Trade

Foreign investment and productivity improvements revived an Indiana steel mill (WSJ). In 2008, Luxembourg-based ArcelorMittal “twinned” the Burns Harbor plant with one in Ghent, Belgium. Burns Harbor engineers and managers went to Ghent to learn how the similar plant produced more efficiently; $150 million investments in plant automation and computerization brought productivity to record levels. The plant is hiring more workers with computer and engineering degrees, according to the union representative: “Steel working used to be 80 percent back and 20 percent brain, now it's the other way around.” CFR’s Ted Alden discusses the shortage of skilled workers in the U.S. manufacturing pipeline and the need for firms, governments, and unions to work together to encourage young people to pursue manufacturing careers, and schools to increase relevant education. Google-MMI Deal Earns Chinese Approval The Guardian reports that Chinese regulators approved Google’s $12.5 billion acquisition of Motorola Mobility (MMI), with the condition that the Android operating system must remain free for smartphone and tablet manufacturers for at least five years. Chinese approval was the last major regulatory hurdle for the proposed merger between U.S. firms that has already been approved by other authorities. Google’s primary interest in acquiring MMI was gaining access to its patent portfolio. EU Antitrust Chief Ratchets Up Pressure on Google After complaints from more than a dozen companies, the European Union’s antitrust chief turned up pressure on Google, leaving it with a number of weeks to remedy anti-trust allegations or face formal charges and possible fines (Reuters). International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Innovation Facebook Millionaires May Power New Startups Though Friday’s Facebook IPO disappointed Wall Street (WSJ), Bloomberg reports that the 850 new millionaires of current or former Facebook employees may help fund and advise the next generation of social media startups. These potential investors would compete in a frothy market; U.S. venture investing rose 25 percent last year. Facebook veterans could provide more than just funds to startups: “The most important thing is the experience and connections they’re bringing to the table,” said Aydin Senkut, who left Google to start his own venture capital firm. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Infrastructure Golden Gate Bridge to Turn Seventy-Five The Associated Press recounts the history of San Francisco’s iconic Golden Gate Bridge, which will turn seventy-five over Memorial Day weekend. The bridge has endured through the help of generations of engineers and workers who have maintained and redesigned the bridge. Currently, key elements of the structure are being replaced or modified to improve resilience to earthquakes. Other planned upgrades include adding a moveable barrier to separate traffic and a net system to prevent suicides. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

Facebook successfully completed its initial public offering (IPO) raising $16 billion with a total initial market capitalization of $104 billion, the largest for a U.S. IPO (Bloomberg). That valuation is expected to rise today; IPOs are usually priced low so share prices “pop” on the first day (BusinessWeek). Potential Facebook investors are encouraged by its stickiness (LA Times) but wary of GM’s move to end paid advertising (Reuters). New Facebook millionaires may be a tax windfall for California (BBC). Co-founder Eduardo Saverin’s decision to renounce his U.S. citizenship led a pair of senators to propose new taxes on those who leave (LA Times). Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. International Trade and Investment Solar Cell Trade War The U.S. Department of Commerce proposed additional tariffs on solar cells imported from China (FT). The anti-dumping ruling would set tariffs at 250 percent generally, but only 31 percent for 61 specific Chinese suppliers. These tariffs are dramatically higher than the countervailing duties of 2.9 to 4.73 percent proposed by Commerce in late March in response to allegations of unfair Chinese subsidies. Yesterday’s separate proposal may spark a trade war and may slow the installation of solar panels in the United States. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Education and Human Capital Divorce and Tax Rates Correlate with Labor Supply On average, Europeans log 30 percent fewer hours of work per year than Americans. A new study at VoxEU.org found that fewer divorces and higher taxes correlate with fewer hours worked. Men work shorter hours in countries with higher effective tax rates, while divorce rates correlate with hours worked by women. The authors concluded: “marriage provides an implicit social insurance since the spouses are able to share their income. However, if divorce rates are higher in a society, women have a higher incentive to obtain work experience.” Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Infrastructure Lack of Natural Gas Infrastructure Prevents Trade The Financial Times reports on Japan’s skyrocketing imports of liquefied natural gas (LNG) as its electrical grid struggles with an idle nuclear fleet (BBC). Asian LNG prices recently hit a four year high of $18 per mBTUs, while a mild winter and surging shale gas production drove U.S. prices to below $2 per mBTU. U.S. producers cannot export much LNG because there is only one American LNG export terminal, located in Alaska. Federal approval was recently granted for a larger export terminal in Louisiana, but it will not begin operating until 2015 or 2016. CFR’s Michael A. Levi—the David M. Rubenstein Senior Fellow for Energy and the Environment—discussed the consequences if shale gas production declines. He argued that more LNG export terminals would not lead to a destabilizing shortage if domestic production falls. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Debt and Deficits Extension of 'Bush Tax Rates' Debated Treasury Secretary Timothy Geithner argued against extending the “Bush tax rates” for the highest income bracket (WSJ). “The cost of extending the Bush tax cuts for the top 2 percent of earners for the next decade is about $1 trillion. Tax cuts don’t pay for themselves. You have to pay for them. We can’t afford to borrow the money,” he said. CNBC anchor Larry Kudlow believes an extension would sustain economic recovery: “The uncertainty over the Bush tax cuts already has caused a number of business leaders to threaten a hiring freeze and a dampening of investment.” Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Corporate Regulation and Taxation Senate Approves Two Governors for Federal Reserve The Senate approved the Obama administration’s two nominees—a Democrat and a Republican—to the central bank’s seven-member Board of Governors, giving it a full roster for the first time in six years (MarketWatch). Separately, Reuters reports that the president of the St. Louis Fed, James Ballard, supports breaking up large banks: "We do not need these companies to be as big as they are. The regulatory system would be much simpler if large firms were broken up, rather than trying to write complicated rules to capture all of the potential risks at complex firms.” Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

