ABSTRACT

Recent literature has expressed considerable pessimism about the prospects for both productivity and overall economic growth in the U.S. economy, based either on the idea that the pace of innovation has slowed or on concern that innovation today is hurting job creation. While recognizing the problems facing the economy, this paper offers a more optimistic view of both innovation and future growth, a potential return to the innovation and employment-led growth of the 1990s. Technological opportunities remain strong in advanced manufacturing and the energy revolution will spur new investment, not only in energy extraction, but also in the transportation sector and in energy-intensive manufacturing. Education, health care, infrastructure (construction) and government are large sectors of the economy that have lagged behind in productivity growth historically. This is not because of a lack of opportunities for innovation and change but because of a lack of incentives for change and institutional rigidity.

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• U.S. Productivity Growth: An Optimistic Perspective

November's U.S. Bureau of Labor Statistics (BLS) employment report showed continued improvement in the job market, with employers adding 211,000 workers to their payrolls and hourly pay edging up compared with its level a year ago. The pace of job growth was similar to that over the past year and somewhat slower than the pace in 2014. For the 69^th consecutive month, private-sector payrolls increased. Since the economic recovery began in the third quarter of 2009, all the nation’s employment gains have occurred as a result of expansion in private-sector payrolls. Government employment has shrunk by more than half a million workers, or about 2.5 percent. In the past twelve months, however, public payrolls edged up by 93,000.

The good news on employment gains in November was sweetened by revised estimates of job gains in the previous two months. Revisions added 8,000 to estimated job growth in September and 27,000 to job gains in October. The BLS now estimates that payrolls increased 298,000 in October, a big rebound compared with the more modest gains in August and September, when payrolls grew an average of about 150,000 a month.

Average hourly pay in November was 2.3 percent higher than its level 12 months earlier. This is a slightly faster rate of improvement compared with the gains we saw between 2010 and 2014. A tighter job market may mean that employers are now facing modestly higher pressure to boost employee compensation. The exceptionally low level of consumer price inflation means that the slow rate of nominal wage growth translates into a healthy rate of real wage improvement. The latest BLS numbers show that real weekly and hourly earnings in October were 2.4 percent above their levels one year earlier. Not only have employers added more than 2.6 million workers to their payrolls over the past year, the purchasing power of workers' earnings have been boosted by the slightly faster pace of wage gain and falling prices for oil and other commodities.

The BLS household survey also shows robust job gains last month. Employment rose 244,000 in November, following a jump of 320,000 in October. More than 270,000 adults entered the labor force in November, so the number of unemployed increased slightly, leaving the unemployment rate unchanged at 5.0 percent. In view of the low level of the jobless rate, the median duration of unemployment spells remains surprisingly long, 10.8 weeks. Between 1967 and the onset of the Great Recession, the median duration of unemployment was 10.8 weeks or higher in just seven months. Since the middle of the Great Recession, the median duration of unemployment has been 10.8 weeks or longer for 82 consecutive months. The reason, of course, is that many of the unemployed have been looking for work for a long time. More than one-quarter of the unemployed—slightly more than two million job seekers—have been jobless for at least 6 months.  That number has been dropping for more than five years, but remains high relative to our experience before the Great Recession.

If there is bad news in the latest employment report, it's the sluggish response of labor force participation to a brighter job picture. The participation rate of Americans 16 and older edged up 0.1 point in November but still remains 3.5 percentage points below its level before the Great Recession. About half the decline can be explained by an aging adult population, but a sizeable part of the decline remains unexplained. The participation rate of men and women between 25 and 54 years old is now 80.8 percent, exactly the same level it was a year ago but 2.2 points lower than it was before the Great Recession. Despite the fact that real wages are higher and job finding is now easier than was the case earlier in the recovery, the prime-age labor force participation rate remains stuck well below its level before the recession. How strong must the recovery be before prime-age adults are induced to come back into the work force? Even though the recovery is now 6 and a half years old, we still do not know.

I came across an interesting chart in yesterday’s Morning Money tipsheet from Politico that struck me as a something that sounded intuitively correct but was, in fact, not. It's worth a comment on this blog, which has served as a forum for discussion of jobs numbers throughout the recovery.

Between last week’s BLS employment report and last night’s State of the Union, we’ve heard a lot about impressive job growth in 2015. For my part, I wrote on this blog last week that the 2.6 million jobs created last year makes 2015 the second best calendar-year for job gains of the current recovery.

The tipsheet’s "Chart of the Day," however, suggested that job growth in 2015 was actually lower-than-average if we adjust for the change in the size of the labor force. This is what was in the tipsheet from Politico:

CHART OF THE DAY: NOMINAL JOB GROWTH — Via Hamilton Place Strategies: "Adjusting jobs data to account for labor force shifts can help shed some light on voters' economic angst, even as we see good headline statistics. … Though 2015 was a good year in terms of job growth during the current recovery and had higher-than-average job growth as compared to recent recoveries, 2015 actually had lower-than-average job growth if we adjust for the change in the size of the labor force." http://bit.ly/1OnBXSm

I decided to look at the numbers.

The authors propose that we should "scale" reported job gains by the number of workers, which at first seems to make sense. Surely, an increase in monthly employment of 210,000 cannot mean the same thing when there are already 150 million employed people as when there are just 75 million employed people.

But this intuition is subtly wrong for a simple reason: The age structure of the population may also differ in the two situations I have just described. Suppose when there are 75 million employed people, the population of 20-to-64 year-old people is growing 300,000 every month. Suppose also when there are 150 million employed people, the population of 20-to-64 year-olds is shrinking 100,000 per month. 

Most informed observers would say that job growth of 210,000 a month is much more impressive under the latter assumptions than it is under the first set of assumptions, even though under the latter assumptions the number of employed people is twice as high as it is under the first assumptions.

BLS estimates show that in the seven years from December 2008-December 2015, the average monthly growth in the 16-to-64 year-old (noninstitutionalized) U.S. population was 85,200 per month. That is the lowest average growth rate of the working-age population going back to at least 1960. Here are the numbers:

Once we scale the monthly employment gain by the growth in the working-age population, the growth of jobs in recent years has been more impressive—not less—than suggested by the raw monthly totals. Gains in employer payrolls have far surpassed the growth in the number of working-age Americans over the past five years.

Headline writers have been impressed by recent job gains because the job gains have been impressive.

Alert voters everywhere realize the economy is neither as strong as claimed by the party in power nor the disaster described by the opposition. The election season will bring many passionate but dubious claims about economic trends. People running for office know that voters rank the economy near the top of their concerns. Of course, perceptions of the economy differ from one voter to the next. A few of us are soaring, more are treading water, and too many are struggling just to stay afloat.

