Has Business Bailed on the Social Contract?

Kevin drum has a post this week enumerating what he sees as the list of reasons that have been put forward regarding the difficulties in getting the economy to recover from its current problems.  I want to write about the combination of two of them:

1. The Tyler Cowen "Great Stagnation" hypothesis. We've picked through all the low-hanging economic fruit over the past century, and like it or not, we're now entering an extended period of low productivity growth because we're not inventing lots of cool new stuff.
2. Various structural explanations that suggest the United States has an increasing number of workers who flatly don't have the skills to do anything useful in the modern economy — a problem that was temporarily masked by the housing bubble and was only fully exposed when the economy collapsed. This takes various forms, both weak (workers can be retrained but it will take a while) and strong (forget it, they're simply useless).

For those who haven't read Tyler's Great Stagnation, one of the basic premises is that before about the mid-1960s we invented lots of stuff that consumers could afford that (a) changed people's lives and (b) created lots of jobs on net.  The classic example is the automobile.  It made a radical difference in personal mobility, and created jobs in building, maintaining, and fueling the darned things.  Similarly for the telephone.  However, if an adult from the mid-1960s were to walk into my house today, perhaps the only thing that is conceptually new is the personal computers and software running on them.  The PC certainly meets the first criteria; whether it has created new jobs on net is less obvious.  PCs have eliminated large numbers of unskilled and low-skilled jobs.  Eliminated jobs not just in the sense that the automobile eliminated jobs for buggy-whips; eliminated jobs for typists, draftsmen, and people in call centers.  And attached to appropriate robots, are eliminating more skilled positions such as welders and machinists.

Since the end of WWII, the US has had an informal social contract, a major feature of which is that in exchange for low regulation and tax rates (relative to the rest of the developed world), business would provide everyone who wanted a job with one that paid an at least marginally living wage (including benefits).  Government actions that enforced this contract included pro-union regulations and enforcement, minimum wages, and so forth.  Business wasn't particularly happy about the situation, but there wasn't much they could do about it either.

Beginning by the mid-1980s, it became increasingly possible for business to "do something about it." Two of the primary factors were automation made possible by ever-cheaper and ever-more-powerful computer hardware and software, and relaxed rules about capital mobility. Recessions, by idling some of the productive capacity, were the ideal time to relocate and automate. "Relocate" could be indirect -- if you make layoffs at plants in both Michigan and Alabama, but later bring only Alabama back up to full output, you've "relocated".  With relaxed rules on capital flows, sites for new factories included Mexico and China. Some argue that illegal immigration was another way for business to get around the social contract, but I'm not convinced it is as important as the other two factors.

One of the results has increasingly been "jobless" recoveries following recessions. If you look at graphs of job losses and recoveries for recessions since WWII, there is a pronounced break in the shape of the curves for the three post 1981-2 recessions.  Calculated Risk provides a nice version of just such a chart on a monthly basis. Particularly given the depth of the last (current?) recession, it is not surprising that the curve looks like it may take a decade for employment to reach the pre-recession level. Current proposals for "fixing" the jobs problem will likely fail because they don't address the lapse of the social contract.

 

 The strong form of number (2) in Drum's list is that there are a significant number of people who want jobs but are worthless from the perspective of an employer.  Item (1) has contributed to that situation -- we are not creating new places in the economy with a large demand for workers.  In addition, the primary innovation of the second half of the 20th century -- cheap processing power and software -- has allowed for the automation of a large number of jobs.  And it certainly appears that business is not being held to the social contract.  The combination is, well, scary.

Substantial adjustments to the social contract have a tendency to be messy affairs.  Consider the French Revolution of the 1790s, the Russian Revolution in 1917, or the transition of the US economy from one based large on agriculture to one heavily into manufacturing over the period of about 1890 to 1930. 

An Example of Future Grid Problems?