Reuters discusses yesterday’s White House meeting, where President Obama and Speaker Boehner argued over what provisions could be attached to the next debt limit increase, expected in early 2013. Boehner wants spending cuts and reforms larger than the amount of the debt ceiling hike, while Obama wants to separate the debt limit from the budget. The Washington Post summarizes the political considerations and how automatic actions such as the spending cuts from the last debt ceiling vote and the expiration of the Bush-era tax rates would reduce the deficit. Earlier this year, CFR’s Edward Alden discussed the CBO report on the budget impact of current legislation if Congress does not act. While he states that no action would be bad policy, he suggests that Congress take the current law as a budget baseline. Herd of Big Money Bond Bulls Thins Despite their strong performance in 2011, few influential money managers and investors advocate buying U.S. government bonds, and many are now urging a switch back to stocks (Reuters). As investors allocated more money to U.S. Treasuries, bond prices rose, driving yields to record lows, and lowering the cost of financing the federal deficit. Despite the expert opinions, many retail investors continue to buy U.S. Treasuries as a bulwark against uncertainty caused by everything from Greece’s potential exit from the Euro to JP Morgan Chase’s recent $2 billion loss. As the United States continues to run budgets with high deficits, politicians debate different plans to reduce government costs and to raise revenue. This CFR Backgrounder by Jonathan Masters outlines the competing policy paths on federal fiscal reform, and the global consequences for failing to bring down U.S. debt. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Corporate Regulation and Taxation Fitch Gauges Impact of Basel III Fitch Ratings released a report on the impact of the global Basel III guidelines that take effect at the end of 2018. The report said twenty-nine global systematically important banks will need to raise a collective $566 billion dollars in additional equity to satisfy stricter capitalization rules or pare their $47 trillion in combined total assets. Banks in Europe and the United States will face different challenges (FT). U.S. banks will suffer because capital requirements increase for risky activities, while European banks will have less flexibility in defining capital. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Education and Human Capital SAT to Align to Common Core Education Week reports that the next president of College Board, creator of the SAT and AP tests, plans to align the SAT to the Common Core State Standards (CCSS). David Coleman will take the reins at College Board on October 15. He is a co-founder of Student Achievement Partners, the lead author of the CCSS. Coleman believes that modifying the SAT to follow CCSS will give an assessment matching expectations that follows the steady progress of students, though others are concerned about the ramifications of altering the well-established test. The report of the CFR Independent Task Force on U.S. Education Reform and National Security highlights the importance of CCSS and asserts that fixing the nation’s underperforming K-12 schools is critical to economic competitiveness and national security. Education Statistics under Review The Department of Education’s National Center for Education Statistics (NCES) is reviewing its high school data after erroneous data skewed rankings (Education Week). U.S. News & World Report’s annual “Best High Schools” rankings gave high positions to some schools that were undeserved because data from NCES’s Common Core of Data (CCD) were faulty. CCD encompasses over 100,000 schools, and NCES is currently reviewing data for over 5,000 high schools. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Innovation How Stanford Teaches Innovation The dean of Stanford’s business school believes that innovation stems from people who act as “change agents” (WSJ). According to Dean Saloner, effective change agents need to: identify problems and solutions, apply creativity, and get things done. Schools can mold future business leaders into change agents by engendering skills in analysis, creativity and leadership. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

Since the 1960s, teacher unions have been the primary lobbyists on education policy, but new advocacy groups are emerging (Education Week). These single-issue groups are gaining traction on Capitol Hill and in state governments. While they have found common cause with teacher unions on some issues, they are often in opposition. Michelle Rhee, the former chancellor of DC public schools, created StudentsFirst and explained: "I think unions and textbook manufacturers are all doing what they're supposed to [in advocating for their interests].” She added “We wanted to start an organized national interest group constantly pushing for the interest of kids." The new report of the CFR Independent Task Force on U.S. Education Reform and National Security highlights the importance of the Common Core State Standards and asserts that fixing the nation’s underperforming K-12 schools is critical to economic competitiveness and national security. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. International Trade and Investment Low Chinese Investment in America A recent report by the Vale Columbia Center on Sustainable International Investment discussed the relative paucity of Chinese foreign direct investment (FDI) in the United States and offered five policy recommendations. Chinese FDI is growing rapidly but from a small base, only 0.25% of total FDI in the United States. U.S. policymakers must weigh the potential employment gains from Chinese FDI against strategic concerns as many Chinese firms are state-owned enterprises, while also remembering that China can also invest in U.S. competitors, or enemies. This CFR Independent Task Force report encourages the Obama administration and Congress to adopt “pro-America” trade and investment policies that bring more Americans the benefits of global engagement. Measuring the True Cost of Tariffs Bloomberg’s editors argue that imposing large tariffs against subsidized Chinese photovoltaic solar cells will undercut U.S. energy goals. Chinese subsidies helped drive down prices more than 40 percent in the past 12 months and contributed to U.S. manufacturer bankruptcies, but they also helped more U.S. consumers purchase solar panels. While tariffs may protect domestic manufacturers, they cause prices to rise; solar installers will bear higher material costs and U.S. customers will either not buy solar panels, or shift money away from other spending, hurting sales and employees in those industries. CFR’s Ted Alden, the Bernand L. Schwartz Senior Fellow, discussed the Commerce Department’s preliminary decision—final decision due in June—to levy duties on Chinese solar cells of just 2.9 to 4.7 percent. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Corporate Regulation and Taxation HP Loses Tax Battle with IRS The U.S. Internal Revenue Service won a court case against Hewlett-Packard, invalidating over $190 million in claimed tax credits (Reuters). The court agreed with the IRS that HP had entered into complex financial arrangements not for economic reasons, but to synthetically create financial benefits by avoiding U.S. taxes. The scheme relied upon differences in tax treatment between the United States and European nations and structuring what the court determined was a loan to a Dutch entity, as an investment. With the highest statutory corporate tax rate in the world—35 percent for federal taxes only—the United States is at a competitive disadvantage. This CFR Backgrounder by Jonathan Masters discusses the effect of current policy, and proposals for U.S. Corporate Tax Reform. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Innovation GM Halts Paid Facebook Advertising General Motors—the third biggest advertiser in the United States—has decided to halt paid advertising on Facebook (WSJ). The move will save GM $10 million and GM will continue to use its free company Facebook pages. GM will pay nothing to Facebook, but will pay $30 million to outside agencies. This move raised questions about Facebook’s future revenue growth, just as higher than expected demand for its initial public offering allowed it to increasethe number of shares for sale by 25 percent (Bloomberg). Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

