Steven Strauss

Commentator on Public Policy with over 100,000 readers (est.), Fellow Harvard University 2011-2012, Managing Director NYCEDC 2008-2011, Director World Economic Forum 2006-2008, McKinsey 2001-2007, Ph.D. Yale 2002. Contributor at The Huffington Post, BusinessInsider, EconoMonitor, and Project-Syndicate

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The End of the American Middle Class?

Are we destined to be techno-serfs serving a ruling elite of information oligopolies?

In the brave new world envisioned by pundits, we will all be micro-entrepreneurs with personal brands -- each of us controlling our own destiny, selling our services into digitally enabled markets. Traditional employers and wage slavery will be extinct.

Unfortunately, the companies of this new economy aren't philanthropic do-gooders. They are profit-maximizing corporations, with incentives (and increasingly, the market power) to pay their personnel (AKA independent contractors, euphemistically called micro-entrepreneurs) as little as possible. This could lead to a future with a small affluent elite, and the rest of us reduced to techno-serfism.

Economists (see, David Autor and David Dorn (2013); Maarten Goos, Alan Manning, and Anna Salomons (2014)) have noted a long-term hollowing out and polarization of our labor markets due to offshoring and automation. The result is: rapidly increasing demand and productivity for high-skilled "knowledge" workers (e.g., software developers); some increased demand for certain types of low-skilled service workers with jobs difficult to automate or offshore (e.g., home health care workers, waitressing); and collapsing demand for middle-skilled workers with jobs easily automated or offshored (e.g., assembly line workers in manufacturing). All of which helps explain the increasing levels of income inequality we have been experiencing in the U.S. (see, Wojciech Kopczuk, Emmanuel Saez and Jae Song (2010)).

Further, the companies of the Digital Economy (e.g., Airbnb, Amazon, Apple, Google, Facebook, Uber) tend to be oligopolies (which gives them huge negotiating power with smaller businesses, workers and micro-entrepreneurs) due to:

Network effects - Consider Uber, as one example. Uber drivers are micro-entrepreneurs, not employees. Drivers want to sell their services into whichever market has the most people looking to purchase a ride. Riders want to use the market with the most drivers looking to sell their services. This tendency for both parties to flock to the most liquid market, typically results in oligopolies or monopolies.

High fixed costs - Continuing with the Uber example, its business model has very high fixed costs - substantial upfront investment is needed to create the markets, develop the software, and accumulate a critical mass of buyers and sellers. Estimates are that Uber is spending billions to create this infrastructure, and the very size of its investment dissuades competitors.

Low marginal costs - Once a Digital Economy company is up and running, the marginal cost of a transaction is small. The transaction cost incurred by Uber when a passenger takes a ride (exclusive of the driver's fee) is essentially zero. Uber now operates in over 200 markets, so a competitor challenging Uber in one market risks a price war Uber will almost certainly win -- because it can make extra profits in markets where it faces less competition. Further, many Uber users utilize its service in multiple markets. Even if a new competitor enters just one market, a user might not switch because of the convenience of dealing with one company nationally.

Information asymmetry - Companies like Uber, Amazon and Airbnb accumulate information about both their suppliers and users, which they can use to craft optimal pricing strategies (or, to dig up "dirt" on opponents and/or manipulate our emotions). The Amazon Prime service is a good example of a pricing strategy (high volume customers prepay to receive a bundle of services) that locks in customers and dissuades future competitors.

In their pursuit of profit, Digital Economy oligopolies have every incentive to use their increasing power to commodify everyone they buy from -- and, this process will potentially impact more and more of the economy.

For example, Amazon (which now controls about half the U.S. book market) negotiates aggressively with publishers and has used its market power to punish non-cooperative companies (e.g., Hachette books were difficult to buy on Amazon during their dispute). Amazon has also been criticized for its treatment of its warehouse workers (most of whom aren't Amazon employees, but temps hired via agencies). If Amazon manages to drive all publishers out of business and deals directly with independent writers and editors, Amazon will have the incentive and market power to also turn writers and editors into low paid commodity content providers.

On the consumer side, in a world where Uber is a quasi-monopoly in car service transport (or Amazon has driven most of America's publishers and booksellers out of business), these companies will also have considerable pricing power when dealing with their customers.

So, we have a plausible future where profits, information and political power (the leading companies of the Digital Economy already invest heavily in politics) increasingly accrue to a small group of technology-driven oligopolies. And the rest of us are reduced to commoditized micro-entrepreneurship (i.e., techno-serf) roles, paid the minimum the Amazons of the world calculate as necessary (given our lack of alternative employers) -- but paying the maximum these oligopolistic powerhouses can charge.

Welcome to our potential future -- is wage slavery starting to look good?

Steven Strauss is the John L. Weinberg/Goldman Sachs & Co. Visiting Professor at Princeton University's Woodrow Wilson School and an Adjunct Lecturer in Public Policy at the Harvard Kennedy School.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

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As Bricks and Clicks Merge, Geeks Are Discovering Politics

As with the first industrial revolution, the merger of Clicks and Bricks forces us to ask: Which laws need to be updated, which are just irrelevant, and which are barriers to entry created by special interests? Best placed to help our internet billionaires contribute to this important project are -- politicians, civil servants, lobbyists and other political hangers-on, looking for lucrative work.

America's statutes, policies and regulations (Laws) are designed for a non-digital world -- a world where a taxi was something you hailed on the street, not by clicking a smartphone app. The world of Bricks (i.e., the older traditional economy) and Clicks (i.e, the newer tech-fueled economy) are merging. With this merger, we are forced to examine our existing Laws (a point also made by Fareed Zakaria). As companies scramble to lobby the government for the most favorable results, political types and high powered lobbyists will be in great demand (e.g., David Plouffe -- a key strategist behind President Obama's two presidential wins -- recently joined Uber).

Originally, computers (e.g., the IBM 700/7000 series circa 1952 ) had little direct interaction with the world of Bricks. They were used for: artillery trajectory tables, payroll and accounting, and similar behind-the-scenes work. The machines took up entire rooms, and operated in batch mode(1).

Moore's law (computer processing power doubles every 18-36 months) has proved unrelenting. As processing costs decline exponentially and other technologies advance, the worlds of Bricks and Clicks are merging.

Cabs have existed for centuries -- London has had taxi service since 1654. And renting out a spare room has been happening for centuries. What has changed -- and the impact is dramatic -- is the decline in transaction costs and the resulting increase in market efficiency brought about by adding the world of Clicks to the world of Bricks. This has triggered the rise of the sharing economy, among many other manifestations.

Innovations -- such as, Uber's uniting dynamic pricing, smartphones, GPS, stored billing information, a two way rating system (you rate the driver and the driver rates you) and much else -- make the new economy a very efficient system for transacting business, thereby resulting in more business activity.

But merging Clicks with Bricks creates friction with old Laws from the pre-Click world, which can be categorized as:

Laws that remain necessary, in some form, in our digital era: For example, most cities have auto inspection and safety rules for vehicles, particularly for vehicles that carry paying passengers. The safety concerns are the same, whether the passenger is picked up by Lyft, Uber or a traditional car/taxi service. These Laws served a legitimate purpose prior to the merging of Clicks and Bricks, and that purpose remains applicable, even in the digital age.

Laws that are obsolete in the digital era: As an example, in a different time, when horses were the major mode of urban transportation, all sorts of Laws were created specifically for an era of horse traffic. Most of these are now irrelevant, or have been repealed. But those remaining from that era must be re-examined (and eliminated or revised) if unnecessary or detrimental to new needs and goals.

Laws that never had any good reason to exist, but were the result of special interests creating barriers to entry, as discussed in more detail below.

As Adam Smith said:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

One way for businesses to conspire against the public is to have government create artificial barriers to entry, and thereby generate unearned profits for politically connected businesses.

For example, the number of yellow taxis allowed on the streets of NYC at any one time is restricted to 13,437. No matter how great the demand, the capacity of the streets, the time of year, or the strength or weakness of the NYC economy -- only 13,437 yellow cabs are allowed. The number 13,437 doesn't reflect a perfect balance of the laws of supply and demand -- demand for the privilege of driving a yellow cab far outstrips the supply. The current price for a medallion (i.e., the right to have a yellow taxi on the streets of NYC) -- about $1 million -- reflects this high demand.

NYC medallion owners are a concentrated special interest group, with a financial interest in limiting the issuance of new medallions. The general public also has an interest in the taxi industry -- more and better service -- but for most people, this isn't their highest priority. For medallion owners, however, the taxi medallion is of utmost importance since it represents their very livelihood. Medallion owners, therefore, can have an outsized influence on this one narrow issue. But the rise of Uber and similar services means we suddenly have new and powerful interests at the table, challenging old rules.