Since reaching a low point in 2009, total U.S. output—as measured by real GDP—has climbed 15 percent, or about 2.1 percent a year. The recovery has been long-lived and steady, a tribute to the stewardship of the Administration and Federal Reserve. The economic rebound has also been disappointingly slow in view of the depth of the recession. GOP office seekers will mention this fact a number of times before November.

Compared with the worst months of the Great Recession, the unemployment rate has dropped by half. It now stands at a respectable 4.9 percent, almost 3 points lower than the rate when President Obama took office and far below the rate in fall 2009 when it reached 10 percent. Payroll employment has increased for 77 consecutive months. Since hitting a low in January 2010, the number of workers on employer payrolls has surged 14.6 million, or about 190,000 a month. While the job gains are encouraging, they have not been fast enough to bring the employment-to-population ratio back to its pre-recession level. June’s job numbers showed that slightly less than 80 percent of adults between 25 and 54 were employed. That’s almost 2 percentage points below the employment-to-population rate on the eve of the Great Recession.

One of the most disappointing numbers from the recovery has been the growth rate of wages. In the first 5 years of the recovery, hourly wages edged up just 2 percent a year. After factoring in the effect of consumer price inflation, this translates into a gain of exactly 0 percent. The pace of wage gain has recently improved. Workers saw their real hourly pay climb 1.7 percent a year in the two years ending in June.

The economic bottom line for most of us is the rate of improvement in our family income after accounting for changes in consumer prices. No matter how household income is measured, income gains have been slower since 2007 than they were in earlier decades. The main reason is that incomes produced in the market—in the form of wages, self-employment income, interest, dividends, rental income, and realized capital gains—fell sharply in the Great Recession and have recovered very slowly since then. That a steep recession would cause a big drop in income is hardly a surprise. Employment, company profits, interest rates, and rents plunged in 2008 and 2009, pushing down the incomes Americans earn in the market. The bigger surprise has been the slow recovery of market income once the recession was behind us.

Some critics of the recovery argue that the income gains in the recovery have been highly skewed, with a disproportionate share obtained by Americans at the top of the income ladder. Economist Emmanuel Saez tabulates U.S. income tax statistics to track market income gains at the top of the distribution. His latest estimates show that between 2009 and 2015 income recipients in the top 1 percent enjoyed real income gains of 24 percent. Among Americans in the bottom nine-tenths of the income distribution, average market incomes climbed only 4 percent.

However, Saez’s estimates also show that top income recipients experienced much bigger income losses in the Great Recession. Between 2007 and 2009 they saw their inflation-adjusted incomes drop 36 percent (see Chart 1). In comparison, the average market income of Americans in the bottom nine-tenths of the distribution fell just 12 percent. These numbers mean that top income recipients have not yet recovered the income losses they suffered in the Great Recession. In 2015 their average market income was still 13 percent below its pre-recession level. For families in the bottom nine-tenths of the distribution, market income was “only” 8 percent below its level in 2007.

Only about half of households rely solely on market income to support themselves. The other half receives income from government transfers. What is more, this fraction tends to increase in bad times. Many retirees rely mainly on Social Security to pay their bills; they depend on Medicare or Medicaid to pay for health care. Low-income Americans often have little income from the market, and they may rely heavily on public assistance, food stamps, or government-provided health insurance. When joblessness soars the percentage of families receiving government benefits rises, largely because of increases in the number of workers who collect unemployment insurance.

Government benefits, which are not counted in Saez’s calculations, replace part of the market income losses families experience in a weak economy. As a result, the net income losses of most families are much smaller than their market income losses. The Congressional Budget Office (CBO) recently published statistics on market income and before-tax and after-tax income that shed light on the size and distribution of household income losses in the Great Recession and ensuing recovery. The tabulations show that, except for households at the top of the distribution, net income losses were far smaller than the losses indicated in Saez’s income tax data.

For example, among households in the middle fifth of the before-tax income distribution, average market income fell more than 10 percent in the Great Recession (see Chart 2). If we include government transfers in the income definition, average income fell 4.4 percent. If we account for the federal taxes families pay, average net income fell just 1 percent. In contrast, among households in the top 1 percent of the distribution, average market income fell 36 percent, average income including government transfers fell 36 percent, and average income net of federal taxes fell 37 percent. Government transfers provided little if any protection to top-income households.

The CBO income statistics end in 2013, so they do not tell us how net income gains have been distributed in the last couple of years. Nonetheless, based on Saez’s income tax tabulations it is very unlikely top income recipients have recovered the net income losses they experienced in the Great Recession. All the available statistics show household income gains since 2007 have been negligible or small, and this is true across the income distribution.

It is popular to say slow income gains in the middle and at the bottom of the distribution are due to outsize income gains among families at the top. While this story is at least partly true for the three decades ending in 2007, it does not fit the facts for the years since 2007. CBO’s latest net income tabulations show that inequality was almost 5 percent lower in 2013 than it was in 2007. The Great Recession hurt the incomes of Americans up and down the income distribution, but the biggest proportional income losses were at the very top. To be sure, income gains in the recovery after 2009 have been concentrated among top income recipients. Even so, their income losses over the recession and recovery have been proportionately bigger than the losses suffered by middle- and low-income families.

Editor's note: This piece originally appeared in Real Clear Markets.

Washington is again paralyzed and pulling back on clean energy economic development. Deficit politics and partisanship are firmly entrenched and the raft of federal financial supports made available through the 2009 stimulus law and elsewhere is starting to expire.

No wonder it’s hard to imagine—especially if you’re sitting in the nation’s capital—how the next phase of American clean energy industry growth will be financed or its next generation of technologies and firms supported.

And yet, one source of action lies hidden in plain sight. With federal clean energy activities largely on hold, a new paper we are releasing today as part of the Brookings-Rockefeller Project on State and Metropolitan Innovation argues that U.S. states hold out tremendous promise for the continued design and implementation of smart clean energy finance solutions and economic development.

Specifically, we contend that the nearly two dozen clean energy funds (CEFs) now running in a variety of mostly northern states stand as one of the most important clean energy forces at work in the nation and offer at least one partial response to the failure of Washington to deliver a sensible clean energy development approach.

To date, over 20 states have created a varied array of these public investment vehicles to invest in clean energy pursuits with revenues often derived from small public-benefit surcharges on electric utility bills. Over the last decade, state CEFs have invested over $2.7 billion in state dollars to support renewable energy markets, counting very conservatively.  Meanwhile, they have leveraged another $9.7 billion in additional federal and private sector investment, with the resulting $12 billion flowing to the deployment of over 72,000 projects in the United States ranging from solar installations on homes and businesses to wind turbines in communities to large wind farms, hydrokinetic projects in rivers, and biomass generation plants on farms. 

