Neenah, Wis.- Part Three

Part three of this article about a small manufacturing town in Wisconsin concludes by comparing the political thinking of a long-time employee in one of its industries to that of his boss, who owns the factory.

Beginning an evening shift at Neenah Foundry with a mandatory stretching session.

By NELSON D. SCHWARTZ  Photographs by DAMON WINTER  Nov 25, 2017 for The New York Times

‘Go to Where the Fish Are At’

Watching those changes heightens the anxiety at an old-school manufacturer like Neenah Foundry, but these companies and their workers are adapting. Mr. Lamia, the 57-year-old veteran employee who backed Mr. Trump after decades of always voting a straight Democratic ticket, is a case in point.

Although he complains that “it’s so hard to compete against Mexico,” he has reinvented himself more than once during his career at Neenah Foundry.

After his first job as a laborer was eliminated, he got a commercial driving license and drove trucks there. Looking to rise and avoid another layoff from the foundry, Mr. Lamia then spent one day a week for five years at Fox Valley Technical College and eventually became certified as an electrician. With overtime, he earns roughly $70,000 a year, a solidly middle-class wage here.

Indeed, for workers with two-year degrees in fields like automation, metal fabrication and advanced manufacturing, employers are offering $50,000 to $60,000 to start. “We call them gold-collar workers in the state,” said Susan May, the president of Fox Valley Technical College.

But even as salaries for skilled workers like Mr. Lamia have risen, the number of low-paid entry-level laborers at Neenah Foundry is shrinking.

His boss, Tom Riordan, is about to invest $15 million in robots, automating part of the process in which cast metal parts are removed from sand molds by unskilled chippers and grinders.

“American manufacturers need to take a tough-love approach,” he said, sitting in Neenah Foundry’s nondescript board room, not far from the noisy factory floor. “Sometimes you just have to suck it up, adapt, and serve your customers.”

Mr. Lamia favors another sort of tough love: tariffs aimed at the countries he feels are “feeding off the U.S. and don’t play by the same rules.”

To comply with new government regulations, for example, Neenah Foundry will spend more than $1 million over the next six months to reduce silica particles by half, to 25 parts per billion. In China and India, workers simply make do with masks, and Mr. Lamia doesn’t believe he and his colleagues should be at a disadvantage when environmental standards overseas lag behind those in the United States.

“If Neenah Foundry has to pay millions for emissions controls and China doesn’t have to, then they should have to pay more to export to the U.S.,” he said. “It’s got to be a level playing field, and this should have been done a long time ago.”

Mexico is a more complicated case, Mr. Lamia added, especially given the country’s role as a major importer of American grain and other products. “Trump’s got a lot on his plate, but he should impose tariffs on China for sure,” he said.

Tom Riordan, chief executive of Neenah Enterprises, the foundry’s owner, is frustrated by the influx of cheap products from overseas rivals but worries about the damage a trade war could inflict.

Appealing as the tough talk on trade might be at times, it wasn’t enough to persuade Mr. Riordan, a self-described moderate Republican, to vote for Mr. Trump. Instead, he cast a write-in ballot for a fellow Wisconsinite, Representative Paul D. Ryan, the House speaker.

Mr. Riordan doesn’t discount the appeal of Mexico to manufacturing executives like himself. But he’s not considering a wholesale move south of the border for Neenah Foundry — instead, he wants to find ways to supply American manufacturers who have relocated there. “A lot of our customers are heading south, and you go where the fish are at,” he said.

As for the Nafta trade deal now being renegotiated, Mr. Riordan favors keeping changes to a minimum, rather than ripping up the 24-year old agreement, as President Trump has threatened to do.

“There isn’t an easy answer, but my personal bias would be against that,” he said. “Let’s put some lipstick on this pig, and not make a whole lot of substantial changes.”

He knows that axles made here will go into vehicles exported to Mexico and other countries that are trade targets of the White House. What’s more, Mexico is a major importer of corn and soybeans from American farmers, who in turn buy tractors and combines from John Deere, a major customer.

“Do we really understand what we’re doing?” Mr. Riordan asked. “We have a big trade surplus with Mexico in terms of grain. If U.S. farmers are suddenly at a disadvantage, who is going to pay the price for that? American agricultural equipment manufacturers, which impacts us.”

As the steward of a manufacturer that has survived world wars, the Great Depression, the Great Recession and a couple of trips to bankruptcy court, Mr. Riordan is much more optimistic about his company’s ability to compete globally than many of his workers.

With the North American Free Trade Agreement being renegotiated, White House decisions on trade will reverberate in places like Neenah.

The same goes for the country’s ability to win in trade with the likes of Mexico or China.

“If rational minds prevail in Washington, over time the country will get it right,” Mr. Riordan said. “But Congress and the president need to get it right in the meantime.”

This concludes this three-part article

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Neenah, Wis.- Part Two

Part two of this article on a small midwestern factory town recounts some of the experiences of workers suffering from the effects of globalization on their livelihood.

By NELSON D. SCHWARTZ  Photographs by DAMON WINTER  Nov 25, 2017 for The New York Times

‘Change Is Hard for People’

                       John Bergstrom, whose ancestors arrived in Neenah from Norway 150 years ago, has helped build seven new office buildings.

Families are always rising and falling in America, Nathaniel Hawthorne observed around the time John Bergstrom’s ancestors arrived in Neenah from Norway 150 years ago, and Mr. Bergstrom can vouch for that.

The first Bergstroms made cast-iron stoves and carriages. When new technologies made those businesses obsolete, they turned to what would become the region’s dominant industry by the mid-20th century: paper.

They prospered, and the Bergstroms joined the other paper barons who built mansions along Lake Winnebago. That house is now a museum, and the Bergstroms’ paper business faded as mills closed.

