports

The runaway success of Thomas Piketty’s Capital in the Twenty-First Century has increased the discussion of growing income inequality and what, if anything, should be done to reduce it. In addition to the book, Piketty has worked with Emanuel Saez in producing a series of computations on changing American incomes. Their claims are stark and widely cited to the point where they have become the received wisdom: between 1979 and 2007 (the last year before the onset of the Great Recession), over 91 percent of income gains due to productivity growth since 1979 has been captured by the wealthiest 10 percent of the population. This left just 9 percent of the economy’s expanded output for the bottom 90 percent of the population who only managed a meager real income growth of 5 percent while GDP per person for all Americans, including the top 10 percent, was rising 74 percent.

Why does this matter? Because if it’s actually true that productivity no longer benefits most workers, then why should elected officials do the hard work of advancing pro-productivity policies like corporate tax reform, investment in science and technology, and the development of sector-based productivity strategies. Better to concentrate their efforts on policies to redistribute gains to the bottom 90 percent.

Piketty and Saez and other advocates of the message that productivity no longer benefits average American workers are wrong. Lower and middle class workers have gained and are likely to continue to gain going forward from increases in productivity.

If progressives want to help raise the incomes of average American workers, a robust economic growth strategy with a strong focus on the key drivers of productivity growth – technological innovation and digital transformation of the economy – will be critical. This does not mean that other strategies to ensure more equal distribution of that productivity (e.g. higher minimum wages, more progressive taxes, universal health care, and the like) are not needed to more closely match median and average income growth. But the lesson from this analysis is that progressives ignore productivity growth at their own peril, and more importantly, at the peril of average working Americans.

The Middle Kingdom Galapagos Island Syndrome: The Cul-De-Sac of Chinese Technology Standards

December 15, 2014
| Reports

Read the Chinese translation of the executive summary.

China has made the development of indigenous technology standards, particularly for information and communications technology (ICT) products, a core component of its industrial development strategy. China has done so believing that indigenous technology standards will advantage China's domestic producers while blocking foreign competitors and reducing royalties that Chinese firms pay for foreign technologies. But, by using indigenous rather than global technology standards for ICT products, China risks engendering a “Galapagos Island” effect that isolates Chinese ICT products, technologies, and markets from global norms, as Japan experienced to the significant detriment of its ICT sector.

This report explains why the development and adoption of global, interoperable technology standards matters. It then explores Japan’s experience with the “Galapagos Island Syndrome,” explaining how that nation’s isolation from global technology markets ultimately inflicted significant damage to an industry that had once been among Japan’s most vibrant.

The report then turns to examining China’s standards development approach and identifies four central shortcomings: 1) it risks picking the wrong standard; 2) it risks delays in standards development (often caused by bureaucratic inefficiency or rivalry) that cause both missed market and economic growth opportunities; 3) it encourages a belief that Chinese markets alone are of sufficient scale; and most importantly 4) even when and if it does succeed in developing indigenous standards, it risks the Galapagos Island  effect that isolates China’s ICT products and markets from global ones. 

The report concludes by offering recommendations for how China can improve its approach to standards development in a way that benefits China’s ICT enterprises, China’s consumers of ICT products, and even the broader global economy. Among other recommendations, it notes that:

  • China should adopt an “open participation model” in product standards development processes and frameworks that is transparent, open, and non-discriminatory for all stakeholders.

  • China should remove policies that inappropriately withhold access to standards-development organizations (SDOs) or other Chinese standards-making forums based on where a company or organization is headquartered.

  • China should align its standards (including national, industrial, and provincial standards) with international standards and use international standards as the basis of Chinese standards and regulations wherever practical. China should not make minor alterations to existing international standards with the intent of developing a China-only standard. 

  • Technology that is not developed or registered in China should still be considered for inclusion in Chinese standards. 

  • Wherever the majority of the rest of a global industry sector has developed a voluntary consensus standardization forum as the preferred venue for the development of certain ICT standards, Chinese industry should join the rest of the sector in the development and use of those standards.

