Authors: Erik Brynjolfsson,Andrew McAfee
Local, national, and global databases of job opportunities and candidates can have a huge payoff. Too often employers focus narrowly on graduates from a few schools when there are thousands of equal or better-qualified candidates. The federal government could use prizes to spur development of these databases. We should also encourage and support private companies to develop better algorithms and techniques for identifying skills and matching them to employers. For instance, a company called Knack, which Erik advises, has developed a series of games, each of which generates megabytes of data. By mining the data, Knack can get surprisingly accurate assessments of the players’ creativity, persistence, extroversion, diligence, and other characteristics that are hard to discern from a college transcript or even a face-to-face interview. Other companies such as HireArt and oDesk are also using analytics to create better matches and less friction in the employment market. We are also encouraged by the burgeoning use of ratings like TopCoder scores to provide objective metrics of candidate skills. This makes it easier for job seekers to find their best niches and for entrepreneurs and employers to find the talent they need.
4. Support Our Scientists
After rising for a quarter-century, U.S. federal government support for basic academic research started to fall in 2005.
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This is cause for concern because economics teaches that basic research has large beneficial externalities. This fact creates a role for government, and the payoff can be enormous. The Internet, to take one famous example, was born out of U.S. Defense Department research into how to build bomb-proof networks. GPS systems, touchscreen displays, voice recognition software like Apple’s Siri, and many other digital innovations also arose from basic research sponsored by the government. It’s pretty safe to say, in fact, that hardware, software, networks, and robots would not exist in anything like the volume, variety, and forms we know today without sustained government funding.
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This funding should be continued, and the recent dispiriting trend of reduced federal funding for basic research in America should be reversed.
We should also reform the U.S. intellectual property regime, particularly when it comes to software patents and copyright duration. In any age, but especially in the second machine age, intellectual property is extremely important. It’s both a reward for innovation (if someone invents a better mousetrap, he or she gets to patent it) and an input to it (most new ideas are recombinations of existing ones). Governments therefore have to strike a delicate balance; they have to provide enough intellectual property protection to encourage innovation but not so much that they stifle it. Many of today’s informed observers conclude that software patents are providing too much protection. The same is probably true for at least some copyrights; it’s not clear what public interest is served by laws that ensure Disney’s 1928 “Steamboat Willie” (precursor to Mickey Mouse) remains under copyright, as does the song “Happy Birthday.”
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PRIZES
Many innovations are of course impossible to describe in advance (that’s what makes them innovations). But there are also cases where we know exactly what we’re looking for and just want somebody to invent it. In these cases, prizes can be especially effective.
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Google’s driverless car was a direct outgrowth of a Defense Advanced Research Projects Agency (DARPA) challenge that offered a one-million-dollar prize for a car that could navigate a specific course without a human driver. Tom Kalil, Deputy Director for Policy of the United States Office of Science and Technology Policy, provides a great playbook for how to run a prize:
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1.
Shine a spotlight on a problem or opportunity
2.
Pay only for results
3.
Target an ambitious goal without predicting which team or approach is most likely to succeed
4.
Reach beyond usual suspects to tap top talent
5.
Stimulate private-sector investment many times greater than the prize purse
6.
Bring out-of-discipline perspectives to bear
7.
Inspire risk taking by offering a level playing field
8.
Establish clear target metrics and validation protocols
Over the past decade, the total federal and private funds earmarked for large prizes have more than tripled and now surpass $375 million.
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This is great, but it’s just a tiny fraction of overall government spending on research. There remains great scope for increasing the volume and variety of innovation competitions.
5. Upgrade Infrastructure
It’s almost universally agreed among economists that the government should be involved in building and maintaining infrastructure—streets and highways, bridges, ports, dams, airports and air traffic control systems, and so on. This is because, like education and research, infrastructure is subject to positive externalities.
Excellent infrastructure makes a country a more pleasant place to live, and also a more productive place in which to do business. Ours, however, is not in good shape. The American Society of Civil Engineers (ASCE) gave the United States an overall infrastructure grade of D+ in 2013, and estimated that the country has a backlog of over $3.6 trillion in infrastructure investment.
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However, only a bit more than $2 trillion has been budgeted to be spent by 2020, leaving a large gap. You might think that the ASCE has an obvious bias on the question of infrastructure spending, but the data bear them out. Between 2009 and 2013, public investment in infrastructure fell by over $120 billion in real terms, to its lowest level since 2001.
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Bringing U.S. infrastructure up to an acceptable grade would be one of the best investments the country could make in its own future. As we write in 2013, energy prices are dropping, thanks in large part to the domestic shale oil boom, and wages in countries like China are rising. Because of these and other factors, we often hear from business leaders something very close to what Eric Spiegel, the CEO of Siemens USA, said in an interview: “The U.S. is a great place for manufacturing these days. We’re making things here in the U.S. that we’re shipping over to China. . . . We just need to make sure that we’ve . . . got the infrastructure in place to be able to handle the increased work.”
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There’s an interesting historical wrinkle in discussions about infrastructure investment. The legendary economist John Maynard Keynes, whose name is attached to a school of thought that advocates stimulus spending, famously suggested in 1936 that during recessions the government should put money in bottles, bury the bottles deep in old coal mines, then sell the rights to dig them up.
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Doing so, he argued only partly in jest, would “be better than nothing” because it would create demand during periods when labor and capital would otherwise go unused. Economists fiercely debate whether or not this could actually work, but they rarely debate the merits of good roads and bridges, or of government involvement with them because of positive externalities. We’re making our argument for infrastructure investment because of these externalities, independent of any Keynesian stimulus it might provide, and we’re squarely in the economic mainstream when we do so.
