Gay, Christian, libertarian billionaire Peter Thiel will set your mental gears turning

COV.W.09.22.14.FINAL.inddThe latest Fortune magazine cover story focuses on the interesting ideas of billionaire Peter Thiel. The following excerpt offers just a few examples of why the cover headline proclaims “Peter Thiel Disagrees With You.”

Thiel’s support for anti-aging research is perhaps the most extreme manifestation of his being a “definite optimist”—a person who, as Thiel defines the term in Zero to One, believes “the future will be better than the present if he plans and works to make it better.” Thiel contrasts such a person to an indefinite optimist, someone who thinks “the future will be better, but … doesn’t know how exactly, so he won’t make any specific plans.” Thiel abhors the latter outlook, which he feels predominates in America.

A second notorious Thiel charity is the Seasteading Institute, which he co-founded in 2008 with the aim of launching floating cities outside the reach of existing governments. In our conversations, however, Thiel spoke of this project almost in the past tense, noting that “it’s quite hard to do, both technologically and culturally.”

Thiel’s most infamous charitable project has probably been his 20 Under 20 program, which provides gifted students between the ages of 18 and 20 with $100,000 to launch their own startups. The program empowers “definite optimists,” but also highlights Thiel’s view that we are in an “education bubble,” in which colleges saddle undergraduates with needless debt by tricking them into thinking their degrees will be worth more than they really will be.

There has been pushback. Former Harvard president Larry Summers called the program “the single most misdirected philanthropy in this decade,” according to TechCrunch, while Slate Group chairman Jacob Weisberg wrote in Newsweek, “Thiel fellows will have the opportunity to emulate their sponsor by halting their intellectual development around the onset of adulthood, maintaining a narrow-minded focus on getting rich as young as possible and thereby avoid the siren lure of helping others or pursuing knowledge for its own sake.”

For all the controversy, it’s a narrow program. “It’s classic Peter,” says [venture capitalist Marc] Andreessen. “You’ve got people in the academy freaking out like it’s the death knell for organized education,” he says. “It’s 20 kids a year. Wake me up when it’s 20,000 kids.”

When opposition to free trade makes little sense politically

Nina Easton notes with interest in her latest Fortune magazine column that the potential beneficiaries of free trade have elected representatives who tend to pursue an alternate economic course.

You wouldn’t know it from the behavior of leading Washington Democrats, but guess who benefits most from free-trade pacts? Workers in unionized, Democratic strongholds: America’s big cities. Labor-backed protectionists insist that America’s factory towns were devastated by the North American Free Trade Agreement.

Now, together with a contingent of Tea Party Republicans, they want to stop pending trade deals with Europe and Asia. But the numbers show that these same bastions of blue voters are thriving on exports—especially to NAFTA partners Mexico and Canada. Indeed, trade is what’s driving post-recession economic gains—and job growth—in big cities. In the first two years of recovery, exports grew at five times the rate of output in America’s 100 largest metro areas and were responsible for more than half of those cities’ economic recovery, according to data collected by J.P. Morgan Chase’s Global Cities Initiative.

Take Chicago. The Windy City’s exports to Mexico and Canada exploded from $12 billion in 2005 to $20 billion in 2012. And a substantial portion of that came from categories such as electronics, machinery, and vehicle parts that benefited from NAFTA’s elimination of tariffs and other trade barriers. …

… Now two new pacts—one with Europe, the other with Asia—are on the table. They, too, would expand free-trade zones for cities like Chicago. But before those deals can pass, Congress needs to extend “fast track” so that carefully negotiated pacts with other countries are considered on an up or down vote rather than amended to death. Democrats, though, are standing in the way.

Senate Majority Leader Harry Reid has refused to bring free-trade legislation to the floor. The new Senate Finance Committee chair, Ron Wyden, is slow-walking it toward what he calls a “smart track.” Senators like Elizabeth Warren and Sherrod Brown are outspoken free-trade skeptics, while in the House, 150 Democrats have signed a letter opposing fast track. President Obama supports the legislation but shows few signs of making it a top priority. “There’s an interesting disconnect between Democratic mayors, who realize their economic growth is in large part tied to greater access to foreign markets, and many national Democrats who seem to be missing that,” says J.P. Morgan Chase executive vice president Peter Scher.

Serving customers better with empathetic employees

While often portrayed as a system based on the chase for dollars, capitalism actually derives its power from the fact that people enrich themselves by serving others. Those who understand that concept are likely to understand the basis of the phenomenon described in Geoff Colvin‘s latest Fortune column.