Space commercialization may take a small step forward on Saturday (NYT). SpaceX is planning to launch the first commercial capsule to the International Space Station (ISS). If successful, SpaceX’s Dragon will ferry cargo to ISS, and validate a reusable spacecraft capable of carrying astronauts. SpaceX CEO and founder Elon Musk—who also co-founded Paypal and Tesla Motors—vowed his company will send humans to Mars within twenty years. Closer to Earth, several startups are receiving research and development funds from NASA to develop equipment to reach earth orbit. Noted astrophysicist Neil deGrasse Tyson sat down with Foreign Affairs Editor Gideon Rose to discuss the importance of space exploration in supporting economic growth and stimulating scientific and technological progress. 4G Smartphones Face Limited Chip Supplies Qualcomm, the sole provider of LTE chips that allow cell phones to connect to new 4G and older cellular networks, is capacity constrained (Bloomberg). A shortage in these chips may slow the growth of mobile technology and applications; access to the faster 4G networks aids the shift of web use from computers to smartphones. Qualcomm contracts Asian manufactures, such as Taiwan Semiconductor, to make its chips. Those manufactures are grappling with unexpectedly high demand, increasingly complex chips, and manufacturing processes that decrease production yields. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. International Trade and Investment Senate to Review Ex-Im Reauthorization Amendments TheHill reports that Senate Majority Leader Harry Reid will allow Senate votes to proceed on five GOP amendments to the reauthorization of the Export-Import Bank (Ex-Im) today. The proposed amendments—which would limit the power of Ex-Im or modify its charter—are all expected to fail to secure sixty votes for approval. The amendments highlight the tension within the GOP over Ex-Im; business groups favor reauthorization, while many conservatives such as ex-Senator John Sununu argue against Ex-Im reauthorization (Boston Globe). CFR’s Ted Alden discusses the issues facing lawmakers as they consider Ex-Im reauthorization, including the increasingly aggressive actions of developing countries to finance their exports and Ex-Im’s efforts to match them. Software Piracy Growing in Developing World As computer sales in emerging markets surge past sales in developed markets, software piracy accelerates (Financial Times). Research indicates that 68 percent of software in emerging markets is pirated, compared to 24 percent in mature markets. For instance, in China $3 billion of software was sold in 2011, but an estimated $9 billion in additional software was pirated. Software industry groups are calling for greater legal protection and enforcement. This CFR Independent Task Force report encourages the Obama administration and Congress to adopt a “pro-America” trade policy that brings to more Americans the benefits of global engagement. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Infrastructure Girding the Electrical Grid The sun will reach the peak of its eleven-year activity cycle next year, and U.S. electrical regulators are debating how best to protect the electrical grid from sunstorms (WSJ). Experts disagree on the vulnerability of the modern electrical grid as regulators weigh whether to require hundreds of millions of dollars in new safeguards. During a sunstorm, excessive amounts of charged solar particles buffet the Earth’s magnetic field, inducing current flows in the electrical grid that could lead to surges and blackouts. Such an event led to a nine-hour blackout across most of Quebec in 1989. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

California is expected to record a $16 billion deficit this year (LATimes). Earlier this year, Governor Jerry Brown submitted a state budget with a deficit of $9.2 billion. Since that time, tax receipts have fallen below estimates, courts have invalidated proposed cuts to healthcare, and the legislature has not aggressively pursued further cuts. At a press conference today, Brown is expected to call for deeper cuts and continue to support a ballot initiative to raise taxes (Reuters). As the United States continues to run budgets with high deficits, politicians debate different plans to reduce government costs and to raise revenue. This CFR Backgrounder by Jonathan Masters outlines the competing policy paths on federal fiscal reform, and the global consequences for failing to bring down U.S. debt. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Education and Human Capital STEM Student Visas Broaden New visa rules will allow more foreign STEM students in U.S. schools to claim a temporary visa (Dept. of Homeland Security). The newly accepted degree programs include pharmaceutical science, econometrics, and quantitative economics. STEM graduates in eligible fields of study can receive a 17-month visa extension after graduation to find work in the United States. CFR’s 2009 Independent Task Force on U.S. Immigration Policy recommends policies with three goals: reform of legal immigration to improve efficiency and U.S. competitiveness; effective enforcement of immigration laws; and a fair, humane, and orderly way to deal with migrants illegally living in the United States. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Infrastructure Chicago Leads on Infrastructure Chicago Mayor Rahm Emanuel argues in an opinion piece in Politico that cities nationwide should invest in infrastructure. “What is true for Chicago is true for cities nationwide: By neglecting to invest in our infrastructure for nearly four decades, we have allowed our foundations to decay and our strengths to decline. If we don’t take action, Chicago will face another lost decade.” Chicago’s broad $7 billion infrastructure plan and its innovative public-private partnership vehicle, The Chicago Infrastructure Trust, were the focus of Steven J. Markovich’s inaugural Policy Initiative Spotlight. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Innovation New York Becomes a Technology Center The New Tech City report found that New York City has passed Boston to become the number two technology startup hub (NYT). While Boston continues to lead NYC in biotech and cleantech, New York’s technology sector leverages the city’s strengths in advertising, finance, and creative content providers. However, growth is concentrated geographically in Midtown and Lower Manhattan because broadband internet infrastructure is limited in other areas of the city. Facebook Co-founder Renounces U.S. Citizenship Eduardo Saverin, Facebook co-founder, has renounced his U.S. citizenship (BusinessWeek). His stake in Facebook could be worth an estimated $3.8 billion after the initial public offering and renouncing his citizenship allows him to reduce his IRS tax bill. He became a resident of Singapore, which has no capital gains tax for individuals. The Brazilian born tech leader moved to the United States in 1992 and became a citizen in 1998. Last year, 1,780 Americans renounced their citizenship, up from 235 in 2008. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