In so doing, the funds stand well positioned—along with state economic development and other officials—to build on a pragmatic success and take up the challenge left by the current federal abdication of a role on clean energy economic development.

Yet here is the rub: For all the good the funds have achieved, project-only financing—as needed as it is—will not be sufficient to drive the growth of large and innovative new companies or to create the broader economic development taxpayers demand from public investments.  Also needed will be a greater focus on the deeper-going economic development work that can help spawn whole new industries. 

All of which points to the new brand of fund activity that our paper celebrates and calls for more of. 

In recent years, increasingly ambitious efforts in a number of states have featured engagement on at least three major fronts somewhat different from the initial fund focus: (1) cleantech innovation support through research, development, and demonstration (RD&D) funding; (2) financial support for early-stage cleantech companies and emerging technologies, including working capital for companies; and (3) industry development support through business incubator programs, regional cluster promotion, manufacturing and export promotion, supply chain analysis and enhancement, and workforce training programs.

These new economic development efforts—on display in California, Massachusetts, New York, and elsewhere—show the next era of state clean energy fund leadership coming into focus. States are now poised to jumpstart a new, creative period of expanded clean energy economic development and industry creation, to complement and build upon individualistic project financing. 

Such work could not be more timely at this moment of federal gridlock and market uncertainty.

Along these lines, then, our paper advances several recommendations for moving states more aggressively into this new period of clean energy economic development. We suggest that:

• States should reorient a significant portion (at least 10 percent of the total portfolio) of state CEF money to clean energy-related economic development

• States, as they reorient portions of their CEFS to economic development, should better understand the market dynamics in their metropolitan regions.  They need to lead by making available quality data on the number of jobs in their regions, the fastest-growing companies, the critical industry clusters, gaps in the supply chain for those industries, their export potential, and a whole range of economic development and market indicators

• States also should better link their clean energy funds with economic development entities, community development finance institutions (CDFIs), development finance organizations and other stakeholders who could be ideal partners to develop decentralized funding and effective economic development programs

In addition, we think that Washington needs to recognize the strength and utility of the CEFs and actively partner with them:

• The federal government should consider redirecting a portion of federal funds (for instance, from federal technology support programs administered by the Department of Energy and other programs meant for federal-state cooperation) to provide joint funding of cluster development, export programs, workforce training, and other economic development programs  through matching dollars to state funds that now have active economic development programs, and to provide incentives to states without such programs to create them

• The federal government should create joint technology partnerships with states to advance each state’s targeted clean energy technology industries, by matching federal deployment funding with state funding.

• The states and the federal government, more generally, should look to “decentralize” financing decisions to local entities with street knowledge of their industries, relying on more “development finance” authorities that have financed traditional infrastructure and now could finance new clean energy projects and programs

In sum, our new paper proposes a much greater focus in U.S. clean energy finance on “bottom up,” decentralized clean initiatives that rely on the states to catalyze regional economic development in regions. Such an approach—which reflects the emergence of an emerging “pragmatic caucus” in U.S. economic life—is currently demanded by federal inaction. However, it might also be the smartest, most durable way to develop the clean energy industries of the future without the partisan rancor and obtuseness that has stymied federal energy policy. State clean energy funds—having funded thousands of individual projects—bring significant knowledge to bear as they focus now on building whole industries. For that reason, the funds’ transition from project development to industry creation should be nurtured and supported.

With Washington adrift and the United Nations climate change panel again calling for action, the search for new clean energy finance solutions continues.  

Against this backdrop, the Metro Program has worked with state- and city-oriented partners to highlight such responses as repurposing portions of states’ clean energy funds and creating state green banks.  Likewise, the Center for American Progress just recently highlighted the potential of securitization and investment yield vehicles, called yield cos. And last week an impressive consortium of financiers, state agencies, and philanthropies announced the creation of the Warehouse for Energy Efficiency Loans (WHEEL) aimed at bringing low-cost capital to loan programs for residential energy efficiency. WHEEL is the country’s first true secondary market for home energy loans—and a very big deal. 

Another big deal is the potential of bond finance as a tool for clean energy investment at the state and local level. That’s the idea advanced in a new paper released this morning that we developed with practitioners at the Clean Energy Group and the Council for Development Finance Authorities.

Over 100 years, the nation’s state and local infrastructure finance agencies have issued trillions of dollars’ worth of public finance bonds to fund the construction of the nation’s roads, bridges, hospitals, and other infrastructure—and literally built America. Now, as clean energy subsidies from Washington dwindle, these agencies are increasingly willing to finance clean energy projects, if only the clean energy community will embrace them.

So far, these authorities are only experimenting. However, the bond finance community has accumulated significant experience in getting to scale and knows how to raise large sums for important purposes by selling bonds to Wall Street. Accordingly, the clean energy community—working at the state and regional level—should leverage that expertise. The challenge is for the clean energy and bond finance communities to work collaboratively to create new models for clean energy bond finance in states, and so to establish a new clean energy asset class that can easily be traded in capital markets.

Along these lines, our new brief argues that state and local bonding authorities, clean energy leaders, and other partners should do the following: 

• Establish mutually useful partnerships between development finance experts and clean energy officials at the state and local government levels
• Expand and scale up bond-financed clean energy projects using credit enhancement and other emerging tools to mitigate risk and through demonstration projects
• Improve availability of data and develop standardized documentation so that the risks  and rewards of clean energy investments can be better understood
• Create a pipeline of rated and private placement deals, in effect a new clean energy asset class, to meet the demand by institutional investors for fixed-income clean energy securities

State and local bond finance represents a powerful but underutilized tool for future clean energy investment.

For 100 years, the nation’s state and local infrastructure finance agencies have issued trillions of dollars’ worth of public finance bonds to fund the construction of the nation’s roads, bridges, hospitals, and other infrastructure—and literally built America. Now, as clean energy subsidies from Washington dwindle, these agencies are increasingly willing to finance clean energy projects, if only the clean energy community will embrace them.