This isn't just about the taxi industry. This challenge will occur across the entire economy. One benefit of this merging of Bricks and Clicks is a "housecleaning" of our Laws. As significant new participants emerge, they'll seek to remove government barriers that hinder their business models. However, these new competitors will behave as Adam Smith predicted, and attempt to create new barriers to trade benefitting their own interests. Arguably this process has already begun - newcomer Uber was recently accused of encouraging taxi regulations that would favor its business model, and make it more difficult for new entrants. Capitalism is innovative and efficient, but not always admirable.

My one prediction: For both well-funded new competitors (trying to revise or create Laws that benefit their interests), and old form competitors (with tremendous incentives to protect their turf), civil servants, politicians, lobbyists and others of their ilk will be in high demand!

(1) In this period computer programs were typed on punch cards and left to run overnight at a data center; by the way, punch cards were still in use as late as the mid-1980s).

An earlier version of this blog appeared as: Strauss, Steven. "Regulation for Bricks, Clicks, and the Sharing Economy." Aspen Journal of Ideas. Aspen Institute, Nov. 2014. Web.

Steven Strauss is the John L. Weinberg/Goldman Sachs & Co. Visiting Professor at Princeton University's Woodrow Wilson School and an Adjunct Lecturer in Public Policy at the Harvard Kennedy School.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

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Archive - Actually Tax Cuts Don't Seem to Have Much Impact on Economic Growth

It has been something of an article of faith among conservatives that the solution to America's problems is in smaller government and lower tax rates. The argument on taxes goes something like: 'We need to unleash the wealth creators, who stimulated by the prospect of more income (due to lower tax rates), will create wealth for all of us.' And, that any tax increase -- for even the wealthiest taxpayers -- would have catastrophic consequences. Actually the post World War II American economy provides a nice empirical test of this hypothesis -- the maximum marginal income tax rate gradually declined from about 90% to about 35%. Shouldn't this decline have lead to an explosion of economic growth as our wealth creators were unleashed? Sorry, Sarah Palin... it didn't. During the ultra high tax 1950s (top marginal income tax rate of 90%), the United States had some of its best real economic growth (over 4%/year). And, for the decade where we had our lowest marginal income tax rates -- we had our worst real economic growth (about 1.5%/year). (See Table 1 below.) So what happened? Well, first of all (Spoiler Alert! The following will upset ideologues!), the real world is complicated. Taxes are one part of the American economy, but by no means the only driver of our decision making process. People are motivated by lots of things -- not just money. In all the recent discussions about Steve Jobs, I can't recall a single quote, anecdote or story that suggested income tax rates had any influence on Steve Jobs' behavior. Does anyone really believe that if US income tax rates had been slightly higher Bill Gates would have founded Microsoft in Singapore (or some other low tax center)? As another example -- Warren Buffet, who has been an active investor from the 1950s to today, certainly could have moved offshore when tax rates were higher. He didn't. Also, keep in mind that economic growth is not driven just by entrepreneurs and their hard work (okay, I've now simultaneously infuriated both the left and the right). In the 1950s, the global economy was emerging from World War II and the United States was the only industrial economy relatively unscathed. With better policies (arguably, the then current 90% tax rate was too high), we might have had even higher economic growth rates in the 1950s. But, our strong economic growth throughout the 1950s was helped by a strong tail wind (from outside the US). In the early 21st century, we suffered relatively anemic economic growth (despite much lower tax rates), but we also faced a far more competitive world and a disastrous real estate bubble. It is not clear that lower income tax rates would have had much impact. But higher income tax rates and other policy adjustments might have avoided the real estate bubble from which we are now recovering. Finally and most importantly, it is not just how the money is raised, but how it is spent. Tax revenues that improve infrastructure, and pay for basic research and education are investments in our future, and will foster economic growth. Tax cuts that primarily favor high end consumers might stimulate the purchase of luxury goods (McMansion anyone?), but may not contribute much to overall economic growth. My point, and I do have one -- is that ideology is a poor substitute for pragmatic approaches to complicated problems. In fact the evidence that tax rates influence economic growth in any way is equivocal at best. A myriad of other factors are involved. Simply reducing tax rates, and primarily for the wealthy, may hinder -- rather than enhance our economic recovery.

Table 1: Comparison of mean marginal tax rates and mean real GDP growth rate

Steven Strauss was the founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation. He will be an Advanced Leadership Fellow at Harvard University for 2011-2012. He has also worked as a management consultant for McKinsey and has a Ph.D. in Management from Yale University. You can follow him on Twitter @steven_strauss. Sources: The real GDP growth rates are from www.wolframalpha.com; the income tax rates are from the National Taxpayers Union. Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss A version of this post originally appeared at the Huffington Post: http://www.huffingtonpost.com/steven-strauss/tax-cuts-economic-growth-_b_1031376.html

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A Disturbing Glimpse of GOP's Low Tax/Limited Regulation Utopia

Recently, the US Chamber of Commerce (Chamber) ranked Tennessee No. 1 among our 50 states for its low taxes and limited regulatory environment, and recommended Tennessee as a role model for the nation.

The Chamber, Tea Party, GOP, Grover Norquist, Mitt Romney and Newt Gingrich tell us that low taxes and limited regulation will solve America's economic problems, including giving us a balanced budget. Indeed, the Republicans are making a major push to eliminate or reduce state income taxes across the US. Norquist (and others) claim that government programs are a waste, no job is ever created by government, and so on. Tennessee, under their theory, should be a low tax/limited government utopia.

Instead, Tennessee's results imply -- 'you only get what you pay for.' Let's benchmark Tennessee's performance against the rest of the US.

Economic: Low taxes and limited regulation haven't resulted in an economic boom for Tennessee. Among American states, Tennessee ranks 48th in median household income, and 35th for its high unemployment rate. Sadly, Chamber members aren't flocking to hire people in Tennessee (see Appendix, below, for details).

Proponents of the 'low tax/limited regulation strategy' tell us it's not just about money, but also about quality of life. So let's see how Tennessee does on some basic metrics for Health, Personal Safety, and Education:

Health: Tennessee ranks 45th among American states for life expectancy, and infant mortality is 30% above the national average (Appendix below).

Personal Safety: Tennessee's highway fatality rate is 30% above the national average. Its murder rate is 50% above the national average (Appendix below). Maybe hiring a few more police officers would help?

Education: Education is one of the core functions of local government, and as America moves towards a hi-tech future -- preparing the next generation should be a priority. Instead, Tennessee does poorly on both quality and quantity metrics. Particularly alarming are Tennessee's significantly lower percentages of high school, college and advanced degree graduates, relative to national averages (Appendix below).

At an overall level among American states, Tennessee was ranked 44th -- where 50th is worst-performing -- by the American Human Development Index (Index). The Index was developed:

'as an alternative to simple money metrics. It is an easy-to-understand numerical measure made up of what most people believe are the very basic ingredients of human well-being: health, education, and income.' Source: The American Human Development Project, 2012.

Correlation is not causality. But it appears that Tennessee residents receive fewer and lower quality services from their government and private sector -- because they spend less money on their government and have a limited regulatory environment.

Oliver Wendell Holmes, Jr remarked, 'Taxes are the price we pay for a civilized society,' and the word 'price' is worth emphasizing. We are a free society and can choose how much government we want to buy, and how much regulation we're willing to accept.

My point isn't that the people of Tennessee have made bad choices, or that other states have made better choices. But when a politician tells you s/he can cut your taxes and reduce regulations -- without increasing the budget deficit, and/or reducing the quantity (or quality) of services -- that politician is likely a liar.

Americans pay ~$2,200/person per year in state taxes; Tennessee residents pay ~$1,700/year.

If you live in Tennessee, would you vote for a candidate who asked you to pay $500/year more in taxes, but would improve state results -- with a combination of increased services and regulations -- to, at least, meet national averages?

If you live in another state, would you vote for a politician who proposed cutting your taxes by $500/year, but would cut services and regulatory enforcement to make that happen?

Do you disagree with my analysis? Do you think other factors are affecting Tennessee's performance relative to national averages?

I welcome your comments!

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University and over 20 years private sector work experience. You can follow him on twitter at: @Steven_Strauss.

Appendix with Sources Economic:

Median Household Income: Tennessee's ~$40,000 (ranked 48th). National average is (~$51,000), and best performing state (New Hampshire) is ~$66,000.

Unemployment Rate (December 2011): Tennessee's ~8.7% (ranked 35th). National average is 7.7%, and best performing state (North Dakota) is only 3.3%.

Health

Life Expectancy: Tennessee's is 75 years (ranked 45th). National average is 78 years, and best performing state (Hawaii) is 82.

Infant Mortality Rate (measured as deaths of infants under 1 year old per 1,000 live births): Tennessee's is 8.9 (ranked 44th). National average is 6.9, and best performing (Washington State) is 5.1.

Personal Safety

Highway Fatalities Measured as Deaths per 100 Million Vehicle Miles Travelled: Tennessee's is 1.4. National average is 1.1, and best performing state (Massachusetts) is .6.

Murder Rate per 100,000 of Population: Tennessee's is 7.4. National average is 5.1, and best performing state (New Hampshire) is .9.