The New York Times ran a story this week about the possible consequences of shutting down the Indian Point nuclear power station.  Last month, Gov. Cuomo said he would insist that the two Indian Point reactors be shut down in 2013 and 2015, when their original 40-year licenses expire.  His decision to oppose license extensions may be reasonable; there have been a number of problems with aging reactors as they approach the end of their original license lifetimes, or after those licenses have been renewed.  The Vermont Yankee facility and New Jersey's Salem station have, for example, been plagued by tritium leakage as they age.

The Governor asserts that some combination of new generators and new transmission facilities can be in place by the summer of 2016, the first peak power season after both reactors would be shut down.  Various experts have weighed in, pointing out that the permitting, lawsuits, and construction for a new generator or transmission line invariably take more than five years in New York.  An example is the New York Regional Interconnect (NYRI), a proposed transmission line that would have brought power from upstate New York to the New York City and Long Island region served by the Indian Point plant.  After several years of planning, the NYRI was put on hold indefinitely in 2009 because of opposition by people in the areas through which it would have run.

Almost one-fifth of the entire US population lives in BosWash -- the strip from the Boston suburbs on the north to the Washington, DC suburbs on the south and within 100 miles or so of the Atlantic (see the map below).  In the future, that strip is very likely to resemble New York City's current situation.  About 25% of the electrical power is generated by aging nuclear plants.  As pressure to shut those down grows, planners will be left to the same "combination of new generators and new transmission facilities" to replace the nuclear power (and under current plans, meet steadily increasing demand).

It seems unlikely that new coal plants will be built in that strip.  If for no other reason, burning coal produces large amounts of ash that must be gotten rid of.  Disposal of solid waste within the region is already a growing problem.  New York City, much of whose solid waste ends up in Pennsylvania, Ohio, and Virginia, is the most extreme example of that particular difficulty.  Gas-fired generation would require importing large volumes of natural gas.  Perhaps shale gas will allow the East Coast to produce sufficient amounts of gas for that purpose; I'll believe it when I see it.  The alternative sources of gas are far away, and will require either gasification facilities for liquefied natural gas, or large long pipelines.  The last option is to produce the electricity outside the region and import it over large new transmission facilities.

If the US must shift to renewable sources for its electricity, those transmission facilities will be large indeed.  Hydro power from Montreal, wind power from the Great Plains, solar power from the desert Southwest.  Huge facilities, carrying power long distances, running through areas where people seem likely to oppose the construction.  In short, the same basic problem that New York City and Long Island face today, only on a much larger scale.  The utilities that serve NYC and LI are warning that unless everything goes nearly perfectly, the city and the Island will be subjected to rolling summertime blackouts once the Indian Point reactors are shut down.  Over a somewhat longer time scale, it would appear that the BosWash corridor would be much the same: unless everything goes nearly perfectly, about 60 million people would be subjected to rolling blackouts.

Keep your eye on New York; it's likely to be a predictor for the future of much of the East Coast.

Sarah Palin's e-mail

Today is the day that the State of Alaska is releasing the e-mail messages from Sarah Palin's tenure as Governor.  News organizations that have requested a copy have to send someone to Juneau to pick up the paper copy, some 24,000 pages in total.  Geekdom in general is outraged.  Paper?  Travel to Juneau?  Why can't anyone who wants to just download the file?  Defenders of the action have pointed to limited bandwidth, the cost of server capacity, and so forth.  I think the reason is completely non-technical.

I spent three years on the permanent legislative staff for the General Assembly of Colorado.  Part of that job was interpreting what a variety of state laws actually meant in practice.  So my initial response was to pull up a copy of Alaska's open records law to see what it said.  Here's the first paragraph:

Unless specifically provided otherwise, the public records of all public agencies are open to inspection by the public under reasonable rules during regular office hours. The public officer having the custody of public records shall give on request and payment of the fee established under this section or AS 40.25.115 a certified copy of the public record.

