Global Job Creation: What Do Engineers Say?

IEEE, the world's largest engineering society, is planning to weigh in
on the issue of job creation not only in the US but world wide. Many
nations arrange meetings between the President of IEEE and their
President when he visits. Can you imagine what it is like to win
re-election in a society of more than 400,000 people, most of who are
PhDs who don't trust much of anything you say in words, scattered all
over the planet?

Here is my own response, as a member of some of the IEEE committees,
to the global challenge of job creation:


===================


Jobs and competitiveness certainly are major issues for the entire
world right now. Also, the engineering way of thinking could
contribute a lot to better policy, if
we maintain analytic and mathematical approaches just as intensely as
we do when we know something has to work or we get into deep trouble.
Since about 2009, I have felt some calling myself, on-again off-again,
to address these problems analytically... more or less until the past
few months.

But several questions have discouraged me somewhat. First, is there
any community support out there for analytic thinking, from people who
carry a shingle saying "engineer"? (Back in the days of Norbert Wiener
and Bernard Shaw maybe there was, but what of Stakeholder Washington?)
Second -- can IEEE marshall
the intellectual resources and integrity in this specific area to be
anything other than another stakeholder pleading emotionally for its
own special interests? (Not that Congress would be offended or
surprised by that these days -- or all that respectful.)
Perhaps there are other places where it might work better.

I mention all this, not to throw water on the the idea, but because we
can't really rise to the challenge unless we face up to it first. I
would make an analogy to the issue of access to space, recently
discussed in the transportation and aerospace committee, where a
position paper approved at the committee level reminded us that we
still really have to rise to the challenge of lower cost access before
any of the great dreams can become attainable in the real world.

There are many many connections between the kind of mathematics we
study in the Computational Intelligence Society, and the economics
they taught me in the two degrees in economics I have from Harvard and
the London School of Economics
(and a course or two as part of the crossdisciplinary PhD in applied
mathematics).
But these are nontrivial subjects. A unified perspective on economics
and intelligent systems is rarely taught  (though folks have me
working on a video course right now which addresses some of the
basics, more microeconomics than macroeconomics, though important
links exist to both.)

----

OK, getting to jobs.....

In 2009, working for Specter's office in the Senate, the independent
thinking Specter was appalled by the wild claims both for and against
"Green jobs." Lots of people spent lots of time writing propaganda
saying that climate bills would create lots of jobs -- and equally,
that they would be job killers. A lot of folks became numb to such
claims, or chose to believe whatever was best for what they wanted for
other reasons. (That's what IEEE would be playing into in Congress...
a jaded field that expects empty propaganda, and assumes that any
stakeholder is one more part of that.) Elmendorf of the Congressional
Budget Office strived hard to offer a more objevtive bipartisan
analysis; thus CBO did an analytical piece on climate bills
and job creation/destruction, citing all the best econometric studies
and quantitative eocnomic analysis they could find. Later, I was asked
to give a briefing in the Capitol building on the true story,
analyzing the analysis, posted as the November 2009 item at
http://www.werbos.com/energy.htm. Elmendorf was in attendance,
and folks were listening back then... but not really since I returned to NSF.

My bottom line: some climate bills would be job creators, and others
job killers. It deepnds on the details -- and if we don't get into the
details, we don't help. I do owe
thanks to EPC, and to Harold Adams in particular -- hearing realities
of the power industry was crucial to me in getting the formal analysis
correlated with reality. The same would be true for all the kinds of
"job creation" ideas IEEE might advocate.

Another part of the conclusion: the econometric models available then
were frankly much less capable than the models we had in the 1980s
(when I build econometric models at DOE) for addressing these kinds of
questions. That's especially true when the world economy is in a kind
of disequilibrium state, where some sectors
(like health care) are overstressed and inflated, while others (like
construction) are depressed. The old Wharton Annual Model could
capture such effects, to some degree, but the Financial Times has
recently described how uncorrelated  today's models have been to
flkuctuations of the past few years, let alone the more complex task
of figuring out what things like climate bills do to the economy. In
my view, the Federal Reserve has been more competent in analyzing
these things than just about anyone else I keep track of (though IMF
shows insight too) -- due not only to Bernanke's PhD work, but perhaps
also due to the fact that the last manager/developer of the Wharton
Annual Model moved to the Federal Reserve when Wharton econometrics
was scaled back.

On to substance --

The real problem with jobs is that it's not just jobs. Even for a
crude first order analysis of what works best for the world economy,
we need to think in terms of multiobjective optimization. At least
four crucial measures of performance --
jobs, debt, growth and sustainability. If the world keeps oscillating
in manic-depressive ways between debt and jobs (often losing sight of
the other two),
we have little hope of moving ahead. Thus we face a mathematical problem,
even at teh crudest level -- how to achieve a Pareto optimum between
jobs, debt, growth and sustainability, and also between at least the
three main economies (US, EU and China, with perhaps Brazil on-again
off-again as a kind of surrogate for other patterns). (As engineers,
we know that listing 1,000 variables doesn't always give us a
manageable "warm start" to a complex optimization problem. Focus is a
key start to managing this kind of complexity.)

