If you thought the Keystone state had overcome its brain-drain problem, think again. A report last month from the Social Capital Project of the Joint Economic Committee of Congress examined the reality of brain drain across all 50 states.  Pennsylvania fared much worse than most states–ranking No. 42 out of 50–when it comes to retaining and attracting highly educated and skilled workers who are the building blocks of the knowledge economy.

The report uses U.S. Census data from 1940 to 2017 and focuses on highly educated people between the ages of 31 and 40 who are either “movers” or “leavers,” heading off to different states, or “stayers” who continue to live in their home state.

The key finding for Pennsylvania:  It had leavers who were more likely to be more at the top of the national education distribution than stayers were.

In 2017, Pennsylvania was among the biggest losers–a common theme among the so-called Rust Belt states–in what experts called “gross brain drain,” which is the simple difference between the share of leavers and the share of stayers in a state, not including people who move there.

One bright spot for Pennsylvania is that when researchers evaluated net brain drain (which factors in new “entrants” coming from other states, as well as those leaving for staying in a given state) dating back to 1970, the state actually reduced its net brain drain.

Putting it all together, the best performers since 1970 are East Coast states on the Acela corridor, the West Coast, and Illinois, Texas, Colorado, Arizona and Hawaii.

The report finds that the split geography of brain gain and brain drain has huge implications not only for the economy, but also for American society and politics

“By increasing social segregation, it limits opportunities for disparate groups to connect,” the report said.  “And by siphoning a source of economic innovation from emptying communities, brain drain can also lead to crumbling institutions and civil society.  As those natives who have more resources leave, those left behind may struggle to support churches, police athletic leagues, parent-teacher associations and local businesses.”

The end result is a “lopsided winner-take-all pattern of haves and have-nots,” says Richard Florida, a professor and urbanist at the University of Toronto and a senior editor of The Atlantic.  “Our politics become ever more divisive and polarized as the ‘big sort’ grows ever bigger, eating away at the social fabric of our nation.

I recently returned from a 17-day trip to Denmark, Norway and Sweden, although most of the time was spent in Norway.  Now, I understand why Nordic countries are among the happiest nations on earth, year in and year out.

Each year, the UN Sustainable Development Solutions Network releases the World Happiness Report, which lists the happiest countries in the world. You can link to the 2018 report at http://worldhappiness.report. The annual ranking of 156 countries uses a statistical model based on a gamut of considerations ranging from their citizens’ healthy life expectancy and income to their governments’ levels of social support and corruption.

This year’s winner was Finland, closely followed by Norway (which finished first in 2017) and Denmark, which follows a trend of Scandinavian countries consistently winning the title of the most content places on earth. And they do so even though they have long, cold, dark winters.

So the question is:  What are these Northern European countries doing differently that make their citizens so happy?

It appears that the answer has to do with neighborly support between citizens and state support for social programs. People generally want to feel secure and they also benefit from having a community they can count on–an environment the Scandinavian countries create better than most.

The Nordic countries, in general, pay some of the highest taxes in the world. (I bought a cap in Copenhagen and 25 percent of the total cost was value-added tax.) However, there is widespread public support for this because people see taxes as investments in quality of life for all.

In Norway, for example, they have free healthcare, free higher education and comprehensive social security, all of which goes a long way when it comes to happiness. Norway also has the fourth-highest per capita income in the world–$74,065.

Public spaces are clean and generally free of litter.  Public transit–buses, trains and trams–are widely available, modern and easy to use in major cities. Virtually every Norwegian I encountered spoke fluent English and was solicitous and friendly to visitors.

This year’s World Happiness Report devoted a special chapter to why the United States, once perched near the top of the index, slipped four spots to No. 18 this year, despite being among the highest per capita income countries in the world.

The U.S.’s well-being is being undermined by three interconnected epidemics–obesity, substance abuse (opioid addiction) and depression, said Jeffrey Sachs, director of the Center for Sustainable Development at Columbia University and a co-author of the chapter.

Sachs noted that the three epidemics, which are “likely mutually reinforcing,” are exacerbated by high levels of income inequality and a “woefully inadequate” healthcare system.  Other factors, according to Sachs, include corporate deregulation and increasing screen time on social media.

