mar

Regional leaders need to join together to stay competitive in the global market

In 2014, St. Petersburg, Fla. mayor Rick Kriseman and Tampa mayor Bob Buckhorn went on a trade mission to Chile. But, in recognizing that scale matters in such attempts at global competitiveness, the two mayors made their trip not as representatives of two separate cities, but as dual ambassadors of the Tampa Bay region. Prior…

       




mar

Webinar: The effects of the coronavirus outbreak on marginalized communities

As the coronavirus outbreak rapidly spreads, existing social and economic inequalities in society have been exposed and exacerbated. State and local governments across the country, on the advice of public health officials, have shuttered businesses of all types and implemented other social distancing recommendations. Such measures assume a certain basic level of affluence, which many…

       




mar

Life after coronavirus: Strengthening labor markets through active policy

Prior to the COVID-19 crisis, the growing consensus was that the central challenge to achieving inclusive economic prosperity was the creation of good jobs that bring more workers closer to a true “middle-class” lifestyle (Rodrik, 2019). This simple goal will be hard to meet. The lingering effects of the coronavirus crisis will add to the…

       




mar

The labor market experiences of workers in alternative work arrangements

Abstract Nearly 16 million workers (10.1 percent of the workforce) were in nontraditional work arrangements in 2017, including independent contractors, workers at a contract firm, on-call workers, and workers at a temp agency. As a group, nontraditional workers are more likely to be found in certain industries (e.g., business and repair services) and occupations (e.g.,…

       




mar

Unpredictable and uninsured: The challenging labor market experiences of nontraditional workers

As a result of the COVID-19 pandemic, the U.S. labor market has deteriorated from a position of relative strength into an extraordinarily weak condition in just a matter of weeks. Yet even in times of relative strength, millions of Americans struggle in the labor market, and although it is still early in the current downturn,…

       




mar

How tight is the US labor market?

The number of jobs employers are trying to fill is higher relative to the number of unemployed people than at any time in the last quarter century, yet both wages and prices have been surprisingly stable.  One reason for that surprising disconnect might be that this standard metric overstates the tightness of the labor market,…

       




mar

(De)stabilizing the ACA’s individual market: A view from the states

The Affordable Care Act (ACA), through the individual health insurance markets, provided coverage for millions of Americans who could not get health insurance coverage through their employer or public programs. However, recent actions taken by the federal government, including Congress’s repeal of the individual mandate penalty, have led to uncertainty about market conditions for 2019.…

       




mar

Benin’s landmark elections: An experiment in political transitions

Benin is the new field of dreams and promises kept. In a year when many countries on the continent are changing their constitutions to allow for incumbent presidents to run yet again, Benin, under President Yayi Boni, is respecting the term limits set down in its constitution. Thanks in part to pressure from the population,…

      
 
 




mar

In the marijuana industry, size doesn’t always matter


In the marijuana reform conversation, one of the grandest boogeymen is “Big Marijuana.” Reform advocates, opponents of marijuana legalization, patients, consumers, media, and many others worry openly that the marijuana industry will consolidate into a corporate beast and a bad market actor reminiscent of Big Tobacco companies.

In a paper released earlier this month entitled, “Worry about bad marijuana—not Big Marijuana,” Jonathan Rauch and I engage the likelihood and risks of the emergence of such a corporate entity. Although the paper makes several points, we begin with a discussion of exactly what “Big Marijuana” means. What we find is that the concept is tossed around so frequently, assigned to so many different types of market actors, that it has ultimately lost meaning.

Often, the term is used to describe any large corporate entity or consolidation effort within the marijuana industry. In reality, standard corporate consolidation or the existence of large companies in an industry are basic aspects in capitalism. What’s more there are huge differences between marijuana industry actors today and Big Tobacco companies of the middle of the 20th century—in terms of size, scope, and market power to name a few. It should be expected that an industry that is young, fractured, and rapidly maturing will endure periods of consolidation and in the process, large and successful corporate entities will emerge. One should not assume, however, that such behaviors are sinister, suspect, or intent on engaging in immoral or illegal activities.

Nor should one assume that only large corporate entities can engage in bad behaviors. They surely can, but other market actors may as well. The policy conversation around marijuana industry structure often holds Big Marijuana up as the actor who will bring problems for enforcement, diversion, sale to minors, sale to problem users, etc. The reality is that a marijuana entity of any size can behave in many of those behaviors. The problem with an unending focus on industry structure or corporate size is that policymakers and regulators can give a pass to smaller actors who may engage in the types of behaviors people inside and outside of industry seek to avoid—those same types of behaviors we saw from the tobacco industry.

We argue there is a more sensible, safer step forward that begins with a simple premise. There are certain outcomes that the marijuana industry must avoid, and policy and regulation should preferably ban, but at least disincentivize those outcomes. We mention a few in the paper: antisocial marketing (marketing to children or problem users), regulatory capture, outcomes that hurt medical marijuana patients, and increasing barriers to entry and corporate crowd out—but others like diversion, illegal sales, and more must (and do) concern policy makers. In some cases, certain behaviors are more likely to come from larger corporate entities, but many behaviors can happen, independent of firm size.

There are a variety of ways to avoid some of these outcomes beyond a focus on firm size and corporate consolidation. Some of those options are highlighted by the RAND Corporation’s Drug Policy Research Center. In “Options and Issues Regarding Marijuana Legalization,” the authors argue a shift away from the corporate model—either through the use of non-profit entities or government operation of whole portions of the market (supply, retail, or both) can have real benefit. These approaches can allow regulators greater control over negative market actions and induce incentives focused on public health and good governance, rather than profit maximization. Those arguments are quite convincing, but as states continue to construct medical and recreational marijuana programs using the corporate model, it is important to consider policy approaches within that existing framework.

Thus, we recommend that regulators and policy makers not primarily focus on firm size, corporate consolidation, or the corporatization of the marijuana industry. Instead, they should work to avoid specific outcomes they see as unwanted or bad and pass laws, promulgate regulations, conduct information and education campaigns, and take whatever actions are necessary to stop them in their tracks. At the end of the day, one thing is clear: no one wants “Bad Marijuana” regardless of whether it comes from Big, Small, or Otherwise-Sized Marijuana.

Click through to read the full report, “Worry about bad marijuana—not Big Marijuana.”

Click through to watch the public event and paper release “Big Marijuana: How corporations and lobbies will shape the legalization landscape.”

Authors

Image Source: © Rick Wilking / Reuters
      
 
 




mar

1,000,000 of Our Neighbors at Risk: Improving Retirement Security for Marylanders

Increasingly, many Marylanders are unprepared for retirement.

