Amy Liu’s recent paper, “Remaking Economic Development,” is disruptive in that it rightfully undercuts the shaky foundation of what draws many practitioners to the field: the idea that success is simply structuring transactions to attract new jobs and investment. These two metrics alone can’t diagnose the economic health or trajectory of a community. Instead, as the paper outlines, setting the right goals—measured by growth, prosperity, and inclusion—provides a much richer framework for a community’s trajectory, vibrancy, and opportunity.

Goal-setting clarifies how a community defines success and when it has been achieved, and promotes collaboration and increases buy-in from diverse stakeholders. If, as Liu argues, goals were designed to lead to growth, prosperity, and inclusion, metro areas would make dramatically different choices around policies, investments, and priorities, and people and communities would likely be in an overall stronger economic position.

However, these goals represent a longer-term proposition than conventional measures, and, perhaps naively, “Remaking Economic Development” fails to acknowledge the barriers that prevent most communities from setting the right goals:

1. Goals should focus on long-term interests, but election cycles prioritize clear near-term political wins. Meaty investments in infrastructure, workforce development, and fiscal policy reform needed to shift the competitive position of a community rarely yield easily defined and clearly increased short-term political capital.
2. Economies function as regions, but many municipal strategies are not aligned with regional goals. A metropolitan area is the logical unit to measure success, but civic leaders are elected from individual municipalities, or from a state that has a larger focus. Although it’s easier to market a region of 5 million people than a city of 650,000, in Detroit, intramural competition between cities and suburbs, suburbs and suburbs, and even neighborhoods within the city all undermine the cooperative effort to set goals regionally. The failure of mayors within a region to recognize their economic connectedness is a huge problem and fuels wasteful incentive battles over retail and other projects that are not economic drivers.
3. Goal-setting takes time, money, and requires data, but capacity is in short supply. Most economic developers and political leaders lack the framework, experience, and manpower to effectively lead a goal-setting process. And if the choice is between collectively setting goals or managing a flurry of “bird-in-hand” transactions, the transaction under consideration will always receive resources first. Leaders are primarily evaluated on near term jobs and investment figures; not having the time to lead a goal-setting process and, in many cases, lacking the approach and datasets to appropriately undertake this activity make goal-setting easy to eliminate.

Despite these obstacles, setting the right goals is critical to building healthy communities. To combat political challenges, strong collaboration between business and public sector leadership is crucial, as is the recognition of diverse sub-economies with different value propositions and opportunities. Leaders must ultimately acknowledge that near term wins mean little if they are leading down a path that will not fundamentally address the long-term investment climate and the region’s productive capacities, grow wages or address employment levels, and offer broad opportunities for diverse economic participation. The following steps can help:

1. Harness diverse, cross-sectoral perspectives. Fundamentally, businesses understand their industries better than anyone else; hence the public sector should identify ways to encourage growth, increased productivity, greater inclusion, and more competitiveness in targeted sectors by listening to businesses and jointly setting goals that marry private sector profit and public economic and social interests effectively. This approach may offset some of the other realities of short election cycles and limited capacity to participate in goal-setting or planning processes.
2. Identify unique roles for communities within a larger regional framework. Although competition between local cities may inhibit the most meaningful dialogue and alignment of interests, deeper analysis often produces greater clarity on the niche opportunities for different communities. For example, although Detroit has a strong manufacturing base, a major project requiring more than 40 acres will likely have better site options in the suburbs. In the same vein, companies seeking a vibrant urban campus with easy access to food, living, and other amenities are likely better suited to Detroit than one of the surrounding communities. That said, both companies are likely to draw employees from communities all over the region. Effective goal-setting includes analysis that should allow municipalities to uncover their niche opportunities within a larger regional framework.
3. Balance short-term and long-term priorities and successes. The truth is that near term investments are vital in creating momentum, providing stability, and creating jobs while long-term investments, policy decisions, and industry-focused asset development fundamentally position an economy to win over time. For example, incentives play an important role in offsetting competitive disadvantages in the short-term and should be used as a way to fill the gap while a community fixes the bigger economic challenges, ranging from exorbitant development costs to workforce development issues. The disconnect is that many communities are not focusing incentives on strategic, long-term priorities.

"Remaking Economic Development” elegantly exposes the shortsightedness toward aggressive deal-making that often prevents communities from thoughtfully building their long-term economic strength with an eye on growth, prosperity, and inclusion. Sadly, the economic development profession has historically focused on growth without much attention to prosperity and inclusion, which are arguably most important in building a sustainable economy. Goal-setting—painful as it may be—is the first step towards remaking the practice and establishing an honest foundation to build a better economy in the future.

      

      

Editors’ Note: We need to do better with the long-term instruments of counterterrorism, write Raymond Odierno and Michael O’Hanlon. That includes efforts within our own societies to promote social cohesion. This article originally appeared on USA Today.

In the aftermath of the Brussels tragedy, many good ideas are being floated to improve defenses against terrorists who are poised to strike. Belgium needs more resources for police work, including staking out suspects. Europe needs terrorist watch lists that are better automated and integrated. Police forces and national intelligence agencies need to work together more effectively, readjusting the point at which traditional police work ends and counterterrorism raids begin. We need to use technology such as closed-circuit TV, as well as simpler but time-tested methods like bomb-smelling dogs, more effectively in unhardened public places like subway stops and the external lobbies of airports.

The above are immediate and short-term measures. They are crucial. They are also insufficient. We need to continue to go after Islamic State's finances, too, leading a worldwide effort to restrict its sources of revenue and ability to store and move funds around. Beyond these actions, we need to do better with the long-term instruments of counterterrorism. These include the use of social media and other counter-messaging against the so-called caliphate. But they also include efforts within our own societies and especially those in Europe to promote social cohesion. Within many countries the inability to develop programs encouraging assimilation of immigrants, and of the home-born disaffected, has led to substantial pockets of disenfranchised citizens, a large majority being Muslim.

At least on issues concerning Muslim-majority communities, the United States can help point the way. We are fortunate, largely to the credit of our nation's Muslims who join our society in full and pursue the American dream, to have relatively few problems with Islamist extremism. Of course, there are exceptions, but on the whole, Muslim-American communities are our single greatest domestic allies in the struggle against extremism at home. They help provide information on would-be terrorists in their midst; they do not typically shelter, aid or condone the thinking of such extremists. Most of all, acting as loyal citizens, they provide role models and hopeful visions to their young, reducing the odds that the 20-somethings who seem to wind up the main culprits in most attacks abroad will feel the same urge within the United States. Because our own terror watch lists have gotten better since 9/11, and because of the hard work of border and immigration agencies, we are also often able to limit the movements of suspected terrorists to the United States from abroad.

None of this is to sound complacent. More than 70 individuals were arrested on American soil last year on suspicion of interest in supporting Islamic State or otherwise conducting extremist activity, and we suffered the San Bernardino tragedy.