John Bergstrom, now 71, had the foresight to diversify, moving into automobile sales and then real estate. From a single General Motors dealership that opened in 1982, the Bergstrom family now dominates auto sales throughout the region, selling everything from Chevys and Cadillacs to Hondas, Toyotas and BMWs.

“Change is hard for people,” Mr. Bergstrom said. “So many of the communities in the middle part of America were based on a particular business or industry, and when that changed, the community didn’t. They lost the ability to continue to be what they once were.”

Indeed, as a developer, he helped Neenah avoid the fate of other Midwestern towns that depended on a single smokestack industry.

In 1993, Mr. Bergstrom and 11 other local businessmen each put in $100,000 to develop a decrepit site downtown with a new office building. It quickly filled up — and since then Mr. Bergstrom has helped build seven new office buildings, lifting the work force in downtown Neenah from 500 to more than 3,700.

A revitalization of the area has attracted businesses like Plexus, a maker of electronic equipment, whose new building is in the background.

One of those sites was the former Bergstrom paper mill, which the town tore down about a decade ago. It is now home to the headquarters of Plexus, a rapidly growing maker of complex electronic equipment that also has two manufacturing facilities nearby, employing nearly 2,000 people in all.

“When you fly on a 747, there are likely Plexus parts in that plane that were made here,” said Dean Kaufert, the mayor of Neenah.

There is still a paper mill downtown as well — Neenah Paper, which traces its roots to the 1870s and was spun off from Kimberly-Clark in 2004. The company has thrived by making high-end stationery, labels and other products requiring production and service know-how not easily replicated overseas.

But the closing of so many other mills has a way of obscuring success stories.

Football fans watching a Green Bay Packers game at The Dome, a restaurant and sports bar owned by Mayor Kaufert.

Nearly a decade after the mill closed in Kimberly, Wis., putting 570 employees out of work, the town is still struggling with how to redevelop the 91-acre brownfield site.

Last month, the paper maker Appvion filed for bankruptcy, putting at least 1,000 jobs in the Appleton area in jeopardy. Nearby, at Appleton Coated, 500 workers have been laid off since the summer, with a skeleton crew staying on as the company’s new owner seeks a buyer for the plant.

Passing the ruins of the abandoned plant in downtown Kimberly as he drove to work at Appleton Coated every day, Chris Bogan would have the same thought: his mill could be next.

So when that came to pass this fall, after five years of winding massive paper rolls, Mr. Bogan was scared, but not shocked. “Three days after I was hired at Appleton Coated, we were warned about layoffs, so I worried about it all the time,” he said.

Two other local manufacturers did step up and make offers to Mr. Bogan and other laid-off workers, but the $14 to $17 an hour they offered didn’t come close to the $28.66 he was earning at the paper plant.

And with his wife at home taking care of two toddlers, including a 2-year-old son with cerebral palsy, there was no way to bridge that gap. “If my wife was working, that would be acceptable, but in my situation that won’t work,” he said.

A Marine veteran, Mr. Bogan has enrolled at Fox Valley Technical College, and hopes to receive his commercial trucking certification in a few months.

That could lift his salary back above $20 an hour, but in the meantime he and his family are without health insurance. His son’s therapy is covered by Medicaid.

Students with two-year degrees in fields like automation can command starting salaries of $50,000 to $60,000 a year

“It’s been a little over a month, and people are coming to terms with the fact that we won’t be making the same wages that we were,” he said. Mr. Bogan said his main concern now was making sure his wife would still be able to bring their son to his occupational, speech and physical-therapy sessions each week.

Downtown Neenah is only a 15-minute drive from his home, but the craft beers on tap there and the farm-to-table restaurants that have opened up might as well be in Madison or Brooklyn.

“The area is changing,” he said. “I grew up on the outskirts of town, and as a local guy, it’s not for me. I’d rather cook a steak at home than go out and pay $120 for a meal.”

To be continued

Neenah, Wis.- Part One

This is the story of small midwestern town that prospered as a factory town in the years following the Second World War, rich in paper production and iron foundries. Since then, foreign competition, from which the town’s industry was not protected, has led to wage stagnation and factory closings. Thus the townspeople, traditionally Democratic (“the workers’ party?”), voted in the last election for the presidential candidate who promised to bring back their jobs from abroad and protect them with tariffs from unfair competition. Will he deliver? Does anyone in Washington care?

The story of Neenah, the town in question, can be multiplied a hundred times throughout Wisconsin, Michigan and Pennsylvania, the three traditionally Democratic-voting states that went Republican in the last election. Someone had better start listening to these Americans and making good on promises before they become irretrievably lost and embittered.

Because of the length of the original article that appeared in The New York Times, we have broken it down into three consecutive postings, of which this is the first. 

 

Feeding paper into a giant cutter inside the Neenah Paper mill, a survivor in the region’s declining paper industry.

By NELSON D.  SCHWARTZ  Photographs by DAMON WINTER  Nov. 25, 2017 for The New York Times

NEENAH, Wis. — In Winnebago County, they’ve seen the paper mills close, one by one.

While Kimberly-Clark, founded here in 1872, still employs several thousand people locally, abandoned mills dot smaller towns in the region. Paper production has moved to cheaper locales overseas with less stringent pollution rules. That has left a pall — and a sense of fear and insecurity — hanging over places like Neenah, even as factories in other industries are still humming.

For many, the villain is trade.

Take Neenah Foundry, a 145-year-old operation that employs nearly 1,000 workers here. Its employees have watched in frustration as cheap manhole covers and sewer grates flood into the country from India and elsewhere, where competitors are eligible for government subsidies and face fewer environmental regulations.

“For a long time, trade hasn’t been fair,” said Jeff Lamia, who started work at the foundry earning $5.35 an hour, fresh out of high school nearly 40 years ago, and now makes $27 an hour.

