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Cloud computing services over the Internet have the potential to spur a significant increase in government efficiency and decrease technology costs, as well as to create incentives and online platforms for innovation. Adoption of cloud computing technologies could lead to new, efficient ways of governing.

On April 7, the Brookings Institution hosted a policy forum that examines the economic benefits of cloud computing for local, state, and federal government. Federal Chief Information Officer Vivek Kundra delivered a keynote address on the role of the government in developing and promoting cloud computing. Brookings Vice President Darrell West moderated a panel of experts and detailed the findings in his paper, "Saving Money through Cloud Computing," which analyzes its governmental cost-savings potential.

After the program, panelists took audience questions.

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• Cloud Computing a Fiscally Smart Move
• Cloud Computing Saves Money, Makes Government More Open
• Cloud Computing Will Fundamentally Change Government Operations
• Government on Cloud Will Yield Cost-Effective System

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• The Economic Gains of Cloud Computing

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20100407_cloud_computing
• 0407_cloud_computing_kundra_remarks
• 0407_cloud_computing_kundra_presentation

Our former Brookings colleague Rebecca Blank, now at the Commerce Department, is today leading the first meeting of the Obama Administration’s Innovation Advisory Board, looking at the innovative capacity and economic competitiveness of the United States.

I applaud the effort.  Nothing is more important to America’s longterm competitiveness than emphasizing innovation.  As the council looks to the private sector and global markets, I urge it to examine how the U.S. government can lead innovation and contribute to economic growth.  The best place to look is new and emerging digital technologies that can make government more accessible, accountable, responsive and efficient for the people who use government services every day.

Here are some of the recommendations I made in a recent paper I wrote with colleagues here at Brookings as part of our “Growth Through Innovation” initiative:

• Save money and gain efficiency by moving federal IT functions “to the cloud,” i.e., using advances in cloud computing to put software, hardware, services and data storage through remote file servers.

• Continue to prioritize the Obama administration’s existing efforts to put unparalleled amounts of data online at Data.gov and other federal sites, making it easier and cheaper for citizens and businesses to access the information they need.

• Use social media networks to deliver information to the public and to solicit feedback to improve government performance.

• Integrate ideas and operations with state and local organizations, where much of government innovation is taking place today. 

• Apply the methods of private-sector business planning to the public sector to produce region-specific business plans that are low cost and high impact.

These improvements in government services innovations in the digital age can help spur innovation and support a robust business climate.  And, as a sorely needed side benefit, they can also serve to eliminate some of the current distrust and even contempt for government that has brought public approval of the performance of the federal government to near historic lows.  

Executive Summary

The move to the cloud is one of the defining information technology trends of the early 21st century. By providing businesses, universities, government agencies, and other entities with access to shared and often physically dispersed computing resources, cloud computing can simultaneously offer increased flexibility, reduced cost, and access to a wider array of services.

Cloud computing has also created a set of new challenges. For example, the issues of privacy and security in the cloud are well recognized and have been extensively discussed in the business and popular press. However, one critical issue that has received very little attention with respect to cloud computing is export control.

In the broadest sense, export control relates to regulations that the United States and many other countries have put in place to restrict the export of various sensitive items, information, and software.

There is an inherent tension between cloud computing and export control. While the concept of the cloud is centered on the premise of removing the need to track the details of data movement among various destinations, export control regulations are built largely around restrictions tied to those very movements.

If cloud computing is to reach its full potential, it is critical for providers and users of cloud services to address its implications with respect to export control. It is equally important to adapt the export control regulations to reflect the increasing prevalence of cloud computing in a manner that preserves the ability of American companies to benefit from the efficiencies of the cloud while also ensuring that American national security and foreign policy interests are adequately protected.

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• Download the Paper

The first instance of “cloud” computing came in 2006, when Amazon released its Elastic Compute Cloud, a service for consumers to lease space on virtual machines to run software. Now, the cloud enables the transfer and storage of data around the world, in an almost seamless fashion. Using cloud services are a seamless experience from the consumer perspective. This ease of use obscures significant regulation from governments on both sides of the Atlantic. The Safe Harbor Principles is a framework that ensures that personal consumer data being transferred from the EU to the US is still subject to a level of security in compliance with the EU’s stricter regulation on data protection. US companies must be certified within this framework, in order to transfer consumer data outside the EU.

A comprehensive data privacy arrangement that satisfies both sides of the Atlantic is necessary to preserve the free flow of data, and the resulting commerce, between the two regions. Speaking at the 2014 Cloud Computing Policy Conference, Cameron F. Kerry suggested that neither side of the Atlantic can afford to partition the Internet. Currently trade negotiators are assessing the viability including an update to Safe Harbor Principles as a part of the Transatlantic Trade and Investment Partnership (TTIP).

TTIP and the Future of Trade

The NSA revelations last year have only increased support for further regulation over the transfer of personal data in the cloud, especially in the European Union (EU). The revelations have also brought to light significant differences in the European and US conceptions of privacy. The ruling by the European Court of Justice on the “right to be forgotten” is a recent example of this transatlantic divide. In EU countries, citizens can now request Google to take down links from search results that lead users to potentially damaging information.