The US has the broadest range of retirement savings options in the world. There are thousands of retirement products offered. But most Marylanders don’t use them.

The need is growing. The Baby Boomers are the largest generation in history. They will live longer in retirement than any generation in history.

But – financially – many are not prepared. Many have virtually no retirement savings: more than a third those within ten years of retirement age have saved less than $10,000. $10,000 invested and spent over the average person’s retirement works out to about $1,000 of income per year. Even with Social Security, that’s not much to live on.

Fears about retirement are the #1 economic concern. Many Marylanders know they’re unprepared – and they’re worried about it. Concerns about retirement security are now more broadly based than the cost of health care, fear of job loss or other economic concerns – and have been for over a decade.3 Those concerns have grown since the financial crisis, even though the stock market has recovered. Many know they’ll have to defer retirement—and many fear they will never be able to afford to retire at all.

The key to retirement saving is having a retirement plan and contributing to it every paycheck. But many businesses, including most smaller businesses, don’t offer retirement plans. As a result 1,000,000 Marylanders working in private businesses across the State don’t have a retirement plan. There are, of course, individual retirement accounts (IRAs) -- but almost no one uses them who didn’t get access through an employer-based plan via payroll deduction.

Having a plan is essential, but not a panacea. Even when plans are available, many employees don’t join. Many who do contribute and save less than they need to meet their own goals. Even with plans, many will need to save more.

The challenge continues at retirement, because most of these plans are paid out in a single lump sum payment—few plans offer reliable retirement income for life that traditional pensions do. Since most retirees do not consult financial advisors and are not financial experts themselves, some who live longer than average or are unlucky in their investments will find that they haven’t saved enough and will exhaust their savings.

They will, of course, have Social Security. That’s why it’s so important that Social Security be both preserved and strengthened. But the average monthly benefit in Maryland is about $1,300 and for most people Social Security covers only a fraction of their basic needs in retirement. Most Marylanders will need additional income from retirement savings – and the State of Maryland can help them get it.

Other states and other governments are making it easier for people to save and for private employers to help them do it. Maryland should, too. Acting now will save Maryland taxpayers millions in the future.

California, Massachusetts, and Illinois have already enacted legislation. Illinois created a new program that requires employers who have no retirement plan to automatically enroll their employees in a state-created program. Massachusetts authorized a program for uncovered employees of non-profits. California created a board to plan and propose program similar to that in Illinois. Similar legislation is being or has been introduced in some fifteen other states – states all across the country with varying political orientations, populations, and economic bases.

Although there are many variations under consideration, these programs generally provide for an automatic payroll deduction of a set amount unless the employee opts out. Funds are to be invested professionally and may be pooled to achieve higher returns and lower costs. Those who cannot or do not want to make complex financial decisions are not required to do so – their contributions are placed automatically into a reliable fund or set of funds.

In order to ensure that employers – many of whom are small businesses – can participate in a program, it must be designed to help them avoid significant disruption, expense or administrative burden. This can be accomplished by enabling employers to use current payroll processes to help their employees to build retirement security, without requiring employers to make contributions themselves.

If Maryland doesn’t act now, Maryland taxpayers will face higher costs for decades to come.

These plans are designed to be self-sustaining: their operating costs are paid for by plan contributions and the State would not assume any obligations. In practice, however, these plans will end up saving taxpayer funds: If Maryland doesn’t act now, Maryland taxpayers will face higher costs for decades to come, as retirees are forced to turn to State assistance instead of living on their own savings.

There are many ways to improve retirement security. The key is for businesses to help their employees save, without becoming overburdened themselves.

Task Force is not recommending any one approach, but strongly recommends that Maryland join other states, by developing and implementing a plan that helps Marylanders have more secure retirements.We recommend development of a specific state-based program that meets Maryland’s needs from the options discussed in our report.

We Can Do Better: Principles for Improving Marylanders’ Retirement

In developing that program, we recommend the following principles as guidelines:

Make it easier for all Marylanders to save for retirement.

  • Access: Every Marylander should have access to an automatic payroll deduction retirement savings plan through their employer. People who are self-employed or unemployed should be able to make contributions at the same time that they pay their State taxes.
  • Simplicity: People should have access to simple, low cost retirement savings plans that make enrollment automatic (auto-enrollment), that don’t require complex investment and savings decisions by providing low-cost automatic (default) options, and that enable savers to grow their saving rate over time through auto-escalation.
  • Portability: They must be able to keep their retirement savings plan when they change jobs. Individuals should never be forced out of a plan because they change or lose their jobs. Workers should have the choice of keeping their existing retirement savings in the plan when they move to another employer or consolidating their retirement savings by moving it to another retirement plan.
  • Choice: Of course, they should have the ability to change the amount that they save, change their investments, move to another plan, or stop saving entirely.

Make it easier for private employers to help their employees save.

  • Since most of the companies who do not offer a retirement plan are smaller businesses, it’s essential that they aren’t forced to take on significant additional financial, administrative or regulatory burdens.
  • Employers should be able to use their current payroll processes to quickly and easily forward employee contributions to a savings plan without assuming significant additional legal or fiduciary responsibilities or taking on significant additional cost.
  • Employer contributions should not be required, but should be permitted if allowed by federal law.
  • Consumer protection, disclosure, and other protections are essential, but these and other regulatory responsibilities should be undertaken by the program itself and not imposed on businesses.

Make it easier for Marylanders to get reliable retirement income for life.

When people retire, they no longer have a paycheck that provides reliable monthly income. They should be able to have a reliable monthly income stream from their retirement savings, too. Retirees should not have to worry about how much their retirement income might be or how long their pension will last if, like half of Americans, they live longer than average.

Investments should be low cost, provide good value, and be professionally managed.

Any program should be self-sustaining. Maryland should help Marylanders save for retirement without risking the State’s credit. It should cover its own operating costs without relying on taxpayer funding or risking the State’s credit by creating contingent liabilities.