The Worst Innovation Mercantilist Policies of 2014

December 8, 2014
| Reports

Innovation is a central driver of growth. As a result, an increasing number of countries are seeking to become innovation leaders. Unfortunately, the methods that many choose are grounded in “innovation mercantilism”: a strategy that sees technology-based exports as the key to success while relying on distortive and protectionist tactics to achieve that goal. These practices do not just damage other economies; they damage the entire global innovation system, leading to less innovation and productivity. Moreover, they often do not even help the countries embracing the practices, instead, mercantilist policies lead them to neglect the greater opportunity to spur growth by raising the productivity of all sectors of their economies, not just a few high-tech ones.

The Eight Worst Mercantilist Policies in 2014 Are:

  • China: Abused its anti-monopoly law by instigating capricious investigations against foreign multinationals in order to protect domestic firms.
  • China: Threatened the long-term viability of the global solar industry through massive and unfair subsidies to Chinese-owned solar companies.
  • India: Issued a patent rejection for the cancer drug Abraxane.
  • India: Introduced new telecommunications equipment tariffs.
  • Indonesia: Prepared legislation that requires foreign Internet companies to store user data locally.
  • Nigeria: Proposed “Guidelines for Local ICT Content Development.”
  • Russia: Implemented localization requirements on Internet service companies.
  • Spain: Passed legislation taxing Internet news aggregators for publishing snippets of articles in search results.

10 Policy Principles for Unlocking the Potential of the Internet of Things

December 4, 2014
| Reports

Watch "How Can Policymakers Help Build the Internet of Things" live on 12/4 at 1 P.M.  

The Internet of Things encapsulates the idea that ordinary objects—from thermostats and shoes to cars and lamp posts—will be embedded with sensors and connected wirelessly to the Internet. These devices will then send and receive data which can be analyzed and acted upon. As the technology becomes cheaper and more robust, an increasing number of devices will join the Internet of Things. Though many of the changes to everyday devices may be subtle and go unnoticed by consumers, the long-term effect could ultimately have an enormously positive impact on individuals and society. A connected world is capable of anything from improving personal health to reducing pollution to making industry more productive. The Internet of Things offers solutions to major social problems, but this vision of a fully connected world will not be achieved without initiative and leadership from policymakers to promote its deployment and avoid pitfalls along the way.

The potential size and scope of the Internet of Things is enormous, with over 16 billion devices estimated to be in use today, and many more to come. By 2020, the total worldwide count is expected to reach over 40 billion. This growth is visible across practically every industry. By 2020, the number of wearable devices will surpass 100 million, the number of Internet-connected cars will exceed 150 million, and the number of connected wireless lights will reach 100 million—to name just a few.

The magnitude of the benefits brought by the Internet of Things is also impressive, and this technology may improve nearly every aspect of life. Consider the benefits of smart homes. Connected devices that automatically regulate electricity usage based on whether anyone is home can cut energy usage and bills. Smart meters can send dynamic price signals to smart appliances to reduce peak energy consumption. Connected sensors can improve home safety by detecting fires and other emergencies more quickly and reliably than traditional methods, alerting authorities sooner. Blinds that automatically detect and filter out sunlight, smart heating and cooling systems that can maintain different rooms at different temperatures, and lighting that automatically adapts to time of day and can be controlled from a smartphone will make home life more comfortable than ever before.

Connected devices can also provide consumers important new insights about their health and fitness. Companies are designing wearables for every stage of life from smart “onesies” with embedded sensors that help parents monitor their infants’ health to activity sensors that allow elderly adults to live safely and independently. Wearable biometric monitors can help individuals track their health, monitor chronic medical conditions, and improve health care outcomes. In addition, fitness trackers such as FitBit and Nike FuelBand can help consumers be more active and engage in healthy behaviors.

Local leaders can help build smart cities by integrating the Internet of Things into public buildings and infrastructure, including roadways, transit systems, and utilities. These technologies can help make cities safer, more sustainable, and more resilient while also providing new economic opportunities for their residents. For example, networked sensors can monitor the structural integrity of bridges and highways in real time to prevent catastrophes from happening and encourage cost-savings through timely preventative maintenance. And, intelligent transportation systems can make roads safer, facilitate traffic flow, and make public transportation more efficient.