“They can build stuff for pennies in China with no environmental rules,” he added. “Our foundry has an ungodly amount of emissions controls and that costs big money. Overseas, they throw it out into the air and we have to compete. That’s not a level playing field.”

Employees have watched in frustration an influx of cheap manhole covers and sewer grates from foreign competitors.

More than a year after Donald Trump’s victory, it’s easy to forget that the seemingly tectonic electoral shift came largely from 80,000 voters in Wisconsin, Michigan and Pennsylvania who moved those reliably Democratic industrial states into the Republican column.

Few places embody the underlying economic and political dynamics of that switch more than Winnebago County. Almost a third of Wisconsin’s 72 counties flipped from blue to red, and like most of them, Winnebago is heavily dependent on manufacturing, whether in gritty blue-collar towns like Oshkosh and Menasha or in Neenah, which is home to both factories and corporate offices downtown.

Indeed, with one-fifth of its jobs in the factory sector, Winnebago is more dependent on manufacturing than over 90 percent of the nation’s counties. As a result, residents worry about foreign competition for locally made products like Oshkosh trucks or the fire engines built by Pierce in Appleton and exported around the world.

And with the North American Free Trade Agreement hanging in the balance, and the possibility of a trade war rising, White House decisions on trade in the months ahead will reverberate here and in other Midwestern states — and may determine whether last year’s political shift becomes more enduring.

Mr. Trump’s attacks on free trade and promises to bring back good-paying jobs from overseas resonated deeply here — even with lifelong Democrats like Mr. Lamia. Those issues, along with a growing disdain for politicians in general and Hillary Clinton in particular, prompted Mr. Lamia to choose Mr. Trump after voting for Barack Obama in 2008 and 2012.

Other foundry workers like Jeff Olejnik, a Democrat who couldn’t bring himself to vote for Mr. Trump in November and reluctantly supported Mrs. Clinton, admits that his message on trade was compelling.

 

An employee in a filtration suit uses a heavy grinding wheel to smooth down rough edges on molded parts

“People in the Midwest don’t ask for much,” he added. “They want to take a vacation once a year, have decent health care and enough money to pay their bills and save for retirement. That’s our life, but pretty soon there won’t be no middle class.”

For many who have made a life in Neenah, it has been a place where a worker without a college degree can secure the middle-class security and comfort that have slipped out of reach elsewhere.

Mr. Lamia and his wife own a home 10 minutes from the foundry, have three cars between them, and a decade ago they purchased a summer place in Michigan’s Upper Peninsula.

In many respects, economic data for the area still paints a sanguine picture. At 2.8 percent, the county’s unemployment rate is more than a full percentage point below the national average. Help-wanted signs hang from local factories, and Neenah Foundry recently raised hourly wages for chippers and grinders, an entry-level job, to about $12.25 an hour from $11.25.

But there is a creeping sense of having to work harder just to stay in place, as salaries and lifestyles erode amid pressure from globalization and the unceasing demand for ever-rising profits in corporate America.

“People are working similar jobs to what their parents did but are not able to maintain the same lifestyle,” said Mark Harris, a former mayor of Oshkosh who is now the Winnebago County executive. “That’s causing anxiety.”

And while unemployment may be low now, older residents have seen factories and mills close in town after town, with Wisconsin losing 120,000 factory jobs over all since 2000, including 20,000 in the paper industry alone. Not only has that kept wages in check, but it has also prompted doubts among blue-collar workers about whether they — or their children — have much of an economic future here.

“We had eight kids in our family, and my mother didn’t have to work,” Mr. Olejnik said. “Grocery stores weren’t open on Sunday and you spent time with your family. Now, the mall is open on Christmas Eve. We’ve lost a lot.”

To be continued

Amazon at the Top of “The Management Top 250” List

In spite of Amazon’s insensitivity to social responsibility, it is No. 1 in management—due to its exceptionally high score in innovation. Tech companies stay light and profitable in management by contracting out most of their front-line work. Amazon retains its agility by working in small teams and putting its emphasis on  customer satisfaction. This is what we learn from this article in The Wall Street Journal.
Jeff Bezos, chief executive of Amazon, which ranked No. 1 in the Management Top 250. Amazon, Apple and Alphabet are innovation and customer-satisfaction standouts because so many of their products are reshaping industries and social behavior. Photo: Drew Angerer/Getty Images

. . .  The ranking—compiled by the Drucker Institute, founded in 2007 to advance the ideals of the management sage—differs from other “best of” lists in that it doesn’t measure any single aspect of a company’s prowess, such as profits or productivity. Rather it takes a holistic approach, examining how well a business does in five areas that reflect Mr. Drucker’s core principles: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength.

Tech success

Why do so many of the biggest names in tech—some of which didn’t even exist three decades ago—make the Management Top 250 list?

For the most part, the tech companies at the top get high grades across all five categories, landing in all but a few instances in the upper 15% to 20% of the more than 600 companies analyzed by the Drucker Institute.

Amazon, Apple and Alphabet are innovation and customer-satisfaction standouts because so many of their products—from cloud-computing platforms to smartphones to the burgeoning field of drones and driverless vehicles—are reshaping entire industries as well as social behavior.

Tech firms such as Alphabet and Microsoft also contract out much of their front-line work. The official staff that remain tend to be highly paid and enjoy generous perks, a likely factor in those companies’ high employee scores, says Rick Wartzman, director of the Drucker Institute’s KH Moon Center for a Functioning Society. “Their workforces are the winners of the knowledge economy,” he says.