So far, these authorities are only experimenting. However, the bond finance community has accumulated significant experience in getting to scale and knows how to raise large amounts for important purposes by selling bonds to Wall Street. The challenge is therefore to create new models for clean energy bond finance in states and regions, and so to establish a new clean energy asset class that can easily be traded in capital markets. To that end, this brief argues that state and local bonding authorities and other partners should do the following:

• Establish mutually useful partnerships between development finance experts and clean energy officials at the state and local government levels
• Expand and scale up bond-financed clean energy projects using credit enhancement and other emerging tools to mitigate risk and through demonstration projects
• Improve the availability of data and develop standardized documentation so that the risks and rewards of clean energy investments can be better understood
• Create a pipeline of rated and private placement deals, in effect a new clean energy asset class, to meet the demand by institutional investors for fixed-income clean energy securities

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Event Information

The financial sector has undergone major changes in response to the Great Recession and post-crisis regulatory reform, as a result of the Dodd-Frank Act and Basel III. These changes have created serious questions about the sector’s role in supporting economic growth and how it affects financial and overall economic stability.

On June 8, the Initiative on Business and Public Policy at Brookings explored the intersection of the financial system and economic growth with the goal of informing the public policy debate. The event featured a keynote address by Richard Berner, director of the Office of Financial Research and other participants with a wide range of views from a variety of backgrounds. Among other issues, the experts considered the changing landscape of the financial sector; growth-promoting allocation and investment decisions; credit availability for low- and moderate-income households; the ideal balance between growth and stability; and the impact of the 2014 midterm elections on regulatory reform.

 Follow the conversation at @BrookingsEcon or #Finance.

Video

• Keynote remarks by Richard Berner
• The financial sector: How has it changed?
• The view from the trenches
• The future of the U.S. financial sector

Audio

• Can the financial sector promote growth and stability?

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• Aaron Kleins presentation
• 20150608 BAER slides
• 20150608 MEHTA slides
• 20150608_financial_sector_stability_transcript

Financial advisors offer their clients many advantages, such as setting reasonable savings goals, avoiding fraudulent investments and mistakes like buying high and selling low, and determining the right level of risk for a particular household. However, these same advisors are often incentivized to choose funds that increase their own financial rewards, and the nature and amount of the fees received by advisors may not be transparent to their clients, and small-scale savers may not be able to access affordable advice at all.  What is in the best interest of an individual may not be in the best interest of his or her financial advisor.

To combat this problem, the Department of Labor (DoL) recently proposed a regulation designed to increase consumer protection by treating some investment advisors as fiduciaries under ERISA and the 1986 Internal Revenue Code.  The proposed conflict of interest rule is an important step in the right direction to increasing consumer protections.  It addresses evidence from a February 2015 report by the Council of Economic Advisers suggesting that consumers often receive poor recommendations from their financial advisors and that as a result their investment returns on IRAs are about 1 percentage point lower each year.   Naturally, the proposal is not without its controversies and it has already attracted at least 775 public comments, including one from us .

For us, the DoL’s proposed rule is a significant step in the right direction towards increased consumer protection and retirement security.  It is important to make sure that retirement advisors face the right incentives and place customer interests first.  It is also important make sure savers can access good advice so they can make sound decisions and avoid costly mistakes.  However, some thoughtful revisions are needed to ensure the rule offers a net benefit. 

If the rule causes advisors’ compliance costs to rise, they may abandon clients with small-scale savings, since these clients will no longer be profitable for them.  If these small-scale savers are crowded out of the financial advice market, we might see the retirement savings gap widen.  Therefore we encourage the DoL to consider ways to minimize or manage these costs, perhaps by incentivizing advisors to continue guiding these types of clients.  We also worry that the proposed rule does not adequately clarify the difference between education and advice, and encourage the DoL to close any potential loopholes by standardizing the general educational information that advisors can share without triggering fiduciary responsibility (which DoL is trying to do).  Finally, the proposed rule could encourage some advisors to become excessively risk averse in an overzealous attempt to avoid litigation or other negative consequences.  Extreme risk aversion could decrease market returns for investors and the ‘value-add’ of professional advisors, so we suggest the DoL think carefully about discouraging conflicted advice without also discouraging healthy risk.

The proposed rule addresses an important problem, but in its current form it may open the door to some undesirable or problematic outcomes.  We explore these issues in further detail in our recent paper.

Introduction

I would like to thank the Department for giving me the opportunity to testify on this important issue. The document I submitted to you is more general than most of the comments you have received, talking about the issues facing retirement savers and policymakers, rather than engaging in a point-by-point discussion of the detailed DOL proposal¹.

Issues around Retirement Saving

1. Most workers in the bottom third of the income distribution will rely on Social Security to support them in retirement and will save little. Hence it is vital that we support Social Security in roughly its present form and make sure it remains funded, either by raising revenues or by scaling back benefits for higher income retirees, or both.

2. Those in the middle and upper middle income levels must now rely on 401k and IRA funds to provide income support in retirement. Many and perhaps most households lack a good understanding of the amount they need to save and how to allocate their savings. This is true even of many savers with high levels of education and capabilities.

3. The most important mistakes made are: not saving enough; withdrawing savings prior to retirement; taking Social Security benefits too early² ; not managing tax liabilities effectively; and failing to adequately manage risk in investment choices. This last category includes those who are too risk averse and choose low-return investments as well as those that overestimate their own ability to pick stocks and time market movements. These points are discussed in the paper I submitted to DoL in July. They indicate that retirement savers can benefit substantially from good advice.

4. The market for investment advice is one where there is asymmetric information and such markets are prone to inefficiency. It is very hard to get incentives correctly aligned. Professional standards are often used as a way of dealing with such markets but these are only partially successful. Advisers may be compensated through fees paid by the investment funds they recommend, either a load fee or a wrap fee. This arrangement can create an incentive for advisers to recommend high fee plans.

5. At the same time, advisers who encourage increased saving, help savers select products with good returns and adequate diversification, and follow a strategy of holding assets until retirement provide benefits to their clients.

Implications for the DoL’s proposed conflicted interest rule

1. Disclosure. There should be a standardized and simple disclosure form provided to all households receiving investment advice, detailing the fees they will be paying based on the choices they make. Different investment choices offered to clients should be accompanied by a statement describing how the fees received by the adviser would be impacted by the alternative recommendations made to the client.

2. Implications for small-scale savers. The proposed rule will bring with it increased compliance costs. These costs, combined with a reluctance to assume more risk and a fear of litigation, may make some advisers less likely to offer retirement advice to households with modest savings. These households are the ones most in need of direction and education, but because their accounts will not turn profits for advisors, they may be abandoned. According to the Employee Benefits Security Administration (EBSA), the proposed rule will save families with IRAs more than $40 billion over the next decade. However, this benefit must be weighed against the attendant costs of implementing the rule. It is possible that the rule will leave low- and medium-income households without professional guidance, further widening the retirement savings gap. The DoL should consider ways to minimize or manage these costs. Options include incentivizing advisors to continue guiding small-scale savers, perhaps through the tax code, and promoting increased financial literacy training for households with modest savings. Streamlining and simplifying the rules would also help.