Industries that restructure their practices around the Internet of Things can improve productivity and sustainability. With everything from networked assembly lines that track every screw turn to ensure quality control and safety to connected supply chains that reduce downtime and ensure transparency in material sourcing, the Internet of Things will increase industry competitiveness. The increased capacity for data collection from the Internet of Things brings benefits as well. Insurers can use actuarial models that factor in data from connected devices to better understand risk and reduce costs for their customers. Companies can monitor and enhance the safety of their workers in real time and prevent accidents.

Overall, global spending on the Internet of Things is predicted to grow to approximately $3 trillion by 2020. Of course, any capital equipment represents a cost, not a benefit. In that businesses and consumers purchase technology only if benefits exceed costs and because many benefits extend beyond the immediate purchasers to the entire network, the overall economic benefits from the Internet of Things will be even more significant.

As technological barriers decrease and adoption of the Internet of Things takes off, its potential benefits depend in part on how policymakers respond to this technology. There are four main approaches policymakers could employ regarding the Internet of Things:

1. Precautionary regulations: Some policymakers focus on the potential risks associated with the Internet of Things and want to regulate it accordingly. These policymakers believe that preemptive regulations will increase consumer trust and therefore increase adoption, but the reality is that heavy-handed rules would likely imposes costs, limit innovation, and slow adoption.

2. No intervention: Some policymakers resist laws and regulations for the Internet of Things because they believe the free market operating independently of government interventions achieves the maximum possible consumer benefit. However, by avoiding all interventions, policymakers miss the opportunity to proactively support the deployment of the Internet of Things.

3. Indigenous innovation: Some policymakers view the Internet of Things as an opportunity to create export opportunities for domestic firms. These policymakers may endorse policies that hinder foreign companies from competing in the domestic market, such as adopting national technical standards rather than adopting international ones. Such policies are anti-competitive and create fragmented markets for the Internet of Things.

4. Technology champions: Some policymakers have taken a proactive role in accelerating the development and deployment of the Internet of Things, such as by funding research on sensor networks, creating pilot projects for smart cities, preventing over-regulation of wearable health technologies, and providing incentives for smart grid deployment. These policymakers see government as a critical partner in promoting the benefits that come from using these technologies.

Recognizing why the first three approaches are wrong is crucial to developing sound policy for the Internet of Things. Its status as an emerging innovation necessitates the “technology champions” approach in order to create a policy framework that is fully cognizant of its benefits, allows for future innovation, and responsibly protects against misuse without restricting its capacity to deliver social, civic, and economic benefits.

10 Policy Principles for the Internet of Things:

  1. Chart the course for adoption.
  2. Lead by example.
  3. Look to partnerships to overcome obstacles.
  4. Reduce regulatory barriers and delays for getting smart devices to market.
  5. Minimize the regulatory cost of data collection.
  6. Make it easy to share and reuse data.
  7. Relentlessly pursue better data.
  8. Reduce the “data divide”.
  9. Use data to tackle hard problems.
  10. Where rules are needed to protect consumers, keep them narrow and targeted.

The Challenges for America’s Defense Innovation

November 21, 2014
| Reports

 

From WWII to the 1957 launch of the Soviet Sputnik to the 1980s defense buildup, U.S. defense investments in research and development not only promoted American security and safety but made a major contribution to U.S. innovation and economic leadership, assisting in the development of a host of industry-defining technologies from the Internet to GPS to the laser. Yet since the end of Cold War, federal funding for R&D, including defense R&D, has increased much more gradually and recently has actually declined. In addition, the 2013 sequestration – which mandated automatic spending cuts numerous programs including defense research initiatives – has exacerbated the challenge.
This report takes a closer look at America’s defense innovation ecosystem, assessing the current state of U.S. military expenditures compared to historical averages and our international competitors. It then analyzes the impact of the sequestration and limited budgets, the decline of the industrial base for defense needs, and the erosion of domestic innovation generally on the health of the defense research enterprise. The United States defense system is still the most innovative in the world, but that leadership is not assured and is in danger of failing. This decline in leadership will not only impact defense innovation and capabilities, but also overall commercial innovation and U.S. competitiveness.