Education

Average Mathematics Scores for 8th Graders: Tennessee's is 275. National average is 283, and best performing state (Massachusetts) is 299.

Educational Attainment for Persons 25 years and older: 83% of Tennessee residents at least graduated High School, 23% obtained Bachelors' degrees, 8% went on to advanced degrees. Comparable national percentages are 85%, 28%, 10%.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on February 1st, 2012 as A Disturbing Glimpse of GOP's Low Tax/Limited Regulation Utopia

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It's Time to Take the Anti-Norquist Pledge

Like all Americans, I yearn for a simplified tax code, and I stand second to no citizen in my passion for tax reform. My wife and I between us possess the following graduate degrees: Ph.D., M.Phil., two M.A.s and a J.D. from reputable institutions -- so grant that we are of at least median intelligence. Yet we can't manage to do our tax returns correctly without professional assistance. I assure you, I strongly believe in tax reform. But Grover Norquist's misleadingly-named Americans for Tax Reform (ATR) has absolutely nothing to do with tax reform.

Norquist, president and founder of ATR, is famous for the polarizing 'tax reform' pledge (the 'Norquist Pledge') he badgers politicians into signing -- under penalty of designating them anti-tax reform. The current version of this pledge states that signers will:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Norquist even emphasizes that the pledge has no exceptions for war, natural disaster, or other misfortunes. For example, a signer of the Norquist Pledge isn't permitted to vote to increase tax rates on America's 1% -- even if such changes would be revenue neutral, and/or are desperately needed for a national emergency. Our current marginal tax rates reflect random political compromises, so why they should be set in stone for the coming decades is not clear to me.

At last count, 238 Members of the House of Representatives and 41 Senators committed to the Norquist Pledge. Republican Presidential candidates Mitt Romney and Newt Gingrich have also signed the pledge -- which is binding for a politician's entire term in office.

The Norquist Pledge has nothing to do with tax reform as understood by most American taxpayers. For example, the majority of Americans favor increasing -- rather than capping -- the marginal tax rates of the top 1%. (By the way, ATR -- a tax-exempt institution -- pays no taxes on its annual revenues of about $5 million per year, according to ATR tax forms.) Mr. Norquist's real goal (explained in his other writings) is to substantially shrink the size of government.

I oppose the Norquist Pledge for (at least) two reasons:

ATR is a misleading, Orwellian assault on our language: ATR is entitled to a view that tax revenues should be capped, or that the '1%' shouldn't pay more taxes -- but they should call themselves Americans for Flat Tax, Americans for Limited Government, or anything which describes their real goals.

We need compromise, not gridlock: The Norquist Pledge was directly responsible for the near default of the U.S. government, and contributes to the acrimonious political atmosphere we all suffer from. The American Bill of Rights and the Constitution are core non-negotiable commitments every American has the right to insist our politicians pledge to defend and protect. But pledges to not raise marginal tax rates on the top '1%' make normal compromise and negotiation impossible.

To counter this harmful situation, I propose the American Citizen's Anti-Norquist Pledge:

As an American citizen, I hereby irrevocably commit that I will not support, contribute to or vote for any politicians who have signed the Norquist Pledge, unless they publicly renounce that pledge. As a shareholder of any American corporation, I pledge to oppose any corporate contributions to ATR and to vote against any corporate management using corporate funds to support ATR. As a consumer, I will not knowingly purchase goods and services from corporations that support the Norquist Pledge.

Finally, I would welcome your comments:

Do you agree the Norquist Pledge is harmful to our country?

If you agree that the Norquist Pledge is harmful, would you be willing to sign the Anti-Norquist Pledge?

What else could we do to reverse the Norquist Pledge? If you would like updates on the creation of the Anti-Norquist Pledge, and other topics, please follow me on twitter: @Steven_Strauss.

Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on January 22nd, 2012 as It's Time to Take the Anti-Norquist Pledge

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Government Action Is Key to Driving Innovation, Entrepreneurship and Economic Growth

A general theme of the Republican presidential debates is that government is a waster of resources, net destroyer of jobs, and stifler of innovation. Interestingly, these same candidates praise the private sector's innovation and creativity (e.g., Apple, Facebook, Google, etc.).

The GOP ignores that most of our excellence in scientific innovation is attributable to government support for basic research. Currently 66% of research at American universities is funded by local, state and federal governments, with most of these funds coming from the federal government. This pattern has been consistent since WW II (1).

University research should be funded by the government -- it is the classic public good. It produces broad benefits to society that no one institution can capture, has very uncertain benefits and has very long time spans, hence it is not suitable for private sector support.

Not one of the technology companies listed above (and many others not mentioned) would exist without the Internet. The Internet (and its predecessors) was originally a creation of the federal government. It was supported for the first 20+ years by our federal government before becoming commercially viable. It was 'incubated' with government support at our universities, with private sector involvement coming relatively late.

Yet, I can't think of a single time during the debates when any Republican presidential candidate acknowledged the federal government's highly important role in funding predecessors of the Internet (and other key technologies) -- when the private sector lacked the vision and initiative to make these long-term investments.

Aside from anecdotal evidence, we have statistical evidence for university's key role in economic development:

The concentration of great universities in a nation is extraordinarily closely related to its economic competitiveness. It is closely associated with economic output per capita ([correlation] .74), total factor productivity (.77) and overall competitiveness (.71) based on the Global Competitiveness Index ... 'Extraordinary Value of Great Universities', Atlantic Magazine, Richard Florida, 2011

Higher education is an American strength. List 1 (below) names the world's top 10 science and engineering universities. All these schools are American and most are State universities. I don't know of any other global industry where all top 10 institutions are American. Significantly, the one global industry (higher education) where America retains unquestioned dominance is driven by Government and the not-for-profit sector.

America's higher education and research sector is something all Americans can take pride in. But particular credit goes to the many politicians and bureaucrats who had the courage, and insight, to fund truly long-term projects and technologies too uncertain for a risk-averse private sector.

However, as with any success, we face challenges. Just when our political leadership lacks the courage and vision to make long-term investments in science -- other countries seek to copy our success by improving their performance in higher education.

For example, it has been widely noted that China aims to significantly improve its higher education sector. On one level, we should applaud and support China's pushing back the frontiers of knowledge because it benefits everyone (e.g., if a Chinese university cures cancer, we all benefit).

On another level, if we, as Americans, want to: (a) continue to be a frontrunner in scientific knowledge and innovation, and (b) benefit (economically and strategically) from being at the cutting edge of innovation (e.g., jobs and other benefits that would result from curing cancer ) -- we will have to 'up our game'.

I am happy to report that the spirit of creative government and willingness to make long-term commitments is still alive in America. Mayor Michael R. Bloomberg recently created Applied Science NYC, a city-sponsored initiative to build a new top tier science and engineering campus in NYC. This week it was announced that Cornell University with Technion was selected for the initiative. According to Mayor Bloomberg,

the campus is expected to spawn 600 new companies over 3 decades creating at least 30,000 permanent jobs

This initiative is a renewed commitment to the belief that government can, and must, play a creative role -- as convener and provider of seed-funding -- to keep America growing.

Let me know if you agree about the role of government and universities in economic growth. More importantly, let me know whether you feel the Republican presidential contenders (e.g., Romney, Gingrich, et al) have shown any real vision about America's economic future.

I look forward to your comments.

List 1: Academic Ranking of World Universities in Engineering/Technology and Computer Sciences - 2010 (Source: www.arwu.org)

Massachusetts Institute of Technology (MIT)

Stanford University

University of California, Berkeley

University of Illinois at Urbana-Champaign

Georgia Institute of Technology

The University of Texas at Austin

University of Michigan - Ann Arbor

Carnegie Mellon University

Pennsylvania State University - University Park

University of California, San Diego & University of Southern California (tied).

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University. Follow him on Twitter @steven_strauss.

Disclosure: Applied Sciences NYC was one of the initiatives Steven Strauss helped to create while working at NYCEDC.

Sources: (1) National Science Foundation, National Center for Science and Engineering Statistics. 2011. Academic Research and Development Expenditures: Fiscal Year 2009. Detailed Statistical Tables NSF 11-313. Arlington, VA. Available at http://www.nsf.gov/statistics/nsf11313/.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on December 20th, 2011 as Government Action Is Key to Driving Innovation, Entrepreneurship and Economic Growth

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Actually, Corporations That Lobby and Make Campaign Contributions Get Special Benefits

Recent reports reveal that: GOP Presidential candidate Newt Gingrich received nearly $2 million for activities (not technically within the definition for lobbying) resembling lobbying, and former GOP Congressman Tauzin -- the country's highest paid lobbyist -- received $11.6 million.

With rare bi-partisan consensus, all members of Congress assure their constituents that money spent lobbying them and campaign contributions to their campaigns does not influence their judgment. Yet, despite these assurances, 75% of all Americans believe money influences Congress.