Beyond matters of culture and assimilation, specific programs here contribute as well. In Montgomery County, Maryland, a coalition of faith leaders, school officials and law enforcement officers collaborate to try to identify and help would-be radicals before they turn to dangerous ways. In Ohio, fire departments try to reach into difficult neighborhoods and recruit workers. They recognize that their role in society can be less polarizing to some disaffected than would, say, certain types of police outreach, but that by extending the presence of the government into places where it is not always welcome, they can tamp down the temptations of some to turn to violence.

Many places in Britain are doing the same thing. Britain is a sort of bridge to Europe on this issue, like on many others—not having the apparent problems of say Molenbeek, the enclave in Brussels from which recent attackers have originated, but also having more concentrations of recent immigrants from the Middle East than does the United States. Aware of this situation, British authorities also try to extend the state's connections with shaky neighborhoods in ways that seek to engender trust in the state and better community rapport. Sometimes this can rely on police, who in the United Kingdom are usually unarmed. However, at other times, less traditional instruments, or less potentially imposing symbols of state authority, can be better. Again, fire departments come to mind, as do work programs that foster a sense of community involvement and cohesion (while also providing a paycheck). Sometimes armies can help, depending on their roles and reputations in given societies. Any of these can improve the government's image in key neighborhoods, while also helping create the kinds of communications between community leaders and authorities that produce intelligence leads when things start to go off the tracks.

U.S. presidential candidates are not talking much about these kinds of issues. But efforts to build social cohesion are not at odds with what some of them are advocating in response to Brussels. Greater police presence in jurisdictions like Molenbeek, intelligence surges and reforms, and also stronger actions against Islamic State in the Middle East and beyond are needed, to be sure. But such measures are not, in themselves, adequate.

Building social cohesion is difficult, of course, and often the strides forward are slow to come and hard to measure. It usually must happen at the city level. It is usually manpower-intensive work. It is always painstaking. Sometimes, of course, it simply fails. But without a reinvigorated emphasis on building social cohesion, in which cities and other jurisdictions learn from each other and share best practices to tie their communities more strongly together, we will not succeed in this crucial challenge of our times.

      

Announcements of new federal regulations on the use of program-related investments (PRIs) and the launch of a groundbreaking fund in Chicago are the latest signals that impact investing, once a marginal philanthropic and policy tool, is moving into the mainstream. They are also illustrative of two important and complementary paths to institutional change: fast-moving, collaborative local leadership creating innovative new instruments to meet funding demands; federal regulators updating policy to pave the way for change at scale.

Impact investing, referring to “investment strategies that generate financial returns while intentionally improving social and environmental conditions,” provides an important tier of higher-risk capital to fund socially beneficial projects with revenue-generating potential: affordable housing, early childhood and workforce development programs, and social enterprises. It is estimated that there are over $60 billion of impact investments globally and interest is growing—an annual JP Morgan study of impact investors from 2015 reports that the number of impact investing deals increased 13 percent between 2013 and 2014 following a 20 percent increase in the previous year.

Traditionally, foundations have split their impact investments into two pots, one for mission-related investments, designed to generate market-rate returns and maintain and grow the value of the endowment, and the other for program-related investments. PRIs can include loans, guarantees, or equity investments that advance a charitable purpose without expectation of market returns. PRIs are an attractive use of a foundation’s endowment as they allow foundations to recycle their limited grant funds and they count towards a foundation’s charitable distribution requirement of 5 percent of assets. However they have been underutilized to date due to perceived hurdles around their use–in fact among the thousands of foundations in the United States, currently only a few hundred make PRIs.

But this is changing, spurred on by both entrepreneurial local action and federal leadership. On April 21, the White House announced that the U.S. Department of the Treasury and Internal Revenue Service had finalized regulations that are expected to make it easier for private foundations to put their assets to work in innovative ways. While there is still room for improvement, by clarifying rules and signaling mainstream acceptance of impact investing practices these changes should lower the barriers to entry for some institutional investors.

This federal leadership is welcome, but is not by itself enough to meet the growing demand for capital investment in the civic sector. Local innovation, spurred by new philanthropic collaborations, can be transformative. On April 25 in Chicago, the Chicago Community Trust, the Calvert Foundation, and the John D. and Catherine T. MacArthur Foundation launched Benefit Chicago, a $100 million impact investment fund that aims to catalyze a new market by making it easier for individuals and institutions to put their dollars to work locally and help meet the estimated $100-400 million capital needs of the civic sector over the next five years.

A Next Street report found that the potential supply of patient capital from foundations and investors in the Chicago region was more than enough to meet the demand – if there were ways to more easily connect the two. Benefit Chicago addresses this market gap by making it possible for individuals to invest directly through a brokerage or a donor-advised fund and for the many foundations without dedicated impact investing programs to put their endowments to work at scale. All of the transactional details of deal flow, underwriting, and evaluation of results are handled by the intermediary, which should lead to greater efficiency and a significant increase in the size of the impact investing market in Chicago.

In the last few years, a new form of impact investing has made measurement of social return to investments even more concrete. Social impact bonds (SIBs), also known as pay for success (PFS) financing, are a way for private investors (including foundations) to provide capital to support social services with the promise of a return on their investment from a government agency if some agreed-upon social outcomes are achieved. These PFS transactions range from funding to support high-quality early childhood education programs in Chicago to reduction in chronic individual homelessness in the state of Massachusetts. Both the IRS and the Chicago announcements are bound to contribute to the growth of the impact bond market which to date represents a small segment of the impact investing market.

These examples illustrate a rare and wonderful convergence of leadership at the federal and local levels around an idea that makes sense. Beyond simply broadening the number of ways that foundations can deploy funds, growing the pool of impact investments can have a powerful market-making effect. Impact investments unlock other tiers of capital, reducing risk for private investors and making possible new types of deals with longer time horizons and lower expected market return.

In the near future, these federal and local moves together might radically change the philanthropic landscape. If every major city had a fund like Benefit Chicago, and all local investors had a simple on-ramp to impact investing, the pool of capital to help local organizations meet local needs could grow exponentially. This in turn could considerably improve funding for programs—like access to quality social services and affordable housing—that show impact over the long term.

Impact investing can be a bright spot in an otherwise somber fiscal environment if localities keep innovating and higher levels of government evolve to support, incentivize, and smooth its growth. These announcements from Washington and Chicago are examples of the multilevel leadership and creative institutional change we need to ensure that we tap every source of philanthropic capital, to feel some abundance in an era where scarcity is the dominant narrative.

Editor's Note: Alaina Harkness is a fellow at Brookings while on leave from the John D. and Catherine T. MacArthur Foundation, which is a donor to the Brookings Institution. The findings, interpretations and conclusions posted in this piece are solely those of the authors and not determined by any donation.

      

Stephen was still a teenager on the north side of St. Louis when his dad, a police officer, was killed during a robbery in their neighborhood. Despite the trauma, Stephen later joined the police force to continue his dad’s legacy and commitment to safe and inclusive neighborhoods. But even before the fatal shooting of Michael Brown in Ferguson in 2014, Stephen (not his real name) yearned to right local wrongs through broader approaches. “The darkest forces weren’t necessarily the ones getting arrested,” he observed. “So I retired from the police force after 22 years, essentially to chase after a different type of perpetrator.” Wanting to focus on policies at multiple levels of government that “were causing the disparities that fueled increasing crime and violence in St. Louis,” Stephen pivoted to civil rights enforcement, tracking policy violations and innovations at a government agency in the St. Louis region.

