INTRODUCTION

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

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

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

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

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At the recent celebration of the 50^th anniversary of Dr. Martin Luther King’s March on Washington, Dr. King's daughter, Rev. Bernice King, cited Syria and called for international approaches rooted in love and embodying her father's commitment to nonviolence.  It is truly ironic that, after President Obama lauded King's legacy on the steps of the Lincoln Memorial, the administration announced its plans for unilateral military action to address the Syrian government’s horrific use of chemical weapons.

The situation in Syria causes us to ask:  Have all nonviolent alternatives been exhausted in accomplishing the president’s goal of responding to the brutal crimes of the Assad regime while averting a new regional (potentially global) war?

While, to date, public discourse has focused on the pros and cons of a punitive military strike, has adequate attention been given to the probability that a cruise missile strike will prompt retaliatory action—threatened by Syria, Hezbollah and Iran—against the state of Israel?  Have we considered adequately that the spiral could continue to an unthinkable escalation, keeping in mind Dr. King’s admonition that violence begets violence?  As United Nations Secretary General Ban Ki-moon stated:  "Diplomacy should be given a chance and peace given a chance.”

In sum, before authorizing or taking military action, could Congress and the administration assure us that certain steps (such as the following) have been incorporated as part of a broader regional solution?

Engage nonmilitary options in a multilateral coalition—Rather than going it alone, has the U.S. exhausted all efforts to lead a multilateral coalition to stop and punish Syrian chemical weapons use by other means under international law?  Could the pending United Nations inspections report pave the way for further multilateral interventions, ranging from global sanctions on Syria to criminal prosecution of the Assad regime at The Hague?  Could a tough U.N. sanctions resolution in response to the regime’s criminal use of chemical weapons be issued in preparation for the U.N. General Assembly this month?

Make renewed attempts to engage Russia and China, together with Track II diplomacy partners—The Russians are as concerned as the U.S. about the delivery of materials of mass destruction into terrorist hands.  The International Institute for Sustained Dialogue (IISD), its Dartmouth Conference and other Track II partners could be engaged, along with multilateral and U.S.-Russia congressional exchanges (including China and our allies) to further diplomatic action and sanctions.   

Engage Middle East and global interfaith partners—The sectarian fault lines across the Middle East require serious interfaith dialogue guided by principles and values that are common to all the Abrahamic faiths, addressing the conflict through what has been called the “relationship paradigm" of sustained dialogue. Initiatives such as the U.S.-Islamic World Forum, interfaith endeavors by Pope Francis and the Saudi king’s new interfaith center should be tapped.  A Brookings research report with Terror Free Tomorrow on the soft power effects of interfaith engagement and service in hot spots like Nigeria and South Asia illustrates this largely untapped potential.

Executive Order on Track II diplomacy, interfaith and service initiatives—President Obama could issue an executive order directing the State Department, the Defense Department, the White House Offices on Faith-Based and Neighborhood Partnerships and Social Innovation and Civic Participation, the Peace Corps and other agencies to report in 30 days on strategies and Track II partners that could further support regional solutions in the Middle East and other global hot spots.  Stepped-up multilateral emergency humanitarian aid for the mounting number of refugees from the Syrian conflict could also be marshaled with the United Nations, the Arab League, NATO and the U.S. 

In taking this “road less traveled” by charting a nonviolent direct action campaign and multilateral coalition to punish Syria and strengthen partnerships for peace, President Obama and Congress would establish a higher ground and marshal moral force with potential to break the cycle of violence, thus continuing the trailblazing legacy of Nelson Mandela, Dr. King and Gandhi.

2014 was a relatively friendless year for the Democratic Republic of Korea (DPRK or North Korea). It publicly lost its best friend and patron, China, to its erstwhile nemesis, the Republic of Korea (ROK or South Korea), when Presidents Park Geun-hye and Xi Jinping celebrated their growing friendship at the July summit in Seoul. Recently, retired PLA General Wang Hongguang wrote in the Chinese language site of Global Times, which is closely linked to the Chinese Communist Party, that China tired of cleaning up North Korea’s “mess” and would not step in to “save” North Korea if it collapses or starts a war.[1] And there is a vigorous debate in Beijing on whether the DPRK should be treated on a “normal” basis with China’s interests as the sole guide and purpose or be treated as a special case needing China’s indulgence and protection.[2] Since the Sony hack of November, North Korea has been under tighter scrutiny, both real and virtual, by Seoul, Beijing and Washington, accompanied by tighter sanctions in the new year. Bludgeoned by global condemnation of its atrocious human rights record, Pyongyang’s pariah status has intensified. Only Russia has been warming up to North Korea out of its own economic and political self-interest.