 

From WWII to the 1957 launch of the Soviet Sputnik to the 1980s defense buildup, U.S. defense investments in research and development not only promoted American security and safety but made a major contribution to U.S. innovation and economic leadership, assisting in the development of a host of industry-defining technologies from the Internet to GPS to the laser. Yet since the end of Cold War, federal funding for R&D, including defense R&D, has increased much more gradually and recently has actually declined. In addition, the 2013 sequestration – which mandated automatic spending cuts numerous programs including defense research initiatives – has exacerbated the challenge.

This report takes a closer look at America’s defense innovation ecosystem, assessing the current state of U.S. military expenditures compared to historical averages and our international competitors. It then analyzes the impact of the sequestration and limited budgets, the decline of the industrial base for defense needs, and the erosion of domestic innovation generally on the health of the defense research enterprise. The United States defense system is still the most innovative in the world, but that leadership is not assured and is in danger of failing. This decline in leadership will not only impact defense innovation and capabilities, but also overall commercial innovation and U.S. competitiveness.

The Economic Cost of the European Union's Cookie Notification Policy

November 6, 2014
| Reports

In 2009, the European Union sought to regulate HTTP cookies—small text files are sent from a website and stored in a user’s web browser while the user is browsing that website—as part of their “e-Privacy” Directive, forcing all European websites to not only post their cookie policies, but also to seek the consent of each visiting user for the use of those cookies. This report finds that the total annual cost of this law is $2.3 billion dollars per year. This figure includes both compliance costs for European website operators and productivity costs. Given these costs and the law’s limited demonstrated benefits, European policymakers should abolish this largely symbolic “feel good” law for the sake of the European digital economy.

This report explores how not only is the EU privacy directive’s cookie policy costly, it also offers little to no benefits for EU citizens. In fact, by raising costs for website operators, it reduces the revenue available to develop quality online content and services for consumers. By requiring websites to notify users of all HTTP cookies, the policy may discourage many uncontroversial uses of cookies such as personalization which improve users’ online experiences. This policy also ignores that even when cookies are used to deliver targeted advertising, this largely benefits consumers with better ads and website owners with higher revenue they can use to provide higher quality consumer experiences. Additionally, users have filed few complaints about how websites are using cookies. The UK’s ICO received only 38 complaints regarding cookies between April and June of 2014, comparable to 9,000 complaints for automated sales calls during the same period. Answer ing this trifling number of complaints is not worth the law’s financial burden given the fact that the ICO also has noted that the majority of cookie complaints are “vexatious, personal, and time wasting.”

Several European Union and member state policymakers have begun looking at the cost-benefit analysis of this law a few years after its original implementation. As the European Union and its member states begin to revisit the e-Privacy directive, they should recognize that continuing to implement this cookie law is costly both to economic productivity and individual European websites. Furthermore, if the ICO’s experience is any sign of this law’s public mandate, it is unwanted in Europe as well. The European Union should act expeditiously to rollback this burdensome directive for the good of its digital economy and the ease of web surfing of its citizens.

Digital Drag: Ranking 125 Nations on Taxes and Tariffs on ICT Goods and Services

October 24, 2014
| Reports

Information and communications technology (ICT) drives productivity growth in the developed and developing world alike. Yet despite the clear benefits, many nations discourage ICT adoption by businesses and consumers by imposing discriminatory tariffs and taxes on cell phones, computers, telecommunications services and an array of additional ICT goods and services in the vain hope of increasing government revenues and/or protecting domestic ICT producers. Of 125 nations examined in this report, 31 impose combined ICT tax and tariff rates of over 5 percent of product or service costs, with several countries adding more than 20 percent to costs. Another 40 countries impose taxes and tariffs of between 1 and 5 percent. Economic studies demonstrate that these added costs limit ICT adoption which slows productivity growth. This report examines ICT tax and tariff policies around the world, assesses the negative impact of these policies on ICT adoption and productivity growth and recommends that nations eliminate all tariffs and discriminatory taxes on ICT goods and services.