I met Stephen in February while in St. Louis for a conference his agency organized on HUD’s recently strengthened Affirmatively Furthering Fair Housing (AFFH ) rule, which increases local accountability in promoting residential integration. He wasn’t a speaker at the event, but hearing his story reinforced the importance of combating the deeply entrenched and often invisible causes of segregation.

Recent events and new academic research, including landmark findings by Raj Chetty and colleagues testifying to the benefits of low-poverty neighborhoods for low-income kids, the updated AFFH rule, and the Supreme Court’s disparate impact decision upholding other tools to fight segregation have brought renewed attention to these challenges. Meanwhile, underlying these developments, poverty has failed to decline since the recession and, as recent Brookings research shows, has become more concentrated in neighborhoods of extreme poverty.

How can regional leaders and practitioners respond to these challenges? I was in St. Louis to discuss one part of the solution—advancing more mixed-income neighborhoods. In the Chicago region, our housing and community development-focused firm, BRicK Partners, is collaborating with the Chicago Metropolitan Agency for Planning (CMAP), the Illinois Housing Development Authority (IHDA), and 10 metropolitan Chicago public housing authorities, with support and leadership from HUD, to develop and operate the Regional Housing Initiative (RHI)

RHI is a small, systemic, and potentially scalable “work around” of a very specific set of programs and policies that contribute inadvertently to regional inequities. A flexible and regional pool of resources working across the many traditional public housing authority (PHA) and municipal jurisdictions in the Chicago region, RHI increases quality rental housing in neighborhoods with good jobs, schools, and transit access and provides more housing options to households on Housing Choice Voucher (HCV) waiting lists. Recognizing that the federal formulas allocating HCVs to each individual PHA are not responsive to population, employment, or poverty trends, RHI partners convert and pool a small portion of their HCVs to provide place-based operating subsidies in support of development activity that advances local and regional priorities. RHI supports both opportunity areas with strong markets and quality amenities as well as revitalization areas where public and private sector partners are planning and investing toward that end. In both cases, the bulk of RHI investments are in the suburbs, where the PHAs are smaller and the rental stock more limited. 

RHI has committed over 550 RHI subsidies to nearly 40 mixed-income and supportive housing developments across Chicagoland, supporting more than 2,200 total apartments, over half of which are in opportunity areas. The pooling and transferring of subsidies has allowed RHI to support proposals that local jurisdictions wouldn’t be able to undertake otherwise.

Although a number of innovative programs around the country provide assistance to households moving to opportunity areas, RHI is unique its focus on increasing the supply of housing in opportunity areas regionwide. Its approach is consistent with lessons learned from Brookings’ work on Confronting Suburban Poverty in America: With CMAP as a strong quarterback, RHI has addressed the shortage of rental housing in the suburbs by working across jurisdictions, developing shared priorities, metrics and selection criteria, and by working with IHDA and other stakeholders to leverage greater private sector investment.

This recipe for success is now being deployed in communities beyond Chicago. Baltimore is preparing to advertise for its first round of developer applicants under the leadership of the Baltimore Metropolitan Council, with regionwide PHAs, the State Housing Finance Agency, and a regional housing counselor lined up as supportive partners. In St. Louis, the regional planning and housing finance organizations both attended the February conference where I met Stephen, signaling the potential for greater collaboration for both these entities and the PHAs.

Like many housing advocates and professionals, my colleagues and I at BRicK Partners derive a lot of satisfaction from supporting communities like Baltimore and St. Louis and individuals like Stephen and his peers with replicable best practices. Given today’s political realities, we don’t expect major changes in the federal formulas and statutes behind some of the regional inequities, but “work arounds” such as RHI can still scale up. Nationwide, just a small percentage of HCVs have been converted for such flexible supply-side solutions, but there is reason to be hopeful that this will change. The Regional Mobility Demonstration proposed in the 2017 budget as well as federal public housing voucher legislation passed by the House of Representatives earlier this year are signs that there is real momentum to advance regional strategies that increase access to opportunity for low income residents and families. 

      

In the face of seemingly weekly terrorist attacks and reports that Islamic State affiliates are growing in number, political leaders are under pressure to take tougher action against ISIS and other violent extremist threats. Removing terrorists from the battlefield and from streets remains critical—President Obama announced last week that the United States will send 250 more special operations forces to Syria, for one, and other military, intelligence, and law enforcement efforts will be important. According to one assessment, the United States has spent $6.4 billion on counter-ISIS military operations since August 2014, with an average daily cost of $11.5 million. As a result of these and related efforts, the territory the Islamic State controls has been diminished and its leadership and resources degraded.

The more challenging task, however, may be preventing individuals from joining the Islamic State or future groups in the first place and developing, harnessing, and resourcing a set of tools to achieve this objective. Violent extremism is most likely to take root when communities do not challenge those who seek to radicalize others and can’t offer positive alternatives. Prevention is thus most effectively addressed by the communities themselves—mayors, teachers, social workers, youth, women, religious leaders, and mental health professionals—not national security professionals, let alone national governments. But it’s easier said than done for national governments to empower, train, and resource those communities. 

Political leaders around the globe are increasingly highlighting community engagement and the role of communities more broadly in a comprehensive counterterrorism strategy. States, however, continue to struggle with how to operationalize and sustain these elements of the strategy. 

Show us the money

First, there is the funding shortfall. Too many national governments continue not to provide local governments and communities with the resources needed to develop tailored community engagement programs to identify early signs of and prevent radicalization to violence. To take just one example of the disparity, the $11.5 million per day the United States spends on its military presence in Iraq is more than the $10 million the Department of Homeland Security was given this year to support grassroots countering violent extremism (CVE) efforts in the United States, and nearly twice as much as the State Department’s Bureau of Counterterrorism received this year to support civil society-led CVE initiatives across the entire globe. Although a growing number of countries are developing national CVE action plans that include roles for local leaders and communities, funding for implementation continues to fall short. Norway and Finland are two notable examples, and the situation in Belgium was well-documented following the March attacks in Brussels.

Prevention is thus most effectively addressed by the communities themselves...not national security professionals, let alone national governments.

At the international level, the Global Community Engagement and Resilience Fund (GCERF)—established in 2014 and modeled on the Global AIDS Fund to enable governments and private entities to support grassroots work to build resilience against violent extremism—has struggled to find adequate funding. GCERF offers a reliable and transparent mechanism to give grants and mentoring to small NGOs without the taint of government funding. Yet, despite the fact that “CVE” has risen to near the top of the global agenda, GCERF has only been able raise some $25 million from 12 donors—none from the private sector—since its September 2014 launch. This includes only $300,000 for a “rapid response fund” to support grassroots projects linked to stemming the flow of fighters to Iraq and Syria—presumably a high priority for the more than 90 countries that have seen their citizens travel to the conflict zone. The GCERF Board just approved more than half of the $25 million to support local projects in communities in the first three pilot countries—Bangladesh, Mali, and Nigeria. GCERF’s global ambitions, let alone its ability to provide funds to help sustain the projects in the three pilots or to support work in the next tranche of countries (Burma, Kenya, and Kosovo) are in jeopardy unless donors pony up more resources to support the kind approach—involving governments, civil society, and the private sector—that is likely needed to make progress on prevention over the long-term.