Several recent academic studies support the public's concern:

Tax Benefits: Recent research shows that, in expectation for every $1 a firm spends to lobby for targeted tax benefits, the benefit is between 6x and 21x. (See 1;2 below.)

Improved Cash Flows: On average, and controlling for other factors, firms that engaged in lobbying received more generous depreciation treatment. (2)

Increased Market Value: Another study demonstrates that firms which lobby 'significantly outperform non-lobbying firms with respect to increased market value of equity'. This can be as high as adding another 2% per year to returns. (3)

Protection: A separate analysis found that "compared to non-lobbying firms, firms that lobby, on average, have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators." (4)

These results are from research done by non-partisan academics -- using rigorous statistical techniques -- and are not anecdotes or rumors. Correlation is not causality, but basically it appears that lobbying and campaign contributions can confer special benefits to corporations, while corporations breaking the law can reduce the probability of getting caught.

If you doubt the value of lobbying or campaign contributions, consider that American corporations now spend about $3.5 billion/year on lobbying alone. The Cato Institute estimates the value of the resulting corporate welfare at about $90 billion/year.

The recent Supreme Court decision (Citizens United) held that corporations are people for First Amendment purposes (and thus entitled to make unlimited investments supporting or opposing candidates). To our nation's detriment, large corporations may consequently decide that investments in lobbying and campaign contributions (i.e., investments for preferential treatment at the expense of the rest of society) -- are safer and more lucrative than producing innovative goods and services.

If a firm decides not to participate in the lobbying game (or doesn't have the money 'to pay to play') -- when its competitors do -- the non-lobbying firm will likely be strategically disadvantaged (e.g., pay higher taxes, receive unfavorable depreciation treatment, inappropriate treatment of intellectual property, etc.) compared to its competitors. One might ask (in this context) what the difference is between paying for lobbying and paying protection money. Good question!

While all the GOP presidential candidates have spoken eloquently about small businesses, entrepreneurs, and start-ups -- these are exactly the persons/entities least likely to be able to afford access to Gingrich et al.

The Securities Industry and Financial Markets Association (SIFMA) reported that its member firms collectively lost pre-tax $34 billion in 2008 (an amount equal to the prior 2 years' profits). Despite massive and unprecedented losses, the financial industry did not reduce its expenditures on lobbying and campaign contributions. Instead, it increased lobbying and campaign spending by about 40% over the prior presidential cycle -- from $690 million in 2004, to $956 million in 2008.

This investment in political advocacy appears to have paid off handsomely! In 2008-2009, the Federal government made up to $7 trillion available to support America's banks -- and on such generous terms -- that the banking industry's 2009 recorded profits were double those of its best prior year. All while many American small businesses (unable to afford such generous campaign contributions to their elected officials) suffered record losses/layoffs.

If (like me) you are appalled, consider reading Lawrence Lessig's Republic, Lost: How Money Corrupts Congress--and a Plan to Stop, and join the fight.

I welcome your thoughts and comments.

Much of the above analysis is derived from the Lessig book, but I am solely responsible for any errors and opinions in this essay.

Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation. He is an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University. Follow him on Twitter @steven_strauss.

Sources: All campaign and lobbying data is from www.opensecrets.org, unless otherwise noted.

Raquel M. Alexander, Stephen W. Mazza, and Susan Scholz, "Measuring Rates of Return on Lobbying Expenditures: An Empirical Case Study of Tax Breaks for Multinational Corporations," Journal of Law and Policy (2009).

Brian Kelleher Richter, Krislert Samphantharak, and Jeffrey F. Timmons, "Lobbying and Taxes," American Journal of Political Science (2009).

Matthew D. Hill, G. W. Kelly, G. Brandon Lockhart, and Robert A. Van Ness, "Determinants and Effects of Corporate Lobbying," [Unpublished working paper] (2011).

Frank Yu and Xiaoyun Yu, "Corporate Lobbying and Fraud Detection," Journal of Finance and Quantitative Analysis (2011).

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on December 12th, 2011 as Actually, Corporations That Lobby and Make Campaign Contributions Get Special Benefits

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Actually, Despite GOP Claims -- the U.S. Isn't Over-regulated

The GOP presidential candidates believe, as an article of faith, that the United States is an overly-regulated society. They want to eliminate "unnecessary" regulations and even entire regulatory agencies to, in their view, unleash the growth potential of American business. Governor Perry wants to eliminate 3 federal regulatory agencies (2 he named; one whose name he couldn't remember), Ron Paul wants to eliminate 5 agencies, and so on (Republican Presidential Debate, November 9th 2011).

The GOP candidates claim that the U.S. regulatory environment is not competitive with that of our peer group, and risks losing jobs to other countries. Still another article of faith among GOP candidates is that the regulatory scheme has worsened under President Obama.

I describe these as "articles of faith", because to my knowledge -- they have not shown any non-partisan research, or international benchmarks, to demonstrate that our overall regulatory environment is particularly burdensome.

Leaving aside the GOP candidates' anecdotal views, it is helpful to examine real data that compares the U.S. regulatory burden with that of our peer group. The World Bank conveniently prepares an Ease of Doing Business Index (Index) whereby:

'Economies are ranked on their ease of doing business, from 1 - 183. A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm. This index averages the country's percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings for all economies are benchmarked to June 2011.'

As with any index of this nature, this Index is not a perfect proxy for each country's actual level of regulatory burden. Nonetheless, it is a good indicator of how the U.S. compares to its peer group and to a list of 183 other countries. The Index examines: starting a business, protecting investors, enforcing contracts, among other relevant topics. The Index data can be sorted three ways:

Large Countries (List 1 below): I view this as our peer group. In this category, the U.S. is the easiest country where one can do business.

High Income Countries (List 2 below): In this category, the U.S. is the fourth easiest for doing business, behind several much smaller high-income countries.

All Countries (List 3 below, including many under-developed countries): Again, the U.S. ranks fourth.

The World Bank Index samples 10 regulatory categories, so is not exhaustive across all regulations. But it clearly shows that overall -- we are among the easiest of countries in which to conduct business, particularly when compared with our peers.

As for the Obama administration's performance, a recent General Accounting Office study found no particular increase in the regulatory burden by comparison with the preceding Bush administration (Bloomberg News, 'Obama Wrote 5% Fewer Rules Than Bush', October 25, 2011).

Finally, an additional interesting piece of data comes from a recent survey of high net worth entrepreneurs in China -- 60% of which are considering emigrating, most to the U.S. The reasons cited include: the strength of the American regulatory system -- and the resulting safety of our food, environment, workplace, etc. (Bloomberg Business Week,'China's Super-Rich Buy a Better Life Abroad', November 22, 2011).

Not every regulation or law in the U.S. is perfect; not every regulator is a paragon of virtue. We can all name individual failures. Certainly, we should strive, as a country, to be the best we can be, and compare ourselves against international standards. But we cannot make our economy stronger or more competitive by making judgments and major structural changes based on faith -- rather than reality.

The data collected for the U.S. and its peer group -- over several years -- does not show that the U.S. has a systematically bad regulatory environment. But if we eliminate several major regulators (e.g., EPA) we:

a) Will likely make our country significantly less safe, less healthy, and more unpleasant, b) Won't improve our international competitiveness, and c) May actually dissuade foreign investors from coming to the U.S.

What do you think?

List 1: Large Countries Ranked for Ease of Doing Business (Top 5)

U.S.

UK

Republic of Korea

Saudi Arabia

Canada

List 2: High Income Countries Ranked for Ease of Doing Business (Top 5)

Singapore

Hong Kong

New Zealand

U.S.

Denmark

List 3: All Countries Ranked for Ease of Doing Business (Top 5)

Singapore

Hong Kong

New Zealand

U.S.

Denmark

Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation. He will be an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University. Follow him on Twitter @steven_strauss.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on November 29th, 2011 as Actually, Despite GOP Claims -- the U.S. Isn't Over-regulated

[stevenstrauss-blog]

Let's Stop Forcing Real Wealth Creators to Leave the U.S.!

No, I don't mean the so-called 1% -- for various reasons, they aren't leaving. I mean the immigrant entrepreneurs and foreign students at our best universities.

'The great competitive advantage of India is that it draws on the entrepreneurial and creative energy of 1.2 billion people. The great strength of America is that it draws on the entrepreneurial and creative energy of almost 7 billion people.' Indian Media and Tech Entrepreneur, Mumbai India, Spring 2011

In the U.S., our leading companies and universities routinely have teams composed of the best and the brightest from around the world. In America, a typical research team could be composed of (for example) a Pakistani Muslim, an Israeli Jew, a Hindu from India and a Christian from Iowa. In China or India, this would be unusual or impossible.

The U.S. faces increasing competition from other countries, and has relatively few natural competitive advantages that cannot be duplicated elsewhere. One of our few sustainable competitive advantages has been our openness to immigration, but that great American tradition has recently been under assault.