Downloads

Publication: The Maryland Governor’s Task Force to Ensure Retirement Security for All Marylanders
      
 
 




mar

How school closures during COVID-19 further marginalize vulnerable children in Kenya

On March 15, 2020, the Kenyan government abruptly closed schools and colleges nationwide in response to COVID-19, disrupting nearly 17 million learners countrywide. The social and economic costs will not be borne evenly, however, with devastating consequences for marginalized learners. This is especially the case for girls in rural, marginalized communities like the Maasai, Samburu,…

       




mar

The labor market experiences of workers in alternative work arrangements

Abstract Nearly 16 million workers (10.1 percent of the workforce) were in nontraditional work arrangements in 2017, including independent contractors, workers at a contract firm, on-call workers, and workers at a temp agency. As a group, nontraditional workers are more likely to be found in certain industries (e.g., business and repair services) and occupations (e.g.,…

       




mar

Unpredictable and uninsured: The challenging labor market experiences of nontraditional workers

As a result of the COVID-19 pandemic, the U.S. labor market has deteriorated from a position of relative strength into an extraordinarily weak condition in just a matter of weeks. Yet even in times of relative strength, millions of Americans struggle in the labor market, and although it is still early in the current downturn,…

       




mar

There’s no recession, but a market correction could cause one

Before last Friday’s employment release, some pessimistic observers feared a recession was near. The latest GDP release from the BEA showed real output growth slowed to a crawl in the first quarter, rising at an annual rate of only 0.7 percent. And that followed the report on March employment that had shown an abrupt slowdown…

       




mar

The new oil market: Chaos or order?

The CEO of Royal Dutch Shell recently projected oil prices will remain “lower forever.” This comes after a decade of the most chaotic gyrations of oil markets since the 1970s. But unlike that earlier period, when production cuts by the new OPEC cartel led to a quadrupling of world oil prices, this one has included…

       




mar

Making sense of China’s stock market mess


Nearly two years ago China’s Communist Party released a major economic reform blueprint, whose signature phrase was that market forces would be given a “decisive role” in resource allocation. That Third Plenum Decision and other policy pronouncements raised hopes that Xi Jinping’s government would push the nation toward a more efficiency-driven growth model in which the private sector would take a greater share of economic activity and the state would exercise its leadership less through direct ownership of assets than through improved governance and regulation.

Over the past two weeks, Xi’s bureaucrats launched the most heavy-handed intervention in China’s stock markets in their twenty-five year history. Spooked by a sudden 19% plunge in the Shanghai Composite Index, regulators halted initial public offerings, suspended trading in shares accounting for 40% of market capitalization, forced state-owned brokers to promise to buy stocks until the index reached a higher level, mobilized state-controlled funds to purchase equities, and promised unlimited support from the central bank. At first these measures failed to prevent a further fall. But by the end of last week, the market stabilized, at a level 28% below its June 12 peak but still up 82% from a year ago, when the bull run started. What ever happened to the “decisive role” of market forces?

A skeptic would argue that the contradiction between market-friendly rhetoric and dirigiste reality shows up the hollowness of Xi’s reform program. Under this reading, the promised economic restructuring is unlikely to make much progress, either because Xi doesn’t really believe in it, or because the power of entrenched interest groups and bad old habits is simply too great to overcome.

This view finds support in both the embarrassing stock-market spectacle and the fitful progress of reforms. Progress in a few areas has been solid: slashing of bureaucratic red tape has led to a surge in new private businesses; full liberalization of interest rates seems likely following the introduction of bank deposit insurance in May; Rmb 2 trillion (US$325 billion) of local government debt is being sensibly restructured into long-term bonds; tighter environmental regulation and more stringent resource taxes have contributed to a surprising two-year decline in China’s consumption of coal. But many other crucial reforms are missing in action. Most important, almost nothing has been done to dredge the dismal swamp of state-owned enterprises (SOEs), which deliver a return on assets only half that of private companies, but still suck up a share of national resources (capital, labor, land and energy) grossly disproportionate to their contribution to output.

Given this record, it is plausible to interpret the stock market’s wild ride over the past year as a diversionary tactic by a government facing economic growth that ground ever lower and reforms that seemed ever more stuck in the mud. First Beijing tried to pump things up by encouraging retail investors to return to a stock market they had abandoned after the last bubble burst in 2007, and let brokers extend huge amounts of credit to enable investors to double their bets on margin. By early July, margin credit stood at Rmb 2 trillion, four times as much as a year earlier. That figure equaled 18% of the “free float” value of the market (i.e. the value of all freely tradable shares, excluding those locked up in the hands of strategic long-term shareholders). Even after a recent decline, margin credit is nearly 14% of Shanghai’s free-float market capitalization, compared to less than 6% in New York and under 1% in Tokyo.

The Chinese government also tried to entice foreign investors by permitting them to invest in the Shanghai market via brokers in Hong Kong. And for a while it seemed possible that domestic A-shares would be included in the MSCI Emerging Markets Index, which would have forced global institutions to move billions of dollars of equity investments to Shanghai in order to ensure their funds matched their index benchmarks. (In early June, MSCI deferred that decision for at least another year.) Amid a dearth of good economic news, the government could point to a buoyant stock market as evidence that it was doing something right. And after a couple of years spent cracking down on wealth-making activities through a fierce anti-corruption campaign, Beijing could also reassure business and financial elites that it had their interests at heart.

For a while it worked: the Shanghai index more than doubled in the 12 months before its June peak. But the ill-informed enthusiasm of novice investors, magnified by credit, pushed valuations to absurd levels that could lead only to an ugly crash. Now that the crash has come, China’s leaders must face the grim reality of a broken market, a stagnant economy, and a stalled reform program.

This account has much truth to it. The government did encourage the stock bubble, and its blundering intervention last week did undermine the credibility of its commitment to markets. Yet there is another way of looking at things that is both less dire and better attuned to China’s complexities.

Little evidence suggests that the stock market lay anywhere near the center of policy makers’ concerns, during either the boom or the crash. The main aims of macroeconomic policy over the last nine months have been to support investment growth by a cautious monetary easing, and to stabilize a weakening property market (important because construction is the key source of demand for heavy industry). The stock market was a sideshow: an accidental beneficiary of easier money, and the fortuitous recipient of funds from investors fleeing the weak property market and seeking higher returns in equities.

There was good reason for policy makers not to pay much attention to the stock market. China’s market is essentially a casino detached from fundamentals. It neither contributed much to economic growth while it was rising, nor threatened the economy when it collapsed.

In countries such as the U.S.—where about half of the population own stocks, equities make up a big chunk of household wealth, and corporations rely heavily on funds raised on the stock market—a big stock-market fall can inflict great pain on the economy by slashing household wealth and spending, and making it harder for companies to finance their investments. China is different: less than 7% of urban Chinese have any money in the market, and their equity holdings are dwarfed by their far larger investments in property, wealth management products, and bank deposits. Equity-raising accounts for less than 5% of total corporate fund-raising; bank loans and retained earnings remain by far the biggest sources of investment funds.