An innovation powerhouse

There is more than one way to the top. No. 1 Amazon is actually one of the Management Top 250’s most uneven performers. Within the larger universe of analyzed companies, it scored in the bottom 20% on social responsibility. The lackluster grade comes after years of critical news reports about the working conditions of its warehouse workers and poor marks from activists for not being more transparent about its environmental record. Yet, its mighty innovation score—so high that it lies off the charts compared with other companies’ scores—catapulted it to first place.

Amazon, which has assembled a high-profile corporate-responsibility team over the past few years, declined to comment for this article.

The company’s $20.85 billion research-and-development spending in the 12 months through September outstripped all other U.S. companies, according to S&P Global Market Intelligence data. It has kept ahead despite its swelling size by moving quickly and sticking to its founding principle of starting with the customer, says Reid Greenberg, executive vice president of digital and e-commerce at research and consulting firm Kantar Retail.

Its agility, he says, comes from grouping workers in small teams. Chief Executive Jeff Bezos instituted the “two-pizza team” concept, where the ideal team size is one that can be fed on two pizzas. When it was instituted in the early 2000s, it was “really jarring,” says Eric Heller, CEO of Marketplace Ignition, a consulting firm for brands and retailers, and a former senior manager at Amazon. But by getting rid of bureaucratic layers, it fueled innovation. Each team owned projects as small as a single button on the website and was responsible for improvements.

131201231606-vo-amazon-drone-delivery-system-00003211-story-top                      A drone picking up a package in an Amazon warehouse.

At Amazon, potential product ideas get written up into dummy news releases that get marked up. Creators must answer questions such as the cost of the project, how much the product or service would sell for and the launch date.

It’s always day one for Amazon—”today we’re starting day one of the next five years or the next 10 years and we’re not dwelling in the past”—says Mr. Greenberg. “That’s really how the company thinks and breathes, and…that helps them maintain a competitive advantage.”

The company’s early emphasis on frugality led to creative ideas, the most impressive of which were rewarded with a highly coveted “door desk award,” a trophy that looked like a typical worker’s desk. Ideas ranged from how to better affix shipping labels to packages to how to save money on conference-room equipment. . . .

This Tax Plan Puts Another Knife Into American Democracy

Even The Wall Street Journal is warning how catastrophic the about-to-be-voted- on Republican tax bill will be, not only for the middle-class and the unfortunates at the bottom of our social chain but also for our economy as a whole.
BN-WK781_3jvFx_OR_20171204132740
Senate Majority Leader Mitch McConnell speaks on Capitol Hill about the importance of passing tax reform, Nov. 30. Photo: Tom Williams/Zuma Press
By TOM STEYER  

After more than three decades as an investor, I fully appreciate that folks on Wall Street don’t have time to follow every detail of Capitol Hill’s policy debates. What matters to the financial industry is the bottom line. So how does the current Republican tax proposal look with that in mind?

On the surface, the GOP plan might seem to offer the kinds of short-term rewards that really resonate. But let’s face it: Republicans’ supposedly pro-business ideas have seemed that way before. While business owners and investors may have made extra returns in the near-term, however, America’s economy ultimately suffered.

Less than a decade ago, after years of dramatic deregulation coupled with revenue-draining tax cuts, the entire U.S. financial system effectively collapsed. It took down with it millions of American consumers, workers, small businesses, retirees and middle-class homeowners.

The country can’t afford this kind of outcome again. That’s why I want to be as straight as possible: Despite what you may believe, the Republican tax plan taking shape is a sham. It will lead to more pain and less prosperity for the vast majority of Americans. Investment professionals have a moral obligation and a personal interest in opposing the bill.

Stopping it will be good for investors’ bank accounts, because when Main Street and the rest of the nation does well, so does the financial sector. Trickle-down economics doesn’t work, but trickle-up does. Trying to re-enact Reaganomics under completely different circumstances may well lead the economy back into a recession—one that the country will be ill-equipped to weather after the GOP proposal adds $1 trillion to the national debt.

The plan’s massive tax cuts won’t reinvigorate the economy. For years corporations have enjoyed historically high profits, but investment hasn’t increased alongside them. Last month at a meeting of The Wall Street Journal’s CEO Council, an editor asked attendees whether they would boost investment if the tax bill passed. Few hands went up.

 Neither will it juice consumer spending. Sixty-two percent of the benefits from the Senate bill’s tax cuts flow to the top 1% of earners, according to an analysis by the Tax Policy Center. The true source of consumer power rests with the middle class, yet this report shows that nearly half of American families would ultimately see their taxes rise under this plan. They would be left with less money to spend, not more.

Honest analyses indicate that the Republican proposal overwhelmingly helps the wealthy and is probably a net negative for almost everyone else. That’s largely because it will be paid for with money taken out of the pockets of working Americans and their children: The tax cuts will be used as an excuse to further gut investments in education, health care and training. Slashing these services for working Americans will stunt the country’s future prosperity and weaken the overall economy.

Congress should realize that the American people will not be fooled by the noise. If they see a bill passed that hands out filet mignon to the wealthy while leaving them struggling over scraps, they will be furious. Once again, they’ll realize that the system serves the needs of those at the top and ignores working families. They’ll consider this more evidence of corruption. And it will be harder than ever to argue otherwise.

For too long, those at the top of the economic ladder have refused to concede that opportunity in America is nothing like it used to be for working people. The pain caused in small towns when companies shipped their operations overseas has been ignored. The people who experienced globalization and automation as a huge threat have been forgotten. Too many families and communities have been treated as costs, or as commodities to be ruthlessly exploited.

It’s time to remember that America does not start and end on Wall Street. The country prospers when all Americans succeed together. That’s why we must address the growing inequality that is tugging at the seams of our society and destabilizing our politics. Passing this tax plan, which adds to workers’ pain, would put another knife into American democracy. It would be a true disaster.