"Open to inspection" usually means that you can look at a paper copy.  In most states, agencies are not required -- or even allowed -- to give the public access to their file cabinets, microfiche readers, or computers.  "During regular office hours" usually means that the requester has to come to the agency in order to perform that inspection.  But the real kicker is that phrase "shall give... a certified copy".  As a general rule, the word "shall" means that it's a requirement: any copy that leaves the agency premises must be certified.  And certified, while less demanding than notarized, generally means some identifiable mark added to the copy that indicates someone at the agency says the copy is accurate.

Is a file downloaded over the internet certified?  Almost certainly not.  Consider the site where I obtained the copy of the open records statute.  Not only was it not certified, but there were multiple statements to the effect that, despite their best efforts, there was the possibility that the copy was inaccurate.  The Alaskan state agency doesn't appear to have that choice -- they can only distribute copies whose accuracy they certify.

How about a write-once CD?  A better chance there.  At least it's a physical medium and can have a physical sticker (or whatever) on it.  There's still a potential problem in that the CD contains thousands of individual documents (e-mail messages).  Can a single certification cover all of them?  Someone in Alaska has probably decided that question.  I don't know the answer, but I would guess that each "document" has to be certified, at least in a "page n of m" sense.  Internal to the agency, I would worry about control of the process, though.  The CD is a copy of one (or thousands) of computer files.  How secure was the process that accumulated the files so that a master CD could be created?

Which pretty much leaves paper.  The sheer unwieldiness of the medium makes it easier to lock down the process by which the certified copy is created.  Multiple people involved in changes.  Locked doors.  If need be, numbers added in blue ink by hand.  Far from the ideal solution -- and I expect that there are a number of people inside the Governor's Office that are saying "This is so stupid!" -- but known to keep you within the requirements of the statute.

Napoleon is reputed to have said "Never ascribe to malice that which is adequately explained by incompetence."  IT progresses so rapidly that it is impossible for the law to keep up.  Never ascribe to malice or incompetence that which is adequately explained by statute.

Can dishonest manufacturing ruin a sport?

There have been numerous reports of Chinese export products that are flawed in ways that are dangerous.  Many involve low-end inexpensive goods -- cadmium in cheap children's jewelry, contaminated materials in dry wall boards, etc.  This post is about a small but relatively expensive product line that, at least potentially, affects me more directly.  It relates to public policy in the sense that international sporting bodies make international policy.

I'm a sport fencer.  Epee, if it matters, as I don't care for the right-of-way and limited-target rules that foil and sabre have, but that's a subject for a different day.  Fencers have to put a lot of trust into their safety equipment.  Most of the standards for equipment were significantly upgraded after the "Smirnov incident": Vladimir Smirnov, a Russian fencer, died from an injury he received during the 1982 World Championships.  The standards are set by the Fédération Internationale d'Escrime (FIE).  They're not rich enough to test on a continuous basis, so an honor system is used.  A manufacturer submits samples for testing, along with a check to cover the testing costs.  If the samples pass, then the vendor can mark the equipment as conforming so long as they do not change their process or materials.  If such changes occur, the vendor will have to submit new samples (and another check).

Many elite fencers use protective masks that have a plastic visor in place of a portion of the traditional wire mesh.  The visor allows for better visibility than the wire mesh.  In addition, the International Olympic Committee (IOC) at one point threatened to drop fencing events (fencing has been in every modern Olympics from the beginning) because the wire-mesh masks rendered the competitors anonymous to the crowds.  There are a number of material and manufacturing standards to which a visor mask must conform.  In November 2009, at the Junior World Championship, a visor failed catastrophically.  In February 2010, the FIE took the extraordinary step of banning visor masks in FIE-sanctioned foil and epee competitions.  Most national fencing bodies followed suit.  A picture of the mask with the broken visor is shown here.