There are several disputes that negotiators must first resolve. Europeans would prefer that American regulators take a more active role in cases where US firms are violating the Safe Harbor principles. EU officials have also indicated they would like to include a mechanism to send an alert if data were improperly shared with US law enforcement officials. The expansion of the codes of conduct within the cloud would serve as a major step towards finalizing TTIP. A European Commission Analysis finds that TTIP would inject about $130 billion into the US economy. Ultimately both the EU and the US have so much to gain that both nations must find a way to resolve these thorny issues.

Kevin Risser contributed to this post.

Last September, as part of its annual conference with the United States Central Command, the Saban Center for Middle East Policy at the Brookings Institution conducted a day-long simulation of a confrontation between the United States and Iran arising from a hypothetical scenario in which the Syrian opposition had made significant gains in its civil war and was on the verge of crushing the Assad regime.  

The simulation suggested that, even in the wake of President Rouhani’s ascension to power and the changed atmosphere between Tehran and Washington, there is still a risk of misunderstanding and miscalculation between the two sides.

This new Middle East Memo examines the possible U.S. foreign policy lessons that emerged from this crisis simulation, and stresses the importance of communication, understanding the Saudi-Iran conflict and the difficulty in limited interventions. 

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• Hard Road to Damascus: A Crisis Simulation of U.S.-Iranian Confrontation over Syria

According to an August 2015 survey, 72 percent of Americans find drug costs unreasonable, with 83 percent believing that the federal government should be able to negotiate prices for Medicare. Recently, Acting Administrator of the Centers for Medicare and Medicaid Services (CMS) Andy Slavitt commented that spending on medicines increased 13 percent in 2014 while health care spending growth overall was only 5 percent, the highest rate of drug spending growth since 2001.

Some of the most expensive drugs are covered under Medicare’s medical benefit, Part B, because they are administered by a physician. They are often administered in hospital outpatient departments and physician offices, and most commonly used to treat conditions like cancer, rheumatoid arthritis, and macular degeneration. Between 2005 and 2014, spending on Part B drugs has increased annually by 7.7 percent, with the top 20 drugs by total amount of Medicare payments accounting for 57 percent of total Part B drug costs. While overall Part B drug spending is a small portion of Medicare drug spending, the high growth rate is a concern, especially as new expensive breakthrough cancer drugs enter the market and have a negative effect on consumers’ pockets.

Unlike Part D, the prescription drug benefit, there are fewer incentives built in to Part B for providers to consider lower cost treatments for patients even if the lower cost drug may be clinically equivalent to the more expensive drug, because prior to budget sequestration, providers received 6 percent on top of the Average Sales Price (ASP) of the drug. Larger providers and hospitals often receive discounts on these drugs as well, increasing the amount they receive directly on top of the out-of-pocket cost of the drug.

This leads to more out-of-pocket costs for the consumer, as patients usually pay 20 percent of Part B services. The Government Accountability Office (GAO) estimated that in 2013, among new drugs covered under Part B, nearly two-thirds had per beneficiary costs of over $9,000 per year, leading to out-of-pocket costs for consumers of amounts between $1,900 and $107,000 over the year. On top of these high costs, this can lead to problems with medication adherence, even for serious conditions such as cancer.

A New Payment Model

To help change these incentives and control costs, CMS has proposed a new demonstration program, which offers a few different reimbursement methods for Part B drugs. The program includes a geographically stratified design methodology to test and evaluate the different methods. One of the methods garnering a lot of attention is a proposal to lower the administration add-on payment to providers, from current 6 percent of ASP, to 2.5 percent plus a flat fee of $16.80 per administration day.

Policymakers, physician organizations, and patient advocacy organizations have voiced major concerns raising the alarm that this initiative will negatively affect patient access to vital drugs and therefore produce poorer patient outcomes. The sequester will also have a significant impact on the percentage add on, reducing it to closer to an estimated .86 percent plus the flat fee. But we believe the goals of the program and its potential to reduce costs represent an important step in the right direction. We hope the details can be further shaped by the important communities of providers and patients who will deliver and receive medical care.

Geographic Variation

Last year, we wrote a Health Affairs Blog that highlighted some of the uses and limitations of publicly available Part B physician payment data. One major use was to show the geographic variation in practice patterns and drug administration, and we particularly looked at the difference across states in Lucentis v. Avastin usage. As seen in Exhibit 1, variation in administration is wide among states, even though both are drugs used to treat the same condition, age-related macular degeneration, and were proven to have clinically similar outcomes, but the cost of Lucentis was $2,000 per dose, while Avastin was only $50 per dose.

Using the same price estimates from our previous research, which are from 2012, we found that physician reimbursement under the proposed demonstration would potentially change from $120 to $66.80 for Lucentis, and increase from $3 to $18.05 for Avastin. Under the first payment model, providers were receiving 40 times as much to administer Lucentis instead of Avastin, while under the new proposed payment model, they would only receive 3.7 times as much.

