Updates from McKinsey

How smart choices on taxation can help close the growing fiscal gap
The growing fiscal gap has policy makers in a difficult position. Swift action in a few areas can help them improve the operational efficiency of fiscal systems.
By Aurélie Barnay, Jonathan Davis, Jonathan Dimson, and Marco Dondi – Governments around the world have implemented a range of fiscal and debt measures to fund policy initiatives over recent decades. As a result, tax revenues as a proportion of GDP have risen four percentage points across Organization for Economic Cooperation and Development (OECD) countries since 1980. However, many governments remain inadequately funded. Despite higher tax revenues, spending is rising faster than income, leading to widening budget deficits and higher levels of debt.

Four distinct trends are playing out: increasing automation in the workplace, leading to pressure on employment; the evolution of global trade through the proliferation of e-commerce and digital business, raising questions over cross-border taxation; rising self-employment; and an aging population. Each of these could further widen the fiscal deficit in the years ahead. Moreover, we see all four accelerating, placing policy makers in an ever-tightening fiscal bind.

Basic economics provides two options for balancing the books: either increase revenues or decrease spending.

The bottom line for governments is that there are no easy answers. Whether they seek to increase taxation or boost efficiency, they are likely to face headwinds. Still, decisive and rapid action is essential to optimize tax collections and keep pace with an inevitable rise in demand for services.

Tax revenues in OECD countries have risen slightly over the past 35 years. However, spending has risen more, leading to widening deficits that governments have bridged with debt. OECD tax revenues were 34 percent of GDP in 2017. Because of tax deficits and the effects of the 2008 financial crisis, the average ratio of gross debt to GDP rose from 66 percent of GDP in 1995 to 88 percent in 2017.

Sources of tax revenue have remained stable over time. Over three decades, personal income and consumption together accounted for 82 to 89 percent of revenues. The biggest single contributor was payroll and income tax, accounting for 50 to 55 percent of revenues (even though the contribution of personal income tax declined by nearly 7 percentage points). Consumption and excise duties remain little changed at 32 to 34 percent of revenues.

More people are working for themselves, either as a contractor to several companies or a single company. This emerging gig economy accounts for an estimated 28 percent of EU and US employment. The proportion would rise to 46 percent if everyone had their preferred working arrangement, according to MGI research.

However, the gig economy creates challenges for tax authorities. First, independent workers are generally less compliant than their employed peers, and in some countries are required to pay less taxes. Evidence from the US suggests that workers subject to limited information reporting, such as the self-employed, have an around 50 percentage point lower rate of tax compliance than traditional workers. There are also ongoing legal debates in some jurisdictions over whether gig economy workers are employees for the purposes of worker classification and social security contributions.

Governments can close the widening gap between revenues and expenditures in a variety of ways through tax revenues, nontax revenues, and spending optimization. In addition, some governments are either implementing or considering approaches based on monetary finance.

The gap between government revenues and spending has widened and is likely to continue to do so. The onus, then, is on tax authorities to act now. more>

Updates from Chicago Booth

Want to be happier? Give more to others
By Alice G. Walton – There’s scientific evidence, it turns out, to back up centuries-old religious teachings that it’s better to give than to receive. Chicago Booth’s Ed O’Brien and Northwestern PhD candidate Samantha Kassirer find that giving to others might make you happier in the long run and has staying power, whereas the joy of receiving fades quickly.

In an experiment, the researchers gave college students $5 for five days in a row and told them to spend it the same way each day. Half of the students were instructed to spend the money on themselves, say by buying a coffee daily. The other half were told to spend the money on others, for example by donating to a single charity or leaving a tip in the same coffee shop each day. Every night, the participants completed a survey in which they reported how they felt overall that day.

The happiness level of the students who spent money on themselves declined over the five days, the researchers find. But for those who donated the money, their happiness level on the fifth day was similarly high as on the first. more>

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Updates from Ciena

Because you asked. Adaptive IP.
In light of the digital disruption being driven by 5G, IoT, AI, and edge cloud, many of our customers have asked us to help them reimagine their IP networks in a way that allows them to scale in a simpler and more cost-effective way. We listened and answered their call with Ciena’s Adaptive IPTM.
By Scott McFeely – IP, or more formally referred to as Internet Protocol, is the common language that enables billions of interconnected humans and machines to “talk” to each other on a daily basis for business and consumer applications and use cases. IP is the “language” and foundation of the largest human construction project ever created – the internet – and it works because it’s based on open industry standards.