The U.S. Department of Education’s 2011 National Assessment of Educational Progress (NAEP) found that two-thirds of U.S. students are not proficient in science (EducationWeek). Only 2 percent of students earned the “advanced” rating on the test administered in both public and private schools. Possible explanations include the lack of qualified teachers and poorly designed curricula; only four of thirty-seven states studied set science proficiency standards at or above NAEP’s. Twenty-six states are evaluating a new common science curriculum based upon a framework developed by the National Research Council. The new report of the CFR Independent Task Force on U.S. Education Reform and National Security recommends expanding the Common Core State Standards to include science, and asserts that fixing the nation’s underperforming K-12 schools is critical to economic competitiveness and national security. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Corporate Regulation and Taxation J.P. Morgan Chase Loses $2 Billion Betting on Recovery J.P. Morgan Chase announced a $2 billion loss on derivative positions on corporate bonds; the largest U.S. bank in terms of assets was betting on economic recovery (WSJ). CEO Jamie Dimon said that in spite of this loss, the bank expects to earn approximately $4 billion for the quarter. Dimon disagrees with those who see this loss as validation of the need for the Volcker Rule (BusinessWeek): "This [trade] doesn't violate the Volcker rule, but it violates the Dimon principle. This does not change analyses, facts, detailed argument." Though, he acknowledged: “It is very unfortunate. It plays right into all the hands of a bunch of pundits out there." Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Debt and Deficits Business Leaders Push for Deficit Reduction U.S. business leaders are pressing Congress to address the mounting federal debt through a bipartisan deficit reduction deal (WSJ). In private meetings and roundtable lunches, executives are encouraging lawmakers from both parties to prepare for an agreement with mutual compromises before year’s end, often pointing to the 2010 Simpson-Bowles plan as a model. As the United States continues to run budgets with high deficits, politicians debate different plans to reduce government costs and to raise revenue. This CFR Backgrounder by Jonathan Masters outlines the competing policy paths on federal fiscal reform, and the global consequences for failing to bring down U.S. debt. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Innovation Opinions vary on Facebook IPO Bloomberg reports that demand for the Facebook initial public offering (IPO) is weaker than expected. Institutional investors have expressed concern that Facebook may have limited growth potential, as advertising revenue has not grown as fast as the number of registered users, which recently surpassed 900 million. Reuters has a conflicting report, and says a source indicates the Facebook IPO is already over-subscribed due to large demand from institutional investors. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

Richard Mourdock, who defeated long-serving Senator Richard Lugar this week for the GOP nomination in Indiana, is a serious politician. He served two terms as state treasurer and ran for the House of Representatives three times. Therefore, his comments in the wake of his decisive primary victory over Lugar, a highly respected conservative senator known for his occasional willingness to work across the aisle, deserve to be taken seriously. And they demonstrate as clearly as anything I've read why the Congress is becoming so dysfunctional and incapable of dealing with the enormous challenges facing the country. Two comments stand out. First, Mourdock said: "This is a historic time and the most powerful people in both parties are so opposed to one another that one side simply has to win out over the other." And secondly: "My idea of bipartisanship, frankly, going forward is to make sure we have such a Republican majority in the U.S. House, the U.S. Senate, and the White House that if there's going to be bipartisanship, it's going to be Democrats coming our way instead of them trying to pull Republicans their way." Given the size of Mourdock's victory among GOP voters, and his strong support from within the party, it is evident that these views are widely shared. But both statements are wrong. The first has always been false, and the second has been untrue for many years now. The notion that "one side simply has to win out over the other" represents a fundamental misunderstanding of the U.S. political system. As Thomas Mann of the Brookings Institution and Norman Ornstein of the American Enterprise Institute point out in their surprising new bestseller It's Even Worse Than It Looks (#80 and back-ordered on Amazon), the U.S. government simply cannot function that way. In a parliamentary system like Britain or Canada, one side can actually win a majority government and spend the next five years implementing its program before it has to face the voters again. The U.S. system of government, in contrast, was explicitly designed to ensure that one side never wins out over the other. While occasional victories for a single party are certainly possible, major legislation almost always requires bipartisan compromise. The second statement is more interesting, because at one point it was largely true. Bipartisanship as it existed for much of the post-war era was a product of Democratic domination of the Congress. From 1949 to 1993, the Democrats controlled the House of Representatives and only lost the Senate four times, three of those in the 1980s when Ronald Reagan was president. While the White House switched back and forth, Democratic control of the Congress was such that any Republican who wanted to influence legislation had to be bipartisan on terms that were largely dictated by the Democrats. It is not unreasonable for a Republican politician to wish the same today in reverse. But the terms of the game have changed, largely because of the Republicans' willingness to use the Senate's full panoply of obstructionist privileges. With the filibuster having become a normal legislative tool rather than an exceptional measure, virtually all legislation requires a three-fifths majority. So for Mourdock's wish to become reality, the Republicans would have to take the White House, hold the House, and pick up more than a dozen seats in the Senate. There is not a single serious political strategist who believes this is possible. And even 60 votes in the Senate is not much of a margin. The Democrats briefly enjoyed the full trifecta for President Obama's first two years, and all they have to show for it is a health care bill that looks very little like what hard-core Democrats had sought. Two other Democratic priorities -- an energy bill to curb carbon emissions and an immigration reform bill -- never got off the ground. One plausible theory is that the sole aim for politicians like Mourdock is to shrink the size and role of the federal government. But even for that purpose, a gridlocked Congress will fail. The big spending programs like Medicare and Social Security will continue to grow unsustainably unless Congress intervenes, and taxes will rise with the expiration of the Bush tax cuts at the end of this year. A government on auto-pilot is hardly in the interests of Republicans. The impulse to fight for one's beliefs is understandable and laudable. If war is the continuation of politics by other means, as Clausewitz said, then politics is also war by other means -- a means for resolving differences without violence. But to succeed in either, you have to understand the terrain on which you are fighting. Mourdock's comments suggest he does not. And the more politicians who come to Washington with such views, the harder it will be to govern the country effectively.