There’s no reason why the U.S. can’t score much higher in the World Happiness Report. Sachs says we have the means to do so. “Rather, the major practical barrier is corporate lobbying that keeps dangerous corporate practices in place and imposes untold burdens on the poor and vulnerable parts of the U.S. population, coupled with the failure of the American political system to address and understand America’s growing social crisis.”

If you’ve traveled abroad to Western Europe or Asia, you know their roads, rails, seaports, wind farms and solar panels put our facilities to shame by comparison. And you also know President Trump’s infrastructure bill is going nowhere fast.

But that doesn’t mean there’s not a pot of money available to invest in infrastructure right now, especially in energy-related infrastructure. And when I say pot of money, I’m talking about the U.S. Department of Energy’s (DOE) loan program, with $40 billion–yes, billion–in existing spending authority.

The case for using these funds–which have already been used to make infrastructure investments in electricity transmission, carbon capture and sequestration, utility-scale electricity storage, nuclear projects and advanced vehicle manufacturing–was made on May 17 in a blog post by Brookings senior fellow Dan Reicher.

Reicher writes that an ad hoc coalition of companies and NGOs has been pressing the case for DOE’s Loan Program Office (LPO) investments in energy and transportation infrastructure for more than a year.

Reicher testified on DOE’s mission at a hearing of the House Energy and Commerce Committee in January. He said there was no need to appropriate $50 billion in federal funding (as Rep. Ryan Costello, R-PA proposed) because there was already $40 billion in LPO ready to be deployed for infrastructure.

The testimony caught the attention of both the vice chairman of the committee and its ranking member on the energy subcommittee.

The two subsequently penned a bipartisan letter that emphasized that “projects supported by the LPO are geographically diverse and impact of every region of the country…[and have] created over $50 billion in total project investment and saved or created 56,000 American jobs and greatly assisted local economies.

The Trump administration had proposed eliminating the loan program but congressional appropriators rejected the request in the omnibus spending bill passed by Congress and signed by Trump in March.

The loan program was originally authorized in 2005 and some key members of Congress don’t want it eliminated. In fact, the omnibus spending bill explicitly directs DOE to process LPO applications, provides funds to administer the program and does not rescind any previously appropriated funds, Reicher wrote.

He said the loan program is “alive” and available now to begin funding nationally significant energy projects “at a time of need and delay” on a formal infrastructure bill. However, Reicher warned that this is only a “temporary reprieve if DOE does not get LPO quickly back in gear, OMB stalls decisionmaking on individual loans or Congress has a change of heart.”

Reicher urged Congress and the Trump administration to make the most of a good opportunity. “With LPO back in business, and appropriate reforms in the works, this successful program can do even more to advance the deployment of innovative energy infrastructure in states across the country.”

 

 

Damn, I would have never guessed that.  But it’s true.

That’s just one of the insights of a new “Food Truck Index” published recently by the U.S. Chamber of Commerce Foundation.  The index covers food-truck regulations in 20 of America’s largest cities.

It examines three key metrics:  ease of obtaining permits and licenses; complying with restrictions, and operating a food truck.

It does so by relying on data regarding fees, trips to government agencies, and the number and degree of government procedures collected in part by surveying 288 food- truck operators.

The cities that fared worst were highly regulated, NIMBY cities like San Francisco, Washington, D.C.,  Boston and Seattle.

Philadelphia used to be in this category but over the past decade regulations have become more business-friendly, streamlined and less onerous.

As a result, Philadelphia ranks No. 4 among cities as one of the best places to operate a food truck, and ranks first among cities on the East Coast.

For example, Philadelphia leads on the second dimension of the index, which covers compliance with restrictions such as the number of feet a food truck must locate from a school.

The findings from the Food-Truck Index were recently published in CityLab by co-founder and editor at large Richard Florida.

As Florida observed, “the expansion of food trucks to include an array of more upscale fare is either a shining example of urban revival, or a looming indicator of runaway gentrification and escalating housing prices.”

Either way, food trucks are a significant and rapidly growing part of the economy of cities like Philadelphia.

However, that does not mean it’s easy to get started in the food-truck business, even in more increasingly entrepreneur-friendly cities like Philadelphia.