The mask was branded by Uhlmann, a prestigious German firm.  Some years back, Uhlmann outsourced much of their manufacturing to China.  A forensic engineering analysis of the failed mask uncovered a number of disturbing things:

• The FIE requires a particular brand of polycarbonate (Lexan) with known properties for the visor.  The failed visor was made of an unknown non-Lexan material, with improper brand coding -- that is, forged markings.
• Visors are required to be shaped using draping, a process which minimizes stress build-up.  The failed visor had been injection molded, which is a lot cheaper, but creates areas of high stress which are subject to breaking.
• There are standards for the accuracy of the fit between the visor and the metal mounting, in order to avoid placing unnecessary stress on the polycarbonate; the mask with the failed visor did not come close to meeting these standards.

There are a number of other ways that a manufacturer could build "fake" high-end fencing gear.  FIE-qualified epee blades are made from an expensive maraging steel alloy and stamped with an FIE mark.  Forging the mark on non-maraging blades is easy enough to do, and only a metallurgical lab is going to be able to tell the difference.  Similarly, testing the cloth used for the protective garments is destructive: how much pressure does it take to actually put a hole in the material?

You have to believe that Uhlmann was as surprised by this as anyone.  As I said, their brand name is prestigious, and they charge high prices.  I suspect that the CEO of the Chinese manufacturing company would be surprised: suitably high quality products built at lower cost is how he/she grows the business.  But what do you do if you're the FIE?  Give up on trying to provide qualified equipment entirely?  Or ban equipment manufactured in certain countries?  Neither one is likely to be palatable to the IOC, who asserts that they foster international cooperation and athlete safety.  Can dishonest equipment manufacturing threaten to cost a sport it's Olympic status?

Stealth entitlement reform

Rep. Ryan's budget proposal called for changes in the fundamental nature of both Medicare and Medicaid.  Since that time, the Republicans have been getting an earful from a lot of writers in the media, and from voters, about the proposed Medicare changes.  Must less has been written about Medicaid, even though it appears that we are approaching a "perfect storm" situation that may make conversion of Medicaid from an entitlement to a block grant program a much easier fight.

Medicaid is a slow-motion budget disaster for the states.  Almost all states have reached the political limits on their tax rates, and Medicaid expenses are growing faster than their economies and revenues.  As a result, Medicaid spending has begun to crowd out spending on state programs with a longer history: depending on the state, all of roads, K-12 education, and higher education have taken larger percentage hits than Medicaid.  The recession accelerated the problem, but did not cause it; the train wreck has been relatively clear in the numbers since at least the mid-1990s.

Two recent developments are in the process of locking the states into this disaster mode.  First, the federal Affordable Care Act blocked states from tightening their eligibility standards.  From the perspective of the Democrats at a national level, this is a feature and not a bug: much of the expansion of insurance coverage provided by the ACA is due to increased Medicaid eligibility, some of which is threatened if states tighten things up.  Second, the Medicaid statute puts a floor under the coverage (that is, which things must be covered), and includes language that puts an implicit floor under provider reimbursements.  Beneficiaries and providers are currently attempting to sue over state violations of that reimbursement floor; the NYTimes published a piece last Saturday that summarizes the current status.

The floor on spending, the rate of growth of that floor, and the practical limits on states' ability to raise revenue puts the states in a very difficult position.  Extended into the not-to-distant future, the numbers suggest states could be in a position where they are literally having to choose whether to continue with Medicaid or to completely drop their support of, for example, higher education.  It seems possible that at least some will choose to withdraw from Medicaid instead of dropping those other programs, despite the consequences.

It appears that it may be possible to put together a coalition of interests that could pass a Medicaid reform package.  Converting the program to a block grant program would, in particular, allow a number of parties to claim victory.  In particular:

• Congressional Republicans could claim a victory on entitlement reform
• Senate Democrats from conservative states could claim -- assuming that required state maintenance of effort spending is less than current spending, which seems likely -- to have relieved some of the pressure on state budgets
• States would be freer to explore alternative approaches for delivering health care to the poor
• The Obama administration could claim delivery of "bipartisan" legislation

Interestingly, the Obama administration filed a friend-of-the-court brief in the Supreme Court case arguing that individuals are not allowed to sue over reimbursement rates, and that the decision is solely in the hands of the federal executive.  A possible implication of the brief is that the administration will not be enforcing the statutory requirements.  Such a decision would have important ramifications.  There are already parts of the United States where low reimbursement rates have made it difficult for clients to find providers who will accept new Medicaid patients.  Health insurance -- and Medicaid typically functions as insurance with the state in the role of insurer -- that is not accepted by providers is little better than no insurance at all.  At least to me, that suggests that the administration is willing to forgo the role of Medicaid in the ACA.