Infotech executives are starting to talk funny, and we all need to pay attention. “Designing emotion into the product is now something you really have to think about explicitly and measure yourself against,” says Brad Smith, CEO of Intuit, the maker of personal finance and small-business software. He’s telling me what it takes to win in his business today. When he and his colleagues test software, they mark it up with “happy faces or puzzled faces so the developers understand the emotion we were feeling at the time.” Really? For software that keeps the books?

“I need great product designers, and IT people aren’t always great at aesthetics,” says the CIO of one of Europe’s largest retailers at a conference in Berlin recently, describing his hiring challenges. “And I need people who are empathetic and collaborative. I can’t have a great IT architect who has to be locked in a room.” Excuse me? Isn’t that where code writers are most at home: alone in a dimly lit room, a crumpled bag of chips at their side?

“We’re hiring artists, special-effects creators, and people who understand beauty,” says Charles Phillips, CEO of Infor, a maker of enterprise software. We’re at his headquarters in Manhattan’s Silicon Alley, where he’s describing his strategy for competing against industry giants Oracle and SAP. Infor, he says, offers “beautiful business software for your business processes.” This, for software that has long occupied the boiler room of corporate infotech.

The clear trend here is not some fad in the software industry. A mushrooming demand for employees with affective, non-logical abilities spans the economy. Empathy—sensing at a deep level the feelings and thoughts of others—is the foundation. “Non-cognitive skills and attributes such as team working, emotional maturity, empathy, and other interpersonal skills are as important as proficiency in English and mathematics,” reports an advisory group of executives and educators on education reform in the U.K. When author George Anders searched for online job postings that paid over $100,000 a year and specified empathy or empathic traits, he quickly found 1,000 of them from companies as varied as Barclays Capital, McKinsey, and Mars.

Bigger, better (?) hospitals

The latest Bloomberg Businessweek probes one consequence of the federal Affordable Care Act: greater incentives for hospital mergers.

To cut costs, health-care providers are linking family practices and specialists with hospitals, rehabilitation centers, and outpatient clinics. The hope is that consolidating services will eliminate redundancies, reduce waste, and improve patient outcomes by making it easier for medical professionals to coordinate care—all objectives of the Affordable Care Act.

In recent years, President Obama has pointed to large integrated providers such as Pennsylvania’s Geisinger Health System and Utah’s Intermountain Healthcare as examples of companies that deliver superior care at lower cost. …

… Yet the desire to expand coordinated care is creating health systems so big they can dictate prices. That conflict is playing out in the Partners deal, which has run into opposition from state regulators and competitors who say the company’s market power has warped medical charges in the state. …

… A 2012 review of academic studies by the Robert Wood Johnson Foundation found “hospital consolidation generally results in higher prices.” When hospitals buy doctors’ practices, they typically look for “enhanced bargaining power” rather than opportunities to improve care. “Lots of mergers happen that don’t lead to greater coordination, and there are ways to achieve coordination without mergers,” says Paul Ginsburg, a professor at the University of Southern California’s Schaeffer Center for Health Policy and Economics. “The higher prices for many mergers could be an order of magnitude greater than savings from coordination.”

For more analysis of the consequences — intended or otherwise — of Obamacare, be sure to sign up for Katherine Restrepo’s regular “Health Care Update” newsletter.

A change in course that does not bode well for China

Except for those who admire the Chinese government’s authoritarian ways (paging Thomas Friedman), it’s hard to see the likelihood of any positive developments emerging from these changes depicted in the latest Bloomberg Businessweek.

Three weeks before Xi’s speech, the party had issued new recruitment rules, the first major revision in 24 years, that aim to further slow the growth of the world’s largest political organization. Only people likely to be so dedicated to party doctrine that they won’t succumb to the temptations of graft will be welcomed.

Ding Xueliang, professor of social science at the Hong Kong University of Science & Technology, says Xi and other top leaders became convinced China needed a smaller, purer party after close study of the collapse of Communist rule in the former Soviet Union. “The major problem they identified about the Soviet Communist Party was: No. 1, the senior cadres didn’t believe in party principles, didn’t believe in communism or socialism, and only believed in their own self-interest,” Ding says. “No. 2, within the cadre system—amongst the higher- and middle-level officials—there were extensive networks of corruption.”