While still a formidable gap, this new policy would have decreased financial reimbursement for providers to administer Lucentis, a costly, clinically similar drug to the much cheaper Avastin. As seen in Exhibit 1, a majority of physicians prescribe Avastin, thus this policy will allow for increased reimbursement in those cases, but in states where Lucentis is prescribed in higher proportions, prescribing patterns might start to change as a result of the proposed demonstration.

Source: Author’s estimates using 2012 CMS Cost Data and Sequestration Estimates from DrugAbacus.org

The proposed demonstration program includes much more than the ASP modifications in its second phase, including:

• discounting or eliminating beneficiary copays,
• indication-based pricing that would vary payments based on the clinical effectiveness,
• reference pricing for similar drugs,
• risk-sharing agreements with drug manufacturers based on clinical outcomes of the drug, and
• creating clinical decision tools for providers to help develop best practices.

This is all at the same time that a new model in oncology care (OCM) is being launched, which could help to draw attention to total cost of care. It is important that CMS try to address rising drug costs, but also be sure to consider all relevant considerations during the comment period to fine-tune the proposal to avoid negative effects on beneficiaries’ care.

We believe CMS should consider offering a waiver for organizations already participating in Center for Medicare & Medicaid Innovation (CMMI) models like the OCM, because financial benchmarks are based on past performance and any savings recognized in the future could be artificial, attributable to this demonstration rather than to better care coordination and some of the other practice requirements that are part of the proposed OCM. Furthermore, because this demonstration sets a new research precedent and because it is mandatory in the selected study areas rather than voluntary, CMS must try to anticipate and avoid unintended consequences related to geographic stratification.

For example, it is possible to imagine organizations with multiple locations directing patients to optimal sites for their business. Also, without a control group, some findings may be unreliable. The proposed rule currently lacks much detail, and there does not seem to be enough time for organizations to evaluate the impact of the proposed rule on their operations. Having said that, it will be important for stakeholders of all types to submit comments to the proposed rule in an effort to improve the final rule prior to implementation.

The critical question for the policymakers and stakeholders is whether this model can align with the multitude of other payment model reforms — unintended consequences could mitigate all the positive outcomes that a CMMI model offers to beneficiaries. Helping beneficiaries is and should be CMS’ ultimate obligation.

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President Barack Obama took office in early 2009 with an ambitious foreign policy agenda for the Americas. In April of that year, his keynote remarks at the fifth Summit of the Americas emphasized the United States’ new course of seeking equal partnership and collaboration in the region.

On June 29, the Latin America Initiative at Brookings and the Corporación Andina de Fomento (CAF) brought together experts from the region to discuss the significance of this renewed hemispheric partnership and featured a keynote address from Arturo Valenzuela, assistant secretary of state for Western Hemisphere affairs. Panelists included: Craig Kelly, principal deputy assistant secretary for Western Hemisphere Affairs at the U.S. Department of State; Michael Shifter, president of the Inter-American Dialogue; Luis Enrique Berrizbeitia, executive vice-president of the Corporación Andina de Fomento (CAF); and Kevin Casas-Zamora, senior fellow at Brookings. They took a closer look at the idea of partnership in the region, reviewed the progress that has been made, explored opportunities that exist for the future and discussed the realities of developing collaborative policies in the region across a wide range of topics, including energy and climate change. The discussion also revisited the policy recommendations made by Brookings‘s Partnership for the Americas Commission.

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• A Confident and Strong Latin America
• Adaptable Latin America Policy
• Four Pillars of U.S. Strategy
• Need a Strong U.S. Relationship with Brazil

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• Latin America and the Obama Administration: A New Partnership?

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• Transcript (.pdf)

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• 20100629_americas_partnership

Over 200 delegates from 50 countries gather this week in Washington for the Presidential Summit on Entrepreneurship. The summit hosts entrepreneurs to teach and learn innovative ways to strengthen professional and social relationships between the U.S. and the Islamic world. During his first major address to the Muslim world, delivered in Cairo last June, President Obama pledged to increase engagement through entrepreneurship, exchange programs and multilateral service initiatives.

Volunteer-led development initiatives have begun to act on Obama’s call for citizen diplomacy and private-sector engagement. The Initiative on International Volunteering and Service at Brookings and the Building Bridges Coalition have fueled an emerging legislative initiative that calls for increasing the role of international volunteers in the U.S. diplomatic agenda and development programs. This Service World Initiative has drawn from Brookings research outlining options to advance the president’s call for multilateral service.

As seen last year, for the first time in history, the majority of the world’s population lived in urban areas. And this trend is accelerating at an unprecedented rate. By 2050, urban dwellers are expected to make up about 70 percent of Earth’s total population. These informed 21st century urban citizens demand 24-7 connectivity, smart electric grids, efficient transportation networks, safe food and water, and transparent social services. All these demands place a huge strain on existing city infrastructures and the global environment. Most affected by this rapid urban boom, are the emerging markets. So how do we tackle this development dilemma?