Is there any sizable country with good intentions for the region that is not giving up or beating up on North Korea? Is there any country Pyongyang likes and possibly even trusts? Mongolia stands out as the sole candidate, and it is friendly with both the East and the West.

Since the 2000s, Mongolia has played an increasingly constructive and steady role in in its bilateral ties with the DPRK and in its promotion of peace and cooperation in Northeast Asia. President Tsakhiagiin Elbegdorj, who visited Pyongyang in 2013, was the first head of state to reach out to the DPRK since Kim Jung Un assumed power and helped author the “Ulaanbaatar Dialogue on Northeast Asia Security,” which held its first meeting in June, 2014. It is a unique forum that combines official (track one) and unofficial academic/think tank/NGO (track two) participants, on a variety of important regional issues. The goals are to decrease distrust among nations and increase cooperation and peace. Both the DPRK and the ROK (Republic of Korea or South Korea) were represented at the inaugural meeting, as were the United States, China, Russia, Japan, and some European nations.

The UB Dialogue, as a consultative mechanism, has the potential to bring together policymakers, international organizations such as the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), and civil society entities and facilitate a range of initiatives related to economic cooperation; military transparency; environmental issues; non-traditional security threats; regional stability, cultural and educational exchange among the participants, including the two Koreas. These are official agenda items and goals of the UB Dialogue. With the Six-Party Talks nearly defunct and inter-Korean relations unable to address regional issues that affect the peninsula, Mongolia may be able to serve as a “Geneva or Helsinki of the East” as some observers have suggested.

Mongolia’s expanding global presence

Mongolia is uniquely positioned as the only country in Northeast Asia that enjoys good relations not only with North Korea but also South Korea, the United States, China, Russia, and Japan.

Mongolia’ relations with the United States, Canada, and Western Europe have steadily improved and deepened since the late 1980s. In recent decades, both Democratic and Republication administrations in Washington have enjoyed mutually warm and collaborative relations with Mongolia. President George W. Bush was the first sitting U.S. president to visit the country in 2005; he thanked the Mongolians for sending troops to join U.S.-led forces in Iraq and Afghanistan and for supporting anti-terrorism initiatives. Former Secretary of Defense Donald Rumsfeld also visited in the same year. In 2007, President Nambaryn Enkhbayar visited Washington to co-sign the Millennium Challenge Corporation Compact with President Bush. The next (and current) leader, President Elbegdorj, met U.S. President Barack Obama at the White House in 2011, as did the first civilian Minister of Defense, L. Bold. Vice President Joe Biden included Mongolia on a three-country Asia visit in August, 2011; China and Japan were the other two. A year later, Secretary of State Hilary Clinton took her turn in Ulaanbaatar. The most recent visit by top-level U.S. officials to Mongolia was by Secretary of Defense Chuck Hagel in April 2014.

Mongolia’s pursuit of the “third neighbor” policy allows the country to develop cooperative relations with the United States, Western Europe, ASEAN nations and others partly as “an air pocket” from its economic and security reliance on Beijing and Moscow. The softer side of this diplomatic push has been demonstrated by Ulaanbaatar’s membership in the Organization for Security and Cooperation in Europe and its previous chairmanship of the Community on Democracies.”[3]

Western experts on Mongolia applaud the way the country has developed a unique “peacekeeping niche” that facilitates participation in UN peacekeeping activities, international anti-terrorism measures, and humanitarian actions. For its small population of about three million, Mongolia takes on a heavy load of peacekeeping activities, ranking 26^th on the UN’s list of contributing nations.[4]

Since 2003, Mongolia annually hosts the “Khaan Quest” peacekeeping exercises for the purpose of tactical advancement and capacity building for its Mongolian Armed Forces (MAF) and for the improvement of regional confidence building. Although the United States and NATO play prominent roles, the Quest has attracted more diverse participants over the years so that by 2012, the number of interested parties expanded to include representatives from China and India as well as an array of developing nations such as Vietnam and Cambodia. These exercises are acknowledged as gatherings devoted to strengthening international cooperation and interoperability on peacekeeping initiatives around the world.[5]