We literally have a situation where the world's best and brightest are educated at our finest schools -- but our immigration policy makes it unnecessarily complicated for them to stay -- precisely when the U.S. most needs highly educated, highly skilled workers to expand its economy.

To cite a few statistics for the U.S., keeping in mind that immigrants are around 15% of the population:

Immigrants are twice as likely as non-immigrants to form a new business (In 2010, about 30% of new business formation was by immigrants).

For the period 1995 to 2005, over half of Silicon Valley startups had one or more immigrants as a key founder.

In 2005, immigrant-founded companies employed 450,000 workers.

According to statistics collected by the National Science Foundation, foreign students received nearly 60% of all engineering doctorates awarded in the US and over 50% of all doctorates in engineering, mathematics, computer sciences, physics, and economics.

The future belongs to knowledge workers, who are the real creators of wealth. The US has a structural shortage of high educational attainment workers and can't afford to lose talent. (Unemployment for this group is under 5%, and has been as low as 2%. We need the world's best talent to continue to grow!)

But, as has been widely reported, we don't make it easy for these wealth creators to stay in the U.S.

One proposal aimed at this problem is the 'startup' visa, championed by a group of leading venture capitalists and entrepreneurs. The proposal would modify the existing EB-5 visa to enable non-U.S. entrepreneurs (with funding support from a U.S. investor) to get a visa to start a U.S. company.

For those of you who don't follow the esoteric minutia of our immigration system, the EB-5 program currently allows wealthy foreign investors to receive a green card for themselves and their families by investing in the U.S. Generally, the program is structured to invite passive investment by the foreign investor, but not active participation (i.e., we welcome and reward foreign investors, but not foreign-born entrepreneurs who could use their education, talents and energy to create jobs here).

To remedy this situation, legislation for a 'startup' visa was proposed in the House in December 2009 (i.e., the Employment Benefit Act of 2009). This proposal was joined in February 2010 by the Senate's Startup Visa Act of 2010.

Instead of the visa going to a passive investor -- the proposed legislation allows a startup company founder or entrepreneur (i.e., a job creator, and potentially, the creator of a new industry) to qualify as a visa recipient with a minimum equity investment of $250,000 (at least $100,000 of which must come from an American investor).

This legislation is widely supported by the venture capital industry and high tech entrepreneurs -- some of the major underwriters of growth for our economy.

Leaving aside the specifics of the 'startup' visa, we as Americans should support legislation that: (1) stops the brain drain of American-educated entrepreneurs and researchers, and (2) encourages the creation of high-tech companies (and the founding of potentially new industries) here -- in the U.S. -- rather than overseas.

Sources: The Kaufman Foundation, www.startupvisa.com, BLS, Statistical Abstract of the United States, United States Census Bureau.

Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation. He will be an Advanced Leadership Fellow at Harvard University for 2011-2012. He has a Ph.D. in Management from Yale University. Follow him on Twitter @steven_strauss.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on November 09th, 2011 as Let's Stop Forcing Real Wealth Creators to Leave the U.S.!

[stevenstrauss-blog]

America: Slouching Towards Third World Status

Will Truthiness Destroy America?

"The best lack all conviction, while the worst Are full of passionate intensity" -- "The Second Coming", William Butler Yeats

Yeats' lines aptly describe our current age of political mediocrity. As we consider our politicians, we can hardly say that they're our best. And the worst of them are full of passionate intensity, with passions driven by ideology, rather than fact-based analysis.

The United States has been in decline relative to other countries for the last 30 years. On key metrics, we've fallen behind our peer group of industrialized countries, such as the UK, France, Germany, and Japan.

Am I exaggerating? Well, according to the Corruption Perception Index, we rank 24th in the world (only slightly better than Qatar) for public sector corruption. We rank 25th (way behind our peer group) in the OECD for math scores among 15-year-olds.

Over the past 30 years, our national debt has grown from about 30 percent of GDP to over 100 percent, and will become much worse based on current trends. In a recent survey of 10,000 Harvard Business School Alumni, "66 percent of respondents see the U.S. falling behind emerging economies." It is difficult to find many encouraging metrics.

If the above statistics don't convince you, visit the New Delhi International Airport, then compare it with our JFK or Newark International Airports. In many areas, our infrastructure is an embarrassment, already inferior to that of many third world countries.

These facts (and many others) have escaped Romney, Santorum and our current group of Republican leaders. Obama and the Democrats aren't doing significantly better at confronting these challenges.

In the 19th century, America aggressively compared itself against the world, and aspired to be "best in class." We were an early adopter of kindergarten because we saw evidence that it would improve educational outcomes. In 1862, the U.S. was suffering through the Civil War, but Congress still had the foresight to pass the Land Grant Colleges Act, which created some of our finest universities. This investment was made because it was important for our country's growth, and the U.S. clearly lagged behind Europe in college and university education.

Today, many of us suffer from what Thorstein Veblen called "trained incapacity" and John Dewey described as "occupational psychosis." We filter the world through our own ideological training, believing only what fits our story. Or, as Stephen Colbert, cultural commentator and 2008 Peabody Award winner commented:

It used to be, everyone was entitled to their own opinion, but not their own facts. But that's not the case anymore. Facts matter not at all... What is important? What you want to be true, or what is true?... Truthiness is 'What I say is right, and [nothing] anyone else says could possibly be true.'

Many Americans still have an almost cult-like belief that America is the greatest nation on earth. They systematically reject evidence suggesting we have significant room for improvement.

Sounds overly-dramatic? When opposing President Obama's health care reform proposals, Speaker of the House John Boehner repeatedly proclaimed (with passionate intensity) that America has the "best health care system in the world." Boehner is correct only if you exclude the entire developed world from the comparison. The U.S. ranks 50th for longevity and 49th for infant mortality, where we're barely ahead of Belarus, Croatia and Lithuania.

I defy anyone to name a single important health care metric where the U.S. is considered a best-practice example as a nation. The only thing we lead the world in... is cost of health care. We have the world's most expensive health care system. For example, our health care system costs almost twice Canada's, but we produce inferior results.

For Boehner to say we have the best health care system in the world, and not be laughed out of office, is at best 'trained incapacity' or 'occupational psychosis.'

Boehner doesn't have to support Obama's health care reform plan. Obama's reforms might make things worse. But, let's have an actual debate grounded in facts, without inventing (and propagating) falsehoods about the current system.

China has been one of the most successful countries economically of the last 30 years. It's fitting then to quote the architect of its economic renaissance Deng Xiaoping: "It doesn't matter whether a cat is white or black, as long as it catches mice." For too many Americans, what matters is not whether the policy works, but whether it fits our preconceived ideologies.

It's the ultimate irony that we need to take the advice of a communist hardliner to put aside ideology, and focus on fact-based pragmatic solutions. Otherwise we'll continue our slouch towards Third World status.

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years' private sector work experience. You can follow him on twitter at: @Steven_Strauss.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on May 20th, 2012 as America: Slouching Towards Third World Status

[stevenstrauss-blog]

The Claustrophobic Digital Village

Privacy in the future will resemble that in asmall village.  As with any small community, dissent from the prevailing conventional wisdom will be easy to spot and punish.  Welcome to the world of social conformity enforced by hashtags.

According to Eric Schmidt (Executive Chairman of Google), in our digital present and future: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”  For most of the 20th Century, our personal histories and actions could easily be hidden, particularly if you lived in a large urban area.  Neighbors and colleagues would only know what you decided to disclose about your past and present.  You could walk away from past behavior and social class, and reinvent yourself - by a move from one city to another (or one country to another).      

Those possibilities for reinvention - or maturing in your views and behavior, without baggage from the past - are disappearing.  Pervasive rating and reputation systems record and punish bad behavior.  And digital footprints follow us everywhere for our entire lives.

Transportation service Uber lets you rate the driver, but the driver also rates you (drunken misbehavior in an Uber car could affect that next ride).  TripAdvisor provides consumer feedback on restaurants, among other things, in most major cities.  So running a tourist trap (with high prices, bad food) will be an increasingly difficult business model.  If you don’t play nice on Ebay, or have been a bad (or good) guest/host at an Airbnb - that will be noted.  So Santa's not the only one with a list of who's been naughty or nice - it's increasingly anyone who does business with you. 

But this isn't really new - for most of recorded history, we lived in small villages with limited ability to reinvent ourselves.  The 20th Century was the exception, not the norm, in human history.  Traditionally most people lived, married and died within a few miles of where they'd been born, and everyone knew everyone else’s business.  Their pasts (and those of their friends and family members) remained with them all their lives - just as our digital histories now follow us.  

Some friends, living in an isolated town, find it idyllic in many ways.  Residents are friendly, courteous and generously support each other in times of need.  But that's largely because everyone knows and remembers who provided help and who didn't, and few actions remain hidden.  Locals know which merchants are honest, and which you have to watch out for. 