Go grassroots

Second, national governments struggle with how best to involve cities and local communities. Governments still have a traditional view of national security emanating from the capital. Although a growing number of governments are encouraging, and in some cases providing, some resources to support city- or community-led CVE programs, they have generally been reluctant to really bring sub-national actors into conversations about how to address security challenges. Some capitals, primarily in Western Europe, have created national-level CVE task forces with a wide range of voices. Others, like the United States, have stuck with a model that is limited to national government—and primarily law enforcement—agencies, thus complicating efforts to involve and build durable partnerships with the local actors, whether mayors, community leaders, social workers, or mental health officials, that are so critical to prevention efforts. 

Some members of the target communities remain skeptical of government-led CVE initiatives, sometimes believing them to be a ruse for intelligence gathering or having the effect of stigmatizing and stereotyping certain communities. As debates around the FBI’s Shared Responsibilities Committees show, there are high levels of mistrust between the government—particularly law enforcement—and local communities. This can complicate efforts to roll out even well-intentioned government-led programs aimed at involving community actors in efforts to prevent young people from joining the Islamic State. The trouble is, communities are largely dependent on government support for training and programming in this area (with a few exceptions). 

To their credit, governments increasingly recognize that they—particularly at the national level—are not the most credible CVE actors, whether on- or off-line, within the often marginalized communities they are trying to reach. They’re placing greater emphasis on identifying and supporting more credible local partners, instead, and trying to get out of the way. 

Invest now, see dividends later

On the positive side of the ledger, even with the limited resources available, new (albeit small-scale) grassroots initiatives have been developed in cities ranging from Mombasa to Maiduguri and Denver to Dakar. These are aimed at building trust between local police and marginalized groups, creating positive alternatives for youth who are being targeted by terrorist propaganda, or otherwise building the resilience of the community to resist the siren call of violent extremism. 

Perhaps even more promising, new prevention-focused CVE networks designed to connect and empower sub-national actors—often with funds, but not instructions, from Western donors—are now in place. These platforms can pool limited resources and focus on connecting and training the growing number of young people and women working in this area; the local researchers focused on understanding local drivers of violent extremism and what has worked to stem its tide in particular communities; and mayors across the world who will gather next month for the first global Strong Cities Network summit. Much like GCERF, these new platforms will require long-term funding—ideally from governments, foundations, and the private sector—to survive and deliver on their potential. 

Somewhat paradoxically, while the United States (working closely with allies) has been at the forefront of efforts to develop and resource these platforms overseas and to recognize the limits of a top-down approach driven by national governments, similar innovations have yet to take root at home. More funding and innovation, both home and abroad, can make a huge difference. For example, it could lead to more community-led counter-narrative, skills-building, or counselling programs for young people at risk of joining the Islamic State. It could also help build trust between local police and the communities they are meant to serve, lead to more training of mainstream religious leaders on how to use social media to reach marginalized youth, as well as empower young filmmakers to engage their peers about the dangers of violent extremism. And national prevention networks that aren’t limited to just government officials can help support and mentor communities looking to develop prevention or intervention programs that take local sensitivities into account. Without this kind of rigorous effort, the large sums spent on defeating terrorism will not pay the dividends that are badly needed. 

      

Baltimore police officer Edward Nero, one of six being tried separately in relation to the arrest and death of Freddie Gray, has been acquitted on all counts. The outcome for officer Nero was widely expected, but officials are nonetheless aware of the level of frustration and anger that remains in the city. Mayor Stephanie Rawlings Blake said: "We once again ask the citizens to be patient and to allow the entire process to come to a conclusion."

Since Baltimore came to national attention, Brookings scholars have probed the city’s challenges and opportunities, as well addressing broader questions of place, race and opportunity.

• In this podcast, Jennifer Vey describes how, for parts of Baltimore, economic growth has been largely a spectator sport: "1/5 people in Baltimore lives in a neighborhood of extreme poverty, and yet these communities are located in a relatively affluent metro area, in a city with many vibrant and growing neighborhoods."
• Vey and her colleague Alan Berube, in this piece on the "Two Baltimores," reinforce the point about the distribution of economic opportunity and resources in the city:
  

  In 2013, 40,000 Baltimore households earned at least $100,000. Compare that to Milwaukee, a similar-sized city where only half as many households have such high incomes. As our analysis uncovered, jobs in Baltimore pay about $7,000 more on average than those nationally. The increasing presence of high-earning households and good jobs in Baltimore City helps explain why, as the piece itself notes, the city’s bond rating has improved and property values are rising at a healthy clip."

• Groundbreaking work by Raj Chetty, which we summarized here, shows that Baltimore City is the worst place for a boy to grow up in the U.S. in terms of their likely adult earnings:

• Here Amy Liu offered some advice to the new mayor of the city: "I commend the much-needed focus on equity but…the mayoral candidates should not lose sight of another critical piece of the equity equation: economic growth."
• Following an event focused on race, place and opportunity, in this piece I drew out "Six policies to improve social mobility," including better targeting of housing vouchers, more incentives to build affordable homes in better-off neighborhoods, and looser zoning restrictions.
• Frederick C. Harris assessed President Obama’s initiative to help young men of color, "My Brother’s Keeper," praising many policy shifts and calling for a renewed focus on social capital and educational access. But Harris also warned that rhetoric counts and that a priority for policymakers is to "challenge some misconceptions about the shortcomings of black men, which have become a part of the negative public discourse."
• Malcolm Sparrow has a Brookings book on policing reform, "Handcuffed: What Holds Policing Back, and the Keys to Reform" (there is a selection here on Medium). Sparrow writes:
  

  Citizens of any mature democracy can expect and should demand police services that are responsive to their needs, tolerant of diversity, and skillful in unraveling and tackling crime and other community problems. They should expect and demand that police officers are decent, courteous, humane, sparing and skillful in the use of force, respectful of citizens’ rights, disciplined, and professional. These are ordinary, reasonable expectations."

Five more police officers await their verdicts. But the city of Baltimore should not have to wait much longer for stronger governance, and more inclusive growth.

       

In March alone, at least nine cities across three continents were hit by terrorist attacks. Municipalities—from megacities to tertiary cities—continue to bear the brunt of such attacks: in the short term, they provide first response and take essential security measures; in the longer term, they suffer from the fallout of intercommunal tensions and economic slowdowns, which can last for years and spread beyond the target city.