WELCOME THE WORLD’S TALENT
Any policy shift advocated by both the libertarian Cato Institute and the progressive Center for American Progress can truly be said to have diverse support.
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Such is the case for immigration reform, a range of proposed changes with the broad goal of increasing the numbers of legal foreign-born workers and citizens in the United States. Generous immigration policies really are part of the Econ 101 playbook; there is wide agreement among economists that they benefit not only the immigrants themselves but also the economy of the country they move to.
Some studies have found that certain workers in the host country, particularly less skilled ones, are made worse off by immigration because their wages fall but other research has reached different conclusions. Economist David Card, for example, evaluated the impact of Cuba’s 1980 Mariel boatlift (a mass emigration of Cubans to the United States approved by Fidel Castro) on the Miami labor market. Mariel brought over one hundred thousand people to the city in less than a year and increased its labor force by 7 percent, yet Card found “virtually no effect on the wages or unemployment rates of less-skilled workers, even among Cubans who had immigrated earlier.”
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Economist Rachel Friedberg reached virtually the same conclusion about mass migration from Russia and the rest of the former Soviet Union into Israel.
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Despite increasing the country’s population by 12 percent between 1990 and 1994, this immigration had no discernible adverse effect on Israeli workers.
Despite this and other evidence, concerns persist in America that large-scale immigration of unskilled workers, particularly from Mexico and other Latin American countries and particularly by illegal means, will harm the economic prospects of the native-born labor force. Since 2007, it appears that net illegal immigration to the United States is approximately zero, or actually negative.
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And a study by the Brookings Institution found that highly educated immigrants now outnumber less educated ones; in 2010, 30 percent had at least a college education, while only 28 percent lacked the equivalent of a high school degree.
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Entrepreneurship in America, particularly in technology-intensive sectors of the economy, is fueled by immigration to an extraordinary degree. Foreign-born people make up less than 13 percent of the country’s population in recent years, but between 1995 and 2005 more than 25 percent of all new engineering and technology companies had at least one immigrant cofounder, according to research by Wadhwa, Saxenian, and their colleagues.
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These companies in total had more than $52 billion in 2005 sales, and employed almost 450,000 people. According to immigration reform advocacy group Partnership for a New American Economy, between 1990 and 2005, 25 percent of America’s highest-growth companies were founded by foreign-born entrepreneurs.
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As economist Michael Kremer demonstrated in a now classic paper, increasing the number of immigrant engineers actually leads to higher, not lower, wages for native-born engineers because immigrants help creative ecosystems flourish.
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It’s no wonder that wages are higher for good software designers in Silicon Valley, where they are surrounded by others with similar and generally complementary skills, rather than in more isolated parts of the world.
Today, immigrants are having this large and beneficial effect on the country not because of America’s processes and policies but often despite them. Immigration to the United States is often described as slow, complex, inefficient, and highly bureaucratic. Darrell West, a vice president at the Brookings Institution, wrote a book in 2011 called
Brain Gain: Rethinking U.S. Immigration Policy
. But his research didn’t prepare him for his own Kafkaesque experiences after he married a German woman who then sought American citizenship. He wrote, “For many immigrants, it is virtually impossible for them to afford the fees, handle the paperwork, and navigate a complex bureaucratic process. Even with a Ph.D. in political science, I was overwhelmed with the complexity of the multiple applications, fees, documentation, interviews, and trips to the immigration office. . . . American immigration is a 19th century process in a 21st century world.”
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In addition to broken processes, the United States also has counterproductive immigration policies. Among technologists, the clearest example of this is probably the annual cap on the number of H1-B visas issued. These allow U.S. employers to hire foreign workers in specialty occupations, usually technical, for up to six years. In the early years of the twenty-first century as many as 195,000 were issued annually, but the quota was reduced to 65,000 in 2004 (in 2006 the program was expanded to include 20,000 graduates of American universities).
The H1-B visa program should be further expanded. We like the imagery of stapling a green card to every advanced diploma awarded to an immigrant. We also support the creation of a separate ‘startup visa’ category aimed at making it easier for entrepreneurs, especially those who have already attracted funding, to launch their ventures in the United States. This idea has been championed most prominently by American venture capitalists and business groups, but other countries have taken the lead. Australia, the UK, and Chile have all launched programs to attract early-stage entrepreneur immigrants, and in January 2013 Canada announced a full-fledged startup visa program, the first of its kind in the world.
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Meanwhile, comprehensive immigration reform stalled in the U.S. Congress in the summer of that same year.
6. Since We Must Tax, Tax Wisely
In general, taxing something discourages its production. That’s usually considered a bad thing, but it doesn’t have to be since we can tax things we want less of. There are also some goods and services that are exceptions to the rule; taxation doesn’t lead to decreases in the amount of them available. Economists say that these offerings are provided inelastically with respect to taxation. We can and should take advantage of this fact.
PIGOVIAN TAXES
A factory might find it really cheap and convenient to dump all of its waste into the river that flows past it, but the resulting toxic water, dead fish, and nasty smell are clearly unwanted. Economists call this type of unwanted effect a
negative externality
. Many types of pollution are prohibited outright as a result, but it’s not possible or smart to forbid every type. Utilities have to generate some pollution when they generate electricity, for example, and while cars today run much more cleanly than they used to, they still give off greenhouse gases. It is an unfortunate fact of human life that some types of production generate ‘bads’ alongside goods.