This snapshot of a small town reveals some of the strengths and weaknesses also found in the world of radical transparency.  It will resemble life in a small intimate village, but on a global scale.  Our future will be more polite and honest, but also duller.  Few would consciously court the role of village fool, knowing embarrassing moments will follow anywhere in the world, for the rest of their lives. 

In a small village, straying from political or social norms can be quickly crushed with boycotts or ostracism.  Similarly, in a world with radical transparency, self-proclaimed thought police can quickly assemble a virtual mob to punish non-conformists. 

The recent forced resignation of Mozilla's CEO (over a political contribution he made in 2008 to ban gay marriage) is a warning to us all.  Our political contributions, blog posts, pictures or comments will be kept forever, and can be used against us when past views/actions aren't the currently accepted norm.  Imagine the damage Senator Joseph McCarthy could have done if he'd had access to the Internet during his 1950's witch hunts for Communists.  So before you contribute to Move-On.org (or the Tea Party), or to a pro-life (or pro-choice) advocacy group - remember that your actions could be used against you if the accepted wisdom becomes a view you opposed. 

In the future, we'll encounter fewer tourist traps on our vacations - in exchange for increased pressure for social and political conformity.   Isn't technological progress grand?  

[stevenstrauss-blog]

Euro Crisis: If We're Heading Towards a 1930s-Style Depression -- Why Is the Stock Market So Bullish?

We seem to be heading towards an economic downturn equivalent to the Great Depression of the 1930s. This isn't a secret. The synthesis below is derived from: Lawrence Summers, Nouriel Roubini, Simon Johnson, Niall Ferguson, Paul Krugman to name just a few. This crisis is not happening quickly. It's more of a slow-motion train wreck -- Greece's crisis started in 2009. But that leaves a puzzle -- why is the American stock market not reacting to obvious warning signs?

Greece and Spain already have unemployment rates exceeding 20 percent. If that isn't a depression -- what is?

Greece is in very deep trouble. Spain (the Euro's fourth largest economy) just needed a $125 billion bank bailout. The weaker economies (Portugal, Ireland, Italy, Greece, Spain) face severe credit crunches as local banks lose deposits (withdrawn because of credit concerns and fear of forced devaluations following a Euro exit).

Serious discussion is already taking place about the demise of the Euro, or even worse the break-up of the European common market -- in which case unemployment rates across Europe will exceed 20 percent. National incomes will decline sharply, resulting in large-scale corporate insolvencies, with the crisis spilling over into the U.S. and Asia.

Arguably, the Germans have a sufficiently healthy economy to avert the crisis. But they are reluctant to act -- without clear structural changes in the European Union/member states to prevent future problems. Amidst a crisis, it's difficult to make structural changes quickly. The Germans (with some legitimacy) fear that a bailout lacking agreement on structural changes will result in some combination of a larger financial disaster later, and/or the German economy permanently subsidizing some of the weaker economies.

Europe's economies provide little reason for optimism.

The U.S. faces a recession next year if the Budget Control Act takes effect, which is likely if Obama wins and partisan gridlock continues. House Speaker Boehner already announced that if Obama's re-elected, the GOP will treat us to another debt ceiling confrontation. If Romney wins, the Democrats (having learnt their lesson from the Republicans) would be as disruptive as possible. If the U.S. faces a major economic crisis triggered by the Euro's collapse, bipartisan consensus on how to resolve it is unlikely.

China's growth model may be reaching its limit. If the rest of the world's problem is too much ideology, China's is arguably the absence of any ideology except kleptocracy. China lacks a functioning legal system. Its officials are disciplined by shadowy communist party entities, rather than accountable to a transparent legal system. Nominally ruling in the name of the proletarian vanguard, China is governed by princelings and kleptocrats, with friction escalating among the kleptocrats.

Internationally, another regional war appears increasingly likely in the Middle East. The U.S. and/or Israel might have a military confrontation with Iran, over Iran's nuclear ambitions. The Syrian situation has the potential to become a regional conflict (Syria, Iran and Russia fighting Syrian dissidents supported by some coalition of Saudi Arabia, the U.S., Turkey and other countries). A Middle Eastern war would lead to significant oil price increases, and trigger a global recession (at a minimum).

Compared to the financial crisis of 2008, governments everywhere are far more constrained by weaker balance sheets, loss of public trust and crisis fatigue.

I'm not saying everything listed above will go wrong (though if that happens, it would be a "global perfect storm"). However, even 1-2 of these plausible misfortunes would make 2013 a really bad year, and the world will have other challenges we cannot foresee (e.g., another nuclear accident, major earthquakes, etc.).

Depressed yet?

So why is the stock market trading as though all's well? The S&P 500 closed on June 15th at 1343. Based upon stock price divided by earnings (P/E ratio), the market now trades at about 21 times the prior 10 years' average earnings. The long-term 10 year P/E ratio is about 16, so today's premium over that long-term average is difficult to explain, considering the risks listed above. At the top of the bubble in October 2007, the S&P was at 1565. Currently, we're only about 15 percent below that peak, and (again) the market isn't reflecting the referenced risks.

Is it a case of short-term delusions, leading to later major stock market debacles? If so -- is it time to go short?

Or does the market know something we don't? Are the risks outlined above really not so bad? Is the market assuming losses will be paid by the government, so let's party like it's 2006? Or could it be that all investments at this stage have poor prospects -- so there's no place to hide?

Stay tuned: 2013 will be an interesting year!

I invite you to follow me on twitter at: @Steven_Strauss or on Facebook at: https://www.facebook.com/Steven.Strauss.Updates.

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years' private sector work experience. You can follow him on twitter at @Steven_Strauss or on Facebook at https://www.facebook.com/Steven.Strauss.Updates.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on June 19th, 2012 as Euro Crisis: If We're Heading Towards a 1930s-Style Depression -- Why Is the Stock Market So Bullish?

[stevenstrauss-blog]

America: Drifting Towards the End of the Republic, With an Entertained Citizenry

"A republic, if you can keep it" Benjamin Franklin, when asked whether America would be a republic or a tyranny.

Our political debates reflect little interest in facts and nuanced discussion -- soundbites reign supreme. The fault's not with our politicians, however; it's with us. Politicians (e.g., Mitt Romney, President Obama, etc.) don't deal with reality because citizens prefer politics as entertainment and theater. If we're the generation that loses our republic, the epitaph should read: "American Republic, Killed by the Internet and Cable TV."

No prior generation of Americans has had such convenient/free access to high quality information. This should be democracy's Golden Age. Paradoxically, the ease with which citizens stay informed -- is destroying the foundations of our republic.

If this seems counter-intuitive, read on.

The Internet revolution provides an incredible wealth of high quality online data from the Congressional Budget Office, Census Bureau and many others, while Google and other search engines rapidly locate what we're seeking. We have access to dozens of cable TV channels, rather than just three networks.

But the easy availability of information hasn't promoted fact-based discussion. Instead, rumor and innuendo have a greater-than-ever role in politics. For example, although President Obama was born in America - - 13 percent of Americans believe he was born in another country. This is a partisan issue -- 23 percent of Republicans think Obama was born outside the United States.

Gallup has tracked the partisanship gap (support from President's own party, minus support from the other party) since 1953. The 10 highest partisan gaps occurred during the last 30 years, with the nine largest gaps during the last 20 years. The birth of the new media age correlates with the birth of hyper-partisanship.

In 2010-11, President Obama's approval rating by Democrats averaged 81 percent, but only 13 percent among Republicans. In 2004-05, President George W. Bush's approval rating by Republicans was 91 percent, but 15 percent among Democrats (a partisan gap of 76 percent =91 percent -15 percent). Partisan gaps of this level suggest that Democrats and Republicans are living in different countries. In fact, they do live in different countries -- in cyberspace.

Courtesy of technology, we can now receive all our information from people who agree with us -- which is exactly what human beings want. And, the new economics of media makes it extremely profitable for information-providers to pander to what we want to hear.

A significant body of peer-reviewed academic research demonstrates that we seek information confirming what we want to believe. Prof. Daniel Gilbert describes this as a contractual relationship between brain and eye, where the eye agrees to look for what the brain wants to see.

Research reveals that convincing us of something we don't want to believe (e.g., persuading hyper-partisan birther Republicans Obama is US-born) requires much stronger evidence -- shown repeatedly -- relative to what's needed to convince a person with neutral views.

For most of our republic's history, news providers tended toward oligopoly or monopoly (due to high fixed costs for gathering/distributing the news). In the 1960s, Americans got news primarily from TV (one of three major networks), local newspapers (which were monopolies, or part of oligopolies) and perhaps a news magazine. The economics of the 1960s' news business favored a focus on the broadest possible market, and penalized narrow-casting to only a targeted political segment.

The 1960s' TV networks would have continually repeated the message that Obama was US-born. They wouldn't have had any economic incentive to pander to birthers, and birthers wouldn't have had alternate TV channels to turn to. Today, we have Fox & Friends treating all sorts of malicious nonsense as serious, factual news.