Yet, post-attack discussions tend to be dominated by what national governments can do to prevent future attacks—whether through enhanced border security, law enforcement, intelligence, or military measures; or though intensified efforts to resolve underlying conflicts; or through more cooperation with foreign governments. This is understandable given the resources of national governments and their long-standing monopoly on force and foreign policy. Nevertheless, a small but growing number of cities and other local authorities are realizing that they have an essential role to play in countering violent extremism (CVE) as well.

Urban trend-setters

There is nothing new about cities coming to the realization that they need to act in the face of global challenges. Mayors and city-networks such as the C40 Climate Action Leadership Group have vocally engaged on the global stage to counter carbon emissions. Cities have frequently shown themselves to be generally more nimble and less averse to risk-taking than their national counterparts. Mayors operate under intense expectations to “get things done,” but when it comes to the threats of transnational violent extremism, what does that mean?

Much like with climate change and other global challenges where cities are becoming increasingly active stakeholders, cities are serving as laboratories for developing and testing innovative initiatives to prevent violent extremism from taking root, designed and implemented in collaboration with local communities. 

[C]ities are serving as laboratories for developing and testing innovative initiatives to prevent violent extremism from taking root.

The comparative advantages of local authorities are manifold: They are best positioned to understand the grievances that might make their citizens vulnerable to terrorist recruitment; to identify the drivers and early signs of violent extremism; to build trust between the community and local police; to develop multi-agency prevention efforts that involve families, community leaders, social workers, and mental health professionals; and to develop programs that offer alternatives to alienated youth who might otherwise be attracted to violence. 

Recognizing these advantages, local leaders are developing strategies and programs to address the violent extremist threat at each stage of the radicalization cycle. Cities across Europe have been at the forefront of these efforts, with Aarhus, Denmark often cited as a model. The approach of Aarhus involves both prevention and care, relying an extensive community-level network to help young people returning from Syria an opportunity to reintegrate in Danish society (provided they haven’t committed a crime) and mentoring to try to dissuade people from traveling to the conflict. 

In Montgomery County, Maryland, the county authorities are involved in a community intervention program that includes training for faith leaders, teachers, social service providers, police, and parents on how to recognize the early signs of extremism in underserviced immigrant communities. 

In Montreal, a $2 million, multi-disciplinary “anti-radicalization center” provides mothers who suspect their children may be vulnerable to radicalization or recruitment with resources that don’t involve contacting the police. The center focuses on training people how to identify the signs of radicalization and researching the drivers of radicalization in Montreal and what works to prevent its growth. 

Cities are dynamic actors, in part, because they have no problem borrowing from each other. Inspired by the Montreal initiative, Brussels opened a prevention-focused, anti-radicalization center, which—like the Montreal center—keeps the police out of the picture unless necessary to confront an imminent threat.

In Australia, both Victoria and New South Wales have set aside funds to support local NGO-led interventions that target individuals who may be radicalizing and build community resilience.

In Mombasa, Kenya, Governor Hassan Ali Joho is working with the regional parliament and local civil society groups to develop a county-level CVE strategy that includes a heavy focus on providing youth with positive alternatives to joining al-Shabab.

Except for Mombasa, nearly all municipality-led CVE efforts are taking place in the global north. Throughout the world, mayors and other local leaders are not part of national-level conversations about how to prevent future attacks. If national governments insist on viewing national security issues like violent extremism as being the exclusive policy domain of the capital, they will miss crucial opportunities to address a threat that is increasingly localized. 

Part of the challenge is that, much like on other global issues, municipal authorities operate within the policy and bureaucratic frameworks of national governments. Those governments can enable or, just as frequently, impede effective local action. Thus, there is often a ceiling for local actors. Raising or breaking through the ceiling is particularly difficult in the security space, given the monopoly that many national governments want to maintain over issues of national security—even while recognizing the need for local solutions.

Flattening the CVE policy space

The good news is that in countries where local authorities can innovate and lead, energy around city-led CVE efforts is increasing. Cities are sharing lessons learned and challenges, with city-to-city networks like with the Strong Cities Network (SCN)—which held its first summit earlier this month in Antalya, Turkey—sprouting to facilitate cooperation.

Yet, a significant majority of SCN members are in countries where national governments already acknowledge local authorities’ key role in CVE. With a few exceptions, cities from large swathes of the globe—including in regions where the problem of violent extremism is most acute, like the Middle East and North Africa, as well as Asia—are not enabled to contribute to efforts to prevent violent extremism from taking root in their communities. 

CVE discussions in general should highlight ways in which national policymakers have enabled effective local CVE activities, as well as roadblocks and solutions. These discussions should also be brought into multilateral platforms such as the U.N. Global Counterterrorism Forum. 

A number of other steps could be taken to enhance vertical cooperation on CVE. For example, countries could involve municipal-level representatives (not simply the national ministry responsible for engaging with such authorities) in developing national CVE plans and provide such authorities with a role in implementation. National governments that already do this could start including representatives of cities in security and broader foreign policy dialogues, particularly with those that continue to resist their involvement. 

National governments should incentivize local authorities to work with their communities to innovate in this issue area. A public-private innovation fund could be established to support city-led CVE projects in countries where political will exceeds resources; those international donors committed to supporting local solutions to global challenges and increasing the involvement of local authorities in national security conversations should invest in such a fund and, more broadly, in building the capacity of city-level officials and practitioners in the CVE sphere.

None of these steps is likely to be an elixir—after all, the notion that national security issues should be handled exclusively at the national level is deeply entrenched. However, taking these steps can generate gradual improvements in vertical cooperation on CVE issues, much like we have seen with international and inter-agency counterterrorism cooperation involving national governments over the past decade. 

       

Ranking U.S. metro areas, or counties, or even countries, by some fixed metric is a straightforward and often useful way to start a deeper dive into a larger body of research. For example, the top 10 counties by share of taxpayers claiming EITC, or the top 10 metro areas by change in prosperity. But what if the phenomenon being measured is more complex, has interacting characteristics that make a top 10 list less useful?

In new research, Brookings Senior Fellow Alan Berube, along with his colleagues at the Metropolitan Policy Program, and John Irons of the Rockefeller Foundation, ask “What makes an economy inclusive?” Inclusive economies, they say, “expand opportunities for more broadly shared prosperity, especially for those facing the greatest barriers to advancing their well-being.” A new Rockefeller Foundation framework identifies five characteristics of inclusive economies: equity, participation, stability, sustainability, and growth.

A typical ranking approach would list the top 10 inclusive economies (or the bottom 10) based on some score derived from data. It turns out, however, that understanding the “trends and relationships that might reveal the ‘big picture’ of what makes an economy inclusive” doesn’t lend itself to typical ranking techniques, and instead requires looking at relationships among the characteristics to ascertain that “big picture.”