But hold on—if the market were really so economically irrelevant, then why did the government panic and try to prop it up with such extreme measures? It’s a fair question. One plausible answer is that the China Securities Regulatory Commission (CSRC), which oversees the market, got worried by the chaos and begged the State Council to mobilize support so that it could gain time to deal with the underlying problems, such as excessive margin borrowing. This explanation certainly seems to be the one the State Council wants people to believe. Despite its strong actions, the Council and its leader, Premier Li Keqiang, have stayed studiously silent on the stock market. The implied message is: “Okay, CSRC, we’ve stopped the bleeding and bought you some time. Now it is up to you to fix the mess and return the market to proper working order. If you fail, the blame will fall on you, not us.” If this interpretation is right, we can expect restrictions on trading and IPOs to be gradually lifted over the next several months, and rules on margin finance tightened to ensure that the next rally rests on a firmer foundation.

The episode highlights the built-in contradictions in China’s present economic policies. Based on numerous statements and policy moves over the last 15 years, there can be no doubt that influential financial reformers want bigger and more robust capital markets—including a vibrant stock market—in order to reduce the economy’s reliance on politically-driven bank lending. Moreover, the success of proposed “mixed ownership” plan for SOE reform likely depends on having a healthy stock market, in which the state shareholding in big companies can be gradually diluted by selling off stakes to private investors.

But the financial reformers are not the only game in town. As analysts like me should have taken more care to emphasize when it was released, the Third Plenum Decision is no Thatcherite free-market manifesto. In addition to assigning a “decisive role” to market forces, it reaffirms the “dominant role” of the state sector. Like all big policy pronouncements during China’s four decades of economic reform, it is less a grand vision than an ungainly compromise between competing interests. One interest group is the financial technocrats who want a bigger role for markets in the name of more efficient and sustainable economic growth. Another consists of politicians and planners who insist on a large state role in the economy so as to maintain the Party’s grip on power, protect strategically important industries and assets, and provide a mechanism for coordination of macro-economic policies.

In short Xi and his colleagues, like all their predecessors since Deng Xiaoping, are trying to have it both ways: improve economic performance by widening the scope of markets, but guide the outcomes through direct intervention and state ownership of key actors and assets. Both elements, from the leadership’s standpoint, are necessary; the critical question is how they are balanced. Free-market fundamentalists might say such an approach is unsustainable and doomed to failure. But they have been saying that since reforms began in 1978, and so far they have been proved wrong by China’s sustained strong economic performance.

Of course the task now is tougher, since China no longer enjoys the tailwinds of favorable demographics and booming global export markets. Moreover, “market guidance” is fairly easy to pull off in physical markets such as those for agricultural commodities, industrial metals or even property, where the government can manipulate supply and demand through control of physical inventories. It is far trickier in the ether of financial markets, where transactions take nanoseconds and billions of dollars of value can vanish in the blink of an eye. Yet Beijing will doubtless keep trying to develop bigger and better capital markets, while at the same time intervening whenever those markets take an inconvenient turn. It is too early to say whether this strategy will prove successful, but one thing is for sure: we will see plenty more wild rides in the Shanghai stock market in the years to come.


Arthur Kroeber is non-resident senior fellow at the Brookings-Tsinghua Center and head of research at economic consultancy Gavekal Dragonomics.
Image Source: Aly Song / Reuters
      
 
 




mar

Marijuana Policy and Presidential Leadership: How to Avoid a Federal-State Train Wreck

Stuart Taylor, Jr. examines how the federal government and the eighteen states (plus the District of Columbia) that have partially legalized medical or recreational marijuana or both since 1996 can be true to their respective laws, and can agree on how to enforce them wisely while avoiding federal-state clashes that would increase confusion and harm…

       




mar

Brookings experts comment on oil market developments and geopolitical tensions

The global COVID-19 pandemic and ensuing sharp decline in oil demand, coupled with an ongoing price war between Saudi Arabia and Russia, have brought oil prices to the brink. This month, those prices fell to an 18-year-low, and world leaders have been meeting in emergency sessions to try to navigate the crisis. On April 10,…

       




mar

The market makers: Local innovation and federal evolution for impact investing


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.

Image Source: © Jeff Haynes / Reuters
      
 
 




mar

The great reversal: How America gave up on free markets

American markets, once a model of competition for the world, have experienced a growing concentration of economic power in a few large corporations. The rise of corporate economic—and political—power has emerged as one of the most important issues of our time. It is destined to be a key point of debate in the coming U.S.…

       




mar

No simple solution to the Rohingya crisis in Myanmar

Reporters on the scene are saying that 300,000 or more members of the Rohingya community (of Muslim faith) in Buddhist-majority Myanmar have fled across the border into Muslim-majority Bangladesh in the past two weeks. The refugees have been describing to reporters a litany of human rights abuses: homes burned, women raped, men beheaded, and more. …

       




mar

The humanitarian crisis facing the Rohingya in Myanmar

Lex Rieffel, nonresident senior fellow in the Global Economy and Development program, and Jonathan Stromseth, senior fellow in the Foreign Policy program, discuss the humanitarian crisis facing the Rohingya in Myanmar, also known as Burma. Rieffel and Stromseth provide background on the Rohingya, the events occurring in Southeast Asia, and recommend policy solutions to ease…

       




mar

On the ground in Myanmar: The Rohingya crisis and a clash of values

During my visit to Myanmar in mid-November, the latest of many since 2010, I witnessed new layers of complexity in the historical and political forces contributing to the Rohingya crisis. While the plight of the Rohingya population has galvanized international opinion, it has reinforced nationalist sentiment within a large segment of the Myanmar population and…

       




mar

Myanmar economy grows despite refugee crisis

For people in the West, Myanmar appears to be a mess. Yet, for many in Asia, it still beckons as a land of opportunity. Western media remain focused on the ethnic cleansing operation against the Muslim Rohingya community launched by the government's armed forces in the wake of sporadic attacks from late 2015 by a…

       




mar

Peace and war in Myanmar

A visitor to Myanmar can easily spend two weeks seeing the main tourist destinations and depart with the impression of having been in a peaceful nation. Within its borders, however, rages the world’s longest continuing civil war. It began at independence in 1948 and no end is in sight. This is the conundrum of Myanmar…

       




mar

Mandate-Based Health Reform and the Labor Market: Evidence from the Massachusetts Reform

The full paper (PDF) can be downloaded at yale.edu.ABSTRACTWe model the labor market impact of the three key provisions of the recent Massachusetts and national “mandate-based" health reforms: individual and employer mandates and expansions in publicly-subsidized coverage. Using our model, we characterize the compensating differential for employer-sponsored health insurance (ESHI) -- the causal change in…