If anyone is interested -- perhaps in a separate discussion thread on jobs --
there is a whole lot more to be said, but let me start with a crude model for
what the US and the Japan economies are facing. So far as I know, the
economists in the "White House" of Japan are the only ones who have
gotten so far as a decent first-order analysis of the jobs versus
federal dbet dilemma.

Just to get a Pareto optimum of jobs and federal debt... we can think
of it as looking for policies that get the most jobs possible SUBJECT
to a constraint on how much debt one takes on. Thus if X dollars of
government spending or X dollars of tax breaks/reductions/incentives
yield Y jobs... the key issue is the ratio of Y to X over different
posisble activities. The Japanese in 2009 simply estimated as
objectively as possible the Y/X ratios. In a period of unnatural
unemployment (not a trivial concept, but we are certainly there
today), the Pareto optimum comes from deploying activities with a high
Y/X ratio, and cutting back those with low Y/X.
But we need flexibility and automatic stabilizers to shift back somehow when
things become too inflated. (Yes, a few economists have considered the
relevance of feedback control here, and some have been smart enough to
realize you need nonlinear models to capture the cruicial diminishing
returns effects - no H infinity linear robust control here.)

But... we end up trampling on "religion."

It is crystal clear that ordinary government spending and ordinary
cross-the-board tex reductions have Y/X ratios which are reasonably
close to each other.
Devotees of the Laffer curve have often stated that all tax breaks
reduce debt, because of their magical long-term effects, but the
Economist and the Financial Times have often published more serious
reviews finding that it is hard to justify even a 20% "rebound effect"
over ten years, let alone immediately. And so, for ordinary stuff, at
the 300,000 foot level,  jobs/debt really doesn't say much, one way or
another, to the gross debate between government spending and lower
taxes playing out in DC today.

However -- economists have long known that that windfall revenue
doesn't get spent as much as normal revenue. Studies of corporate tax
breaks suggest that they often (but not always) get "banked" -- that
they are so unpredictable that companies are ot so willing to change a
lot for their sake. (Please forgive the oversimplification... so far.)
Thus as the President has noted, special tax breaks for the rich and
unusual loopholes for cretain corporations, especialy oil, have
unusually low Y/X. The idea
of reforming corporate taxes to maintian the same overall level of
revenue, or maybe even a little higher UNTIL WE GET RECOVERY, by
getting rid of the "banked"  special loopholes  to pay for lower
overall rates, is one avenue.  To the extent that a predictable future
carbon tax (like a nice flat $30/ton of CO2) generates revenue
AND stimulates private investment in carbon capture and reuse technology
(an alternative to just shutting down coal plants), the private sector
stimulation effect "juices up" the Y/X ratio to make it better than
the usual government spending;
in other words, a carbon tax would be one way to offset spending or
tax breaks in other areas.

In the Japan analysis, where they really estimated Y/X carefully and
numerically from real data, they found they could get a Y/X THREE
times higher from one specific stimulus activity versus all the other
best stimulus measures people
advocated (and did fund!) in Japan. (I have messages from the Japan
White House economists in my email... but my old IMAC crashed, the
hard drive is being replaced, and I didn't get  it all off the old
hard drive, which I get back next week...)

The super-Y/X activity was "three pillars of eco-economy" - a set of incentives
for greater energy efficiency and flexibility in cars, appliances and
buildings.
One of the data points was the high Y/X observed for "cash for clunkers" --
a program where, in effect, one dollar of government incentive would
be matched by
two doillars of private investment, genertaing the job-creating effect
which would normally require three dollars of government spending.

Germany's EEG program to encourage renewable energy has had much the
same effect, massively helping the German economy -- BUT BECAUSE IT
WAS NEVER
REALLY EXTENDED TO THE WHOLE EU, Germany is now being dragged down
by events in other parts of the EU. Perhaps the EU grid buildout would
be crucial
to making EU-wide EEG really possible... so that jobs could be created in
Greece, Spain and Italy to build solar farms in areas of reliable sun,
to supply electricity to Germany at prices lower than what Germany
pays for renewables today, drawing on private sector capital (of which
there is no shortage these days)
to make the job-creating investment.

But, sadly, the benefits of the latter depend a lot on specific
technology for low-cost solar energy. Some of that is doing OK these
days, but there are huge unmet opportunities -- for example, lower
cost solar thermal and some quantum breakthroughs -- which would
ultimately be worth trillions of dollars, if onlhy we could
get our act together, somewhere on earth, for the required RD&D.
As with batteries, we get into a situation where "for want of a nail,
the kingdom was lost." (IN other words, engineering reality is crucial to providing certain really important investment
opportunities...)

I apologize for the length of this email... and, equally, for the
important things
left out of it. But this is serious stuff. If we remember the
1930's... the fate of the world economy is not a small matter for
anything we want to do, and the world
is certainly not out of the woods yet.

Best of luck,

    Paul