Take, for example, equity, defined as: “More opportunities are available to enable upward mobility for more people.” For this analysis, Brookings researchers used 16 discrete indicators—such as the Gini coefficient, median income of less-educated workers as a share of overall median income, and transportation costs as a share of income—to come up with an equity score for each of the 100 largest U.S. metro areas. (Likewise, each of the other four inclusive economy indicators are composites of many discrete indicators, for a total of about 100 across the five.) Looking at equity alone, the top 10 metro areas are:

1. Allentown, PA-NJ
2. Harrisburg, PA
3. Ogden, UT
4. Scranton, PA
5. Des Moines, IA
6. Salt Lake City, UT
7. Wichita, KS
8. Grand Rapids, MI
9. Pittsburgh, PA
10. Worcester, MA-CT

Top 10 lists can also be fashioned for the other four dimensions in the inclusive economies research, each showing a different mix of U.S. metro areas. For example, the top three metro areas in the growth characteristic are San Jose, CA; Houston, TX; and Austin, TX. For participation: Madison, WI; Harrisburg, PA; and Des Moines. Stability: Madison; Minneapolis, MN-WI; and Provo, UT. And, sustainability: Seattle; Boston; and Portland, OR-WA. In fact, 30 different metropolitan areas are present in the combination of the five inclusive top 10 lists, spanning the country from Oxnard, to Omaha, to Raleigh. The individual top 10 lists for each inclusive economy characteristic look like this:

Because these rankings each impart useful and distinctive information about metro economies, Brookings researchers next combined the data into an overall ranking of the 100 metro areas “based on their average rankings on individual indicators for each of the five inclusive economy characteristics.” Instead of generating a ranking from 1 to 100, the analysis produces a grid-like chart that shows how metro areas fare not only in terms of inclusiveness (top to bottom), but also along a left-to-right spectrum that demonstrates the trade-offs between growth and equity. Here’s a sample from the chart (visit and study the chart here; note that wealth is depicted but by itself is not part of the inclusive economy score):

One thing that stands out when considering this colorful chart against the disaggregated top 10 lists is how unrelated they seem to be. San Jose sits at the upper right position of the chart, suggesting that it ranks as one of the most inclusive metro economies, and yet it ranks only 51st on equity. By contrast, Allentown, PA—on the left of the second row—ranked first in equity, but lower on other measures. However, taken as a whole, both Allentown and San Jose are in the top 20 metro areas overall for inclusiveness. Detroit sits along the bottom row of the inclusiveness chart. Among the five characteristics, it posts its highest rank in growth (37th overall), with much lower ranks in the other categories, even though it ranks 29th for wealth. Las Vegas, NV, is one of the least wealthy metro areas (91st), but ranks 19th in terms of equity.

Berube and Irons point to what they call “a few important insights” about the chart and these data:

• Judged across all five characteristics, the “most” and “least” inclusive metro economies are geographically and economically diverse.
• More equitable metropolitan economies also exhibit higher levels of participation and stability. 
• Growth and equity vary independently across metropolitan areas. 
• Metro areas with similar performance across the five characteristics may not possess the same capacity to improve their performance.

For more detailed discussion, and the complete inclusive economies chart, see “Measuring ‘inclusive economies’ in metropolitan America,’ by John Irons and Alan Berube.

See also “A metro map of inclusive economies,” showing metro areas that are similar to others in these outcomes.

Finally, download detailed information on the composition of the 100 indicators used to measure the five inclusive economies indicators.

       

In the early hours of Sunday June 12, 2016, a madman perpetrated the mass murder of 49 people in a nightclub considered a safe space for Orlando’s LGBT community. 

Politicians quickly went into gear to exploit this tragedy to push their own agendas. Glaringly silent on the civil rights of LGBT communities, Donald Trump and Ted Cruz repeated their calls to ban, deport, and more aggressively prosecute Muslims in the wake of this attack. As if Muslims in America are not already selectively targeted in counterterrorism enforcement, stopped for extra security by the TSA at airports, and targeted for entrapment in terrorism cases manufactured by the FBI. 

Other politicians reiterated calls for Muslim communities to fight extremism purportedly infecting their communities, all while ignoring the fact that domestic terrorism carried out by non-Muslim perpetrators since 9/11 has had a higher impact than the jihadist threat. Asking Muslim American communities to counter violent extremism is a red herring and a nonstarter. 

In 2011, the White House initiated a countering violent extremism (CVE) program as a new form of soft counterterrorism. Under the rubric of community partnerships, Muslim communities are invited to work with law enforcement to prevent Muslims from joining foreign terrorist groups such as ISIS. Federal grants and rubbing elbows with high level federal officials are among the fringe benefits for cooperation, or cooptation as some critics argue, with the CVE program. 

Putting aside the un-American imposition of collective responsibility on Muslims, it is a red herring to call on Muslims to counter violent extremism. An individual cannot prevent a criminal act about which s/he has no knowledge. Past cases show that Muslim leaders, or the perpetrators’ family members for that matter, do not have knowledge of planned terrorist acts. 

Hence, Muslims and non-Muslims alike are in the same state of uncertainty and insecurity about the circumstances surrounding the next terrorist act on American soil. 

CVE is also a nonstarter for a community under siege by the government and private acts of discrimination. CVE programs expect community leaders and parents to engage young people on timely religious, political, and social matters. While this is generally a good practice for all communities, it should not be conducted through a security paradigm. Nor can it occur without a safe space for honest dialogue.

After fifteen years of aggressive surveillance and investigations, there are few safe spaces left in Muslim communities. Thanks in large part to mass FBI surveillance, mosques have become intellectual deserts where no one dares engage in discussions on sensitive political or religious topics. Fears that informants and undercover agents may secretly report on anyone who even criticizes American foreign policy have stripped mosques from their role as a community center where ideas can be freely debated. Government deportations of imams with critical views have turned Friday sermons into sterile monologues about mundane topics. And government efforts to promote “moderate” Muslims impose an assimilationist, anti-intellectual, and tokenized Muslim identity. 

For these reasons, debates about religion, politics, and society among young people are taking place online outside the purview of mosques, imams, and parents. 

Meanwhile, Muslim youth are reminded in their daily lives that they are suspect and their religion is violent. Students are subjected to bullying at school. Mosques are vandalized in conjunction with racist messages.  Workers face harassment at work. Muslim women wearing headscarves are assaulted in public spaces. Whether fear or bigotry drives the prejudice, government action and politicians’ rhetoric legitimize discrimination as an act of patriotism.

Defending against these civil rights assaults is consuming Muslim Americans’ community resources and attention. Worried about their physical safety, their means of livelihood, and the well-being of their children in schools; many Muslim Americans experience the post-9/11 era as doubly victimized by terrorism. Their civil rights are violated by private actors and their civil liberties are violated by government actors—all in retribution for a criminal act about which they had no prior knowledge, and which they had no power to prevent by a criminal with whom they had no relationship.

To be sure, we should not sit back and allow another mass shooting to occur without a national conversation about the causes of such violence. But wasting time debating ineffective and racialized CVE programs is not constructive. Our efforts are better spent addressing gun violence, the rise of homophobic violence, and failed American foreign policy in the Middle East.

We all have a responsibility to do what we can to prevent more madmen from engaging in senseless violence that violates our safe spaces.

This article was originally published in the Huffington Post.

       

Arne Duncan, former U.S. secretary of education during the Obama administration and now a nonresident senior fellow with the Brown Center on Education Policy, discusses the crisis of youth violence in Chicago and solutions that strengthen schools and encourage more opportunities for those who are marginalized to make a living in the legal economy.