The Brookings Institution released a comprehensive report on the geography of U.S. manufacturing and found that different areas specialize in different sectors. Almost 95 percent of very high-tech and 80 percent of all types of manufacturing jobs are in metropolitan areas. Manufacturers benefit from being part of a cluster, a geographic concentration of interconnected firms, their suppliers and service providers, and related institutions such as universities. The report also found that relative to service industries, manufacturing has higher average wages, more innovation, and greater export potential. Success stories of rebounding local economies often provide practical, realistic lessons. CFR’s Edward Alden discussed how North Carolina is responding to the collapse of its manufacturing base. House Passes Ex-Im Bank Reauthorization The House of Representatives voted overwhelmingly to reauthorize the U.S. Export-Import Bank (NYT), a government institution that helps foreign buyers of U.S. exports obtain financing. However, the lopsided vote masked the contentious debate within the GOP, a ideological bout between some pro-business lobbies and conservative political groups. Senate Majority Leader Harry Reid is expected to push the bill through the Senate unchanged in order to avoid expiration of the bank's authority May 31. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Innovation Twitter Deemphasizes Patents The Wall Street Journal discusses Twitter’s new stance on patents. Last month Twitter introduced policies restricting its ability to file infringement cases, limiting the value of patents at a time when tech giants spend billions to acquire them, and court cases such as Oracle v. Google garner headlines. Some in Silicon Valley believe patent fights slow innovation, and that startups shouldn’t spend scarce resources on patent filings. Others contend that patents are often the only way investors can extract value from a failed startup. Should the United States adopt a “patent box” tax incentive as several European countries have done in recent years in order to spur innovation? Jonathan Masters’ latest Policy Initiative Spotlight examines the issue alongside a more conventional policy, the research and development tax credit. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Infrastructure Buying Electricity from Your Roof Solar panel installers are combining new business models with large tax incentives and cheap solar panels to spread their business to the mass market (NYT). Roof Diagnostics installs solar panels onto a homeowner's roof for free. The panels remain the property of the installer, and the homeowner signs a 20-year power agreement at fixed rates, often well below prevailing electricity prices. This allows the installer to receive both tax incentives and a steady stream of payments to finance upfront costs; rates of return are generally between 7 and 13 percent. Scott Thomasson, the president of NewBuild Strategies and an expert on infrastructure funding, recently authored "Encouraging U.S. Infrastructure Investment," a Policy Innovation Memorandum released by the CFR’s Renewing America initiative. Thomasson proposes new initiatives to address crumbling U.S. infrastructure. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Education and Human Capital Could Digital Grading Aid Employers? Education continues to attract innovators who aim to improve the learning experience; the Harvard Business Review discusses using technology to aid employers in selecting employees. Employers can review transcripts, but have limited and costly means to measure important attributes such as communication ability, creativity, and thoroughness. CoursePeer changes that by allowing professors to grade online interactions with students using different metrics. This feedback is then tabulated and provided to potential employers. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Corporate Regulation and Taxation Goldman Sachs Pares Hedge Fund for Volcker Rule As Paul Volcker defends his eponymous rule (NYT), Bloomberg reports that Goldman Sachs redeemed about $250 million from hedge funds in the first quarter. The U.S. bank plans to gradually sell off its positions to prepare for the Volcker Rule’s requirement limiting the stakes banks can have in hedge funds. In a filing, Goldman said: “We currently expect to redeem up to approximately 10 percent of certain hedge funds’ total redeemable units per quarter over 10 consecutive quarters, beginning March 2012 and ending June 2014.” Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