One way is for highly-skilled experts, from a range of countries, to volunteer their time in emerging markets to help improve economic development, government services and stimulate job growth. This type of pro-bono program has many benefits. It benefits the urban areas in these emerging markets by leveraging intelligence, connecting systems and providing near-term impact on critical issues such as transportation, water, food safety, education and healthcare. It benefits the expert volunteers by fostering their teamwork skills, providing a cultural learning experience, and broadening their expertise in emerging markets.

IBM, which chairs the Building Bridges Coalition’s corporate sector, hosts a range of volunteer-led global entrepreneurship programs that improve economic stability for small- and medium-sized businesses, increase technology in emerging markets and open doors for the next generation of business and social leaders. This program connects high-talent employees with growing urban centers around the world and fosters the type of leadership to help IBM in the 21st century.

Recently, IBM sent a group of experts to Ho Chi Minh City as part of its Corporate Service Corps, a business version of the Peace Corps. This was the first Corporate Service Corps mission to be made up of executives, and the first to help a city in an emerging market analyze its challenges holistically and produce a plan to manage them. As a result, the city has now adopted a 10-year redevelopment plan that includes seven pilot programs in areas ranging from transportation to food safety. IBM will also help the city set up academic programs to prepare young Vietnamese to launch careers in technology services. IBM will continue this program throughout the next couple years to evolve the next set of global business and cultural hubs utilizing the volunteer hours of some of its most seasoned experts.

The Presidential Summit this week will further Obama’s call to “turn dialogue into interfaith service, so bridges between peoples lead to action.” The policy initiative of the Building Bridges Coalition, coupled with entrepreneurial innovations such as IBMs, can foster greater prosperity and service between the U.S. and our global partners.

INTRODUCTION

Over the past decade, the focused attention of African nations, the United States, U.N. agencies and other multilateral partners has brought significant progress toward achievement of the Millennium Development Goals (MDGs) in health and malaria control and elimination. The potential contribution of these strategies to long-term peace-building objectives and overall regional prosperity is of paramount significance in sub-regions such as the Horn of Africa and Western Africa that are facing the challenges of malaria and other health crises compounded by identity-based conflicts.

National campaigns to address health Millennium Development Goals through cross-ethnic campaigns tackling basic hygiene and malaria have proven effective in reducing child infant mortality while also contributing to comprehensive efforts to overcome health disparities and achieve higher levels of societal well-being.

There is also growing if nascent research to suggest that health and other humanitarian interventions can result in additional benefits to both recipients and donors alike.

The social, economic and political fault lines of conflicts, according to a new study, are most pronounced in Africa within nations (as opposed to international conflicts). Addressing issues of disparate resource allocations in areas such as health could be a primary factor in mitigating such intra-national conflicts. However, to date there has been insufficient research on and policy attention to the potential for wedding proven life-saving health solutions such as malaria intervention to conflict mitigation or other non-health benefits.

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• malaria africa caprara

In late October at the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP) headquarters in Bangkok, a multi-stakeholder coalition was launched to promote the role of youth and civil society in advancing post-2015 United Nations Sustainable Development Goals (SDGs). The youth initiatives, fostering regional integration and youth service impact in the Association of Southeast Asian Nations (ASEAN) and counterpart regions of Northeast and South Asia, will be furthered through a new Asia-Pacific Peace Service Alliance. The alliance is comprised of youth leaders, foundations, civil society entities, multilateral partners and U.N. agencies. Together, their initiatives illustrate the potential of youth and multi-stakeholder coalitions to scale impacts to meet SDG development targets through youth service and social media campaigns, and partnerships with multilateral agencies, nongovernmental organizations, corporations and research institutes.

The “Asia-Pacific Forum on Youth Volunteerism to Promote Participation in Development and Peace” at UN ESCAP featured a new joint partnership of the U.S. Peace Corps and the Korea International Cooperation Agency (KOICA) as well as USAID support for the ASEAN Youth Volunteering Program. With key leadership from ASEAN youth entitles, sponsor FK Norway, Youth Corps Singapore and Peace Corps’ innovative program in Thailand, the forum also furthered President Obama’s goal of Americans serving “side by side” with other nations’ volunteers. The multi-stakeholder Asia-Pacific alliance will be powered by creative youth action and a broad array of private and public partners from Thailand, Malaysia, Myanmar, Indonesia, Singapore, the Philippines, Australia, Korea, China, Mongolia, Japan, India, Nepal, Pakistan, the U.S. and other nations.

During the event, Dr. Shamshad Akhtar, ESCAP executive secretary, pointed out that “tapping youth potential is critical to shape our shared destiny, as they are a source of new ideas, talent and inspiration. For ESCAP and the United Nations, a dynamic youth agenda is vital to ensure the success of post-2015 sustainable development.”