The internet has evolved over time and will continue to do so well into the future, as more humans and machines come online with new and evolving applications and use cases, such as 5G, Fiber Deep’s Converged Interconnect Network (CIN) architecture, and IP Business Services. This means that the way IP networks are designed, deployed, and managed also needs to evolve to maintain pace.

Over the decades since its introduction in the 1970s, by the legendary Vint Cerf and Bob Kahn, IP has continually evolved to maintain pace with ever-changing application and end-user demands. This evolution has also led to new RFCs and protocols being standardized, adopted, and deployed within routers (at last count there were over 8,000 RFCs and protocols). It has more importantly led to many of these protocols associated with IP no longer being required, updated, or maintained. This is analogous to human languages where words, phrases, and even whole languages, such as Latin, are no longer commonly used over time.

What do we do with these obsolete protocols? We can eliminate them from modern IP networks to reduce storage, compute, complexity, and operating costs. We call such IP networks “lean” and it allows operators to move away from traditional box-centric IP network designs running ever larger and more complex monolithic software stacks, as many traditional IP vendors have and continue to implement today.

Operators are asking for something different. They are asking for Adaptive IPTM, a simpler way to deliver IP.

Last year, we introduced Ciena’s Adaptive IP solution, based on our Adaptive NetworkTM vision, specifically to deliver IP differently. The foundation of the solution is lean IP-capable programmable infrastructure supported by multiple Ciena Packet Networking platforms, but we didn’t just stop there.

While 5G, IP business services, Fiber Deep, and other bandwidth hungry applications are driving the need for more IP at the network edge, the need for more capacity delivered with the lowest power and smallest footprint has also become key. This is particularly true for power/space-constrained DCI applications, as well as outside plant environments for cable access or 4G/5G applications. It is not surprising, then, that we are starting to see demand in the access network and for some applications in the metro for the integration of coherent optics within packet platforms. As part of our Adaptive IP solution, our packet networking platforms can leverage Ciena’s WaveLogic 5 Nano pluggables to deliver the industry’s leading coherent technology in a footprint and power-optimized form factor. more>

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Updates from Adobe

Hitting the Right Notes in Illustration
By Joe Shepter – At some point in their lives, everyone draws,” says illustrator Gabriel Silveira. “Some people continue to draw, but most stop.”

That’s the humble way the 35-year-old Brazilian describes his path to becoming a highly sought-after professional illustrator. Silveira’s futuristic and intensely graphical creations have graced the pages of magazines like ESPN, Wired, and the Harvard Business Review, and enhanced brands and events like Loot Crate and the MCM London Comic Con.

He admits that as he was growing up, he was much more of a fan than a prodigy. Early on, he discovered the Brazilian cartoonists Laerte and Angeli, as well as Franco-Belgian bandes dessinées, becoming fascinated with artists like Hergé and Moebius. From there, he moved on to American titles and developed a particular affinity for the X-Men. Along the way, he noticed that the comic books didn’t merely have an author; they also credited an illustrator.

This sparked an idea that emerged when he graduated from design school in 2005. After struggling to find a design job in Sao Paulo’s competitive advertising scene, Silveira landed a position as an assistant for noted Brazilian illustrator Carlo Giovanni, with whom he trained diligently for nine months. When Giovanni decided to take his practice in the new direction, he generously shared his editorial contacts with Silveira, who quickly established himself as a talented freelancer. more>

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Why Corporations Can No Longer Avoid Politics

By Alana Semuels – For decades, most companies went to great lengths to avoid opining on social issues. No longer.

What’s changed? Frustrated with political gridlock, consumers have turned to business for leadership. “I think business has to pick up the mantle when governments fail you,” Patagonia CEO Rose Marcario told TIME earlier this year. Young consumers are also more likely to patronize brands whose business models claim to include social change.

Nine in 10 members of Generation Z, who account for as much as $150 billion in spending power globally, believe that companies have a responsibility to social and environmental issues, according to McKinsey. In an age when companies have detailed information on customers’ ages, incomes and political persuasions, they’re calculating that these socially aware consumers are more lucrative than those who might be put off by social-justice campaigns.