In the City of Brotherly Love, for example, food-truck operators must pay an average of $25,292 just to operate their trucks, make 24 trips to city agencies and comply with 13 procedures.

That being said, it may be time for some other cities to take a page from Philly’s foodie playbook.  With its vibrant restaurant scene, superb craft beer and coffee, augmented by entrepreneur-friendly regulation, food trucks are helping to reinvent and change Philadelphia for the better.

 

Two days hence, the Federal Communications Commission plans to vote on a proposal by its chairman, Ajit Pai, to repeal net neutrality and stop regulating Internet Service Providers (ISPs) like landline phone companies. The proposal is likely a done deal since the FCC has a Republican majority among its five members.

The net neutrality rules, which were adopted in 2015 under the Obama administration, barred paid prioritization by high-speed ISPs, which would have given faster internet lanes to companies that pay for it.  Pai’s  proposal allows paid prioritization and also punts the policing of any ISP blocking or discriminatory behavior back to the Federal Trade Commission to be investigated on a case-by-case basis. (The proposed order would also require ISPs to disclose information about their practices to the FCC and the public.)

ISPs say Pai’s proposal would lead to a better array of services for online customers and more innovation in the industry.  And one of the largest ISPs, Philadelphia-based Comcast, says it “will not block, throttle or discriminate against lawful content.”

However, small businesses fear a rollback of net neutrality rules could fundamentally change how and whether they do business.  Many started online and turned to e-commerce to become profitable or at least break even. Many entrepreneurs worry that without net neutrality provisions, ISPs would wield their increased power to control how businesses reach consumers.

Last month, the American Sustainable Business Council (ASBC), which represents more than 250,000 business owners, executives and investors, said net neutrality fuels business competition and that without it businesses would lose the free-market aspects of the internet.

“The FCC’s action–which will disregard millions of public comments in favor of net neutrality–masquerades as deregulation, but will actually make winners out of the largest [ISPs], and make losers out of every startup and small business,” said David Levine, president, CEO and co-founder of ASBC.

The new rules are almost certain to increase the costs of transacting business on the internet. And some small businesses may not be able to compete. In the new landscape,  he who has the deepest pockets can pay to get an edge online.

If paid prioritization is legalized, why wouldn’t ISPs take advantage of it, the same way they have dominated the cable television industry? “The communications giants want to turn the internet into the cable system,” Levine said, “where they control who has access and can limit that access to the highest bidder.”

A pay-for-play Internet system could also be problematic for startups or small businesses who often don’t become profitable right away but who conduct their business mostly online, such as website designers or data analysis firms.

It is also worth noting that unwinding net neutrality could also affect freelancers, franchisees and temporary workers who earn a living doing one-off jobs in the so-called gig economy.  According to the Pew Research Center, nearly a quarter of American adults made money in 2016 using online platforms to take on a job or a task, selling something online or renting out their properties using a home-sharing site like Airbnb.

 

 

 

 

Now that both the House and Senate have each pass their own versions of a tax bill, it will be the job of a conference committee composed of three members from each chamber to fashion a compromise incorporating elements of both bills.  Both a majority of members in both chambers would then have to approve the compromise.

Both chambers voted to drop the corporate income tax rate from the current 35 percent to 20 percent, and make the change permanent. (The Senate version would delay the change until 2019; the House bill makes the change effective in 2018.)

However, the House and Senate bills take a much different approach on how to treat “pass-through” businesses, which under the current tax code, pay taxes on business income via the owner’s individual income tax rate.  Many small businesses are pass-through businesses.

The Senate offers higher tax rates on pass-through income, in general, than the House bill.  The House bill cuts the top rate down as low as 25 percent; the lowest rate in the Senate bill is 29.6 percent. (The Senate adopted a 23 percent deduction for pass-through income–limited to 50 percent of wage income–for qualifying businesses.) And, unlike the House bill, the Senate bill pass-through provisions sunset in 2025.

For people like lawyers or accountants whose pass-through earnings are more like wages, the House bill has a slightly higher top rate than the Senate bill.  That’s because the House bill presumes that 70 percent of pass-through is wage income (subject to the regular individual income tax rate and 30 percent is business income subject to the lower pass-through rate cap).  This is the House’s so-called 70-30 rule, but does it fully close the loophole?