Fourteen senators and 33 representatives began meeting yesterday to attempt to hammer out a compromise between two versions of the transportation spending bill (Reuters). Politico discusses the major points of contention, including: authorization of the Keystone pipeline, different scopes—the Senate bill covers two years, while the House proposal spans five—and investment in high speed rail and mass transit. The last highway spending bill expired in September 2009, and Congress has passed nine temporary extensions to keep projects moving until a new version becomes law. Scott Thomasson, the president of NewBuild Strategies and an expert on infrastructure funding, recently authored Encouraging U.S. Infrastructure Investment, a Policy Innovation Memorandum released by the CFR’s Renewing America initiative. Thomasson proposes new initiatives to address crumbling U.S. infrastructure. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Innovation Venture Capital Model Draws Criticism The Ewing Marion Kauffman Foundation reports that over the past decade, public stock markets have outperformed the average venture capital (VC) fund. VC firms have an incentive to increase the size of funds to earn larger fees and profits, but as funds have grown, VC performance has eroded. Since 1997, a majority of funds—62 percent—failed to exceed the returns of public markets after fees. Funds with capital above $400 million performed even more dismally, with 86 percent failing to beat the market. BusinessWeek has some interesting commentary. The Difficulty of Blending Innovation with Continuous Improvement While methodologies such as Six Sigma, Kaizen, and Lean have improved quality while reducing cost, continuous improvement may impede innovation (HBR). To maintain innovative capacity, firms should: deemphasize continuous improvement in appropriate departments such as research and design, consider the need for processes rather than simply improving them, and pay attention to how company culture may become too execution-oriented and cost-focused. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. International Trade and Investment Senators Argue for Export-Import Bank In an opinion piece on Politico, two Democratic senators—Tim Johnson of South Dakota and Mark Warner of Virginia— push for reauthorization of the Export-Import Bank (“Ex-Im”). They argue that Ex-Im is necessary for U.S. firms to compete against international competitors who receive export financing from governments such as China, Germany, Brazil, and France. Additionally, Ex-Im has a lower default rate than commercial lenders and is profitable, having returned nearly $2 billion to the U.S. Treasury since 2008. The House is scheduled to vote today on reauthorization. CFR’s Edward Alden discusses the issues facing lawmakers as they consider Ex-Im reauthorization, including the increasingly aggressive actions of developing countries to finance their exports and Ex-Im’s efforts to match them. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Debt and Deficits New IRS Rules make Offshore Investment Harder In an effort to prevent tax evasion, Congress passed a law in 2010 requiring foreign financial institutions to report on the income earned by U.S. citizens (Bloomberg). As firms brace for the new rules to be phased in starting at the beginning of next year, many are turning away investments from Americans to avoid the increased regulatory burden. Americans will have fewer opportunities to invest overseas, while expatriates will face greater difficulty in finding foreign institutions to handle their transactions. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

The New York Times discusses the importance of Chicago to the U.S. rail network and an infrastructure investment program to reduce delays and chokepoints. The effects will be felt far beyond Chicago; a quarter of all U.S. rail traffic flows through the Windy City. The Chicago Region Environmental and Transportation Efficiency Program—CREATE for short—pulls funding from private sources, state bonds and federal funds for needed infrastructure construction. But CREATE’s future projects may be stalled by Congress’ lack of progress on a national transportation investment program. The staff director of a Chicago consumer group opined, “it seems like as much gridlock as we’ve got with our trains, it’s even worse in Washington, DC.” Lawmakers continue to debate the costs and benefits of investment in the U.S. rail network. This CFR Backgrounder by contributor Elizabeth Dovell, summarizes the historical development of freight and passenger rail as well as policy concerns and options facing lawmakers. Nevada Legalizes Testing of Google Self-Driving Cars Google notched a win as Nevada became the first state to legalize the testing of driverless cars on its roads (CNET). Google continues to develop autonomous driving systems, which the company claims can “help prevent traffic accidents, free up people's time, and reduce carbon emissions by fundamentally changing car use." If widely adopted, Google’s system could also increase highway capacity by allowing vehicles to safely travel at high speeds with little distance between them. Google is also trying to involve automakers and the insurance industry. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. Innovation Does the Software Patent System Stymie Growth? Columnist Vivek Wadhwa believes that the current system of software patents stymies innovation (WashPost). He argues that the granting of overly broad patents causes large companies to spend billions in litigation and defensive patent acquisition, while innovative startups are bullied out of markets. Reforming the process requires limiting software patents to their method of action, rather than the problems they solve. Should the United States adopt a "patent box" tax incentive as several European countries have done in recent years in order to spur innovation? This Policy Initiative Spotlight examines the issue alongside a more conventional policy, the research, and development tax credit. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Education and Human Capital Rates of Return for College Vary Widely While college-educated workers have a higher median income, the Wall Street Journal’s discussion of an analysis by PayScale argues the rate of return differs widely. While the median student does enjoy a 4.4 percent annual return, over 100 colleges delivered negative returns, while the best schools had over 11 percent. Higher average returns are earned by students who achieve high grades, attend schools with strong brands, earn financial aid, and/or pursue more lucrative majors such as engineering, computer science, economics, and the natural sciences. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Corporate Regulation and Taxation Facebook Could Avoid up to $14 Billion in Taxes Facebook’s impending initial public offering could net the leading social network a U.S. tax deduction of up to $14 billion (The Telegraph). Current IRS rules allow firms to deduct the value of options exercised by employees; often these deductions are far larger than expenses claimed by the companies. Senator Carl Levin (D-MI) called attention to this aspect of the tax code earlier this year: “When it comes time to pay taxes, to pay Uncle Sam, the loophole in the tax code allows the company to take a tax deduction for a far larger expense than they show on their books.” The current U.S. corporate tax code gives the United States a competitive disadvantage by combining the highest statutory corporate tax rate in the world—35 percent for federal taxes alone—with a complex system of tax subsidies and loopholes. This CFR Backgrounder discusses the effect of current policy, and proposals for U.S. Corporate Tax Reform. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Debt and Deficits Economists Debate Effects of Capital Gains Taxes The Economist discusses a growing debate among some economists about the wisdom of capital gains taxes. For decades, economic models predicted the optimal tax rate on capital gains was zero; spurring investment would improve incomes for all. But new research argues that capital gains taxes can help decrease inequity and political instability with relatively little influence on workers saving for retirement and wealthy families with multi-generational inheritance. Economists that think higher capital gains taxes make sense globally, but usually acknowledge that any individual nation that enacted higher taxes would be at a competitive disadvantage because capital is mobile. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