“In a politically polarized world that is saturated in social media, you’re not going to escape politics,” says Jerry Davis, a professor of management and sociology at the University of Michigan. “This is a sea change–in the past, companies kept their heads down and did their best to never be seen.” more>

We’re All Free Riders. Get over It!

By Nicholas Gruen – Anathematized and stigmatized today, free-riders built the lion’s share of the prosperity we enjoy today.

Does that mean we should ‘share’ or ‘pirate’ more copyrighted things on the internet? Not necessarily. The free rider problem is real enough.

But here’s the thing. In addition to the free rider problem, which we should solve as best we can, there’s a free rider opportunity. And while we whine about the problem, the opportunity has always been far larger and its value grows with every passing day.

The American economist Robert Solow demonstrated in the 1950s that nearly all of the productivity growth in history – particularly our rise from subsistence to affluence since the industrial revolution – was a result not of increasing capital investment, but of people finding better ways of working and playing, and then being copied. A little of this innovation was fostered by intellectual property rights which give temporary monopolies in technology. But much less than you’d think.

Most innovation can’t be patented. And after patents expire in 20 years (it used to be less) it’s open slather. We’re not paying royalties to the estates of Matthew Bolton and James Watt for their refinements to the piston engine. But we’re still free riding on their work. In other words, free-riding made us what we are today.

At the birth of modernity Thomas Jefferson spoke of the free rider opportunity more eloquently than any statesman then or since:

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation.

Far from wanting to ignore the free rider problem, Jefferson was on top of that too, spearheading the institutionalization of intellectual property. But having done so, throughout his life, including in his administration of patents, he sought balance between dealing with the problems and seizing the opportunities presented by free riding. more>

Updates from Siemens

Artificial intelligence development is changing how industry works
By StevenH – Many industries are going to benefit from artificial intelligence development. It’s hard to say which ones in the long term will find the highest level of success, but we can already see significant benefits in a host of industries.

At its core, artificial intelligence is a tool that can acquire, organize and analyze vast amounts of data to create and parameterize models to recognize patterns and make predictions. AI is delivering many benefits and its continued use is the key to making a business more competitive. By automating some of the repetitive, basic tasks, a company can increase productivity, reduce mistakes and enable quicker, better decisions. In insurance, for example, companies are using AI to automate claims processing. The entertainment industry uses AI to optimize streaming services and suggest content based on an individual’s previous choices and comparing it to the choices of others.

If you’re a business or a company wondering about what to do about AI, whether to use it or even when to use it, then the answer is, Yes. Businesses must think about using AI. Artificial intelligence is a practical tool, and just like banks use it to prevent fraud or healthcare uses its algorithms to scan X rays, companies should look to solve problems and challenges with AI.

In engineering and manufacturing, artificial intelligence is already enhancing the scheduling in a factory by improving downtime and conducting predictive maintenance scheduling. Artificial intelligence saves companies money by reducing costs, for example by collecting data from running machines in the factory and feed it into training for predictive maintenance AI models.

Manufacturers can use these models to detect signs that maintenance is needed, such as changes in vibration signals which might indicate there is a developing problem. They can then schedule a maintenance session at the downtime of their choosing, perhaps overnight on a Saturday where there could be minimal or no loss of production. Naturally, it’s more economical to perform maintenance at the company’s discretion than having an expensive machine offline for several days, while possibly waiting for delivery of replacement parts from somewhere on the other side of the world. more>

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The Adaptive Age

No institution or individual can stand on the sidelines in the fight against climate change
By Kristalina Georgieva – When I think of the incredible challenges we must confront in the face of a changing climate, my mind focuses on young people. Eventually, they will be the ones either to enjoy the fruits or bear the burdens resulting from actions taken today.

Our efforts to reduce greenhouse gas emissions through various mitigation measures—phasing out fossil fuels, increasing energy efficiency, adopting renewable energy sources, improving land use and agricultural practices—continue to move forward, but the pace is too slow. We have to scale up and accelerate the transition to a low-carbon economy. At the same time, we must recognize that climate change is already happening and affecting the lives of millions of people. There are more frequent and more severe weather-related events—more droughts, more floods, more heat waves, more storms.

Ready or not, we are entering an age of adaptation. And we need to be smart about it. Adaptation is not a defeat, but rather a defense against what is already happening. The right investments will deliver a “triple dividend” by averting future losses, spurring economic gains through innovation, and delivering social and environmental benefits to everyone, but particularly to those currently affected and most at risk. Updated building codes can ensure infrastructure and buildings are better able to withstand extreme events. Making agriculture more climate resilient means investing more money in research and development, which in turn opens the door to innovation, growth, and healthier communities.