Politico reported today that some tax lawyers see the plans  to cut taxes on pass-throughs as opening up a new loophole for the very wealthy–hedge fund guys, real-estate tycoons and the like–to recharacterize portions of their income as profit in order to receive a huge tax cut.  For somebody making $500,000, that would save them $30,000.

Wealthy “passive” owners–who don’t work directly for the company they own and more often than not are owners in name only, fronting the cash for their stake in the company but not running day-to-day operations–would still qualify for the special 25 percent pass-through rate on 100 percent of their “passive” net business income under the House bill.

President Trump, for example, in addition to many of his Cabinet members, as well as his son-in-law and senior adviser Jared Kushner, are the owners of passive pass-through businesses. The Trump Organization reportedly has at least 500 of them.

So, I think there will be lots of negotiation in the conference committee over how to treat pass-throughs.  There are clear differences between the House and Senate bills.  For sure, there is not the unanimity on how to tax small businesses as there is on corporations.

 

 

 

 

 

Yesterday, the U.S. House passed a sweeping tax bill, but it’s not clear how much it will do to help small businesses, which create the majority of jobs in the country.

At issue is a proposed 25% tax rate for so-called “pass-through” businesses–such as partnerships, S-corporations (publicly held corporations that elect to be taxed as partnerships) and limited liability companies (LLCs). Unlike traditional C-corporations, their income is not subject to corporate income tax; instead, their owners pay taxes on their share of the business’ profits at their personal tax rates, which currently top out at 39.6 percent for the highest-income individuals.  (The House bill passed yesterday leaves the 39.6 percent rate in place for millionaires.)

The Senate version, which passed the Senate Finance Committee yesterday,  takes a different approach from the House by creating a new 17.4% deduction for pass-through businesses. The deduction is limited to 50% of the taxpayer’s allocable share of W-2 wages. Under a special rule, the W-2 wage limit does not apply in the case of taxpayers with taxable income not exceeding $500,000 for married individuals filing jointly or $250,000 for other individuals. (The benefit of the deduction for service businesses is phased out over the next $100,000 of taxable income for married individuals filing jointly or $50,000 for other individuals.)

But trouble is brewing in the Senate.  Sen. Ron Johnson, Republican from Wisconsin, said Wednesday he is opposed to both the House and Senate bills as it relates to small business.  Johnson said both bills favored corporations over small businesses and pass-through entities.  (Both the House and Senate versions would drop the corporate rate from 35% to 20%.)

It’s unclear how this will all shake out.  The full Senate won’t begin debate on its tax plan until the week after Thanksgiving and whatever comes out of the Senate–which may or may not happen–would have to be reconciled with the House bill in a conference committee.

One thing is clear:  The House version would be a windfall for timber companies, real estate developers, private equity firms, hedge funds and other types of large businesses. In other words, the donor class.

The Tax Policy Center’s Steven M. Rosenthal said that under the House plan, most small-business owners will not even benefit from the proposed 25% tax rate because they don’t earn enough income.  He notes that nearly 90% of pass-through owners already pay a tax rate of 25% or less under current law.

So, who would benefit then? According to a Nov. 8 post by Rosenthal on TaxVox, “the ones who could benefit most from the 25% rate are those in the 39.6% bracket, who currently receive half of all pass-through income.”

During the 2016 presidential campaign, then-GOP presidential nominee Donald Trump actually introduced a proposal that would have dropped the tax rate on pass-through entities to a mere 15%, which critics dubbed the “Trump loophole.”

Through the Trump Organization, Trump owns more than 500 pass-through business entities, mostly LLCs.  The House proposal would slash the tax rate on profits from these entities by more than a third.

But we don’t have a clear view of just how big a windfall that would confer on Trump because he has refused to release his tax returns–but it is potentially millions of dollars. Trump’s family members, including Ivanka Trump and husband Jared Kushner, also have pass-through businesses, and stand to reap a windfall if the House plan’s tax treatment of pass-through entities ever becomes law.

Last Thursday, when Philadelphia officially submitted its proposal to be the site of Amazon’s second headquarters, Mayor Jim Kenney said the city was in the “Goldilocks zone” for the tech giant, adding, “I just want to say we’re going to win.”

