Weekend reading links

1. A new working paper estimates the level of work from home persisting in the US

Full days worked at home account for 28 percent of paid workdays among Americans 20-64 years old, as of mid 2023, according to the Survey of Working Arrangements and Attitudes. That’s about four times the 2019 rate and ten times the rate in the mid-1990s that we estimate in time-use data... it is higher in the United States than other countries.

2. Another NBER working paper examines the revenues impact of tax rate reduction coupled with tax enforcement from an RCT involving 38,028 property owners in the DR Congo. 

We study a policy experiment in the D.R. Congo that randomly assigned 38,028 property owners to the status quo tax rate or to a rate reduction. This variation in tax liabilities reveals that the status quo rate lies above the revenue-maximizing tax rate (RMTR). Reducing rates by about one-third would maximize government revenue by increasing tax compliance. We then exploit two sources of variation in enforcement — randomized enforcement letters and random assignment of tax collectors — to show that the RMTR increases with enforcement. Including an enforcement message on tax letters or replacing tax collectors in the bottom quartile of enforcement capacity with average collectors would raise the RMTR by about 40%. Tax rates and enforcement are thus complementary levers. Jointly optimizing tax rates and enforcement would lead to 26% higher revenue gains than optimizing them independently.

This is an interesting paper. Two observations. One, the results are intuitive. Tax rates are typically kept higher in weak state capability environments, and enforcement naturally lower. Two, the operationalisation of this in a real tax department setting is difficult. For one, how much should one decrease the rate, if at all? The marginal impact of tax reduction is most likely to be be non-linear which means that figuring out the tipping point rate reduction is critical. But that's almost impossible. The joint impact of rate reduction and enforcement adds to the complexity. Similar logic applies to the extent of state capability. What's the likely marginal impact of enforcement?

The problem is that any reduction that's lower than the estimated rate will result in reduction in revenues, an unacceptable political economy and fiscal situation. Experimentation is difficult to administer and gets vitiated by leakages. 

3. President Joe Biden has swept aside convention by throwing in his weight behind striking United Auto Workers (UAW) union and supporting their demand for a 40% pay increase over the life of the next contract. Sample this (HT: Adam Tooze)

Speaking to workers in Michigan, Biden declared, “Wall Street didn’t build this country, the middle class built this country. The unions built the middle class. That’s a fact. Let’s keep going, you deserve what you’ve earned. And you’ve earned a hell of a lot more than you’re getting paid now.” Asked by a reporter whether he was specifically endorsing the UAW’s demand for a 40 percent pay increase over the life of the next contract, a chorus of chanting workers pressured Biden into saying “yes.”

Biden's actions are part of the efforts to win back the non-college-educated 

This is left-wing populism. And there's no point wailing at this turn of the tide. Given the extent to which the pendulum had swung and the rule making processes had become captives of the elites, such backlash was only to be expected. And populisms are by nature aimed at rebalancing to the other extreme. Biden's comments should be seen in that perspective. 

4. Adam Tooze has an excellent blog that highlights the importance of the car industry in American history

Henry Ford’s model of mass production, first pioneered with the Model T introduced in 1908. was credited with a gigantic and unprecedented surge in productivity. Ford’s River Rouge plant became a site of pilgrimage for industrial engineers from all over the world. In 1914, Ford’s introduction of the $5-day, made possible by the exhausting productivity of his mass assembly lines, transformed the wage-price bargain. By the mid 20th century Fordism had come to stand for a particularly American style of mass production, which would enable workers themselves to consume the fruits of their labour... It is hard to exaggerate how closely the rise of US power In the 20th century was associated with the car. In the aftermath of World War II, a staggering 80 percent of all cars manufactured around the world were made in America. By the 1960s Detroit was the city with the highest per capita income in the United States. Fordism was a productive force with geopolitical consequences. Detroit was pivotal to America’s emergence as the arsenal of democracy. If you could mass-produce cars, you could mass-produce bombers, that at least was Ford’s idée fixe.

It was a productivist vision that echoed down more than half a century to the present day, where both advocates of the Green New Deal and Donald Trump’s Operation Warp Speed cite mass production of aircraft in World War II as evidence for what American industry is capable of doing under the right kind of direction. Today, figures from tech and finance are the pinups of capitalism. In the mid-century moment, car executives were at the cutting edge. In the 1950s and 1960s the Secretaries of Defense for Eisenhower, Kennedy and Johnson were auto executives - Charles Wilson of GM and Robert McNamara of Ford. Fordism was not simply a system of mass production. It was also a social model. Insofar as America had a post-World War II welfare bargain, it was defined by the struggles between the auto firms and organized labour between the sitdown strike of 1936-1937 and the Treaty of Detroit struck in 1950 between General Motors and the United Autoworkers. This effectively set America on course for a model of welfarism based on private provision of health care and pensions, unemployment benefits and cost of living based wage adjustment. This agreement between the UAW and the auto industry founds the ongoing conflation in the United States between the “middle class” and the “working class”.