       




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Preparing the United States for the superpower marathon with China

Executive summary The U.S. is not prepared for the superpower marathon with China — an economic and technology race likely to last multiple generations. If we are to prevail, we must compete with rather than contain China. While this competition has many dimensions — political, military, diplomatic, and ideological — the crux of the competition…

       




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Obama's Smart Power Surge Option


President Obama’s speech at West Point, outlining the way forward on Afghanistan and Pakistan, was followed three days later by two important events underscoring the president’s view that “our security and leadership does not come solely from the strength of our arms.” He conveyed a new smart power view of security that “derives from our people [including] … Peace Corps volunteers who spread hope abroad, and from the men and women in uniform who are part of an unbroken line of sacrifice …”

On December 4, General Anthony Zinni, USMC (Ret.), former commander-in-chief of U.S. Central Command (CENTCOM), addressed an audience celebrating the tenth anniversary of the International Center for Religion and Diplomacy (ICRD). He pointedly noted that hard power alone cannot fight terrorism; economic and social factors of terrorist populations should be addressed. He further noted that empowering faith-based approaches “is a tremendous asset to inform the ways we mediate and find common ground … to figure out what the other side of smart power means.”

Recognizing that educational reform is critical, ICRD to date has empowered about 2,300 Pakistani madrassas administrators and teachers with enhanced pedagogical skills promoting critical thinking among students, along with conflict resolution through interfaith understanding. Evidence of success is mounting as the program fosters local ownership reasserting Islam’s fundamental teachings of peace and historical contributions to the sciences and institutions of higher learning—a rich history that was misappropriated by extremists who took over a significant number of madrassas using rote learning laced with messages of hate.

Earlier the same day, President Obama’s newly minted Peace Corps Director Aaron Williams, himself a former Dominican Republic Peace Corps volunteer, received high marks from former Senator Harris Wofford—a JFK-era architect of the Peace Corps—and hundreds of NGOs and volunteer leaders at the “International Volunteer Day Symposium.”

Director Williams has embraced a new “global service 2.0” style leadership committed to championing Peace Corps volunteers alongside a growing corps of NGO, faith-based, new social media and corporate service initiatives. Wofford, who co-chairs the Building Bridges Coalition team with former White House Freedom Corps Director John Bridgeland, spoke about the present moment as a time to “crack the atom of citizen people power through service.”

The notion of a “smart power surge” through accelerated deployment of people power through international service, interfaith engagement, and citizen diplomacy should be quickly marshaled at a heightened level to augment the commander-in-chief’s hard power projection strategies outlined at West Point. 

According to successive Terror Free Tomorrow polling, such strategies of service and humanitarian engagement by the United States have been achieving sustainable results in reducing support for terrorism following the tsunami and other disasters from Indonesia to Pakistan and Bangladesh. Lawmakers should take note of these findings, along with the evidence-based success of Johnston’s ICRD Madrassas project (which, inexplicably, has not received federal support to date, in spite of its evidence of marked success in giving Pakistani children and religious figures critical tools that are urgently need to be scaled up across the country to wage peace through enlightened madrassas education and interfaith tolerance).

A growing coalition of now over 400 national organizations is amassing a “Service World” platform for 2010. They have taken a page out of the incredibly successful Service Nation platform, which Barack Obama and John McCain both endorsed, creating a “quantum leap” in domestic service through fast track passage of the Kennedy Serve America Act signed into law by the president last spring. Organizers hope to repeat this quantum leap on the international level through a “Sargent Shriver Serve the World Act,” and through private-sector partnerships and administration initiatives adapting social innovation to empower service corps tackling issues like malaria, clean water, education and peace.  

With the ICRD Pakistan success, a rebounding Peace Corps and the Building Bridges Coalition’s rapid growth of cross-cultural solutions being evaluated by Washington University, the pathway to “the other side of smart power” through service, understanding and acceptance, is being vividly opened.

A Brookings Global Views paper further outlines how multilateral collaboration can be leveraged with other nations in this emerging “global force for good.” It is a good time to reflect on all this as we approach the upcoming 50th anniversary of the Peace Corps next year in Ann Arbor, where on October 14, 1960 President John F. Kennedy inspired students to mount a new global service.  

President Obama’s call to global engagement in Cairo in June, which ignited the announcement of Service World later that same morning, now demands a response from every citizen who dares to live up to JFK’s exhortation to “ask not what your country can do for you—ask what you can do for your country,” along with our young men and women preparing for engagement at West Point.  

Image Source: © Shruti Shrestha / Reuters
     
 
 




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We need more primary care physicians: Here’s why and how

A series of articles published this year in JAMA Internal Medicine has substantially added to the empirical literature showing that access to and use of primary care medicine in the US is associated with higher value care and better health outcomes than care that is more specialist-oriented. While these studies confirm our view that the…

       




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Willingness to Pay for Health Insurance: An Analysis of the Potential Market for New Low-Cost Health Insurance Products in Namibia


ABSTRACT

This study analyzes the willingness to pay for health insurance and hence the potential market for new low-cost health insurance product in Namibia, using the double bounded contingent valuation (DBCV) method. The findings suggest that 87 percent of the uninsured respondents are willing to join the proposed health insurance scheme and on average are willing to insure 3.2 individuals (around 90 percent of the average family size). On average respondents are willing to pay NAD 48 per capita per month and respondents in the poorest income quintile are willing to pay up to 11.4 percent of their income. This implies that private voluntary health insurance schemes, in addition to the potential for protecting the poor against the negative financial shock of illness, may be able to serve as a reliable income flow for health care providers in this setting.

Read the full paper on ScienceDirect »

Publication: ScienceDirect
Image Source: © Adriane Ohanesian / Reuters
     
 
 




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Reaching the Marginalized: Is a Quality Education Possible for All?

Event Information

January 20, 2010
3:00 PM - 5:00 PM EST

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

Education systems in many of the world's poorest countries are now experiencing the aftershock of the global economic downturn and millions of children are still missing out on their right to a quality education. After a decade of advances, progress toward the Education for All goals may stall or be thrown into reverse. Presenting a new estimate of the global cost of reaching the goals by 2015, the report challenges governments and the international community to act urgently to adopt targeted policies and practices to prevent a generation of children from being left without a proper education.