You have to ask yourself, how can this make sense? When 1 in 3 Americans say they are still struggling to recover from the Great Recession, is it worth saving the Trump family $1 billion by repealing the estate tax? Worth increasing insurance premiums for middle-class families in the individual market by $2,000, as the Center for American Progress estimates the Senate bill would? Worth taxing tuition waivers, making it prohibitively expensive for young people to get advanced degrees and thus sacrificing America’s economic competitiveness down the road? Worth cutting Medicare by $25 billion? Worth ending tax credits for clean energy, sabotaging one of the most promising industries for the 21st century, while protecting much larger tax breaks for oil and gas?

The rest of the country thinks Wall Street’s greed clouds its judgment. But I know that doesn’t have to be true. No matter where investors fall on the political spectrum, deep down, they know that when patriots put country ahead of self, everyone benefits. There’s still time to acknowledge the significant harm that this destructive tax plan will do to American society and then to oppose it. Let’s take the broad view.

Mr. Steyer is the founder and president of NextGen America and Need to Impeach.

When Will They Ever Learn?

The continual claim one hears today from Republicans, including the President and the three men in the photograph below—that their new tax bill will  generate greater revenue for the government, produce higher wages for workers and increase the prosperity of the middle class—flies in the face of reason, as the article below explains. Thomas Piketty clearly stated this in his book Capital in the 21st Century. Many qualified economists (see below) have warned us against this erroneous belief, and now the warning appears in an editorial in the leading conservative business newspaper.

It remains only for us to wait and see these three men and numerous others fall into the hole of debt they will have dug with their obduracy. Unfortunately, all of us will have to suffer too. How will they explain it when lowering taxes doesn’t produce the growth and prosperity they have predicted for small businesses and the middle class? On whom will Trump’s supporters take out their rage?

BN-WG255_3iE5o_M_20171121082313Senate Majority Leader Mitch McConnell, Republican Senator Orrin Hatch and Treasury Secretary Steven Mnuchin at work on the new tax bill.  Photo: J. Scott Applewhite/Associated press

By WILLIAM A. GALSTON  Nov. 22, 2017 for The Wall Street Journal

Six months ago, Senate Majority Leader Mitch McConnell favored revenue-neutral tax reform. Despite the new GOP budget, which permits a $1.5 trillion increase in the deficit over the next decade, and despite estimates from the Joint Committee on Taxation that the Senate Finance Committee’s tax proposal would in fact generate this increase, he insists that he still does.

In a recent CNN interview, Sen. McConnell suggested that the tax cuts would generate enough economic growth to make up for the lost revenue. “I actually think it’s a fairly conservative estimate of how much growth we’re likely to get out of this pro-growth tax reform,” he said.

It depends on how he defines “conservative.” If he means the estimate favored by many conservative politicians, he may be right. But if he means the estimate most conservative economists are offering, he is dead wrong.

Consider the view of Douglas Holtz-Eakin, who served as Congressional Budget Office director under President George W. Bush. “If it’s a well-designed tax policy, it will partially offset the cost” of the tax cuts, he said. But “there’s no evidence anywhere that a tax cut of that magnitude, regardless of composition, will offset” the full cost.

Or consider the argument made by Gregory Mankiw, one of the country’s most respected conservative-leaning academic economists. In principle, he favors so-called dynamic scoring, which builds the effects of increased growth into revenue models. It is “potentially more accurate,” he wrote in the New York Times. But he adds a caveat: “It is also more easily abused by those who want to promote their policies with an unhealthy dose of wishful thinking.”

 So where is the line between solid analysis and wishful thinking? Professor Mankiw continued: “Tax cuts rarely pay for themselves. My reading of the academic literature leads me to believe that about one-third of the cost of a typical tax cut is recouped with faster economic growth.”

If Mr. Mankiw is right, then the Senate bill would add $1 trillion to the national debt over the next decade. And the actual outcome could turn out to be even worse.

Here’s why. As drafted, the Senate bill reduces the cost of tax breaks through phase-in and phase-out provisions. The bill earns a better budgetary score from the Joint Committee on Taxation by setting all individual tax breaks to expire by 2025.

Republican congressional leaders are sensitive to the criticism that this amounts to a bait-and-switch strategy to sell the tax package. Democrats are gearing up to charge that while the corporate rate reductions are permanent, many individuals would find themselves paying higher taxes by the mid-2020s.

In response, Treasury secretary Steven Mnuchin has said, “there are certain parts of this that expire, but we have every expectation that down the road, Congress will extend them.” He may well be right. If so, the real 10-year cost of the bill would be $2.2 trillion, adding nearly $1.5 trillion to the national debt. Republicans cannot have it both ways.

Moreover, this is not a good time to be adding to the nation’s debt burden. According to the CBO, we are already on track to add more than $10 trillion to the national debt over the next decade, raising it from an already high 77% of GDP to a sky-high 91%. If there is even one recession during this period, the debt will rise even higher. We’re in a deep hole, and the Republican plan would dig it deeper.

Standard economics tell us that the best time to stimulate the economy is when unemployment is high and output is well below its potential. This is not what we see today. The labor market stands at what most economists believe is full employment, and the gap between potential and actual output—which stood at 6% during the lows of the Great Recession—has virtually disappeared. Economic output has accelerated, and there are early signs of more rapid increases in both wages and inflation.

 Republicans seem to think that 2017 is 1981 all over again and that large tax cuts are needed to counteract economic slack. But the better analogy for our current situation is to 1986, when Republicans and Democrats came together on historic tax reforms that lowered rates and broadened the base, without adding to the deficit.

Republican tax-drafters must have known that they could lower corporate tax rates to internationally competitive levels and wipe out a slew of special-interest provisions—without worsening the deficit. They made a different choice.