Arizona's "business death penalty" law

This past week, the US Supreme Court upheld in a 5-3 decision (Justice Kagan recused herself) Arizona's law allowing the state to impose a "death penalty" on businesses who hire illegal aliens (or undocumented workers or whichever label you would prefer).  The law allows the state to revoke a firm's business license after a second offense of knowingly hiring illegal aliens.  Now that the state can proceed with enforcement, one has to wonder if they will in fact do so, or if they simply hope the threat is sufficient to achieve their goals.

If we assume that the business also employs legal workers, then such a revocation is bound to cost the state of Arizona some money.  The legal workers will be eligible for unemployment insurance benefits since, to use the magic phrase, they have become unemployed through no fault of their own.  Some may be eligible for Medicaid and other benefits paid for by the state.  Arizona has a terrible state general fund budget mess right now, with little prospect that things will get much better in the near future.  Will the fact that revoking a business license will cost the state in that fashion act to deter the state from actually exercising its authority?

There will be pressure for the state to exercise its authority in an uneven fashion.  Shutting down a car wash is a relatively minor inconvenience for consumers: there are many car washes and most are small independent operations so the effects are small.  Shutting down an Albertson's or Safeway, on the other hand has much larger effects and a much greater impact on consumers.  The state may well be more reluctant to impose the death penalty on a Safeway than on an independent car wash.  Would an implicit policy that rendered large firms immune from the death penalty threat be discriminatory?  Enough so that the state winds up in court again?

Illegal workers are concentrated at the low end of the employment spectrum.  This suggests that businesses might tend to avoid having any workers at that level if they can avoid it.  The new law would seem to encourage a business to, for example, hire a janitorial firm and not its own janitorial staff.  Large businesses have done that sort of outsourcing for a long time; smaller firms may now find the practice more attractive as a means of risk avoidance.  And a very small business, that has been paying part-time cleaners off the books, faces a difficult choice: risk losing the license to operate versus the costs of bringing those workers into the official employment system.

The law also mandates the use of the E-Verify system operated by the federal Department of Homeland Security.  According to the E-Verify web site, "more than 238,000 employers" are enrolled in the system.  Arizona alone has an estimated 150,000 employers who will now have to participate.  Anyone who has dealt with a software system that experiences unanticipated rapid growth knows that the growth all by itself is likely to uncover a variety of problems.  If even a handful of other states enact similar laws, Arizona may find that it has to deal with unexpected difficulties in implementation as E-Verify fails in unexpected ways.

I suspect that very few firms will have their licenses revoked.  Not because they will stop hiring illegal workers, but because the consequences to the state of trying to enforce the law create problems that Arizona's state government won't want to face.

A Colorado policy task I'm glad I don't have

There are policy-oriented tasks that one looks forward to undertaking, and some that one wants nothing to do with.  Federal redistricting in Colorado appears to me to be one of those thankless jobs that no one in their right mind undertakes unless they think that somehow they can gain a partisan advantage.  This session, the General Assembly is split, with the Republicans holding the House and the Democrats holding the Senate and the Governor’s office.  Back in December, before the session started, legislative leadership charged a committee of five Republicans and five Democrats with drawing up new districts.

The committee held hearings around the state.  A couple of weeks ago, they released two different sets of candidate maps, one set drawn up by the Democrats and one set by the Republicans.  Neither set bore any real resemblance to the other, and it appears now that the committee will quietly expire without submitting a redistricting bill.  Expectations are that next week the Democrats will introduce a redistricting bill in the Senate, the Republicans will introduce a different bill in the House, no compromise will happen, and the whole issue will be tossed into the lap of the Denver district court.  The same court drew the district boundaries back in 2001, as well.