On January 20, the Center for Universal Education at Brookings hosted the launch of UNESCO’s 2010 Education for All Global Monitoring Report (GMR) with Kevin Watkins, director of the GMR. The report introduces a new, innovative tool to identify the "education-poor" who are excluded from accessing a quality education. A panel discussion followed featuring Elizabeth King of the World Bank; Barbara Reynolds of UNICEF; and Brookings Fellow Rebecca Winthrop. Brookings Senior Fellow Jacques van der Gaag moderated the discussion.

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The Private Sector and Sustainable Development: Market-Based Solutions for Addressing Global Challenges

The private sector is an important player in sustainable global development. Corporations are finding that they can help encourage economic growth and development in the poorest of countries. Most importantly, the private sector can tackle development differently by taking a market-based approach. The private sector is providing new ideas in the fight to end global…

       




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Job market news just keeps getting better


Employers continued to boost payrolls in 2015, capping six straight years of job gains. It was the third year in a row in which employment gains topped 210,000 a month. In the 12 months ending in November, public and private payrolls increased 220,000 a month, or about 1.9 percent over the year. Virtually all the growth in payrolls was in the private sector, which added 212,000 jobs a month. The public sector added modestly to its payrolls last year, but the number of government employees remains more than one million (4.4 percent) below the peak level attained in 2010. 

Nearly all major industries except mining contributed to job gains in the past 12 months, though gains in manufacturing were weaker than in any year since the expansion began in 2010.  Payrolls in the mining industry tumbled more than 10 percent, hurt by a steep fall in oil and gas prices and the decline in exploration for new energy reserves. The construction industry continued to add to payrolls last year at about the same pace as in the previous two years, although the level of employment is still about 1.2 million (15 percent) below the peak level achieved in 2006.

Based on the age composition of the U.S. population, between 65,000-80,000 new jobs are needed every month to keep the unemployment rate from rising. Since late 2010, monthly payroll gains have comfortably exceeded this threshold. As a result, the jobless rate has declined steadily. In the 12 months through November 2015, the unemployment rate dropped another 0.8 percentage point, falling to 5.0 percent. The jobless rate is now within a half percentage point of its level immediately before the Great Recession. Since reaching a peak in the autumn of 2009, the unemployment rate has been cut in half.

We’ve also seen improvement in other indicators of job market distress in the past year. The number of Americans who want full-time jobs but have been forced to take part-time positions fell more than 11 percent in the 12 months through November 2015. About 9 million workers who wanted a full-time job were employed part-time in the middle of 2010. That number has fallen to about 6 million in recent months.  Similarly, the number of Americans in long spells of unemployment continues to shrink. Workers reporting they were unemployed 6 months or longer fell to 2.05 million in November, representing a considerable improvement since 2010. In that year, more than 6 million jobless workers reported they had been looking for work for at least a half a year.

The most welcome news for Americans who hold jobs is that inflation-adjusted wage levels improved last year.  Real average hourly earnings increased 1.8 percent between November 2014 and November 2015, and real weekly earnings climbed 1.6 percent.  These gains represent a considerable improvement compared with earlier years in the recovery, when real wage gains were negligible.  Nonetheless, nominal wage gains in 2015 were only slightly faster than they were in earlier years of the recovery. The reason for the startling turnaround in real wage growth is that consumer prices increased very little over the past year.  In the 12 months ending in November, the CPI edged up just 0.5 percent, almost a full percentage point more slowly than the average rate of consumer inflation in the previous three years.  The slowdown was driven by lower prices for energy and other key commodities.  (The “core” consumer inflation rate, which strips out the effects of price changes in energy and food, was 2.0 percent last year, a bit higher than the rate in the previous year.) 

Back when politicians and voters cared more about inflation than they currently do, Brookings economist Arthur Okun proposed an economic indicator called the “misery index” to summarize the dual hardships of inflation and unemployment. To measure economic misery Okun suggested adding the current unemployment rate and a measure of consumer price inflation.  In Chart 1 below I have added the civilian unemployment rate and the trailing 12-month percentage change in the CPI.  In the 11 months of 2012 through November, the misery index averaged just 5.4, its lowest level since the 1950s and well below its average levels in the 1990s (8.8) and in the period from 2000 to 2007 (7.8). When inflation is benign and has remained subdued for a long time, Americans may forget the pain they feel when price increases are frequent and large. Okun’s misery index fell to an exceptionally low level in 2015, even if a small majority of Americans continues to believe the economy is getting worse.

The good news in 2015 is that unemployment continued to fall and real wages began to rise.  The less welcome news is that key measures of labor force participation failed to improve.  For example, the labor force participation rate of Americans between 25 and 54 was the same in November 2015 as it was in November 2014. More worryingly, it was 2.1 percentage points below its level in November 2007, just before the Great Recession.  So far we have seen no rebound in participation among people in prime working ages, despite abundant signs that it’s easier to land a job. 

Low participation is the main explanation for depressed employment rates among prime-age Americans.  Participation rates are not only low in comparison to levels seen before the Great Recession, they are also now below those in other rich countries.  Charts 2 and 3 compare employment-to-population rates among 25-54 year-olds in seven OECD member countries (Canada, France, Germany, Japan, Sweden, the United Kingdom, and the United States).  The charts show employment rates separately for men and women in two different years, 2000 and 2014.  The countries are ranked, from left to right, by their employment rates in 2014. In 2000 the U.S. had the second highest male employment rate (Chart 2) and the second highest female employment rate (Chart 3) of the seven countries listed.  By 2014, the U.S. had the lowest male and female employment rates among the countries compared.  Although several nations saw declines in their prime-age male employment rate, only the U.S. also experienced a decline in its prime-age female employment rate.  The other six countries all saw increases in female employment.

The main reason for the drop in prime-age U.S. employment was the decline in prime-age participation. An enduring puzzle of the current recovery is the failure of participation rates to rebound, even in the face of steady improvement in the job market.

Authors

     
 
 




mar

U.S. job market goes from strength to strength as global stock markets tremble


The latest BLS employment report showed remarkable strength in the U.S. job market even as global financial markets were trembling. Employers added 292,000 to their payrolls in December. Upward revisions in previous BLS estimates also boosted gains in October and November. In the last quarter of 2015, payrolls increased at a rate of 284,000 per month, a remarkable performance in the face of rising uncertainty about prospects for the world economy. U.S. employers added a total of 2.65 million jobs in 2015, the second best calendar-year gain of the current recovery. (Gains were stronger in 2014 but smaller in earlier years of the recovery.)