During the 1980s (birth of cable news) and 1990s (birth of online news), the old oligopoly models dissolved. Media started offering differentiated products to give consumers what they want. Today, you can choose from hundreds of different breakfast cereals, and hundreds of different news sources. As with cereal, we pick the news source we like. Some media sources will decide pandering to birthers (or whomever) makes business sense. It's much cheaper (saves the expense of deep research) and more profitable to tell people what they want to hear.

Consumers choose news organizations that affirm their worldview, or at least that won't seriously challenge it (even if contrary to truth and reality). (63 percent of daily Fox viewers believe: "It is unclear whether Obama was born in the US -- or, Obama was not born in the US").

So, welcome to the collapse of our republic. It will be broadcast live -- through hundreds of media channels -- to provide entertainment, but not edification, to the voters.

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years' private sector work experience.

Follow him on twitter at: @Steven_Strauss or on Facebook.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on July 04th, 2012 as America: Drifting Towards the End of the Republic, With an Entertained Citizenry

[stevenstrauss-blog]

Will Cutting Back on Government Help the American People?

It's time for us to cut back on government and help the American people. -- Mitt Romney

Chief Executive Magazine annually surveys CEOs about the best and worst American states for doing business. America's CEOs consider: Texas, Florida, North Carolina, Tennessee and Indiana the Five Best for Business States (BfB); and Michigan, Massachusetts, Illinois, New York and California the Five Worst for Business States (WfB). The survey's rankings have been stable over long periods. Massachusetts, for example, has been known as a high tax, heavily-regulated state for at least the last forty years.

According to the survey, America's BfB have what America's CEOs want -- smaller government, low taxes and business-friendly regulations. The BfB clearly have lower taxes and smaller government with an average per capita state tax of $1,843, compared to the WfB at $2,520. So, let's examine whether smaller government is better for Americans.

CEOs, paradoxically, prefer to live and work in the high tax, heavily-regulated WfB. Of theFortune 500 companies, 165 are headquartered in the WfB, while only about 100 are headquartered in the BfB. Among America's 50 fastest growing corporations, about twice as many have headquarters in the WfB, as in the BfB. Even CEO Romney selected Massachusetts (ranked 47th on the survey) for Bain Capital's headquarters, and it's where he's lived (on and off) for the last 30ish years.

The State Human Development Index ranks American states on well-being and opportunity for their residents (rank 1 is best). On this Index, the WfB are better places to live (average rank 13) compared to the BfB (average rank 36). Metrics such as: household income, life expectancy, infant mortality, and educational opportunity demonstrate that the BfB -- are worse for people.

WfB median household incomes are much higher ($57,000 in the WfB vs. $47,000 in the BfB). Further, people live longer and have lower infant mortality rates in the WfB, compared to the BfB. The WfB average rank (rank 1 is best) is 14 for life expectancy and 15 for infant mortality, while comparable BfB ranks are respectively 31 and 36. In highway fatalities, WfB are safer (average rank 8) compared to BfB (average rank 31).

In higher education, the WfB (as a percent of their college-age population) graduate 50 percent more students with advanced degrees than the BfB. Also, the WfB have 23 of our nation's top universities, compared to the BfB's four.

No wonder CEOs choose to live, and establish growth companies in, the so-called Worst for Business states.

Mitt Romney's shibboleth that shrinking government helps the American people -- isn't based on any rational analysis of costs and benefits. Government isn't a parasite destroying the American economy. Government is the provider of public goods (infrastructure, education, police, safety standards, etc.) that the private sector can't or won't provide. If citizens select lower taxes, smaller government and less regulation, they'll get: less infrastructure, fewer police, teachers and inspectors, resulting in worse outcomes.

This isn't a universal defense of every government employee or program. Nor am I claiming that bigger government is always better government. Government programs should be evaluated, and terminated (or restructured), if they aren't efficiently serving taxpayer needs.

Throughout my career (in the Bloomberg administration, at the World Economic Forum and its Davos conferences, and at McKinsey), I've had the honor of working with some of the world's leading CEOs, venture capitalists and entrepreneurs (such as, my co-judges forNYCBigApps).

I found these business leaders incredibly talented at what they did. However, business expertise conveyed no automatic insights on public policy.

My old boss, NYC Mayor Michael R. Bloomberg (who made a highly successful transition from private to public sector), emphasized that the public sector must make investments the private sector won't risk making. Consider President Obama's successful public sector rescue of the auto industry vs. the private sector approach, which would have left millions more unemployed.

Another smart public sector investment is Applied Sciences NYC (Mayor Bloomberg's plan to bring a major new engineering campus to NYC). The mayor's team did all the work to develop Applied Sciences NYC, but won't reap any tangible benefits -- the benefits are for future generations of New Yorkers. But that's what the public sector must do, to benefit the governed: make major, long-term investments in education, infrastructure, health and other public services.

CEO Romney's actions, in selecting Massachusetts as his base, suggest he understands the importance of government in making America a better place. But, Politician Romney's statements suggest otherwise.

Which Romney are we supposed to evaluate for president?

Disclosure: As the Bloomberg administration's head of policy and strategy for economic development, I was an architect of Applied Sciences NYC.

I invite you to follow me on twitter at: @Steven_Strauss or on Facebook at:https://www.facebook.com/Steven.Strauss.Updates.

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years' private sector work experience. You can follow him on twitter at: @Steven_Strauss or on Facebook at: https://www.facebook.com/Steven.Strauss.Updates.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on July 15th, 2012 as Will Cutting Back on Government Help the American People?

[stevenstrauss-blog]

Euro Crisis: The German Approach Is at Least Partially Correct

Structural Reform in Europe is Key for the Euro's Survival

Germany has received scathing criticism from many experts for its approach to resolving the euro crisis. Germany has been trying to: limit/reduce government budget deficits and promote large-scale structural reform (e.g., improved international competitiveness in the European periphery, create a central authority to manage Europe-wide finances with real enforcement powers against national governments, etc).

A common and vehement criticism is that, to avoid a 1930s-scale economic collapse, Germany and the core euro countries (e.g., Finland, Netherlands, etc.) must shift from an austerity approach to aggressive pro-growth policies. They're urged to: recapitalize weak European banks, create a European bank deposit insurance system, promote fiscal stimulus in place of austerity (implying a mechanism for periphery countries to borrow with a German guarantee), weaken the euro against foreign currencies, and accept some euro inflation. Structural reform (which the Germans view as a top priority) is considered of secondary importance by Germany's critics, to be addressed only after the current crisis is averted.

The hour is late. Unemployment in some euro countries is at Depression levels (in Greece and Spain, unemployment now exceeds 20 percent). The collapse of the euro and the European common market -- which would be economic catastrophes -- are being openlydiscussed. Further, a 1930s-style Depression could also lead to political disasters. The 1930s weren't just an economic disaster -- they set the stage for WWII.

However, the harsh criticism of Germany's approach misses the extent to which corruption, demagoguery and governmental incompetence in Europe's periphery are significant barriers to: resuming growth, resolving this crisis, and continued European integration. Greece is my example, but the issues described below exist in varying degrees across Europe's periphery.

Greece has been in an economic crisis for several years, but its government still hasn't reduced public sector corruption. The elites that benefit continue to resist change. For example, paying bribes (to Greek hospitals to obtain treatment and to tax inspectors to evade taxes) reportedly remains a common practice. The public has very little belief in the honesty of the public sector -- "six Greeks in ten expect public officials to abuse their position for personal gain."

Well into the crisis, the Greek parliament retained all sorts of perks for itself (e.g., free Mercedes) while demanding sacrifices from common citizens. In Greece and other countries of the euro's periphery, violent ultra-nationalist political parties gain in popularity, and rumors connect them with the old corrupt elites.

These aren't just anecdotal reports in the press. In Transparency International's 2011 annual ranking of public sector corruption, New Zealand ranked 1st (the least corrupt country in the world), Germany ranked 14th, and Greece ranked 80th (tied with countries such as El Salvador and Morocco).

Consider another metric: In the most recent World Bank Ease of Doing Business Survey, the easiest country for doing business is Singapore (ranked 1st), with Germany ranked 19th. Greece is ranked 100th (just ahead of Papua New Guinea). Apparently, it's easier to do business in the Republic of Yemen (ranked 99th), than in Greece. As one simple point of comparison: In Greece, it takes 77 days (and probably a few bribes) for a business to turn on electric service; in Germany, it takes 17 days.

A free press is key in fighting public sector corruption. But across the euro's periphery, freedom of the press is weak and often under attack. For example, Greece ranks 70th on the most recent Press Freedom Index, behind Bhutan and ahead of Nicaragua. As a benchmark, Finland ranks 1st with the world's freest press; Germany ranks 18th.

I have huge sympathy for the Greek public (and the other peoples in the Euro's periphery) who suffer from this corruption, are disgusted and want change: "Only one Greek in tensays they see enough corruption prosecutions or strong enough punishments for offences". However, Greece's governing elites - rather than tackle popular reforms such as fighting corruption (that might adversely impact themselves) - have focused instead on unpopular moves, such as pension fund reform.