Amazon has said it will invest up to $5 billion and create 50,000 new jobs in the winning city.  At least 50 cities are vying for the prize. Amazon plans to announce the winner this spring.

I understand Hizzoner has to be a cheerleader. And certainly you can make a case that the city’s business environment, human capital, affordability, quality of life, transportation assets and location makes it a contender.

However, as PlanPhilly’s Jim Saksa noted, Amazon’s decision is likely to come down to one question:  Where can we get the smartest workforce for the best price? And this is where things start to get more problematic for Philly.

While it’s true that Philly’s startup scene has grown slowly but steadily in recent years, the tech talent pool is still insufficient even for companies already here. (Most of the 50,000 employees Amazon wants to hire will likely be programmers and developers.)

A report released last week by the Kauffman Foundation, which studies entrepreneurship, evaluated 40 metro areas on various aspects of entrepreneurial activity.  Philly ranked 24th on the list, down two spots from the previous year. One area of concern:  Philly’s share of scale-ups was just 1.5 percent, well behind some other cities bidding for Amazon HQ2.

This means 15 companies out of every 1,000 firms 10 years and younger started small and reached a scale of more than 50 employees.

Moreover, Philly’s startup investors don’t share the same zest for risky startup ventures their peers in New York, Boston, Austin or Silicon Valley do. In 2015, venture capitalists invested $622M in the region (much of it in the biotech sector). a tenth of what Boston-area startups got and a tiny fraction of the $27.4B in Silicon Valley.  And, as they say, money talks and BS walks.

A lot of startups were born here–like Warby Parker–who then moved to other locales because of outside investors.  In order to scale up,  Philly’s startup community needs to win the attention of outside investors and VCs,  Saksa wrote on PlanPhilly’s website, and that will happen if and when the city produces more big success stories. Certainly, the presence of Amazon HQ2 would lure new tech talent and money.

In addition to a large talent pool, Amazon wants a big subsidy. It’s unclear how much Philly (and presumably the state) is willing to offer, but reports have indicated it could be north of $1B.  Other cities have reportedly offered even more.

In its Request for Proposals, Amazon said the “magnitude [of the public subsidy] may require special incentive legislation.”

In the last decade, as Amazon added new warehouses to its delivery networks, it started to focus on extracting large subsidies for its facilities.  The company has netted at least $1.1B in public incentives to fund its expansion, including $22M several years ago from Pennsylvania officials.  Obviously, the scope and size of the subsidy offered for Amazon HQ2 will be a key factor, if not the key factor.

These are among the key challenges facing Philly’s bid to win the Amazon HQ2 competition.  As noted earlier at the top of this post, Philly certainly has some attractive attributes to offer Amazon.  But a lot of contenders can make similar claims.

In the end, a robust talent pool and ample public largesse will win out. For those reasons, I don’t think that puts Philly in the driver’s seat.

 

 

 

 

 

 

 

As others have noted, Amazon’s recent announcement that it will build a second national headquarters in North America has touched off what is likely to be the feeding frenzy of the century.

Specifically, the Amazon announcement projects as many as 50,000 new jobs with average compensation exceeding $100,000 per year in the new site.  Since Amazon is only seeking bids from metro areas with more than one million people, that has basically narrowed the list of potential candidates to 20.

Amazon’s RFP notes that a “highly educated labor pool is critical” and that the site must be able to attract and retain “technical talent.”  A second set of factors involves land and transportation access, specifically whether a city has a physical site that can accommodate up to eight million square feet of development, provides public transportation and has an airport with direct flights to major U.S. cities and international destinations.

Amazon has also indicated it wants a high quality of life and a cultural community fit. Tax incentives and other public subsidies will also play a key role to be sure.

Based on these criteria, Philadelphia checks all the boxes and probably already has a seat at the table.  Mayor Jim Kenney tweeted on Thursday that Philly would be a “PRIME location for Amazon…” and that he “looked forward to submitting a proposal.” The Philly tech and business community is standing tall with Kenney.  Make no mistake:  For Philly, landing Amazon HQ2 represents a transformational opportunity.

That being said, before communities like Philly go all in, they should step back and think about who will ultimately win. As Brookings’  Metropolitan Policy Program Senior Project Manager Richard Shearer noted in a blog post yesterday, “Amazon has set the table in a way that ensures that just about every community that plays this game will lose, and not just because all but one place will come away without the grand prize.”