The emphasis on finding solid recruits may also place less importance on former President Jiang Zemin’s push to sign up more entrepreneurs. Instead there will be stepped-up recruitment of migrant workers, whom the party hopes can be more easily molded, according to Willy Lam, an expert on the CPC and the Chinese leadership at the Chinese University of Hong Kong.

The failure of Soviet communism stemmed from a lack of adherence to communism? Jon Sanders might want to enlist Capt. Picard for a response.

Interesting elements of the debate over Scottish independence

Peter Coy‘s Bloomberg Businessweek article about this week’s scheduled referendum on Scottish independence features some interesting observations. First, one need not have a written constitution based on the concept of federalism to have concerns about an overly large central government.

London is the capital of one of the most centralized governments of any wealthy nation. Revenue from taxes flows inward and is then disbursed outward in a thoughtful yet rather lordly way. In the U.S., the federal government raises about 60 percent of all taxes. In the U.K., the figure is 95 percent, giving Westminster and Whitehall enormous power over every corner of the nation, out to the remotest of the Shetland Islands.

Later in the article, Coy quotes experts who pan zero-sum economic fallacies and note the negative impact of overly restrictive development policies.

Those who say that London sucks the vitality out of other cities are committing what economists call the lump-of-labor fallacy: that the amount of work to be done is fixed, so if one person gets a job then someone else is unemployed. The truth is that the rich young City traders everyone loves to hate are buying stuff made throughout the U.K. “I don’t think London’s success means that Scotland suffers,” says Jim Whyte, senior insights analyst at Fitch Worldwide in London.

“It feels to me much more like London lifts Scotland up,” says Edward Glaeser, a Harvard University economist who advised Scottish cities on economic development in the early 2000s. “There’s no question that London does excite envy, but I still see envy as being a mortal sin rather than as a sound basis for politics.” Paul Romer, who runs the Urbanization Project at New York University’s Stern School of Business, argues that instead of complaining about London, other U.K. cities should stop restricting real estate development, which drives up housing costs and stunts their growth.

New Carolina Journal Online features

Dan Way reports for Carolina Journal Online about the N.C. Chamber’s concerns surrounding proposed federal ozone rules.

Katherine Restrepo’s Daily Journal explains how less regulation and more transparency would help lower health care costs.

Tax (un)Competitiveness

The Tax Foundation has a new report out today, and it’s not exactly great news for the US.  According to their International Tax Competitiveness Index for 2014, the US ranks 32nd out of 34 countries in the OECD. This is a group of the world’s most developed economies – most of Europe, North America, Australia, New Zealand, Japan, Korea, Chile, Israel, and Turkey.  They’re the countries with which we compete most directly.  So having an uncompetitive tax regime is a problem.

And we’re not just a little bit behind.  Estonia, which ranked #1, scored 100 on this index.  We scored 45.

What makes us so uncompetitive?  Well, it’s a combination of things.  According to the Tax Foundation:

 

  • The largest factors behind the United States’ score are that the U.S. has the highest corporate tax rate in the developed world and that it is one of the six remaining countries in the OECD with a worldwide system of taxation.
  • The United States also scores poorly on property taxes due to its estate tax and poorly structured state and local property taxes.
  • Other pitfalls for the United States are its individual taxes with a high top marginal tax rate and the double taxation of capital gains and dividend income.

We did poorly in pretty much every area, too.  In Corporate Tax, Property Taxes, Individual Taxes and International Tax Rules, we were 26th or lower.  Only in Consumption Taxes did we do relatively well, at 4th.

The Wall Street Journal summed it up well.

A competitive tax code is one that limits the taxation of businesses and investment. Since capital is mobile and businesses can choose where to invest, tax rates that are too high “drive investment elsewhere, leading to slower economic growth,” as the Tax Foundation puts it.

By neutrality the foundation means “a tax code that seeks to raise the most revenue with the fewest economic distortions. This means that it doesn’t favor consumption over saving, as happens with capital gains and dividends taxes, estate taxes, and high progressive income taxes. This also means no targeted tax breaks for businesses for specific business activities.” Crony capitalism that rewards the likes of green energy with lower tax bills while imposing higher bills on other firms is political arbitrage that misallocates capital and reduces economic growth.

At the Locke Foundation, we’ve been saying this for years.  In particular, in a Spotlight report published today, Roy Cordato argues for major reforms to the capital gains tax in North Carolina for precisely these reasons.  Not only does the US need to compete internationally, but North Carolina needs to compete within the United States.  Our tax regime, including our capital gains tax system, doesn’t help us to do that.