3. Need for Research on Online Solutions. The Administration has argued that online advice may be the solution for these savers, and for some fraction of this group that may be a good alternative. Relying on online sites to solve the problem seems a stretch, however. Maybe at some time in the future that will be a viable option but at present there are many people, especially in the older generation, who lack sufficient knowledge and experience to rely on web solutions. The web offers dangers as well as solutions, with the potential for sub-optimal or fraudulent advice. I urge the DoL to commission independent research to determine how well a typical saver does when looking for investment advice online. Do they receive good advice? Do they act on that advice? What classes of savers do well or badly with online advice? Can web advice be made safer? To what extent do persons receiving online advice avoid the mistakes described earlier?

4. Pitfalls of MyRA. Another suggestion by the Administration is that small savers use MyRA as a guide to their decisions and this option is low cost and safe, but the returns are very low and will not provide much of a cushion in retirement unless households set aside a much larger share of their income than has been the case historically.

5. Clarifications about education versus advice. The proposed rule distinguished education from advisement. An advisor can share general information on best practices in retirement planning, including making age-appropriate asset allocations and determining the ideal age at which to retire, without triggering fiduciary responsibility. This is certainly a useful distinction. However, some advisors could frame this general information in a way that encourages clients to make decisions that are not in their own best interest. The DoL ought to think carefully about the line between education and advice, and how to discourage advisors from sharing information in a way that leads to future conflicts of interest. One option may be standardizing the general information that may be provided without triggering fiduciary responsibility.

6. Implications for risk management. Under the proposed rule advisors may be reluctant to assume additional risk and worry about litigation. In addition to pushing small-scale savers out of the market, the rule may encourage excessive risk aversion in some advisors. General wisdom suggests that young savers should have relatively high-risk portfolios, de-risking as they age, and ending with a relatively low-risk portfolio at the end of the accumulation period. The proposed rule could cause advisors to discourage clients from taking on risk, even when the risk is generally appropriate and the investor has healthy expectations. Extreme risk aversion could decrease both market returns for investors and the “value-add” of professional advisors. The DoL should think carefully about how it can discourage conflicted advice without encouraging overzealous risk reductions.

The proposed rule is an important effort to increase consumer protection and retirement security. However, in its current form, it may open the door to some undesirable or problematic outcomes. With some thoughtful revisions, I believe the rule can provide a net benefit to the country.

^{1. Baily’s work has been assisted by Sarah E. Holmes. He is a Senior Fellow at the Brookings Institution and a Director of The Phoenix Companies, but the views expressed are his alone.}

^{2. As you know, postponing Social Security benefits yields an 8 percent real rate of return, far higher than most people earn on their investments. For most of those that can manage to do so, postponing the receipt of benefits is the best decision.}

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Can this sector be saved? We often hear sentiments like: "Does America still produce anything?" and "The good jobs in manufacturing have all gone." There is nostalgia for the good old days when there were plentiful well-paid jobs in manufacturing. And there is anger that successive U.S. administrations of both parties have negotiated trade deals, notably NAFTA and the admission of China into the World Trade Organization, that have undercut America's manufacturing base.

Those on the right suggest that if burdensome regulations were lifted, this would fire up a new era of manufacturing prowess. On the left, it is claimed that trade agreements are to blame and, at the very least, we should not sign any more of them. Expanding union power and recruiting are another favorite solution. Despite his position on the right, Donald Trump has joined those on the left blaming China for manufacturing’s problems.

What is the real story and what needs to be done to save this sector? The biggest factor transforming manufacturing has been technology; and technology will largely determine its future.

Disappearing jobs

Employment in the manufacturing sector declined slowly through the 1980s and 1990s, but since 2000, the decline has been much faster falling by over 6 million workers between 2000 and 2010. There were hopes that manufacturing jobs would regain much of their lost ground once the recession ended, but the number of jobs has climbed by less than a million in the recovery so far and employment has been essentially flat since the first quarter of 2015. Manufacturing used to be a road to the middle class for millions of workers with just a high school education, but that road is much narrower today—more like a footpath. In manufacturing’s prime, although not all jobs were good jobs, many were well paid and offered excellent fringe benefits. Now there are many fewer of these.

Sustained but slow output growth

The real output of the manufacturing sector from 2000 to the present gives a somewhat more optimistic view of the sector, with output showing a positive trend growth, with sharp cyclical downturns. There was a peak of manufacturing production in 2000 with the boom in technology goods, most of which were still being produced in the U.S. But despite the technology bust and the shift of much of high-tech manufacturing overseas, real output in the sector in 2007 was still nearly 11 percent higher than its peak in 2000.

Production fell in the Great Recession at a breathtaking pace, dropping by 24 percent starting in Q3 2008. Manufacturing companies were hit by a bomb that wiped out a quarter of their output. Consumers were scared and postponed the purchase of anything they did not need right away. The production of durable goods, like cars and appliances, fell even more than the total. Unlike employment in the sector, output has reclaimed it previous peak and, by the third quarter of 2015, was 3 percent above that peak. The auto industry has recovered particularly strongly. While manufacturing output growth is not breaking any speed records, it is positive.

Understanding the pattern

The explanation for the jobs picture is not simple, but the Cliff Notes version is as follows: manufacturing employment has been declining as a share of total economy-wide employment for 50 years or more—a pattern that holds for all advanced economies, even Germany, a country known for its manufacturing strength. The most important reason for U.S. manufacturing job loss is that the overall economy is not creating jobs the way it once did, especially in the business sector. This conclusion probably comes as a surprise to most Americans who believe that international trade, and trade with China in particular, is the key reason for the loss of jobs. In reality, trade is a factor in manufacturing weakness, but not the most important one.

The most important reason for U.S. manufacturing job loss is that the overall economy is not creating jobs the way it once did, especially in the business sector.

The existence of our large manufacturing trade deficit with Asia means output and employment in the sector are smaller than they would be with balanced trade. Germany, as noted, has seen manufacturing employment declines also, but the size of their manufacturing sector is larger than ours, running huge trade surplus. In addition, right now that there is global economic weakness that has caused a shift of financial capital into the U. S. looking for safety, raising the value of the dollar and thus hurting our exports. In the next few years, it is unlikely that the U.S. trade deficit will improve—and it may well worsen.