“The best thing we can do is create hope, opportunity and jobs particularly on the South and West side for young and black men who have been disenfranchised, who have been on the streets. If we can give them some chances to earn a living in a legal economy not selling drugs and not on street corners, I think we have a chance to do something pretty significant here,” Duncan says. “My fundamental belief is that the police cannot solve this on their own we have to create opportunities for young people in communities who have been marginalized for far too long.”

Also in this episode, Bruce Katz, the Centennial Scholar, who discusses how European cities are addressing the refugee crisis in a new segment from our Refugee Series.

Thanks to audio engineer and producer Zack Kulzer, with editing help from Mark Hoelscher, plus thanks to Carisa Nietsche, Bill Finan, Jessica Pavone, Eric Abalahin, Rebecca Viser, and our intern Sara Abdel-Rahim.

Subscribe to the Brookings Cafeteria on iTunes, listen in all the usual places, and send feedback email to BCP@Brookings.edu 

       

Los Angeles has long been a city associated with the common ills of urban excess: sprawl, homelessness, and congestion. More charitable descriptions paint it as West Coast paradise, boasting sunshine and celebrities in equal measure.

A three-day visit to downtown Los Angeles exposed the nuances behind these stereotypes. Hosted by the Los Angeles Downtown Center Business Improvement District, which is focused on strengthening downtown as an innovation district, our visit began as a real estate tour but quickly revealed regeneration and innovation activity that confounded our expectations. 

Downtown LA (DTLA)’s innovation district focuses not just on tech firms but also on historic LA industry strengths like fashion, design, and real estate. LA may have sat in the shadow of the Silicon Valley tech boom, but it appears to be revitalizing in time for the convergence economy, in which tech is no longer a separate sector but ingrained in all forms of economic and creative activity.

And at a time where firms are revaluing proximity, vibrancy, and authenticity, DTLA could not be in a better place. While a number of U.S. cities subjected their downtowns to a range of urban renewal initiatives, the urban fabric of DTLA is largely intact. Vibrant areas like South Broadway feature boutique hotels, a dozen theatres, and clothing stores and bars that exist in historic infrastructure like reclaimed theatres. There is an urban feel that is authentically LA.

The initial renaissance of DTLA began in the late 1990s, after the residential units within its 65 blocks had dwindled to just 10,000.

Along with transportation improvements, permissive planning policies such as adaptive reuse—which allowed commercial buildings to be converted into residential use—were instrumental in increasing DTLA’s residential population. Since 1999, the residential population and housing units have tripled. With new bars and restaurants springing up on every corner, it is no surprise that three-quarters of DTLA’s current residents are aged between 23 and 44.

Building on this residential surge, an increasing number of businesses are now setting up or relocating downtown.

DTLA office space has not always been an easy sell. Employers balk at the prospect of subjecting their workforce to the punishing commute. And Bunker Hill and the adjacent Financial District, the epicenter of the central business district, offers little more than unpopulated plazas and cubicled office space.

DTLA has worked to serve its newfound residential population and attract more workers and companies by retrofitting buildings to modern aesthetic standards. The exposed brickwork and ceiling equipment of many DTLA offices like those of Nationbuilder, an online platform used for political and civic campaigns, is not just a statement of style but a conscious decision to make downtown office buildings feel hospitable to creative firms. The BLOC, a 1.9 million square foot retail development, is essentially a mall that has been turned inside out, with the roof removed to reveal an open air plaza, unrecognizable from the fortress-style building that once sat in the same spot.

While downtown’s office blocks are a fantastic asset in attracting innovation activity, the area also boasts a vast amount of warehouse space. These larger footprints, most often used for textile or food production, are attracting a range of activities that require space or, in the case of Tesla’s Hyperloop, secrecy. Such industrial firms are interspersed with new art galleries and a historic knitting mill, proof of the area’s artistic heritage.

The individuals leading the drive for a DTLA innovation district, such as Nick Griffin, director of Economic Development for the Downtown Center Business Improvement District, are realistic about challenges, such as the lack of quality public space, and proactive in leveraging existing assets, such as the large supply of creative office space.

These efforts and LA’s distinctive industry strengths are combatting one of the biggest challenges to attracting businesses downtown: the strength of competing areas like Silicon Beach, which includes Santa Monica and Playa del Rey and offers an established tech ecosystem alongside an attractive location.

Another challenge? Like many U.S. cities, LA bears the scars of suburban sprawl and a legacy of under investment in public transportation. Congestion is a constant complaint.

But here too LA is making progress.

In November, Angelinos will vote on an extension of Measure R—a 2008 ballot initiative raising the sales tax to fund core transportation projects—to provide sustainable funding for transportation infrastructure and improve access to the city center through the metro system.

Other ambitious projects, such as the Regional Connector, a light rail subway through the middle of downtown, will have a profound effect on the area's connectivity. This project is not just about getting people to and from downtown—it will also have a transformative effect on public space. The city is working with Project for Public Spaces to redesign one of the Connector’s hubs, Pershing Square, with the aim of providing a public space where employees and residents can convene and collaborate.

Connectivity will play a vital role in the continuing success of DTLA’s resurgence. But the DTLA innovation district’s main opportunity lies in better serving and connecting the people who make it work. With hometown authenticity and civic commitment, DTLA is on its way to creating a city center that is greater than the sum of its parts.

Photo Credit: Hunter Kerhart

       

Editor’s note: This week the Democrats gather in Philadelphia to nominate a candidate for president and adopt a party platform. Given that there are no minority reports to the Democratic platform, it is likely that it will be adopted as-is this week. And so we can begin the comparison of the two major party platforms. For those who say there are no differences between the Republican and Democratic parties, just read the platforms side-by-side. In many instances, the differences are—as Donald Trump would say, yuuuge. But in one surprising instance, the two parties actually agree. This piece walks readers through one of the biggest contrasts, while an earlier piece by Elaine Kamarck detailed a striking similarity.

When it comes to Republicans and the environment, black is the new green. In addition to denouncing “radical environmentalists” and calling for dismantling the EPA, the platform adopted in Cleveland yesterday calls coal “abundant, clean, affordable, reliable domestic energy resource” and unequivocally opposes “any” carbon tax.

Meanwhile, Democrats are moving in the opposite direction. By the time the party’s draft 2016 platform emerged from the final regional committee meeting in Orlando, it contained a robust section on environmental issues in general and climate change in particular. One of the many amendments adopted in Orlando contains the following sentence: “Democrats believe that carbon dioxide, methane, and other greenhouse gases should be priced to reflect their negative externalities, and to accelerate the transition to a clean energy economy and help meet our climate goals.” In plain English, there should be what amounts to a tax (whatever it may be called) on the atmospheric emissions principally responsible for climate change, including but not limited to CO2.

As Brookings’ Adele Morris pointed out in a recent paper, this proposal raises a host of design issues, including determining initial price levels, payers, recipients, and uses of revenues raised. It would have to be squared with existing federal tax, climate, and energy policies as well as with climate initiatives at the state level.