We needed bipartisanship in the service of tax reform and fiscal responsibility. Instead, we’re getting a party-line bill that cuts taxes and increases the deficit—without even giving permanent tax relief to President Trump’s working-class supporters. I wonder what will happen when they find out. 

Where Computers Need Help from Human Agents

You have frequently read in this column how artificial intelligence (AI) will be putting humans out of work in the near future as it learns to drive our cars, replaces legal researchers and investment specialists, and performs diagnostics in hospitals. Here is a more hopeful estimate that suggests thousands of  new jobs  are arising for humans working alongside computers doing what computers haven’t yet learned to do.

 

By CHRISTOPHER MIMS   Nov. 12, 2017 for The Wall Street Journal

If you want to understand the limitations of the algorithms that control what we see and hear—and base many of our decisions upon—take a look at Facebook Inc.’s FB 0.92% experimental remedy for revenge porn.

To stop an ex from sharing nude pictures of you, you have to share nudes with Facebook itself. Not uncomfortable enough? Facebook also says a real live human will have to check them out.

Without that human review, it would be too easy to exploit Facebook’s antirevenge-porn service to take down legitimate images. Artificial intelligence, it turns out, has a hard time telling the difference between your naked body and a nude by Titian.

The internet giants that tout their AI bona fides have tried to make their algorithms as human-free as possible, and that’s been a problem. It has become increasingly apparent over the past year that building systems without humans “in the loop”—especially in the case of Facebook and the ads it linked to 470 “inauthentic” Russian-backed accounts—can lead to disastrous outcomes, as actual human brains figure out how to exploit them.

   

Whether it’s winning at games like Go or keeping watch for Russian influence operations, the best AI-powered systems require humans to play an active role in their creation, tending and operation. Far from displacing workers, this combination is spawning new nonengineer jobs every day, and the preponderance of evidence suggests the boom will continue for the foreseeable future.

Facebook, of course, is now a prime example of this trend. The company recently announced it would add 10,000 content moderators to the 10,000 it already employs—a hiring surge that will impact its future profitability, said Chief Executive Mark Zuckerberg.

And Facebook is hardly alone. Alphabet Inc.’s Google has long employed humans alongside AI to eliminate ads that violate its terms of service, ferret out fake news and take down extremist YouTube videos. Google doesn’t disclose how many people are looped into its content moderation, search optimization and other algorithms, but a company spokeswoman says the figure is in the thousands—and growing.

Twitter has its own teams to moderate content, though the company is largely silent about how it accomplishes this, other than touting its system’s ability to automatically delete 95% of terrorists’ accounts.

Almost every big company using AI to automate processes has a need for humans as a part of that AI, says Panos Ipeirotis, a professor at New York University’s Stern School of Business. America’s five largest financial institutions employ teams of nonengineers as part of their AI systems, says Dr. Ipeirotis, who consults with banks.

AI’s constant hunger for human brains is based on our increasing demand for services. The more we ask for, the less likely a computer algorithm can go it alone—while the combination can be more effective and efficient. For example, bank workers who previously read every email in search of fraud now make better use of their time investigating emails the AI flags as suspicious, says Dr. Ipeirotis.

What AI Can (and Can’t) Do

A machine-learning-based AI system is a piece of software that learns, almost like a primitive insect. That means that it can’t be programmed—it must be taught.

   

To teach them, humans feed these systems examples, and they need truckloads. To build an AI filter to identify extremist content on YouTube, humans at Google manually reviewed over a million videos to flag qualifying examples, says a Google spokeswoman.

An algorithm can only be as good as “the quantity and quality of the training data to get [it] going,” says Robin Bordoli, CEO of CrowdFlower Inc., which provides human labor to companies that need people to train and maintain AI algorithms, from auto makers to internet giants to financial institutions.

Even when an AI has been trained, its judgment is never perfect. Human oversight is still needed, especially with material in which context matters, such as those extremist YouTube posts. While AI can take down 83% before a single human flags them, says Google, the remaining 17% needs humans. But this serves as further training: This data can then be fed back into the algorithm to improve it.

Relying on AI can lead to false positives, as when the company pulls down legitimate content that its algorithms think might be offensive.

There are many cases when AI can barely perform a task at all, as in the case of Facebook’s nude pic filter. Transcribing receipts and business cards, tagging videos and moderating adult content are all tasks that “should be easy for machine learning, but in practice are too unstructured,” says Vili Lehdonvirta, a senior research fellow at the Oxford Internet Institute in the United Kingdom.

Dr. Lehdonvirta maintains the Online Labor Index, a real-time estimate of the number of people employed for these sorts of tasks. By his calculations, the number of tasks posted to crowdsourced online labor platforms, which includes this kind of work, is up 40% in the past year alone.

   

Systems at risk of being gamed by fraudsters also require constant human attention, says Dr. Ipeirotis. AIs, once trained, are inexhaustible, but this is a curse as much as a blessing: People who outsmart the algorithm can multiply their results a millionfold.

Humans, on the other hand, are slower than AI, but can identify patterns based on very little information. Any time a system must deal with bad actors—like when an entity posing as an American on Twitter is actually a Russian agent—there is no replacement for live staffers.

A Growing Workforce

Some of this labor happens through outsourced systems like CrowdFlower and Mechanical Turk, Amazon.com Inc.’s system for outsourcing individual computer microtasks to a global workforce of more than 500,000 people.

Across the globe, between 10,000 and 20,000 people a week pick up online piecework, flagging porn in online forums, teaching self-driving systems to identify pedestrians and training facial-recognition algorithms, Dr. Lehdonvirta estimates. When you include companies’ own internal teams, there are probably hundreds of thousands of humans, world-wide, whose work is sold as AI, he says.