Even though it will not spark a jobs revival, manufacturing is still crucial for the future of the U.S. economy, remaining a center for innovation and productivity growth and if the U.S. trade deficit is to be substantially reduced, then manufacturing must become more competitive. The services sector runs a small trade surplus and new technologies are eliminating our energy trade deficit. Nevertheless a substantial expansion of manufactured exports is needed if there is to be overall trade balance.

Disruptive innovation in manufacturing

The manufacturing sector is still very much alive and reports of its demise are not just premature but wrong. If we want to encourage the development of a robust competitive manufacturing sector, industry leaders and policymakers must embrace new technologies. The sector will be revived not by blocking new technologies with restrictive labor practices or over-regulation but by installing them—even if that means putting robots in place instead of workers. To speed the technology revolution, however, help must be provided to those whose jobs are displaced. If they end up as long-term unemployed, or in dead-end or low-wage jobs, then not only do these workers lose out but also the benefits to society of the technology investment and the productivity increase are lost.

The manufacturing sector performs 69 percent of all the business R&D in the U.S. which is powering a revolution that will drive growth not only in manufacturing but also in the broader economy as well. The manufacturing revolution can be described by three key developments:

1. In the internet of things, sensors are embedded in machines, transmitting information that allows them to work together and report impending maintenance problems before there is a breakdown.
2. Advanced manufacturing includes 3-D printing, new materials and the “digital thread” which connects suppliers to the factory and the factory to customers; it breaks down economies of scale allowing new competitors to enter; and it enhances speed and flexibility.
3. Distributed innovation allows crowdsourcing is used to find radical solutions to technical challenges much more quickly and cheaply than with traditional R&D.

In a June 2015 Fortune 500 survey, 72 percent of CEOs reported their biggest challenge is that technology is changing fast, naming it as their number one challenge. That new technology churn is especially acute in manufacturing. The revolution is placing heavy demands on managers who must adapt their businesses to become software companies, big data companies, and even media companies (as they develop a web presence). Value and profit in manufacturing is shifting to digital assets. The gap between current practice and what it takes to be good at these skills is wide for many manufacturers, particularly in their ability to find the talent they need to transform their organizations.

Recent OECD analysis highlighted the large gap between best-practice companies and average companies. Although the gap is smaller in manufacturing than in services because of the heightened level of global competition in manufacturing, it is a sign that manufacturers must learn how to take advantage of new technologies quickly or be driven out of business.

Closing the trade deficit

A glaring weakness of U.S. manufacturing is its international trade performance. Chronic trade deficits have contributed to the sector’s job losses and have required large-scale foreign borrowing that has made us a net debtor to the rest of the world -- to the tune of nearly $7 trillion by the end of 2014. Running up endless foreign debts is a disservice to our children and was one source of the instability that led to the financial crisis. America should try to regain its balance as a global competitor and that means, at the least, reducing the manufacturing trade deficit. Achieving a significant reduction in the trade deficit will be a major task, including new investment and an adjustment of today’s overvalued dollar.

The technology revolution provides an opportunity, making it profitable to manufacture in the U.S. using highly automated methods. Production can be brought home, but it won’t bring back a lot of the lost jobs. Although the revolution in manufacturing is underway and its fate is largely in the hands of the private sector, the policy environment can help speed it up and make sure the broad economy benefits.

First, policymakers must accept that trying to bring back the old days and old jobs is a mistake. Continuing to chase yesterday’s goals isn’t productive, and at this point it only puts off the inevitable. Prioritizing competitiveness, innovativeness, and the U.S. trade position over jobs could be politically difficult, however, so policymakers should look for ways to help workers who lose jobs and communities that are hard hit. Government training programs have a weak track record, but if companies do the training or partner with community colleges, then the outcomes are better. Training vouchers and wage insurance for displaced workers can help them start new careers that will mostly be in the service sector where workers with the right skills can find good jobs, not just dead-end ones.

Second, a vital part of the new manufacturing is the ecosystem around large companies. There were 50,000 fewer manufacturing firms in 2010 than in 2000, with most of the decline among smaller firms. Some of that was inevitable as the sector downsized, but it creates a problem because as large firms transition to the new manufacturing, they rely on small local firms to provide the skills and even the technologies they do not have in-house. The private sector has the biggest stake in developing the ecosystems it needs, but government can and has helped, particularly at the state and local level. Sometimes infrastructure investment is needed, land can be set aside, mentoring programs can be established for young firms, help can be given in finding funding, and simplified and expedited permitting processes instituted.

It is hard to let go of old ways of thinking. Policymakers have been trying for years to restore the number of manufacturing jobs, but that is not an achievable goal. Yes manufacturing matters; it is a powerhouse of innovation for our economy and a vital source of competitiveness. There will still be good jobs in manufacturing but it is no longer a conveyor belt to the middle class. Policymakers need to focus on speeding up the manufacturing revolution, funding basic science and engineering, and ensuring that tech talent and best-practice companies want to locate in the United States.

Productivity, which is the output produced by each hour of work in the non-farm business sector, grew at a paltry 1.2 percent a year in the 10 years through the third quarter of this year. In the prior decade, the growth rate was more than double, at around 3 percent a year. The question is what it means.

High-wage workers have done better than the average Joe; and profits have grown faster than wages, but productivity growth is even more important — it is the rising tide that lifts most boats. Average wages grew at more than 2 percent a year during the years of strong productivity growth and are growing at under 1 percent a year now.

The pace of the productivity increase is also vital to the nation’s finances. The last balanced federal budgets came after the fast-growth 1990s, which drove up incomes, profits and tax revenues. Today there are scary forecasts of the size of future budget deficits, and those forecasts are set to become much scarier unless productivity improves.

Slow productivity growth does not have the drama of Janet Yellen arguing with angry senators. It is a problem like termites in the attic where you don’t realize it exists until the roof collapses. And, even worse, it is a problem where there is no generally recognized explanation, nor are there obvious solutions.

One possible explanation, put forward by leading economist Robert Gordon, is that all the best innovations have been used up. He looks at the broad sweep of history, describing the age of steam, the age of electricity, and so on. The last wave, he argues, is the one fueled by the technology bubble, and it ran its course 10 years ago.

Gordon’s diagnosis is hard to swallow, however, as technology is changing all around us. A June 2015 survey of the Fortune 500 companies asked CEOs to list the biggest challenges they face, and their number-one answer by far was the challenge of rapid technological change. Any visitor to Silicon Valley or Cambridge, Massachusetts, is impressed by the pace of change.

There seems to be a major gap occurring between the cup and the lip. Technology changes apace, but the changes are apparently not translating into more efficient factories and offices.