As usual, private employers accounted for an overwhelming share of the job gains. Ninety-seven percent of the gains in the fourth quarter and 96 percent of the gains last year occurred as a result of employment gains in the private sector. Whatever the uncertainty of the world economic outlook, U.S. employers have enough confidence in their own prospects to keep adding to their payrolls at a healthy clip. Public employment remains about 375,000 (1.7 percent) lower than it was at the onset of the Great Depression. Though government payrolls are now growing, in percentage terms they have been rising much more slowly that private payrolls.

Sizeable job gains were recorded in construction, transportation, motion pictures, professional and business services, leisure and hospitality industries, and health care. Gains were modest or negligible in manufacturing and retail trade. Payrolls fell for the twelfth consecutive month in mining, primarily as a result of continued weakness in world energy prices.   

Average hourly pay in private firms edged down 1 cent in December, but the nominal wage was 2.5 percent higher than its level 12 months earlier. This is a somewhat faster rate of improvement compared with the gains workers saw between 2010 and 2014. In terms of purchasing power, U.S. workers are clearly enjoying faster pay gains as a result of lower inflation. The 12-month change in real hourly earnings through November was 1.8 percent, the fastest rate of improvement in the current recovery. 

The BLS household survey also contained a big helping of good news. The unemployment rate remained unchanged, at 5.0 percent, but that was the result of sizeable employment gains combined with a notable influx into the active labor force. The number of survey respondents who said they were employed jumped 485,000, and the number saying they held a job or were actively looking rose 466,000. Over the past 12 months the labor force has increased only 1.69 million, but the number of household survey respondents who say they hold a job has increased 2.49 million.  Contrary to predictions that the implementation of the Affordable Care Act would push employers to put workers on part-time schedules, an overwhelming share of job growth has been in full-time positions. The number of survey respondents who said they held full-time jobs increased 504,000 in December. It has increased 2.6 million over the past year.

The gray cloud in the latest jobs report is the continued weakness in the prime-age labor force participation rate. The participation rate of men and women between 25 and 54 years old is now 80.9 percent, exactly the same as its level a year ago but more than 2 percentage points below its level before the Great Recession. Most labor economists anticipate that easier job finding and rising real hourly pay will bring more potential workers back into the workforce. Among Americans in their prime working years, however, that resurgence in participation is hard to see.


Authors

Image Source: GARY HERSHORN
     
 
 




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Islamic State and weapons of mass destruction: A future nightmare?

      
 
 




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Clean Energy Finance Through the Bond Market: A New Option for Progress


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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Image Source: © Steve Marcus / Reuters
      
 
 




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Are there structural issues in U.S. bond markets?


Event Information

August 3, 2015
9:00 AM - 12:00 PM EDT

Saul/Zilka Rooms
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

With keynote addresses by Federal Reserve Governor Jerome Powell and Counselor to the Treasury Secretary Antonio Weiss



Bond markets are the principal source of credit for businesses and governments in the United States, with almost $40 trillion of outstanding debt. They are also the main mode of investment for pension funds, mutual funds, and many other investors, which is why the safety and efficiency of these markets is, therefore, crucial.

On August 3, the Economic Studies program at Brookings hosted a number of experts to discuss the structure of bond markets in the U.S. and how changes over the last few years are affecting market liquidity, volatility, and overall safety and efficiency. Keynote addresses by Governor Jerome Powell and Counselor Antonio Weiss focused on the Treasury bond market with a panel of experts examining corporate bond markets.

After each session, the speakers and panelists took audience questions.

Antonio Weiss with Jerome Powell and Douglas Elliott (l-r)


Martin Baily with Kashif Riaz, Annette Nazareth, Steve Zamsky and Dennis Kelleher (r-l)

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Statement of Martin Neil Baily to the public hearing concerning the Department of Labor’s proposed conflict of interest rule


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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Publication: Public Hearing - Department of Labor’s Proposed Conflict of Interest Rule
Image Source: © Steve Nesius / Reuters
     
 
 




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What Sanders gets right and wrong about Denmark


The support for Bernie Sanders among young people has stirred a debate about the merits of the American style of a market economy versus the European version, and particularly the Nordic version of capitalism seen in Denmark.

Of course, the chances that Sanders will actually become president are remote and the chances of his enacting his program, if he were to become president, are even more remote. Still, the debate is an interesting one. David Brooks (writing in his New York Times column February 12, 2016) says that Denmark and similar economies in Europe are stagnant and lack the dynamism of America. Sanders’ supporters wrote in response, pointing to the strengths of Denmark: the absence of extreme poverty, the guaranty of good quality health care, and the availability of free college education.

Denmark gets a lot of things right. It provides universal health care of high quality at only a fraction of the cost of the U.S. system. Health outcomes are at least as good as in the United States with Danish wait-times similar to those we have here and infant mortality much lower. Denmark also does well in its primary and secondary education and in its labor market programs. They use tough love on those who are out of work, providing generous income support and training, but if they do not find a job or accept one that is found for them, the unemployed lose their benefits. The Danish “flexicurity” system is much admired because it combines a flexible labor market with income security. People are not guaranteed to keep the job they are in, but they are pretty much guaranteed that they can have a job.

Brooks is correct in pointing to the negative impact of very high tax rates on work. In the Nordic economies and in Germany, the employment rate is high but people work a lot fewer hours than workers in the U.S. On average, employed workers work 1,788 hours a year in the U.S. and only 1,438 in Denmark, and even less in Germany at 1,363, according to the OECD. Of course the Europeans are choosing to work shorter hours, but that choice is made in the face of very high taxes. Consider a busy professional couple in Denmark who want a renovation done to their home. They take home only a fraction of their salary after paying taxes and then they pay a plumber or an electrician to work on their house, and each of these tradespeople gets to keep only a fraction of what they charge for their services. The couple may find it is better to forget about the renovation, or hire people off the books to avoid the prohibitive double taxation.

In terms of innovation, Europe does not have the equivalent of Silicon Valley or the innovation hubs around Cambridge, Massachusetts, or the National Institutes of Health in Maryland. These creative centers generate innovations made in the U.S. that spread around the world and benefit everyone. Denmark is too small to sustain such centers by itself, but the problem extends to Europe more broadly, where policymakers struggle to match American innovation. Brooks is also correct about the danger of universal free college education. Those who graduate from four-year colleges will usually be in the upper half of the income distribution and should not expect to get a free ride from taxpayers who are making far less themselves. At the same time, creating broad financial support to allow children from low-income families to attend college while avoiding crippling debts is absolutely the right policy.