Bloomberg discusses a growing trend in Silicon Valley, in which founders use dual-class stock structures to preserve their control after an initial public offering (IPO). Google’s 2004 IPO issued two classes of shares; shares held by the two founders and CEO had two-thirds of voting rights, while the publically traded shares collectively had the remaining third. Groupon, Zynga, and LinkedIn followed this strategy, and other hot startups are leaning towards it. Facebook’s impending IPO will also use two classes of shares to retain Mark Zuckerberg’s control of the social media giant. Traditional media firms have used this technique for decades to retain family control, including News Corporation and the New York Times. SolarCity Uses New JOBS Act IPO Rules SolarCity, the Elon Musk backed cleantech firm, is filing for an IPO under the new confidentiality rules (Techcrunch). The JOBS Act was signed into law on April 5, and sought to stimulate IPOs by reducing regulatory and disclosure requirements. SolarCity is one of the first firms to file under the new rules. Firm leaders will need to weigh the ease of filing with little disclosure against the value of engendering greater confidence in the market through increased disclosure. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Corporate Regulation and Taxation Confusion over Volcker Rule Timing The Wall Street Journal reports that the Federal Reserve’s recent attempt to clarify the timing of the implementation of the Volcker Rule has led to confusion. On April 19, the Fed issued a statement that banks had to “engage in good-faith planning efforts” to ensure their compliance with proprietary trading restrictions by July 21, 2014. Some lawyers have interpreted this to mean that banks can conduct unfettered proprietary trading until that date, while others believe the Fed is requiring banks to gradually wind down trading operations. The actual Volker Rule regulations are expected to be written by September. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Debt and Deficits Treasury to Sell $5 Billion in AIG Stock The Treasury Department plans to sell $5 billion worth of American International Group (AIG) stock to continue to unwind its position (FT). The U.S. government and Federal Reserve Bank of New York have already reduced their commitments to AIG from $182 billion to $39 billion. The sale of $5 billion in stock will pare government ownership of AIG from 70 to 63 percent. The sale is aided by the recent rise in AIG’s stock price, which is up 41.5 percent since the start of year. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Education and Human Capital Labor Force Stalling is Cyclical, not Structural The Economist argues that the paucity of growth in the U.S. labor force since the start of 2008 is caused by cyclical rather than structural changes. Last Friday’s jobs report indicated that the labor force has five million fewer workers than was predicted in January 2008, and barely more workers than at that time. The author suggests the gap is actually fewer than two million, and can be partially explained by the rise in the use of disability insurance as permanent unemployment insurance. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

In the competition to attract and retain global corporate investment, tax policy is often seen as one of the most immediate and potent levers that legislators can pull. This is especially true given the ability of multinational companies to move business and capital across borders. These transnational flows often take with them the jobs, the R&D, and the innovations that drive and sustain long-term growth. Intellectual property (IP)—including copyrights, trademarks, and patents—is particularly mobile as an intangible asset. In April of next year, the United Kingdom will become the latest country to introduce a corporate tax incentive known as a “patent box,” a policy that grants companies a significant tax break on profits attributed to IP. The policy's name refers to the box that is physically checked on the tax form. The UK patent box, which hopes to attract innovative industries and all their economic fruits, will allow corporations to apply a reduced 10 percent rate to income from patents- versus a headline rate of 23 percent. Patent box policies have also been deployed recently in Holland and Belgium (2007), as well as in Spain and Luxembourg (2008). The Dutch “innovation box” goes even further by including a broader class of IP and a lower rate of 5 percent. As other nations jockey for position, the United States has slipped well behind. The current U.S. corporate tax regime hasn’t undergone a major facelift since 1986. And the current system is doubly flawed, combining the highest top tax rate in the world, at 35 percent, with a host of complex subsidies and loopholes that add to inefficiency. While both parties have acknowledged a need to cut the top rate and end many of the tax subsidies, one incentive that most policymakers—including President Obama and Mitt Romney—would like to preserve is the Research and Experiment (R&E, sometimes R&D) tax credit. Most economists agree that unlike many other corporate tax incentives, the R&D credit deserves special treatment because it provides a wellspring of growth and has social returns that are not captured by businesses—a market failure. But despite the near consensus, Washington has proved unable to make the R&D tax credit a permanent fixture of the U.S. code. It has expired and been renewed thirteen times (often retroactively) since 1981, sunsetting yet again last January. The impermanence of the credit in the U.S., as with many tax policies, has made it less effective as businesses are reluctant to change behavior given uncertainty. "What’s happened traditionally every year is that in the fourth quarter or maybe even beyond the fourth quarter, the R&D credit is enacted and we have to then figure out the deduction for the whole year’s credit," said Bruce Lassman, vice president of international tax at IBM. "So that’s kind of a nerve-wracking thing. It’s difficult to manage your affairs when you have a legislative situation like that.” While there is broad consensus that the R&D tax credit should be made permanent, the  idea of adding a patent box tax incentive has not been part of the debate in the United States. If adopted in concert with the R&D credit, a U.S. innovation box could supply a back-end incentive in the so-called innovation value chain. In other words, it would target the back end, the income from innovations, while the R&D credit incentivizes the front end, or the underlying research. While the latter is more important because the R&D provides spillover social benefits, the revenue incentive provided by an innovation box would likely sweeten the deal and encourage companies to maintain or expand IP-intensive activities in the United States. There are big questions, however about the costs of such an approach.  An innovation tax incentive, depending on the reduced rate and a host of other specifics, would certainly hit the Treasury hard if it's not implemented as part of broader reforms to the tax code.