One reason for this could be a lack of investment in business and human capital —the skills of the workforce. The Great Recession certainly put a damper on all forms of investment and the recovery has been sluggish. Regardless of what caused the slowdown, a boost to investment would help productivity.

Another possibility is that economic data are not capturing the fruits of innovations. Improved surgical procedures, new drugs and better treatment protocols allow hospitals to become more productive, but this large sector of the economy shows almost no measured productivity growth. Silicon Valley is turning out new apps to make our lives easier, but very little of this activity shows up in our productivity statistics.

Another clue to the productivity problem is that, for some reason, the dynamism of the U.S. economy seems to have faded. The number of startups is down, especially the so-called gazelles that grow fast and become much more productive.

Traditionally, a source of productivity growth has been the expansion of the most productive firms and the contraction of the less productive, and this dynamic has also slowed, perhaps due to diminished access to funding, or maybe regulation has become more burdensome.

While the cause of the problem and the nature of the solution remain uncertain, there is a lot of exciting research going on to understand productivity better and formulate policies to enhance it. If misery loves company, the United States should feel better because weak productivity is a problem for all advanced economies.

Moreover, understanding slow growth is not just a challenge for “experts.” Many of the latest best ideas are coming from the global community. Perhaps a new explanation for and solution to the productivity problem will bubble up from the new interconnected world.

Editor's Note: this piece first appeared in Inside Sources. 

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The White House Council of Economic Advisers (CEA) was created by Congress in 1946 to advise the president on ways “to foster and promote free competitive enterprise” and “to promote maximum employment, production and purchasing power.” President Truman, who signed the Employment Act of 1946 into law, was unenthusiastic about the Council and didn’t nominate members for nearly six months. Yet the CEA, comprised of three individuals whom Congress says are to be “exceptionally qualified,” has not only survived but also prospered for 70 years and remains an important part of the president’s economic policy decisionmaking.

On February 11, the Hutchins Center on Fiscal and Monetary Policy at Brookings marked this anniversary by examining the ways the CEA and other economists succeed and fail when they set out to advise elected politicians and tap the expertise of some of the “exceptionally qualified” economists who have chaired the Council over the past four decades.

You can join the conversation and tweet questions for the panelists at #CEAat70.

Video

• Panel 1: The CEA in Moments of Crisis
• Panel 2: The CEA and Policymaking
• Panel 3: Current Economic Policy Issues

Audio

• The Council of Economic Advisers: 70 years of advising the president

Transcript

• Uncorrected Transcript (.pdf)

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• 20160211_economic_advisers_transcript

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The financial crisis is now eight years behind us, but its legacy lingers on. Many Americans are concerned about their financial security and are particularly worried about whether they will have enough for retirement. Guaranteed benefit pensions are gradually disappearing, leaving households to save and invest for themselves. What role could equities play for retail investors?

Another concern about the lingering impact of the crisis is that business investment and overall economic growth remains weak compared to expectations. Large companies are able to borrow at low interest rates, yet many of them have large cash holdings. However, many small and medium sized enterprises face difficulty funding their growth, paying high risk premiums on their borrowing and, in some cases, being unable to fund investments they would like to make. Equity funding can be an important source of growth financing.

On Friday, April 15, the Initiative on Business and Public Policy at Brookings examined what role equity markets can play for individual retirement security, small business investment and whether they can help jumpstart American innovation culture by fostering the transition from startups to billion dollar companies.

You can join the conversation and tweet questions for the panelists at #EquityMarkets.

Video

• Keynote address by Richard G. Ketchum
• Panel Discussion
• Keynote address by Roger Ferguson

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• Not just for the professionals? Understanding equity markets for retail and small business investors

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• Uncorrected Transcript (.pdf)

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• Equity Markets Retirement Security 2016 Apr 15 (2)
• 20160415_equity_markets_transcript

After 10 hectic days, Cypriots will return to economic life. The price, however, is an inevitable and costly adjustment plan. But contrary to many predictions, the eurozone and the Cypriot government have been able to find a solution in less than 10 days. Moreover, the eurozone has avoided yet another financial hurdle that, despite its small size, was described as having the potential to start another acute phase of the euro crisis.

The management of the eurozone crisis over the last three years has proven to be extremely tortuous. It remains so, and this episode will certainly not be the last. However, observers might also point to how the management by congressional leaders of the U.S. fiscal and deficit problems reveals similar political complexities. Could both be the inevitable result of a democratic, diverse, continental political constituency?

What people need to understand about the eurozone is its continuous willingness to ensure the future of the euro, and its (until now) proven capacity to find compromises despite diverging national interests.

Cyprus has been recognized for months as a ticking bomb within the eurozone, mixing a hypertrophied banking system (that produced jobs and wealth for Cypriots) with huge Russian deposits and suspected money laundering.

Cyprus has been recognized for months as a ticking bomb within the eurozone, mixing a hypertrophied banking system (that produced jobs and wealth for Cypriots) with huge Russian deposits and suspected money laundering. It seems that this had become Cyprus’s most important comparative advantage. The fight against money laundering is supposed to be a great cause of the OECD countries, and it is surprising to note that this aspect did not receive appropriate weight when commenting on the unconventional tools used by the troika to design its plan. The Cypriot banking system is not like the average banking system of Southern Europe. It is a case in itself and deserves a solution of its own.

The “success story” of Cyprus was destroyed by the haircut on Greek bonds; Cypriot banks hold massive amounts of Greek bonds on behalf of their foreign clients. Incidentally, this says a lot about the prowess of this supposed “international financial center” and the awareness of its clients. For many reasons, mostly the country’s democratic process, the active search for a solution to problems in Cyprus had been postponed for months until Saturday, March 16, when an agreement was reached between the newly-elected president of Cyprus, the eurozone governments, and the troika. On that date, every old prejudice about the mismanagement of the eurozone crisis, that had been shelved for the last year, suddenly resurfaced with a new torrent: of criticisms (an ill-conceived plan); of denunciations (a crisis of stupidity); of rejection (Europe is for people, not for Germany); of financial horrors (inevitable propagation of the Cypriot bank run); and finally of doomed forecasts (be alert, the breakup is coming).

Yet one week later, it is interesting to visit the control room and watch the radar screens:

• The agreement? Better designed and operational as of Monday, March 25; 
•  Bank runs propagation? No sign (even in the London branches of the two Cypriot banks);
• European periphery bond market? A definitely strong first quarter;
• Stock markets? Stable;
• Exchange markets? Stable.

However, we should not consider this summary to mean that this new episode in the eurozone saga has been more efficiently managed than the previous ones. Definitely not!