But these devilish details should not obstruct the broader view: To the best of my knowledge, this is the first time that the platform of a major American political party has advocated taxing greenhouse gas emissions. Many economists, including some with a conservative orientation, will applaud this proposal. Many supporters and producers of fossils fuels will be dismayed.

It remains to be seen how the American people will respond. In a survey conducted in 2015 by Resources for the Future in partnership with Stanford University and the New York Times, 67 percent of the respondents endorsed requiring companies “to pay a tax to the government for every ton of greenhouse gases [they] put out,” with the proviso that all the revenue would be devoted to reducing the amount of income taxes that individuals pay. Previous surveys found similar sentiments: public support increases sharply when the greenhouse gas tax is explicitly revenue-neutral and declines sharply if it threatens an overall increase in individual taxes.

Once this plank of the Democratic platform becomes widely known, Republicans are likely to attack it as yet another example of Democrats’ propensity to raise taxes. The platform’s silence on the question of revenue-neutrality may add some credibility to this charge. Much will depend on the ability of the Democratic Party and its presidential nominee to clarify its proposal and to link it to goals the public endorses.

       

INTRODUCTION

The Obama administration needs to focus on executing its existing financial rescue plans, keep the TARP focused on the banking sector, and create a contingency plan should the banking system destabilize again.

Crystal balls are dangerous, especially when it comes to economic predictions, which is why it is important for the administration to chart a path forward. Public policy must remain focused on the very real possibility that the apparent easing in the economy’s decline may be followed by little or no growth for several quarters and there could possibly be another negative turn. One of the risks is that the United States is very connected to the rest of the world, most of which is in severe recession. The global economy could be a significant drag on U.S. growth.

Cautious optimism should be the order of the day. We fear that the recent reactions of the financial markets and of some analysts carry too much of the optimism without recognizing enough of the uncertainty. There remains a lot of uncertainty and policymakers should not rest on their laurels or turn to other policies, even if they look more exciting. It is vital to follow through on the current financial rescue plans and to have well-conceived contingency plans in case there is another dip down.

We propose three recommendations for the financial rescue plans:

• Focus on execution of existing programs. The Administration has created programs to deal with each of the key elements necessary to solve the financial crisis. All of them have significant steps remaining and some of them have not even started yet, such as the programs to deal with toxic assets. As has been demonstrated multiple times now since October 2008, these are complex programs that require a great deal of attention. It is time to execute rather than to create still more efforts.
• Resist the temptation to allocate money from the TARP to other uses—it is essential to maintain a reserve of Congressionally-authorized funds in case they are needed for the banks. It would be difficult to overemphasize the remaining uncertainties about bank solvency as they navigate what will remain a rough year or more. The banks could easily need another $300 billion of equity capital and might need still more. It is essential that the administration have the ammunition readily available.
• Third, make sure there is a contingency plan to deal with a major setback for the banking system. The plan needs broad support within the administration and among regulators and, ideally, from key congressional leaders. We probably won’t need it, but there is too high a chance that we will require it for us to remain without one. The country cannot afford even the appearance of the ad hoc and changing nature of the responses that were evident last fall.

We also give the administration a thumbs-up for their bank recapitalization as well as the TALF program, while they are much more skeptical of the Treasury’s approaches to toxic assets. The authors also believe it is time to focus on the truly mind-blowing budget deficits given the danger that markets will not be able to absorb the amount of government borrowing needed without triggering a rise in U.S. interest rates and perhaps an unstable decline in the value of the dollar, nor do they believe there should be a another fiscal stimulus except under extreme circumstances.

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There are a number of causes of the financial crisis that has devastated the U.S. economy and spread globally. Weakness in financial sector regulation was one of the causes and the proliferation of different regulators is, in turn, a cause of the regulatory failure. There is a bewildering, alphabet soup variety of regulators and supervisors for banks and other financial institutions that failed in their task of preventing the crisis and, at the same time, created an excessive regulatory burden on the industry because of overlapping and duplicative functions.

We can do better. This paper makes the case for a single micro prudential regulator, that is to say, one federal agency that has responsibility for the supervision and regulation of all federally chartered banks and all major non-bank financial institutions. There would still be state-chartered financial institutions covered by state regulators, but the federal regulator would share regulatory authority with the states.

The Objectives Approach to Regulation

The Blueprint for financial reform prepared by the Paulson Treasury proposed a system of objectives-based regulation, an approach that had been previously suggested and that is the basis for regulation in Australia. The White Paper prepared by the Geithner Treasury did not use the same terminology, but it is clear from the structure of the paper that their approach is essentially an objectives-based one, as they lay out the different elements of regulatory reform that should be covered. I support the objectives approach to regulation.

There should be three major objectives of regulation, as follows.

• To make sure that there is micro-prudential supervisions, so that customers and taxpayers are protected against excessive risk taking that may cause a single institution to fail.

• To make sure that whole financial sector retains its balance and does not become unstable. That means someone has to warn about the build up of risk across several institutions and perhaps take regulatory actions to restrain lending used to purchase assets whose prices are creating a speculative bubble.

• To regulate the conduct of business. That means to watch out for the interests of consumers and investors, whether they are small shareholders in public companies or households deciding whether to take out a mortgage or use a credit card.

In applying this approach, it is vital for both the economy and the financial sector that the Federal Reserve has independence as it makes monetary policy. Experience in the United States and around the world supports the view that an independent central bank results in better macroeconomic performance and restrains inflationary expectations. An independent Fed setting monetary policy is essential.

An advantage of objectives-based regulation is that it forces us to consider what are the “must haves” of financial regulation—those things absolutely necessary to reduce the chances of another crisis. Additionally we can see the “must not haves”—the regulations that would have negative effects. It is much more important to make sure that the job gets done right, that there are no gaps in regulation that could contribute to another crisis and that there not be over-regulation that could stifle innovation and slow economic growth, than it is that the boxes of the regulatory system be arranged in a particular way. In turn, this means that the issue of regulatory consolidation is important but only to the extent that it makes it easier or harder to achieve the three major objectives of regulation efficiently and effectively.

For objectives-based regulation to work, it is essential to harness the power of the market as a way to enhance stability. It will never be possible to have enough smart regulators in place that can outwit private sector participants who really want to get around regulations because they inhibit profit opportunities or because of the burdens imposed. A good regulatory environment is structured so that people who take risks stand to lose their own money if their bets do not work out. The crisis we are going through was caused by both market and regulatory failures and the market failures were often the result of a lack of transparency (“asymmetric information” in the jargon of economics). Those who invested money and lost it often did not realize the risks they were taking. To the extent that policymakers can enhance transparency, they can make market forces work better and help achieve the goal of greater stability.

Having a single micro prudential regulator would help greatly in meeting the objectives of regulation, a point that will be taken up in more detail below. It is not a new idea. In 1993-94, the Clinton and Riegle proposals for financial regulation said that a single micro prudential regulator would provide the best protection for the economy and for the industry. In the Blueprint developed by the Paulson Treasury, it was proposed that there be a single micro prudential regulator. 

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