The IMF is stepping up its efforts to deal with climate risk. Our mission is to help our members build stronger economies and improve people’s lives through sound monetary, fiscal, and structural policies. more>

Europe Wants ‘Strategic Autonomy,’ but That’s Much Easier Said Than Done

By Stewart M. Patrick – Strategic autonomy has obvious appeal to Europeans at a time of fraying trans-Atlantic bonds and deepening great-power competition. Aspiring to self-reliance is one thing, however. Achieving it will require much more from the European Union. The heterogeneous bloc will have to develop a coherent strategic culture and come to some agreement on a shared assessment of threats—and on how the EU should pursue its interests and promote its values internationally.

Europeans must also reassure the United States that any new EU military capabilities will complement rather than undermine NATO.

Europe’s strategic reappraisal is largely, though not entirely, a function of President Donald Trump. While his predecessors in Washington often pressed the Europeans to ramp up defense spending, Trump has upended the trans-Atlantic alliance in several ways. He has depicted it as obsolete, questioned America’s commitments to NATO’s mutual defense as outlined in Article 5 of the North Atlantic Treaty, and taken precipitous actions without consulting allies in Europe—such as his recent unilateral withdrawal of U.S. troops from northeastern Syria. Confronting such uncertainty, Europeans naturally want to hedge their bets. One way to do so is by developing autonomous military capabilities that permit them to act outside NATO, including with a post-Brexit United Kingdom.

Washington’s own identification of China as America’s primary economic, technological and strategic adversary reinforces these instincts. Few Europeans share such a zero-sum assessment, seeking instead to pursue what Beijing terms “win-win” relations. While Americans seem bent on a new Cold War with China, Europeans must confront a more immediate military and political threat: an aggressive Russia under Vladimir Putin, right on their doorstep.

Beyond defense matters, Trump’s disruption of U.S. foreign policy has persuaded a growing number of Europeans that they need to pursue strategic autonomy across the board. America’s abdication of global leadership has thrust the EU into an unaccustomed role—that of chief defender of the rules-based, liberal international order. As Trump has embraced unilateralism and protectionism, cozied up to dictators and ignored climate change, the EU has become the primary champion of collective security, multilateralism, human rights and the preservation of the global commons. more>

Nature’s Solution to Climate Change

A strategy to protect whales can limit greenhouse gases and global warming
By Ralph Chami, Thomas Cosimano, Connel Fullenkamp, and Sena Oztosun – When it comes to saving the planet, one whale is worth thousands of trees.

Scientific research now indicates more clearly than ever that our carbon footprint—the release of carbon dioxide (CO2) into the atmosphere where it contributes to global warming through the so-called greenhouse effect—now threatens our ecosystems and our way of life. But efforts to mitigate climate change face two significant challenges. The first is to find effective ways to reduce the amount of CO2 in the atmosphere or its impact on average global temperature. The second is to raise sufficient funds to put these technologies into practice.

Many proposed solutions to global warming, such as capturing carbon directly from the air and burying it deep in the earth, are complex, untested, and expensive. What if there were a low-tech solution to this problem that not only is effective and economical, but also has a successful funding model?

An example of such an opportunity comes from a surprisingly simple and essentially “no-tech” strategy to capture more carbon from the atmosphere: increase global whale populations. Marine biologists have recently discovered that whales—especially the great whales—play a significant role in capturing carbon from the atmosphere (Roman and others 2014).

The carbon capture potential of whales is truly startling. Whales accumulate carbon in their bodies during their long lives. When they die, they sink to the bottom of the ocean; each great whale sequesters 33 tons of CO2 on average, taking that carbon out of the atmosphere for centuries. A tree, meanwhile, absorbs only up to 48 pounds of CO2 a year.

Protecting whales could add significantly to carbon capture because the current population of the largest great whales is only a small fraction of what it once was. Sadly, after decades of industrialized whaling, biologists estimate that overall whale populations are now to less than one fourth what they once were. Some species, like the blue whales, have been reduced to only 3 percent of their previous abundance. Thus, the benefits from whales’ ecosystem services to us and to our survival are much less than they could be.

But this is only the beginning of the story. more>