Two examples among many explain why this is not the case. First, the idea to tax every bank account whatever its amount was not a product of “German stupidity” but reflects a demand from the Cypriot president, who was willing to preserve the image of the island as a financial center; as if the confidence of dirty money could be a sustainable comparative advantage for Cyprus! The stupefying thing is that the other euro governments accepted this clause even though it was financially dangerous and certain to be rejected by the populace and its representatives. In following the relief produced by the substance of the new agreement, the Dutch finance minister and chairman of the Eurogroup announced that the Cypriot treatment was great news because it showed that bank depositors may be expected to contribute to future bailout packages. However this is explosive and potentially as damaging as the PSI initiative adopted at Deauville. There was immediate backtracking but this reminds us that the whole process remains fragile. All this being properly considered, we should examine the ongoing euro crisis along a different narrative.

And after having described the situation in Cyprus as potential chaos in the waiting, experts now explain the absence of collateral effects by referring to the July 2012 famous commitment of Mario Draghi.

What the above mentioned facts demonstrate is that markets and people outside of Cyprus adopted (at least until the Dutch minister’s proclamation) a much calmer view than specialized commentators. And after having described the situation in Cyprus as potential chaos in the waiting, experts now explain the absence of collateral effects by referring to the July 2012 famous commitment of Mario Draghi. This is at best an excuse for not exploring other explanations and at worst a superstition for placing too much power in his mouth. Rather, two broader facts should be emphasized:

• First, looking outside the eurozone, the euro has remained as attractive an international currency as before all the vicissitudes of the sovereign debt crisis despite all the aggressiveness on part of the international financial press. The exchange rate with the dollar constantly remained close to 1.3— a rate which reveals an over-valuation of the euro; such stability is surprising given all the daily announcements of its forthcoming collapse. This fact, which has never received proper attention, at the very least proves that the euro has always remained as attractive as the dollar. After all the drama we have gone through, there was little chance that the Cypriot episode will change this global perception of the euro.
  
  
• Second, within the eurozone, there is an underestimated willingness to stick to the euro as the currency of the European continent. Austerity measures are never popular and governments that adopt them have been punished in Greece, Spain, France and Italy. Nevertheless, this is the natural product of democracy, and when it comes to the explicit question— “do you prefer to stay in the eurozone, with its mechanisms and constraints, or move on your own?”— the popular answer everywhere has been “we stay”. This is what popular votes have proven in Ireland, Greece and Spain, as well as in Germany where local elections have regularly promoted euro-friendly candidates.

So what can we conclude from the recent crisis in Cyprus? The first conclusion is that Cyprus will pay a high price for exiting a dramatic situation and securing access to eurozone support; no other feasible deal was better than that one at that particular moment. Second, we have witnessed once again the willingness of the eurozone to stay the course, and its ability to design imperfect but feasible compromises, which is not so bad when compared to what’s going on in Washington. In brief, this is another Euro-solution. However, Cyprus is certainly not the last challenge confronting the governments and people of the eurozone. In that sense, the most problematic lesson from this chaotic week is not financial but political. The future of Europe more and more lies in the hands of Germany and there is no place here for accusing the Germans of egoism. Financially speaking, they have moved forward at every step during the last three years and they are the ones that repeatedly take the biggest risks. There is no question that Germany has a prominent voice and that it defends its financial security before entering into an agreement. This is what should have been expected and this is what we have seen with what happened in Cyprus. Looking forward, the bigger problem facing the eurozone is the urgent need to design a macroeconomic policy that will spur a return to growth for the region. On this issue, there is still no visible Euro-solution and that could prove to be the biggest risk facing Europe.

Introduction

Ninety years after the foundation of the Turkish Republic, Ankara appears to be on the verge of a paradigmatic change in its approach to the Kurdish question. It is too early to tell whether the current negotiations between Ankara and the Kurdish Workers’ Party (PKK) will manage to accommodate Kurdish cultural and political demands. Yet, for perhaps the first time in its history, the Turkish Republic seems willing to incorporate Kurds into the political system rather than militarily confront them. For decades, Turkey sought to assimilate its sizable Kurdish minority, about 15 million people, or around 20 percent of its total population. From the mid-1920s until the end of the Cold War, Ankara denied the ethnic existence of Kurds and their cultural rights. It took a three-decade-long PKK-led insurgency – which started in 1984 and caused a death toll of 40,000 – for the republic to start accepting the “Kurdish reality” and introduce cultural reforms. This perhaps explains why the PKK’s jailed leader Abdullah Öcalan is a national hero in the eyes of significant segments of Kurdish society.

Of the approximately 30 million Kurds in the Middle East, about half live in Turkey. Kurds also constitute a significant minority in neighboring Iraq, Iran and Syria. The Palestinians are often referred to as the most famous case of a “nation without a state” in the Middle East. But the Kurds, who outnumber the Palestinians by a factor of five, are by far the largest ethnic community in the region seeking national self-determination. The future of Turkey - and the Middle East - is therefore intimately linked to the question of Kurdish nationalism.

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• Turkey and the Kurds: From Predicament to Opportunity

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For the first time in Turkey’s history, the electorate directly cast their votes for president earlier this week, overwhelmingly electing current Prime Minister Recep Tayyip Erdoğan to the position with 52 percent of the votes. After 12 years in power, Erdoğan’s victory was widely expected, even though the two main opposition parties chose Ekmeleddin İhsanoğlu as their common candidate in a rare show of unity, and Selahattin Demirtaş the leader of the main Kurdish political party in Turkey, tried hard to appeal to an electoral base beyond just Kurds. The impact of the election’s results, however, remains to be seen.

How should the election results be interpreted? Will Erdoğan succeed in transforming Turkey from a parliamentary system to a presidential one? Who will he chose as prime minister? What will this outcome mean for Turkey’s economic performance and its foreign policy at a time when the neighborhood is sliding deeper into instability, if not chaos? What will happen to Turkey’s European vocation and its transatlantic relations?

On September 4, the Turkey Project of the Center on the United States and Europe at Brookings hosted a panel discussion to consider what President Erdoğan’s new mandate means for the nation, its government and institutions and the ruling Justice and Development Party. Kemal Kirisci, TÜSİAD senior fellow and Turkey project director, moderated the conversation. Panelists included Robert Wexler of the S. Daniel Abraham Center for Middle East Peace, Kadir Üstün of the SETA Foundation, and Brookings Nonresident Senior Fellow Ömer Taşpınar.

Join the conversation on Twitter using #PresErdogan

Audio

• President Erdoğan: Turkey’s Election and the Future

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• Uncorrected Transcript (.pdf)

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• 20140904_erdogan_turkey_transcript