As Shearer observed, Amazon has become the world’s largest online retailer through ruthless cunning. As is often the case with corporate expansions and relocations like this one, there’s a very good chance Amazon already knows exactly where it would like to its HQ2, Shearer wrote, which would mean its RFPs is a way of inviting the site it has already chosen to foot the bill for Amazon’s new digs.

The website Good Jobs First has noted that since 2000, Amazon has obtained almost $1.2 billion in public subsidies for fulfillment and sortation centers.

Shearer said Amazon is probably also looking for business-friendly environs “where it will hold sway. Of course, costs of doing business isn’t the only factor that matters, or maybe even the biggest factor. It probably wants a navigable public sector, meaning a highly business-centric environment, attractive cost structure, accessible state and municipal leaders who will always take Amazon’s calls–a place where the company will be a very big fish, if not the biggest.

This probably rules out several of the country’s largest metro areas or those that are politically fragmented. I’m guessing Amazon may also like a location in a state where its presence could bend the political winds to its liking at the right moments.

When you think about it in this context, the case for Philadelphia as home to Amazon HQ2 becomes a lot more problematic.

 

 

 

 

 

You may have barely noticed the battle to save net neutrality–but you’ll definitely notice it when it’s gone.

Did you know there was an internet Day of Action on July 12?  It reportedly reached 10 million people on generated several million new comments new comments on the Federal Communications Commission’s (FCC) website. (The FCC announced plans in April to eviscerate existing net neutrality regulations.)

In fact, the Day of Action was scarcely visible. Major players like Google, Facebook, Netflix and Amazon barely did anything to promote the protest where it counted–on their most visible and highly trafficked homepages and within their mobile apps. Politico said  that it “may have flown under some radars.” Axios noted that FCC Chairman Ajit Pai has been unflinching in his desire to repeal current net neutrality rules, and with partisan GOP support in favor of it, protests from the tech industry aren’t likely to do much good.

Anyone who doesn’t view the impending doom of net neutrality as a big deal fails to realize just how unequal bandwidth access already is in the U.S., and how crucial a role reliable, fast internet access plays in bridging the digital divide among socioeconomic groups.

The FCC regulation that’s currently in the crosshairs protects net neutrality through a decades-old regulatory clause known as Title II, which classifies ISPs as telecom companies subject to telecom company regulations. If Pai and his GOP majority cohorts on the FCC repeal the Title II classification for ISPs, they will basically be unregulated.

It would be foolish to ignore how some ISPs have meddled in the fight to ostensibly protect net neutrality.  Philadelphia-based Comcast, for example, has been running a social media campaign stating that it supports net neutrality but is against Title II. This is misleading at best. Title II is the regulation under which net neutrality is currently enforced.

Here’s the bottom line:  Undoing net neutrality regulations opens the door to serious exploitation of consumers by ISPs, which would essentially be able to run the internet side of their businesses with little or no government oversight or accountability, Vox reported.

Futhermore, the changes would come at a time when a major repeal of internet privacy laws has already emboldened ISPs to sell their customers’ internet history, browsing data and personal information.

So, what if anything can be done to save net neutrality?

Last week, 10 members of the House–nine of them Democrats–who helped craft the current law governing the FCC submitted an official comment on Pai’s so-called “light-touch regulatory framework.” The House members said Pai’s proposal to undo the FCC’s net neutrality rules “fundamentally and profoundly runs counter to the Telecommunications Act of 1996.  The FCC’s Open Internet Order in 2015 categorized broadband as a “telecommunications service” rather than an “information service” subject to regulation by the Federal Trade Commission.

Meanwhile, a second round of public comment will remain open until August 16.

But let’s be honest:  Under the Trump administration and GOP-controlled Congress, the chances of salvaging net neutrality are slim.  Sen. Al Franken has speculated the net neutrality issue could end up in federal court if and when the FCC completes its proposed repeal of existing regulations.

However, Pai seems determined to gut the FCC’s current regulations regardless of how many members of the public or Congress make their voices heard in favor of net neutrality.  So the next step just might be to start adjusting to a slower, weaker, even more unequal internet.