The post-war compact between the labour represented by unions and capital represented by employers played out in the fifties and sixties. But once the US auto industry faced external competition and imports flooded in, the unions refused to accommodate and their aggressive strike actions triggered reaction from the employers and governments. This is emblematic

The global employment figures at GM tell a tale of the rise and decline of the industry. GM’s US employment peaked in 1979 at 618,365, making it the largest private employer in the United States. Worldwide employment was 853,000. Since then it has been one way decline. In 2022 GM employed 167,000.

But since 2013 there has been a resurgence, which is now being driven by the EV industry.  

This EPI paper is a good resource on the trends in US auto industry.  

5. An excellent example of value capture in chocolate manufacturing - Fairafric chocolate factory in Amanase, 35 miles from Ghana's capital Accra, established by the German social entrepreneur Hendrik Reimers. The company processes local cocoa to make branded chocolate, thereby creating local jobs all through the value chain and ensuring farmers receive far more than the mere 5-6% of what a chocolate bar sells for in western cities. 

6. If you thought Mumbai was the touchstone for inequality, sample this about New York City

The wealthiest fifth of Manhattanites earned an average household income of $545,549, or more than 53 times as much as the bottom 20 percent, who earned an average of $10,259, according to 2022 census data, released earlier this month.

7. The EU's Carbon Border Adjustment Mechanism (CBAM) has come into force from October 1, 2023. 

In CBAM's pilot phase importers of aluminium, cement, electricity, fertiliser, hydrogen, iron and steel will need to report “embodied” emissions (those generated through production and transport). Then, from 2026, importers will have to pay a levy equivalent to the difference between the carbon cost of these embodied emissions in the EU's scheme and any carbon price paid by the exporter in their domestic market. Free permits for sectors will also be phased out, and the housing and transport industries will be brought into the market... Before CBAM's introduction, Europe’s carbon price meant that domestic industries faced an extra cost compared with those in countries with less ambitious decarbonisation plans. This gave importers an incentive to source material from abroad, even if these inputs were dirtier. To compensate for this, the EU handed out permits to industrial producers. These will now be phased out as CBAM is phased in. During the pilot phase, CBAM simply presents an extra hurdle (what economists call a “non-tariff barrier”) for exporters to the bloc. To comply, European firms must report the embodied emissions of their imports. If such data do not exist, importers must use reference values provided by the EU.

This has been the problem with carbon pricing schemes

The EU's current price of €80-90 ($85-95), which is itself only approaching climate economists’ estimate of the social cost of carbon. For instance, half the coal plants covered by China’s emissions-trading scheme face a negative carbon price, meaning that they are in effect paid to burn the dirty fuel, since their emission intensity is below the national average... The scheme also fails to create an incentive to shift from coal to other sources of power... Across the world, activists criticise the ability of firms to use offsets to indulge in what they term “greenwashing”, where companies falsely present themselves as environmentally friendly. Some schemes also struggle to prove they have led to emissions reductions. In 2022 a team of academics, led by Andrew Macintosh of Australian National University, argued that reforestation used as carbon credits in Australia’s scheme either did not happen or would have happened irrespective of payments for offsets... Yet even carbon-pricing programmes that are limited will still help change behaviour, for the simple reason that they encourage the monitoring of emissions.

All said and done, the CBAM is a forced formalisation of carbon emissions by firms in developing countries. It remains to be seen how it'll impact the competitiveness of these firms.  

8. On the problems with IMF quota reform

An admittedly mechanical exercise in updating quotas according to the latest data on GDP, economic openness, variability and currency reserves would increase China’s voting share from 6.4 per cent to 14.1 per cent, while the US’s quota would fall from 17.4 per cent to 14.8 per cent and advanced Europe’s from around 32 per cent to 29 per cent. The current US administration, unsurprisingly, wants to increase the IMF’s overall lending firepower without changing the current voting weights. India, the second-ranked EM, would rise to just 3.5 per cent of total quota. Some middle-income countries, including Brazil and Mexico, would actually see their share fall.

And this about Chinese opportunism

In recent years China, a major bilateral lender to developing countries, has prolonged the suffering of debt defaulters such as Sri Lanka and Suriname by refusing to participate in creditor committees backed by the IMF... China disingenuously portrays its loans as assistance from one developing country to another and resists writedowns. This is absurd and unjust. Beijing cannot credibly be a custodian of a multilateral institution while simultaneously undermining it with a vast opaque parallel system of bilateral lending. Overall, China is an opportunistic multilateralist that participates enthusiastically in institutions it can influence (the Brics and parts of the UN system) and disengages from those it cannot (the G20). There is no guarantee it wants to play a constructive role in the IMF.