Dr. Surin Pitsuwan, former ASEAN secretary-general, called for a new Asia-wide multilateralism engaging youth and civil society.  In his remarks, he drew from his experience in mobilizing Asian relief and recovery efforts after Cyclone Nargis devastated the delta region of Myanmar in May 2008. Surin, honorary Alliance chairman and this year’s recipient of the Harris Wofford Global Citizenship Award, also noted the necessity of a “spiritual evolution” to a common sense of well-being to redress the “present course of possible extinction” caused by global conflicts and climate challenges. He summoned Asia-Pacific youth, representing 60 percent of the world’s young population, to “be the change you want to see” and to “commit our youth to a useful cause for humanity.”

The potential for similar upscaled service efforts in Africa, weaving regional integration and youth volunteering impact, has been assessed in Brookings research and policy recommendations being implemented in the Common Market of Eastern and Southern Africa (COMESA). Recommendations, many of which COMESA and ASEAN are undertaking, include enabling youth entrepreneurship and service contributions to livelihoods in regional economic integration schemes, and commissioning third-party support for impact evidence research.

A good example of successful voluntary service contributions from which regional economic communities like ASEAN can learn a lot is the current Omnimed pilot research intervention in Uganda. In eastern Ugandan villages, 1,200 village health workers supported by volunteer medical doctors, Uganda’s Health Ministry, Peace Corps volunteers and Global Peace Women are addressing lifesaving maternal and child health outcomes furthering UNICEF’s campaign on “integrated health” addressing malaria, diarrheal disease and indoor cooking pollution. The effort has included construction of 15 secure water sources and 1,200 clean cook stoves along with randomized controlled trials.

Last week, the young leaders from more than 40 nations produced a “Bangkok Statement” outlining their policy guidance and practical steps to guide volunteering work plans for the new Asia-Pacific alliance. Youth service initiatives undertaken in “collective impact” clusters will focus on the environment (including clean water and solar villages), health service, entrepreneurship, youth roles in disaster preparedness and positive peace. The forum was co-convened by ESCAP, UNESCO, the Global Peace Foundation and the Global Young Leaders Academy.

Suzy Khimm reports on a proposal from the Bipartisan Policy Center that would establish a framework for reaching a grand bargain on deficit reduction in 2013. In short, the BPC proposes that Congress and the president in the lame duck session would agree to a procedural framework for guiding enactment of major spending and tax reforms in 2013. In enacting the framework, Congress and the president would also avert going over the fiscal cliff. In exchange, Congress and the president would make a small down payment on deficit reduction in the lame duck, and would authorize a legislative “backstop” of entitlement cuts and elimination of tax expenditures that would become law if Congress and the president failed in 2013 to enact tax and spending reforms.

The procedural elements of the BPC’s proposal bear some attention. The BPC’s not-quite-yet-a-catchphrase is “accelerated regular order.” Although it sounds like a nasty procedural disease, it’s akin to the fast-track procedures established in the Congressional Budget Act and in several other statutes. In short, the framework proposed by the BPC would instruct the relevant standing committees in 2013 to suggest to the chamber budget committees entitlement and tax reforms that would sum to $4 trillion dollars in spending cuts and new revenues (assuming extension of the Bush tax cuts). The House and Senate budget panels would each report a grand bargain bill for their chamber’s consideration that would be considered (without amendment) by simple majority vote after twenty hours of debate. Failure to meet the framework’s legislated deadlines would empower the executive branch to impose entitlement savings and to eliminate tax expenditures to meet the framework’s target.

Loyal Monkey Cage readers will recognize that the BPC proposal resembles in many ways the procedural solution adopted in the Deficit Control Act in August of 2011. But there are at least two procedural differences from the 2011 deficit deal. First, rather than a super committee, the BPC envisions “regular order,” meaning that the standing committees—not a special panel hand-selected by party-leaders—would devise the legislative package. Like the August deficit deal, the BPC proposal then offers procedural protection for the package by banning the Senate filibuster and preventing changes on the chamber floors (hence, an accelerated regular order). Second, rather than a meat-axe of sequestration that imposes only spending cuts, the BPC offers a “backstop,” giving what I take to be statutory authority to the executive branch to determine which tax expenditures to eliminate and which entitlement programs to cut back.

These differences from 2011 are subtle, but the BPC believes that they would improve the odds of success compared to the failed Super-committee plus sequestration plan. As a BPC staffer noted:

"One of the reasons the Joint Select Committee on Deficit Reduction failed, in our view, was because only 12 lawmakers were setting policy for the entire Congress,” said Steve Bell, Senior Director of BPC’s Economic Policy Project. “The framework we propose today would both ensure an acceleration of regular budget order in the House and Senate, and it would involve all committees of relevant jurisdiction.”

This is an interesting argument worth considering. Still, I’m not so sure that accelerated regular order would improve the prospects for an agreement.