The Good Businessman—Yes, He Does Exist or, at Least, He Did

What a joy to read William Galston’s Opinion piece this morning in The Wall Street Journal. We fully share his feelings on both issues:  first, that it is possible (though rare) to combine a moral outlook with successful business practice; second, that—from past experience—we know  it is extremely unlikely that lowering taxes will provide any benefit at all to the worker. 

By WILLIAM A. GALSTON  Nov. 15, 2017 for The Wall Street Journal

The older I get, the more drawn I am to obituaries, but not for the obvious reason. They often offer a reminder of the United States as it used to be, and they make me wonder whether we have lost something precious.

Arjay Miller and Henry Ford II.

 I had one of these moments this weekend, when I read about the death of Arjay Miller, 101, who was president of Ford Motor Co. and later dean of Stanford Business School. Under Miller’s leadership (1963-68), Ford modernized its management, introduced the highly successful Mustang, and achieved record earnings.

At the same time, Miller made Ford take automobile safety seriously while General Motors lagged behind. The choice cost Ford sales because some customers balked at paying for innovative equipment such as seat belts. Miller defended his policy as the right thing to do and said corporate leaders should always ask themselves whether they were willing to have their decisions publicly reported. Volkswagen executives have paid dearly for ignoring this advice, and they are not alone

After leaving Ford, Miller helped move Stanford into the top rank of business schools by diversifying the faculty and student body while expanding coverage of ethics and public policy. He founded the Economic Development Corporation of Detroit, supported black-owned and -operated business, and backed a negative income tax to reduce poverty. “Making money is the easy part,” he declared. “Making the world a better place is the hard part.”

 

I wonder how many of today’s executives would be prepared to sacrifice sales and profits to do the right thing. Most of them have been taught that maximizing shareholder value is their sole responsibility—and if this means ignoring the needs of workers and the well-being of local communities, so be it.

 Miller’s example is especially relevant today, as Republicans in the House and Senate consider tax legislation that would allow corporations to repatriate foreign assets at concessionary rates. The bills’ drafters are assuming that executives will use these funds to invest in their businesses.

But that’s not what happened the last time this was done, in 2004, when corporations were allowed to bring back overseas assets if they paid a tax of only 5%. During the next three years, the 15 companies that repatriated the most raised salaries for senior executives, cut more than 20,000 jobs, decreased investment in research, and expanded dividends and stock buybacks. [When will the right get this truth through their thick heads?] All this happened despite the letter of the law, which specified that the funds be used for investing in research and the workforce and prohibited their use for compensating executives and repurchasing stock.

Law is a blunt and often ineffective instrument for inducing corporate leaders to take a broader view. They have enormous discretionary authority. The question is how they choose to use it. Legality is just the beginning. “Moral judgment transcends legalities,” Miller once said. So does moral responsibility.

The tax bills now under consideration in the House and Senate represent the largest corporate tax cuts in many decades. If these bills pass, average Americans will expect something in return—higher wages, better working conditions, and more opportunities for their children. If corporations take the money and run, public retribution will be severe.

Earlier this week, a group of 400 rich Americans sent a letter to Republican members of Congress. Their message: don’t cut our taxes. We don’t need the money; others do. Besides, it is folly to add $1.5 trillion to already dire forecasts of the growth of the national debt over the next decade.

This is a good start. But in addition to political responsibility, America’s financial elite ought to exercise business responsibility. America needs a new era of broad-minded, socially aware corporate leaders who understand the long-term relationship between the well-being of their companies and the well-being of their country.

 An environment in which profits soar while wages stagnate may make for satisfied shareholders. But the revolt against the arrangements that sustain this imbalance is already under way. Today the targets are immigration and trade treaties. Tomorrow the demands could include restrictions on the ability of corporations to shutter plants and fire workers at will. The day after tomorrow, if massive corporate tax cuts yield no benefits for workers, we could see an intensified revolt against elites, not only cultural elites, but the captains of industry and finance as well.

 

Taking the long view is self-interest rightly understood. It means refraining from squeezing the last bit of profit out of your business right now in order to secure a flow of profit over time. The economy rests on a set of political arrangements that the people can revise and—if things get bad enough—upend.

The Most Compelling Criticism of Trump Tax Plan

We found this conservative criticism of the Republican tax proposal in today’s Washington Post.

November 13, 2017 for The Washington Post

The GOP tax plan has been criticized on two grounds. First, it disproportionately benefits the rich at a time when income inequality is an economic, political and social concern. Second, the concept of a debt-creating tax plan is unwise and counterproductive.

It is the second that has drawn robust and diverse criticism from economists. The Penn Wharton Budget Model’s scoring model (assessing a range between a static and a dynamic score) concludes: “The House Tax Cuts and Jobs Act is projected to reduce federal tax revenues between $1.5 trillion (high initial return to capital) to $1.7 trillion (low initial return to capital). Debt rises by more, by about $2.0 trillion to $2.1 trillion, over this [10-year] period, due to debt services. By 2040, revenue falls between $3.6 trillion and $4.4 trillion, whereas debt increases by $6.4 trillion to $6.9 trillion.” Added debt after the budget window raises the potential that the bill will not comply with the Senate’s reconciliation rules. As for growth, the model confirms the past pattern — a brief surge in growth that fades. (“By 2027, GDP is between 0.4% and 0.9% larger than current policy in that year. However, this initial boost fades over time as more debt accumulates. By 2040, GDP is between 0.0% and 0.8% larger than current policy in that year.”)

Alan Greenspan

Others agree that the debt accumulation essentially cancels out any economic benefit. Former Federal Reserve chairman Alan Greenspan argues, “We are premature on fiscal stimulus, whether it’s tax cuts or expenditure increases. We’ve got to get the debt stabilized before we can even think of those terms. … Economically, it’s a mistake to deal with sharp reductions in taxes now.” His warning can be understood as an admonition about both a growing mound of debt and the downside of using debt-creating tax breaks now, when the economy is humming along. If we face an economic downturn in the next couple of years, we’ll have fewer anti-recession tools at our disposal.