The problem for the court, and the reason I wouldn’t want to have to draw the new lines, is that like its budget, Colorado’s legislators and voters have over-constrained the problem.  There are statutes and court orders that specify factors that can be considered, and factors that must not be considered, in drawing the lines.  Three of these seem to be to be particularly troublesome: (1) in effect, there must be an “Eastern Plains” district; (2) similarly, there must be a “Western Slope” district; and (3) the city of Denver must be included in a single district, unless its population has grown too large.

The Eastern Plains and Western Slope requirements are attempts to preserve a voice for Colorado’s rural areas.  Distinct voices are presumably required because of the substantial differences in the two areas.  Why Denver must fit within a single district – and other cities are not granted the same privilege or shackle – is somewhat less clear.  Given that Denver has long been a solidly liberal Democrat stronghold, and is the largest city in the state, one suspects that the purpose was to avoid creating two safely liberal districts, each dominated by half of Denver.

Population patterns have steadily changed the distribution of people in the state.  In particular, the lion’s share of Colorado’s population growth has occurred in the Front Range counties lying between the Rockies and the rural Plains counties to the east.  The following table shows how the growth between 2000 and 2010 was distributed.[1]  Only one of the 12 counties with the largest growth – Mesa County, on the Western Slope – is outside of the Front Range.  Overall, 86 percent of the total growth occurred in the 11 Front Range counties.

 

The target population per Congressional district is now 718,457.  The portion of Colorado outside of the Front Range totals 911,187: enough for one district, but certainly not two.  Those 900 thousand also include the San Luis Valley counties in the south and the mountain resort counties in the center of the state.  The Western Slope and the Eastern Plains, then, must be tacked on to one or more of the Front Range districts (or a portion of the Front Range tacked on to the rural areas, depending on your perspective).

It is increasingly difficult to meet the statutory obligations and not upset some people.  Pueblo, solidly Democratic, resents being attached to the Western Slope and the San Luis Valley – Pueblo and Mesa counties offset one another, and the remaining, mostly conservative, rural areas determine the outcome.  Many Eastern Plains counties are actually losing population; paired with growing Larimer and Weld counties, that rural voice is already on the verge of disappearing.  In order to retain his seat, Congressman Gardner from Yuma will need to convince the voters of Fort Collins and Greeley that he can represent their urban interests if and when those conflict with the interests of his much smaller rural constituency. 

Colorado can be rightfully proud of its rural heritage.  On the other hand, according to census Bureau population figures, Colorado is the 14^th least rural state in the country, slightly more rural overall than New York and Maryland, but less rural than Delaware and Ohio.  Assuming that decades-long trends continue, perhaps as early as 2020, and almost certainly by 2030, the only way to preserve an actual rural representation in Colorado’s Congressional delegation will be to combine almost everything outside of the Front Range into a single rural district.

And that’s why I’m glad that I’m not the one stuck with the job of drawing the new district lines for Colorado.  The current constraints represent an outdated historical perspective: Denver as the dominant population presence, and meaningful rural populations in both the East and the West.  El Paso County has passed Denver in population, Arapahoe County will very likely pass Denver in the next census, and the combination of Larimer and Weld Counties may also pass Denver by 2020 as well.  The rural areas of the state are shrinking in size relative to the Front Range, more so in the East than in the West.  I happen to think redistricting ought to reflect the future direction of the state, not its past.  

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[1] Some might argue against including Weld County as part of the Front Range.  Weld’s population is dominated by Greeley, and I don’t want to split the Fort Collins / Loveland / Greeley area, where boundaries are going to grow increasingly blurred.  Boulder, Jefferson and Broomfield Counties are lumped together because Broomfield County was created from parts of four counties after the 2000 census, and the bulk of its population was drawn from areas that were originally in either Boulder or Jefferson.