First, it strikes me that the real barrier to a grand bargain hasn’t been the Senate’s filibuster rule. The super committee was guaranteed a fast-track to passage, but that still didn’t motivate the parties to reach an agreement. The more relevant obstacle in 2011 and 2012 has been the bicameral chasm between a Republican House and a Democratic Senate. To be sure, eliminating the need for a sixty-vote cloture margin would smooth the way towards Senate passage. But we could easily imagine that the 60th senator (in 2013, perhaps a GOP senator like Lisa Murkowski) might be willing to sign onto a deal that would still be too moderate to secure the votes of House Republicans (assuming no change in party control of the two chambers). As we saw over the course of the 112th Congress, House passage required more than the consent of the House median (an ideologically moderate Republican) and more than the support of a majority of the GOP conference. The big deals in the 112th Congress only passed if they could attract the votes of roughly 90% of the House GOP conference. Expedited procedures can protect hard-fought compromises from being unraveled on the chamber floors but by themselves don’t seem sufficient to generate compromise in the first place.

Second, and related, I’m somewhat skeptical that the small size of the super committee precluded a viable agreement. By balancing parties and chambers, the group was (in theory) a microcosm of the full Congress. If true, then delegating to the super committee was more akin to delegating to a mini-Congress. Perhaps the BPC’s idea of allowing the standing committees to generate proposals would broaden legislators’ willingness to buy-in to a final agreement. More likely, I suspect that the framework would produce a House bill perched on the right and a Senate bill left of center (since the filibuster ban would reduce Democrats’ incentives to produce a bipartisan bill). That leaves the bicameral chasm still to be bridged, suggesting that accelerated regular order might not bring Congress all that much closer to a bipartisan agreement in 2013. Consent of party leaders remains critical for an agreement.

Third, the BPC proposal is unclear on the precise nature of the legislative backstop. But would either party agree in advance to the framework if they didn’t know whose ox would be gored by the administration when it exercised its power to reform entitlements and eliminate tax expenditures? Perhaps delegating such authority to the executive branch would allow legislators to avoid voters’ blame, making them more likely to vote for the framework. (That said, it’s somewhat ironic that the BPC’s embrace of accelerated regular order flows from its desire to broaden the set of legislators whose fingerprints are visible on the grand bargain.) Regardless, the prospects for cuts in entitlement programs could lead both parties to favor kicking the can down the road again before it actually explodes.

Fast-track procedures have a decent track record in facilitating congressional action. (Steve Smith and I have extolled their virtues elsewhere.) But the most successful of these episodes involve narrow policy areas (such as closing obsolete military bases) on which substantial bipartisan agreement on a preferred policy outcome is already in place. Expecting a procedural device to do the hard work of securing bipartisan agreement may be asking too much of Congress’s procedural tool kit in a period of divided and split party control.

EXECUTIVE SUMMARY

The Obama Administration has announced that fixing the nation’s financial system is one of its highest initial priorities and will shortly release a plan to do that. In this essay, we attempt to provide our own version of a roadmap for reform.

We believe that the central challenge confronting policy makers now is to establish a new regulatory framework that will do a far better job preventing financial abuses and their consequences without chilling innovation and prudent risk-taking that are essential for growth in any economy.

To accomplish that end will require a major restructuring and strengthening of the two pillars upon which an efficient and safe financial system must rest: market discipline and sound regulation. It would be a mistake, in our view, to conclude that because both these pillars failed to prevent the current crisis that either one should be jettisoned. Neither pillar alone can do the job. There is no alternative, we need both pillars, but both need to work much better in the future.

The United States has a history of enacting major legislation and adopting new rules in response to crises, and this time will be no exception. The critical challenge is to ensure that reforms remedy the flaws in the current framework; that they are sufficiently flexible to adapt to changing circumstances and to head off future, avoidable crises, and, all the while, that they do not amount to overkill, by chilling the innovation and prudent risk-taking on which continued economic growth very much depends. These objectives will most likely be met if policymakers have a suitable roadmap for guiding their reforms. We suggest the following:

1. Multiple measures should be adopted to improve transparency and increase the incentive for prudent behavior throughout the mortgage process.

    

2. A special set of prudential rules should govern the regulation of systemically important financial institutions (SIFIs), or those whose failure could have systemic consequences, and thus trigger federal rescues.

    

3. A prudential regulator should require all SIFIs to fund some portion of their assets with long-term, subordinated debt. Such debt might also be convertible to equity in the event the institution’s capital-to-asset ratio falls below a certain level.

    

4. Regulators should encourage the formation of clearinghouses for derivatives contracts, starting with credit default swaps, and empower an overseer.

    

5. Financial reforms should be written broadly enough, and with enough discretion for regulators, so that policy makers can better anticipate future financial crises, however they might arise.

    

6. The financial regulatory agencies should be reorganized, so that they have jurisdiction by function or objective (solvency and consumer protection) rather than by type of charter of the regulated financial institution.

    

7. In the short to intermediate run, the housing GSEs — Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System — should be regulated as public utility “SIFIs” (after recapitalization with public funds) or directly operated as government agencies.

    

8. While U.S. financial policy makers must support international cooperation on financial regulation they should not wait for international agreement before taking necessary steps to improve our own system.