The U.S. is an exceptional country with a dynamic and successful economy. Europe would profit from copying the innovation culture of America. American capital markets, notwithstanding the financial crisis, are much more efficient than those in Europe and offer financial support and mentoring to start-up companies. Going the other way, America could learn about ways to retrain workers and avoid the desperate poverty that afflicts too many of our citizens. We could learn about the benefits of negotiating for lower prices from doctors, hospitals and drug companies. Whoever wins the White House should be secure in their belief about America’s strengths and vitality, while admitting that we can learn from what other countries do well.


Editor's note: This piece originally appeared in Inside Sources

Publication: Inside Sources
Image Source: © Dominick Reuter / Reuters
      
 
 




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


Event Information

April 15, 2016
9:00 AM - 12:30 PM EDT

The Brookings Institution
Falk Auditorium
1775 Massachusetts Ave., N.W.
Washington, DC 20036

Register for the Event

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.

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mar

The Republican Senate just rebuked Trump using the War Powers Act — for the third time. That’s remarkable.

       




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The effect of COVID-19 and disease suppression policies on labor markets: A preliminary analysis of the data

World leaders are deliberating when and how to re-open business operations amidst considerable uncertainty as to the economic consequences of the coronavirus. One pressing question is whether or not countries that have remained relatively open have managed to escape at least some of the economic harm, and whether that harm is related to the spread…

       




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Progress in Emerging Markets is Being Put at Risk

Finance ministers of the Group of Eight leading economies have commissioned a study on the role of financial market speculation in recent oil price rises. In India, the regulator recently suspended trade in futures markets for several commodities, blaming speculators for price rises. The global credit crisis has made the financial sector vulnerable to populist…

       




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The CEA training report: Very wide of the mark

       




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Immigration and the U.S. labor market: A look ahead

       




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How did COVID-19 disrupt the market for U.S. Treasury debt?

The COVID-19 pandemic—in addition to posing a severe threat to public health—has disrupted the economy and financial markets, and prompted a strong desire among investors for safe and liquid securities. In that environment, one might expect U.S. Treasury securities to be the investment of choice, but for a while in March, the $18 trillion market…

       




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The Marketplace of Democracy : Electoral Competition and American Politics


Brookings Institution Press and Cato Institute 2006 312pp.

Since 1998, U.S. House incumbents have won a staggering 98 percent of their reelection races. Electoral competition is also low and in decline in most state and primary elections. The Marketplace of Democracy combines the resources of two eminent research organizations—the Brookings Institution and the Cato Institute—to address the startling lack of competition in our democratic system. The contributors consider the historical development, legal background, and political aspects of a system that is supposed to be responsive and accountable yet for many is becoming stagnant, self-perpetuating, and tone-deaf. How did we get to this point, and what—if anything—should be done about it?

In The Marketplace of Democracy, top-tier political scholars also investigate the perceived lack of competition in arenas only previously speculated on, such as state legislative contests and congressional primaries. Michael McDonald, John Samples, and their colleagues analyze previous reform efforts such as direct primaries and term limits, and the effects they have had on electoral competition. They also examine current reform efforts in redistricting and campaign finance regulation, as well as the impact of third parties. In sum, what does all this tell us about what might be done to increase electoral competition?

Elections are the vehicles through which Americans choose who governs them, and the power of the ballot enables ordinary citizens to keep public officials accountable. This volume considers different policy options for increasing the competition needed to keep American politics vibrant, responsive, and democratic.


Brookings Forum: "The Marketplace of Democracy: A Groundbreaking Survey Explores Voter Attitudes About Electoral Competition and American Politics," October 27, 2006.

Podcast: "The Marketplace of Democracy: Electoral Competition and American Politics," a Capitol Hill briefing featuring Michael McDonald and John Samples, September 22, 2006.


Contributors: Stephen Ansolabehere (Massachusetts Institute of Technology), William D. Berry (Florida State University), Bruce Cain (University of California-Berkeley), Thomas M. Carsey (Florida State University), James G. Gimpel (University of Maryland), Tim Groseclose (University of California-Los Angeles), John Hanley (University of California-Berkeley), John mark Hansen (University of Chicago), Paul S. Herrnson (University of Maryland), Shigeo Hirano (Columbia University), Gary C. Jacobson (University of California-San Diego), Thad Kousser (University of California-San Diego), Frances E. Lee (University of Maryland), John C. Matsusaka (University of Southern California), Kenneth R. Mayer (University of Wisconsin-Madison), Michael P. McDonald (Brookings Institution and George Mason University), Jeffrey Milyo (University of Missouri-Columbia), Richard G. Niemi (University of Rochester), Natheniel Persily (University of Pennsylvania Law School), Lynda W. Powell (University of Rochester), David Primo (University of Rochester), John Samples (Cato Institute), James M. Snyder Jr. (Massachusetts Institute of Technology), Timothy Werner (University of Wisconsin-Madison), and Amanda Williams (University of Wisconsin-Madison).

ABOUT THE EDITORS

John Samples
John Samples directs the Center for Representative Government at the Cato Institute and teaches political science at Johns Hopkins University.
Michael P. McDonald

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The Marketplace of Democracy: A Groundbreaking Survey Explores Voter Attitudes About Electoral Competition and American Politics

Event Information

October 27, 2006
10:00 AM - 12:00 PM EDT

Falk Auditorium
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

Register for the Event

Despite the attention on the mid-term races, few elections are competitive. Electoral competition, already low at the national level, is in decline in state and primary elections as well. Reformers, who point to gerrymandering and a host of other targets for change, argue that improving competition will produce voters who are more interested in elections, better-informed on issues, and more likely to turn out to the polls.

On October 27, the Brookings Institution—in conjunction with the Cato Institute and The Pew Research Center—presented a discussion and a groundbreaking survey exploring the attitudes and opinions of voters in competitive and noncompetitive congressional districts. The survey, part of Pew's regular polling on voter attitudes, was conducted through the weekend of October 21. A series of questions explored the public's perceptions, knowledge, and opinions about electoral competitiveness.

The discussion also explored a publication that addresses the startling lack of competition in our democratic system. The Marketplace of Democracy: Electoral Competition and American Politics (Brookings, 2006), considers the historical development, legal background, and political aspects of a system that is supposed to be responsive and accountable, yet for many is becoming stagnant, self-perpetuating, and tone-deaf. Michael McDonald, editor and Brookings visiting fellow, moderated a discussion among co-editor John Samples, director of the Center for Representative Government at the Cato Institute, and Andrew Kohut and Scott Keeter from The Pew Research Center, who also discussed the survey.

Transcript

Event Materials

     
 
 




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