9. Wet leasing and tax avoidance are not the only economic distortions with Ireland. Sample this on data centres,

There are 82 data centres operating in the Republic of Ireland, for example, with most in the greater Dublin area. Another 40 have planning approval and 12 are under construction, according to Bit Power, an Irish market research firm. These centres consumed 19 per cent of Ireland’s total energy use in 2022. This share is set to increase to 28 per cent by 2031, according to Eirgrid, the Irish transmission system operator. Due to concerns about the capacity of its grid, Eirgrid has stopped issuing new grid connections to data centres in the Dublin area until 2028.

10. TN Ninan has a very good article about how China pulled off an "industrial coup" to dominate critical industrial sectors even as US and Europe were caught napping. 

Today China has in place enough manufacturing capacity to supply much if not all of world demand for electric vehicles (EVs), solar panels, and wind-energy turbines, plus the equipment for making them. It may not be allowed to swamp markets, but ending Chinese dependence will take many years. Meanwhile, Beijing is in a position to threaten trade sanctions, such as the recent stoppage of supplies of gallium and germanium, critical for chip manufacture.

The West should blame itself. At the turn of the century, Germany promoted the installation of rooftop solar panels and encouraged China to meet the new demand. Other European countries did likewise. China then moved quickly to acquire scale, thereby gaining huge cost advantages (added to which were state subsidies) that forced hundreds of competitors in the West to go out of business. It now dominates the full value chain from polysilicon to the end product, solar modules. China also accounts for 60 per cent of the wind turbine market, and controls the market for active pharmaceutical ingredients (API), on which India’s feted pharma industry depends. Meanwhile, Chinese car companies saw the coming of EVs as an opportunity to upstage the legacy players focused on internal combustion engines. In battery technology, key to EVs, the Chinese achieved critical technological breakthroughs that made batteries cheaper. Sales soared off the charts as Chinese car companies began turning out low-cost EVs. Also, Tesla was encouraged to invest in a Shanghai giga-factory, the company’s largest.

The extent of strategic foresight (and the absence of it elsewhere) is most visible with regard to raw materials. China moved early to sew up much of Congo’s cobalt (displacing Western companies) and Bolivia’s lithium. When Indonesia banned the export of raw nickel, Chinese refiners descended on the country in droves. China also bought up companies in Australia, the US, and Europe that had technology, or made critical equipment.

11. Very good FT long read on how TSMC is struggling to built its $40 bn chip manufacturing facility in Arizona. This about construction techniques goes to the point about the differences in construction contracting methods in Taiwan and the US. 

The company’s way of awarding engineering contracts caused a lot of friction, leading to delays. In the US, chipmakers tend to choose three separate contractors for the office building, the central utility building which houses all electrical and plumbing infrastructure, and the cleanroom where the chip manufacturing itself happens. But TSMC typically subdivides the work in 20 or more packages. “TSMC will slice those contracts very thinly for the sake of saving cost,” says Charles Lee, co-chief executive at Topco, a Taiwanese company which manages certain chemicals and parts supplies for TSMC. “They are used to handling everything in a top-down manner. In Taiwan, contractors are used to following those orders obediently and adapting to quickly changing instructions, but in the US there will be miscommunication.” More recently, TSMC has struggled to find enough skilled workers for the installation of key advanced machinery.

Then there's the differences in the nature of work management,

The company’s success has been built on its ability to quickly raise yield — the ratio of chips without defects — at every new stage of process technology, which it has achieved by empowering engineers to experiment on the fab floor. This contrasts with some other chipmakers’ practices. Intel, for example, has for many years followed an approach called Copy EXACTLY!, under which each new fab must operate under the exact parameters transferred from the company’s technology development centre in Oregon. Any request to deviate from that has to be approved through a written process including experiments to demonstrate the merit of the proposed changes. The company needs this controlled process to ensure consistent products across its network of fabs, which operate in a number of US states and in countries from Ireland to Israel. At TSMC, however, “fab workers have more autonomy to tweak dials to improve yield”, Patel says... But TSMC’s approach relies to a large extent on having the R&D team, which develops new process technology, only an hour-long high-speed rail ride away. With 20 hours of flight time between Arizona and headquarters, new procedures are needed... 

But once they begin putting silicon wafers through the equipment, “it’s about making the small tweaks to see how we can optimise the process”. Hiring locally But industry experts caution that the flexibility TSMC grants its Taiwan fab workers will be hard to replicate with a US workforce. “You can empower fab workers more as long as they are that highly skilled, but you can’t have that in the US,” Patel says. Technicians in Taiwan typically have completed four years of engineering school, he adds. But engineering graduates in the US “have job opportunities that pay more and are more inspiring, like developing new lenses for Apple or working for Meta, than in a fab.” In Phoenix, that problem is clearly evident. TSMC has already hired more than 2,200 of the 4,500 staff it plans to employ there once the two fabs are in production. But almost half of those hired so far are assignees sent from Taiwan, according to two people familiar with the situation.