Countries add taxes and tariffs to a range of consumer ICT products and services, including mobile phones and plans, computers and broadband service, and other electronics products. While 68 nations add at least 1 percent to the cost of ICT goods and services, Bangladesh imposes the highest costs, adding 57.8 percent to the cost of ICT goods and services over and above the country’s universal 15 percent VAT. In second and third place are Turkey and the Republic of the Congo, which add 26.1 percent and 23.8 percent, respectively. Greece, the only member of the OECD to rank in the top 20 countries, imposes 9.6 percent added ICT costs. Chile, only other OECD country in the top 50, adds 4 percent to costs. The majority of the countries that impose high costs are lower- or middle-income countries located in Africa, South Asia, and South America.

Many of the same countries that have imposed significant costs on consumer ICT products have also enacted high taxes and tariffs on business-use ICT products and services such as office equipment and intermediate ICT parts as well as mobile phones and computers. Forty-six nations impose a total cost on business purchases of ICT goods and services of more than 5 percent. Fully one half of the top 50 countries for business-use ICT tax and tariff rates are from Sub-Saharan Africa, with 11 countries from Latin America and the Caribbean and the rest from other regions. While there are many similarities between consumer-use and business-use ICT taxes and tariffs, tariffs comprise a much larger percentage of total business ICT cost additions than taxes among top countries.

The scholarly economic evidence is clear that because discriminatory taxes and tariffs raise costs for ICT users, whether businesses or consumers, they lead to reduced ICT adoption. The report estimates that these taxes and tariffs result in substantial decreases in adoption: over 20 percent for Bangladesh, Brazil, and the Republic of the Congo; between 10 percent and 20 percent for 11 more countries including Argentina, Pakistan, Ecuador, and Turkey; and between 5 percent and 10 percent for another 18 countries.

Because of reduced ICT adoption, economic growth suffers. For example, for every $1 of tariffs imposed on imported ICT products, India suffered an economic loss of $1.30 because of lower productivity. Overall, estimates point to yearly growth reductions between 0.7 percentage points and  2.3 percentage points of GDP per capita for countries with the highest tax and tariff rates.

Nations impose discriminatory taxes and tariffs on ICT goods and services for a variety of reasons, including the fact that they are relatively easy to tax and are seen as luxury goods. But because ICT taxes and tariffs limit growth, the net revenue benefits from taxing ICT goods and services are usually short lived. Studies indicate that revenue gains from such taxes and tariffs are often cancelled out over time because of reduced economic growth. For example, a recent study estimates that countries that reduce taxes on mobile goods and services regain revenue levels due to added sales and growth within 2 to 6 years.

Governments also enact tariffs on ICT goods in the mostly vain belief that it will spur domestic ICT production. But studies find that in most instances all these tariffs do is raise costs for other ICT-using industries, making them less productive and competitive, while doing little to spur the growth of a domestic ICT goods sector.

Given these findings, the guiding principle for nations should be straightforward: eliminate discriminatory taxes and tariffs on ICT goods and services for either consumers or businesses. This does not necessarily mean that ICT goods and services should be tax free—although some countries have happily begun moving in this direction—just that they should be taxed no higher than other goods and services. However, ICT goods should be tariff free since these are by definition always discriminatory. Finally, nations should also move to eliminate non-tariff barriers to trade that serve to raise the price of ICTs, such as domestic preferences for ICT procurement, local data storage requirements, and other protectionist measures.

A clear way for nations to enable faster economic growth is to spur the use of ICT by businesses and consumers. And many can do this with the stroke of a pen: eliminating discriminatory taxes and tariffs on ICT goods and services. 

The Coming Transportation Revolution

October 17, 2014
| Reports

The Internet of Things, cloud computing and improved sensor technology have created a new paradigm in transportation development that will allow for the creation of truly connected and ultimately autonomous vehicles. These technologies will improve safety, increase efficiency on America's roadways and eventually save billions in accident costs and lost productivity.