This wasn't supposed to happen. Countries on the periphery were supposed to converge to euro core standards. However, the periphery's ruling groups resisted fixing corruption problems during the pre-crisis boom, and resist fixing them now despite the crisis engulfing their people.

Germany/the core, as a consequence, prefers to tightly control bailout terms -- to continually pressure the periphery to reform. Otherwise, emergency loans will become gifts, temporary subsidies become permanent annual transfers, and structural reforms will again be postponed indefinitely. Aside from the risk to the German taxpayers, a failure to come out of this crisis with real reforms sets the stage for an even bigger debacle at a later date.

The Germans deserve commendation for their commitment to a united Europe. It's amazing that Germany continues its efforts to achieve a greater fiscal, regulatory and political union with strong non-corrupt transparent institutions. However, it's also amazing that, several years after this crisis began, the countries in the euro's periphery can continue to resist real reforms.

The Germans are correct -- structural reform cannot be put off any longer.

I invite you to follow me on Twitter at: @Steven_Strauss or on Facebook at: https://www.facebook.com/Steven.Strauss.Updates

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years' private sector work experience. You can follow him on twitter at: @Steven_Strauss or on Facebook at: https://www.facebook.com/Steven.Strauss.Updates

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on July 22nd, 2012 as Euro Crisis: The German Approach Is at Least Partially Correct

[stevenstrauss-blog]

Is Social Media Revolutionary?

"We wanted flying cars, instead we got 140 characters." ~ Peter Thiel, Founders Fund website

We live in an age of rapid change. Amazon, Apple, Facebook, Google, Twitter and many other innovators have changed how we work, communicate and live. But is this a new industrial revolution?

Twenty-some years ago, a large bookstore might have had 100,000 books available. Today online retailers (e.g., Amazon) have millions of books to sell. Similarly, there were no smartphones two decades ago--just simple mobile phones and land lines. Social media then consisted of email and listservs; now we have Facebook and Twitter. A 1990s personal computer had only basic capabilities (word processing, spreadsheets, and a few others). Now an iMac has the power of an earlier generation's supercomputer.

Revolutionary? Well, it depends on what we mean by a revolutionary innovation. I propose that: An innovation is revolutionary if it so changes society that going back to the pre-innovation technology would be catastrophic. By this standard, many of our most recent innovations are incremental, not revolutionary.

Consider the automobile, that archetypal innovation of a few generations ago. If all motor vehicles vanish tomorrow, the result would be catastrophic. If all phones (land lines and mobiles) suddenly stop working--the result would be disastrous for communication.

Now, let's imagine that all social media disappear. Would the economy collapse? I don't think so. Or, if every online store in America closed, would it be catastrophic? Probably not.

Leaving aside these anecdotal examples, it's noteworthy that there isn't an obvious economic growth spike resulting from the Internet era.

The San Francisco based venture capital firm Founders Fund believes that many recent innovations have been incremental, and not revolutionary. It attributes this incrementality to the VC community's failure to support revolutionary technology companies. Critical as this view may be, it implies that incrementalism is a reversible choice. Founders Fund itself is dedicated to investing in revolutionary technologies.

My hypothesis, however, is that we're at the start of a new megatrend of diminishing marginal innovation. The low-hanging fruits of revolutionary technologies have already been discovered and picked. Consequently, we'll need increasing effort to achieve changes that are only incremental and at most, transform a sector. If this megatrend is real, consider these potential consequences:

First, for many entrepreneurs/VCs, incrementalism will be their defining strategy. Stretching to develop revolutionary products will be a losing proposition. Incrementalism isn't unprofitable. LinkedIn, for example, hasn't revolutionized society, but has been very lucrative.

Second, diminishing marginal innovation applies at the economy level, not the sector level. We don't have flying cars as routine transport, and it's difficult to see this occurring. On the other hand, DNA technology is still in its infancy, and might have "running room." We will continue to see sectors transformed (e.g., conventional retailing impacted by online retailing). But innovations in the remaining high growth sectors won't be sufficient to drive revolutionary change/growth in the overall economy. (Consider that even in the 21st Century, an estimated 1/10th of all American jobs are connected to the car industry; it's difficult to see Social Media having that kind of impact.)

Third, by the end of the 21st Century, the world's global multi-nationals will increasingly be headquartered in Asia. Since the late 1970s, the rest of the world has been catching upeconomically with the West. This trend will only accelerate, unless there's new high-impact revolutionary technological innovation in the United States, or economic collapse/stagnation in China/India. (If country GDPs per capita converge to about the same level, country GDPs will then be driven by population. Consequently, China will have four times America's GDP.)

Fourth, as wage levels converge globally, wage differentials (as a driver of offshoring) will also decline/reverse. This is already happening, as the global management consultancyBCG has recently highlighted:

By around 2015, we concluded--when higher U.S. worker productivity, supply chain and logistical advantages, and other factors are taken fully into account--it may start to be more economical to manufacture many goods in the U.S. An American manufacturing renaissance could result.

Fifth, as the public increasingly understands that growth has slowed, and won't soon increase, the focus of politics will be on the zero-sum game of dividing up what already exists (it feels like this political trend has already started).

And last, a future of slow-growth incremental capitalism will favor corporate bureaucrats rather than visionary entrepreneurs.

For most of human history, economic innovation and productivity growth have been low, as were productivity differences between countries. The last two or so centuries have been an exciting exception--but not the norm--for human history.

I hope Founders Fund will be right and I'll be wrong. So, let me close with the sage counsel of Yogi Berra:

Prediction is very hard, especially about the future.

This piece first appeared in Issue 11 of our FREE new weekly iPad magazine, Huffington, in the iTunes App store.

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

This is cross posted from my blog, and originally published on August 30th, 2012 as Is Social Media Revolutionary?

[stevenstrauss-blog]

America as a Tale of Two Neighborhoods

Welcome to Third World America - we'd expect riots and revolution in any foreign city with NYC's level of economic and racial segregation.

Both the affluent and the impoverished in NYC can ride the same mass transit system (AKA the subway) and might work in the same office buildings. But at the end of the day - they return home to very separate parts of the city, their children attend dissimilar schools, and their families lead quite different lives.

The subway station at West 116th Street is in the 10027 zip code area (which extends north to West 135th Street). The subway station at West 86th Street is in the 10024 zip code area (which extends south to West 73rd Street). These two subway stations are separated by 30 blocks - a 30 minute walk, 5 minutes by car, 10 minutes by subway - and an ever-widening gap in opportunity more appropriate for a third world kleptocracy, than America's largest and most affluent city.

Economically: Median family income for zip code 10024 (the 86th Street subway stop) is $110,000/year, with only 7% of the population (and only 3% of its children) below the poverty level. By contrast, median family income in zip code 10027 (the 116th Street subway stop) is just $36,000/year, with 30% of its residents (and 40% of its children) living below the poverty level. Moreover, in the area from about West 116th Street to West 168th Street - at least half the children live in households at or near the poverty level.

Educational Attainment: Around the 86th Street subway stop, 75% of the over-25 population has at least a B.A. degree. And very often those degrees are from prestigious elite colleges, with names like Brown, Wellesley, Harvard and Yale. Around the 116th Street subway stop and further uptown, only 30% of the over-25 population has at least a B.A., and their degrees are more likely from regional or community colleges. Graduation from college is a good indicator of lifetime income potential, so the 70% of the adult population in that area without any college degree - is likely to keep falling even further behind.

Racially: 85% of the population from West 73rd to West 86th Street is white. From West 116th to West 135th Street, only 30% of the population is white.

Frighteningly, the areas noted aren't the poorest or the richest zip codes in NYC, nor are they the most racially disparate - NYC has even larger extremes.

The people in these two worlds might be acquaintances at work - but, generally, they aren't friends. An 86th Street resident with a Yale degree is unlikely to have friends uptown who never attended college. That Yalie residing near 86th Street probably grew up somewhere far from NYC. And friends outside that Yalie's current socio-economic group likely reside back in a hometown far from NYC (and frequently, outside the United States).

Mayor DeBlasio's signature proposals: Cutting back on charter schools, offering pre-Kindergarden, and additional affordable housing - won't make a dent in the widening gap between NYC's "two cities". The Mayor's education proposals, even if effective, would take at least a generation to have any impact. And affordable housing will do nothing to close the gap in opportunity and income.

These trends are not just about NYC, they are happening in much of America. Over the past generation, we've had ever-widening income inequality, combined with (at best) stagnant upward mobility and continued de facto segregation/discrimination. This isn't a good picture of civil society. If we saw these characteristics in a foreign country, we'd expect seething discontent and riots.

I'm not sure how this tale of "two cities" ends for America, but if current trends continue, I don't see this story having a good ending.

Source: Unless otherwise noted, all demographic data is from Census.Gov