Meanwhile the Center for Budget and Policy Priorities finds:

Today’s tax debates are taking place in a substantially different fiscal environment than when past tax cuts were debated. Compared to 1981, when the Reagan tax cuts were passed, and 2001, when the Bush tax cuts were enacted, revenues today are lower and the debt held by the public is considerably higher, measured as a percent of the economy. . . .

And the budget outlook is vastly different, particularly compared to when the 2001 Bush tax cuts were being considered. In 2001, the federal government was running a surplus, the federal debt was shrinking, and large surpluses were forecast for the coming decade. Today’s fiscal outlook is the opposite: deficits are growing and the debt is projected to rise from today’s 77 percent of gross domestic product (GDP) to 91 percent in 2027, according to the Congressional Budget Office (CBO), due to rising health care and other costs associated with the retirement of baby boomers, as well as the significant ongoing costs of the Bush tax cuts.

Moreover, since CBPP doubts the child tax credit and the business expensing provisions will be allowed to expire, “the Committee for a Responsible Federal Budget estimates that continuing them after their expiration in 2023 would add roughly $400 billion to the cost of the bill over the decade. These additional costs and the associated debt service would boost the debt-to-GDP ratio to 99 percent by 2027.”

Understand what the GOP is up to here. In order to give enormous tax breaks to individuals and the wealthy, it will run up the debt, which effectively removes any economic benefit in the long term. Because bigger debt will require budget cuts (likely to affect the poor and middle class), it will further increase economic inequality. And finally, by running up the debt now when the economy is doing fine, we risk leaving ourselves without fiscal defenses when the next economic setback occurs. In short, the concept is fatally flawed — unless your intent is to reward rich donors.

 Jennifer Rubin writes the Right Turn blog for The Post, offering reported opinion  from a conservative perspective. Follow @JRubinBlogger

 

How Corporations and the Wealthy Avoid Taxes (and How to Stop Them) II

We continue the two-part article based on the leaked Panama Papers and more recently leaked Paradise Papers, revealing how multinational firms such as Google avoid paying taxes in the United States.

By GABRIEL ZUCMAN   Nov. 10, 2017 for The New York Times

 Meet Michael. Michael is the (fictional) chief executive and owner of an American company, Michael & Company. Like many people, he would like to pay as little in taxes as possible. But unlike most people, he can take some steps that will allow him to do just that.
  First, he creates an anonymous shell company incorporated in the Cayman Islands, which has lax regulations on disclosing the identities of company owners.

He then opens an account under the shell company’s name in Cyprus (or one of many other tax havens, such as Switzerland, Hong Kong and Panama, whose banks cater to the wealthy and aren’t reliable about cooperating with foreign tax authorities).

  Poverty in the U.S. today

Finally, Michael & Company buys fictitious services from the Cayman shell company (“consulting,” for example) . . . and, to pay for these services, wires money to the shell company’s Cyprus account.

The transaction generates a paper trail that can appear legitimate at first glance. But the reality is more insidious. By paying for fictitious consulting, Michael fraudulently reduces the taxable profits of Michael & Company, and thus the amount of corporate income tax he pays.

And once the money has arrived in Cyprus, it is invested in global financial markets and generates income that the Internal Revenue Service can tax only if Michael reports it or if his Cypriot bank informs the I.R.S.

It’s supposed to, but many offshore banks have routinely violated their obligations in the past, by pretending they didn’t have American customers or hiding them behind shell companies. So this way, Michael can evade American federal income tax as well as paying fewer corporate taxes through his company.

And meanwhile, in America, if he wants to use any of the money stashed in Cyprus, he can simply go to an ATM and make a withdrawal from his offshore account.

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How do we know all this?

Until recently, we did not have a good sense of who owns the wealth held offshore, but with my colleagues Annette Alstadsaeter and Niels Johannesen, we have been able to make progress thanks to leaks over the last few years. In 2015, the Swiss Leaks revealed the owners of bank accounts at HSBC Switzerland, and in 2016 the Panama Papers revealed those of the shell companies created by the Panamanian law firm Mossack Fonseca. These showed that 50 percent of the wealth held in tax havens belongs to households with more than $50 million in net wealth, a minuscule number of ultra-high-net-worth individuals who avoid paying their fair share. In the Paradise Papers, we see that these are not only Russian oligarchs or Belgian dentists who use tax havens, but rich Americans too.

As I mentioned above, about 11.5 percent of world G.D.P. is held offshore by households. For a long time, the bulk of it was held in Switzerland, but a fast-growing fraction is now in Hong Kong, Singapore and other emerging havens.

Luxury yachts, each worth $250 million or more, moored in a European pleasure port

We can stop offshore tax evasion by shining some light on darker corners of the global banking industry. The most compelling way to do this would be to create comprehensive registries recording the true individual owners of real estate and financial securities, including equities, bonds and mutual fund shares.

One common objection to financial registries is that they would impinge on privacy. Yet countries have maintained property records for land and real estate for decades. These records are public, and epidemics of abuse are hard to come by.

The notion that a register of financial wealth would be a radical departure is wrong. And the benefits would be enormous, as comprehensive registries would make it possible to not only reduce tax evasion, but also curb money laundering, monitor international capital flows, fight the financing of terrorism and better measure inequality.

The onus here is on the United States and the European Union. Why do we allow criminals, tax evaders and kleptocrats to ultimately use our financial and real estate markets to launder their wealth? Transparency is the first step in making sure the wealthy can’t cheat their way out of contributing to the common good.

This concludes the two-part article

              Gabriel Zucman is a professor of economics at the University of California, Berkeley and author of “The Hidden Wealth of Nations.”