The Financial Times argues that despite a perceived growing consensus among both parties that corporate tax reform would raise U.S. competitiveness, the upcoming election and other fiscal priorities will delay progress. Politicians tend to avoid sensitive issues such as eliminating corporate tax breaks in an election year. Even after votes are cast, corporate tax reform is unlikely to be a priority as policymakers wrangle over the expiration of the Bush tax cuts, and the automatic spending cuts that emerged from last years’ debt ceiling compromise. Most lawmakers agree corporate tax reform is an important step in improving U.S. global economic competitiveness, but a debate over rate levels and taxes on foreign profits of U.S. multinationals remains unresolved. This CFR backgrounder examines the issue. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Education and Human Capital Disabilities Shrank U.S. Labor Force Since the start of the recession, the U.S. workforce has shrunk; economists estimate a quarter of the 2 percentage point decline in the labor participation rate is due to the rising ranks of disabled (Bloomberg). The number of workers receiving Social Security Disability Insurance has risen 22 percent since December 2007. According to experts, this pattern is typical for recessions: “Impediments to work are compounded for people with disabilities when the economy turns sour and there are simply fewer jobs and greater competition for the jobs that remain.” New Report Supports Common Core’s Math Curriculum Education Week reports that William Schmidt, an education professor at Michigan State University, will publically release a study today supporting the new math curriculum of the Common Core State Standards (CCSS). The research found the new standards to be closely aligned with the best standards of high achievement countries. Researchers also determined that states with standards similar to the proposed CCSS ones tended to have better math scores. The new report of the CFR Independent Task Force on U.S. Education Reform and National Security highlights the importance of CCSS and asserts that fixing the nation’s underperforming K-12 schools is critical to economic competitiveness and national security. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Innovation Facebook Targets Market Cap of $96 Billion Facebook’s regulatory filing for its May initial public offering (IPO) has a target valuation of $76 to $96 billion (WSJ). A valuation in this range would raise $11.8 billion for Facebook, and give the leading social network the largest IPO in U.S. history, with a market capitalization similar to established firms such as Amazon, Hewlett-Packard, and McDonald’s. While Facebook touts its growth potential, its growth may be slowing. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Infrastructure Californian Farmers Prepare to Battle Bullet Train California’s High Speed Rail Authority Board certified the final environmental impact report for the initial Merced-to-Fresno section of the planned bullet train, which would link Los Angeles and San Francisco by 2028. The Los Angeles Times expects Central Valley farming interests to battle the project in court, arguing the rail line would seriously disrupt agriculture. A prolonged legal fight could delay the start of construction planned for later this year. Lawmakers continue to debate the costs and benefits of investment in the U.S. rail network, with high speed rail a key issue. This CFR Backgrounder summarizes the historical development of freight and passenger rail as well as policy concerns and options facing lawmakers. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.

Senior officials from major federal financial regulatory agencies continue to refine the Volcker Rule regulation, with some expecting completion by September (NYT). The regulation authorized by the Dodd-Frank Act would ban proprietary trading at banks. Major banks strongly oppose the drafted rules, arguing they are too lengthy and complex, while proponents believe the provisions are necessary to stop banks from enjoying government support while taking risky bets. Financiers had previously hoped for a substantial delay when regulators admitted they would miss a July deadline. Texas Tops CEO Survey for Eighth Time Texas earned its eighth top-ranking on Chief Executive’s eighth-annual CEO survey of best and worst states for business, while California maintained its reign at the bottom. Survey criteria were taxes and regulations, quality of workforce, and living environment. Louisiana continued its climb up from 47th in 2006 by leaping from 27th  in 2011 to 13th. One chairman who recently moved his firm’s headquarters to the Bayou commented: “In Louisiana there is an active government push to reduce taxes and regulation and to encourage new industry to relocate to the state.” Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Education and Human Capital Harvard and MIT to Offer Free Online Courses through edX Harvard and MIT are launching edX, an open source non-profit joint venture that will offer free online courses (Boston Globe). Each university will contribute $30 million as well as course materials crafted by their faculties. This effort builds upon MITx, MIT’s online learning initiative that was announced in December. While the coursework is free, the universities are contemplating charging for certificates of course completion. EdX will compete with for-profit startups, such as Coursera which offers free courses from Stanford, Princeton, University of Pennsylvania, and University of Michigan. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Innovation Solar Photovoltaic Woes may be Growing Pains A recent report by McKinsey & Co., a leading management consultancy, argues that the solar photovoltaic (PV) market is poised for stable and expansive growth as prices stabilize, costs fall, and innovation continues. PV manufacturing capacity has continued to surge—particularly in China—leading McKinsey to expect further price declines that will ultimately stoke demand even as government subsidies end. The report advises firms to focus on innovation and cost containment. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Infrastructure Natural Gas Production Slows Rising natural gas production from shale helped drive prices to record lows, but recently producers have slowed gas production (WSJ). While the total production pullback has been minor relative to recent growth—and some firms continue to aggressively expand—futures have jumped 18 percent since the April 19 low. Demand also continues to rise as electrical companies continue to switch from coal to gas plants to take advantage of low prices, and avoid new EPA regulations. Infrastructure. Read more on how upgrading the nation’s aging network of roads, bridges, airports, railways, and water systems is essential to maintaining U.S. competitiveness. The Morning Brief is compiled by Renewing America contributor Steven J. Markovich.