Video

• Options for Fixing Finance

I’ve written here before about my research with Betsey Stevenson showing that economic development is associated with rising life satisfaction. Some people find this result surprising, but it’s the cleanest interpretation of the available data. Yet over the past few days, I’ve received calls from several journalists asking whether Richard Easterlin had somehow debunked these findings. He tried. But he failed.

Rather than challenge our careful statistical tests, he’s simply offered a new mishmash of statistics that appear to make things murkier.

For those of you new to the debate, the story begins with a series of papers that Richard Easterlin wrote between 1973 and 2005, claiming that economic growth is unrelated to life satisfaction. In fact, these papers simply show he failed to definitively establish such a relationship. In our 2008 Brookings Paper, Betsey and I systematically examined all of the available happiness data, finding that the relationship was there all along: rising GDP yields rising life satisfaction. More recent data reinforces our findings. Subsequently, Easterlin responded in of papers circulated in early 2009. That’s the research journalists are now asking me about. But in a paper released several weeks ago, Betsey, Dan Sacks and I assessed Easterlin’s latest claims, and found little evidence for them.

Let’s examine Easterlin’s three main claims.

1. GDP and life satisfaction rise together in the short-run, but not the long-run. False. Here’s an illustrative graph. We take the main international dataset — the World Values Survey — and in order to focus only on the long-run, compare the change in life satisfaction for each country from the first time it was surveyed until the last, the corresponding growth in GDP per capita. Typically, this is a difference taken over 18 years (although it ranges from 8 to 26 years). The graph shows that long-run rises in GDP are positively associated with growth in life satisfaction.

This graph includes the latest data, and Dan generated it just for this blog post. In fact, Easterlin was responding to our earlier work, which showed each of the comparisons one could make between various waves of this survey: Wave 1 was taken in the early ‘80s; Wave 2 in the early ‘90s; Wave 3 in the mid-late ‘90s; Wave 4 mostly in the early 2000s. And in each of these comparisons, you see a positive association — sometimes statistically significant, sometimes not.

What should we conclude from this second graph? Given the typically-significant positive slopes, you might conclude that rising GDP is associated with rising life satisfaction. It’s also reasonable to say that these data are too noisy to be entirely convincing. But the one thing you can’t conclude is that these data yield robust proof that long-run economic growth won’t yield rising life satisfaction. Yet that’s what Easterlin claims.

2. The income-happiness link that we document is no longer apparent when one omits the transition economies. Also false. One simple way to see this is to note that in the first graph the transition countries are shown in gray. Even when you look only at the other countries, it’s hard to be convinced that economic growth and life satisfaction are unrelated. To see the formal regressions showing this, read Table 3 of our response. (Aside: Why eliminate these countries from the sample?)

Or we could just look to another data source which omits the transition economies. For instance, the graph below shows the relationship between life satisfaction and GDP for the big nine European nations that were the members of the EU when the Eurobarometer survey started. Over the period 1973-2007, economic growth yielded higher satisfaction in eight of these nine countries. And while we’re puzzled by the ninth — the increasingly unhappy Belgians — we’re not going to drop them from the data! And if you think Belgium is puzzling, too, then we’ve done our job.

3. Surveys show that financial satisfaction in Latin American countries has declined as their economies have grown. Perhaps true. But how are surveys of financial satisfaction relevant to a debate about life satisfaction? And why focus on Latin America, rather than the whole world? In fact, when you turn to the question we are actually debating — life satisfaction —these same surveys suggest that those Latin American countries which have had the strongest growth have seen the largest rise in life satisfaction. This finding isn’t statistically significant, but that’s simply because there’s not a lot of data on life satisfaction in Latin America! (Given how sparse these data are, we didn’t report them in our paper.)

What’s going on here?

Now it’s reasonable to ask how it is that others arrived at a different conclusion. Easterlin’s Paradox is a non-finding. His paradox simply describes the failure of some researchers (not us!) to isolate a clear relationship between GDP and life satisfaction.

But you should never confuse absence of evidence with evidence of absence. Easterlin’s mistake is to conclude that when a correlation is statistically insignificant, it must be zero. But if you put together a dataset with only a few countries in it — or in Easterlin’s analysis, take a dataset with lots of countries, but throw away a bunch of it, and discard inconvenient observations — then you’ll typically find statistically insignificant results. This is even more problematic when you employ statistical techniques that don’t extract all of the information from your data. Think about it this way: if you flip a coin three times, and it comes up heads all three times, you still don’t have much reason to think that the coin is biased. But it would be silly to say, “there’s no compelling evidence that the coin is biased, so it must be fair.” Yet that’s Easterlin’s logic.

There’s a deeper problem, too. The results I’ve shown you are all based on analyzing data only from comparable surveys. And when you do this, you find rising incomes associated with rising satisfaction. Instead, Easterlin and co-authors lump together data from very different surveys, asking very different questions. It’s not even clear how one should make comparisons between a survey (in the US) asking about happiness, a survey (in Japan) asking about “circumstances at home,” surveys of life satisfaction in Europe based on a four-point scale, and global surveys based on a ten-point scale. Easterlin’s non-result appears only when comparing non-comparable data.