The Global Mercantilist Index: A New Approach to Ranking Nations’ Trade Policies

October 8, 2014
| Reports

Countries’ use of mercantilist policies in recent years has expanded dramatically, particularly in emerging economies such as Brazil, China, and India. These practices, such as forced technology transfer or local production as a condition of market access, intellectual property (IP) theft, compulsory licensing of IP, restrictions on cross-border data flows, and currency manipulation, all distort trade and investment and damage the global economy.

Collectively, these policies represent a major threat to the integrity of the global trading system and they demand a coherent and bold response from both free-trading nations such as the United States, as well as multilateral trade and development organizations, such as the World Bank, the WTO, and the United Nations. Despite this, many choose to turn a blind eye to mercantilism, for instance, the World Bank’s Temporary Trade Barriers Database 2013 Update asserts that protectionism may have peaked, and is now subsiding. ITIF refutes that claim, arguing that mercantilism is indeed still a major concern not only for the U.S. economy but for the entire global economy and trading system. It’s time the U.S. government and its like-minded trading partners get more serious about confronting mercantilism.

In order for the U.S. to take the lead in more effectively combating foreign mercantilism, it is time for Congress to provide the charge and the resources to the United States Trade Representative to develop an annual comprehensive ranking of nations’ mercantilist policies; in other words, a “Global Mercantilist Index”. ITIF's “Global Mercantilist Index” (GMI) uses a new comprehensive method to rank nations on mercantilist policies, while also proposing new policy tools to address the problem. 


Summary Policy Recommendations:

Congress should task USTR with creating an annual “Global Mercantilist Index” and provide additional funding accordingly;

The White House should publish a national trade enforcement strategy that reviews the adequacy of U.S. trade enforcement mechanisms with the goal of developing additional enforcement tools and focusing on the worst-behaving countries (Brazil, Russia, India, China and Argentina);

Congress needs to craft an Omnibus Trade and Competitiveness Act, similar to that of 1988, that both institutionalizes a Chief Trade Enforcement Officer and Working Group at USTR and restructures the interagency trade process;

Congress should increase USTR, the International Trade Enforcement Center (ITEC) and the International Trade Administration (ITA) appropriations with those increases targeted to trade and customs enforcement;

Congress also needs to be sure to appoint individuals to the International Trade Commission (ITC) who take trade enforcement seriously and do not simply have a “maximize consumer welfare” mindset;

Congress should require that provision of trade preferences, such as GSP and other development assistance, be tied to the GMI and Special 301 Report findings;

The U.S. Agency for International Development (USAID), the Millennium Challenge Corporation, the State Department, and other U.S. development organizations should advocate for a new approach to development economics not grounded in export led high-tech growth;

The United States should work with our free-trade allies to restructure the WTO to recognize a change in membership toward countries that do not play by the rules so that it becomes a more effective enforcement organization and not just a market opening one;

Trade policymakers should work with the WTO to develop a similar global mercantilist ranking report that applies an international lens;

International development organizations such as the International Monetary Fund, EuropeAid and the World Bank should use the global mercantilist ranking report to inform their funding decisions.

The Rise of Data Poverty in America

September 10, 2014
| Reports

 

Data-driven innovations offer enormous opportunities to 
advance important societal goals. However, to take 
advantage of these opportunities, individuals must have 
access to high-quality data about themselves and their 
communities. If certain groups routinely do not have data 
collected about them, their problems may be overlooked 
and their communities held back in spite of progress 
elsewhere. Given this risk, policymakers should begin a 
concerted effort to address the “data divide”—the social 
and economic inequalities that may result from a lack of 
collection or use of data about individuals or communities. 

Data-driven innovations offer enormous opportunities to advance important societal goals. However, to take advantage of these opportunities, individuals must have access to high-quality data about themselves and their communities. If certain groups routinely do not have data collected about them, their problems may be overlooked and their communities held back in spite of progress elsewhere. Given this risk, policymakers should begin a concerted effort to address the “data divide”—the social and economic inequalities that may result from a lack of collection or use of data about individuals or communities. 

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