If you want to advocate against economic growth — and to argue that it won’t help even in the world’s poorest nations — then you should surely base such radical conclusions on findings rather than non-findings, and on the basis of robust evidence.

A final thought

Why not look at the levels of economic development and satisfaction? The following graph does this, displaying amazing new data coming from the Gallup World Poll. There’s no longer any doubt that people in richer countries report being more satisfied with their lives.

Is this relevant? Easterlin argues it isn’t — that he’s only concerned with changes in GDP. But the two are inextricably linked. If rich countries are happier countries, this begs the question: How did they get that way? We think it’s because as their economies developed, their people got more satisfied. While we don’t have centuries’ worth of well-being data to test our conjecture, it’s hard to think of a compelling alternative.

Justin Wolfers’ column titled “Debunking the Easterlin Paradox, Again” dismisses Richard Easterlin’s work as just plain wrong. I argue here, as I have elsewhere, that where you come out on the Easterlin paradox depends on the happiness question (and therefore the definition of happiness) that you use, as well as the sample of countries and the period of time.

Richard Easterlin finds no clear country-by-country relationship between average per capita GDP and life satisfaction (among wealthy countries), despite a clear relationship between income and happiness at the individual level within countries. Easterlin also found – and continues to find, based on methods different from Wolfers’ – an absence of a relationship between life satisfaction and long-term changes in GDP per capita.

Different well-being questions measure different dimensions of “happiness”, and, in turn, they correlate differently with income (something they themselves show at the end of their last paper, and admit that the relationship between income and well-being is complex). The best possible life question – which Justin Wolfers and Betsey Stevenson primarily use in the first work, and also in the second – asks respondents to compare their life today to the best possible life they can imagine for themselves. This introduces a relative component, and, not surprisingly, the question correlates most closely with income of all of the available subjective well-being questions. Life satisfaction, which they use in the second work, also correlates with income more than open-ended happiness, life purpose or affect questions, but not as closely as the best possible life question.

Wolfers and Stevenson used the most recent and extensive sample of countries available from the Gallup World Poll, and, as the measure of “happiness”, the best possible life question therein, and challenged the Easterlin paradox. In more recent work, with Stevenson and Dan Sacks (2010), referenced in this blog, the authors look at the relationship between life satisfaction and economic growth, based on the World Values survey and GDP levels and the best possible life question, based on the Gallup World Poll. They isolate a clear relationship between life satisfaction and GDP levels, and their statistical analysis is spot on.

Recent studies by Kahneman and Deaton (2010), and Diener and colleagues (2010), for example, find that happiness in a life evaluation sense (as measured by the best possible life question) correlates much more closely with income than does happiness in a life experience sense (as measured by affect or more open ended happiness questions). This holds within the United States (Kahneman and Deaton) and across countries (Diener et al.).

My own work on Latin America, with Soumya Chattopadhyay and Mario Picon, tested various questions against each other and finds a similar difference in correlation, with affect and life purpose questions having the least correlation with income and the best possible life question the most. My work on happiness in Afghanistan found that Afghans were happier than the world average (on par with Latin Americans) as measured by an open ended happiness question, and 20 percent more likely to smile in a day than Cubans. Yet they scored much lower than the world average on the best possible life question. This is not a surprise. While naturally cheerful and able to make the best of their lot, the Afghans also know that the best possible life is outside Afghanistan.

Thus the conclusions that one draws on whether there is an Easterlin paradox or not in part rest on the definition of happiness, and therefore the question that is used as the basis of analysis. Wolfers and co-authors find a clear relationship between GDP levels and life satisfaction and best possible life – clearly important dimensions of well-being. Yet in the same paper they find much less clear relationships when they use happiness, affect and life purpose questions.  

There is also the question of the sample of countries, and whether one is examining cross section or time series data. The most recent debate with Easterlin is about the trends over time rather than cross-sectional patterns. Dropping the transition economies, as Easterlin does, may be a mistake, as Wolfers contends. But it is also important to recognize the extent to which including a large sample of countries that experienced unprecedented economic collapse and associated drops in happiness alters the slope in the cross-country income-happiness relationship (making it steeper). Wolfers also criticizes Easterlin for relying on financial satisfaction data for his Latin American time series sample (because there is not enough life satisfaction data); financial satisfaction correlates closely, but not perfectly, with life satisfaction. Easterlin’s technique allows for the inclusion of a much larger sample of middle income developing countries, a sample of countries that one can imagine is very important to the growth and happiness debate. Wolfers and co-authors use far fewer Latin American countries because comparable life satisfaction data is limited. Either approach is plausible and, as with all work with limited data, is not perfect. But I would not go as far as calling one or the other “plain wrong”.

Finally, there is the simpler question of giving credit where credit is due. We would not be having this debate, nor would we have a host of analysis on well-being beyond what is measured by income, had Easterlin not triggered our thinking on this with his original study of happiness and income over three decades ago (and his patient and thoughtful mentoring of many economists since then). In the big picture of things, Easterlin had the idea.