On the economic side, Mongolia has been diversifying its external relations, with the maintenance of sovereignty and the related desire to reduce its overwhelming dependence on China as important goals. Expansion of economic relations is driven in part by a desire to participate in and benefit from global standards investment funds, and market access is a national priority. In that context, Mongolia’s relations with the West have been constructive and collaborative. For example, in 2013, the United States Trade Representative Michael Froman and Mongolia's Minister for Foreign Affairs, Luvsanvandan Bold, signed the Agreement on Transparency in Matters Related to International Trade and Investment between the United States of America and Mongolia. The Agreement commits the parties to provide opportunities for public comment on proposed laws and regulations and to publish final laws and regulations in Mongolian and English in order to facilitate access, openness, fairness, and procedural coherence in international trade and investment between Mongolia and other countries. “Additional commitments address the application of disciplines on bribery and corruption.” This type of administrative and legal modernization and the incorporation of measures to prevent and correct corruption are exemplary measures that could be helpful to the DPRK and other countries that are unfamiliar with or lagging in appropriate frameworks for doing business with diverse international actors.

Maintaining sovereignty between giants

China and Russia have vied for influence over Mongolia for many decades, from the time when Mongolia was in the Soviet sphere in influence to the present. Although 89 percent of foreign trade in 2013 was with China and Russia provides about 75 percent of Mongolia’s gasoline and diesel fuel and much of its electricity, Ulaanbaatar is assertively broadening and deepening its economic interests with the two big neighbors, especially greater transportation access and cheaper costs (vital to the landlocked nation), participation in the development of the New Silk Road corridor, and the construction of a Russian oil and gas pipeline through Mongolia that reaches China. All three countries have mutual interests and investments in developing Mongolia’s well-endowed mining industry.

But being sandwiched between two giants means Mongolia has to be prudent in preserving its sovereignty and independence, and Ulaanbaatar has done so in practical ways, balancing the two large powers’ interests with its own. The 2010 National Security Concept’s “One-Third Clause” sets a clear limit on the proportion of foreign direct investment from any one country: one-third. Legislation limits (foreign) state-owned companies from gaining control of strategic assets. And as numerous bilateral security and military cooperation agreements link Mongolia with China and Russia, UB has strategically and legally created elbow room for its autonomy. The government’s National Security and Foreign Policy Concepts outline a specific policy of not allowing foreign troops the use of its territory. Such preservationist measures to maintain sovereignty and independence in economic and security terms would be welcome examples to a North Korea which zealously prioritizes national sovereignty.

Mongolia and the Korean peninsula

Mongolia’s potential role as a non-nuclear peace broker in the region was further evidenced by its successful hosting of DPRK-Japan negotiations since 2012, which have yielded bilateral progress on longstanding abduction issues. In March 2014, Ulaanbaatar hosted the first-ever reunion between the parents of one of the abductees, Megumi Yokota (whom North Korea claims is dead), and her daughter, son-in-law, and their child who live in North Korea. Mongolia also served as a neutral venue for high-level talks on normalizing Japan-DPRK relations back in September 2007 as part of the Six-Party Talks framework. Asia Times reported that “arranging this recent meeting reflected Ulaanbaatar's ‘contribution to satisfy regional stability in Northeast Asia’ and how it could play a role in deepening understanding and normalizing DPRK-Japan relations.” President Elbegdorj's administration took particular care in staging the negotiations, including the use of the official state compound in Ikh Tenger as the meeting place. According to Alicia Campi, an American expert on Mongolia and the author of the AT article, Ikh Tenger was requested by the North Koreans.[6]

Mongolian President Elbegdorj is often described as an activist head of state, both for his focused efforts on developing Mongolia internally and advancing the country’s role and contributions internationally. One of his main foreign policy priorities is to promote regional economic integration and cooperation and peace and security. Dialogue and trust-building, two key components of his approach, coincide with ROK President Park Geun-hye’s emphasis on trustpolitik and the proposed Northeast Asia Peace and Cooperation Initiative (NAPCI). Both NAPCI and the UB Dialogue seek to chip away at distrust among Northeast Asian countries and increase collaboration and cooperation through multi-layered activities, including mutually reinforcing Track 1, 1.5 and 2 gatherings. Both emphasize multilateral cooperation on non-traditional security issues and people-to-people exchanges as ways to help build trust and resolve regional problems step by step. NAPCI held a track 1.5 forum in October 2014 in Seoul. In sharp contrast to its reaction to the first UB Dialogue of June that year, the DPRK flatly rejected the invitation to participate in the Seoul dialogue and criticized NAPCI as a cover for pressuring Pyongyang to relinquish its nuclear program and for reunification by absorption.[7]

There is no reason why the Ulaanbaatar Dialogue and NAPCI cannot be complementary and mutually reinforcing. Given that trust in inter-Korean relations is non-existent while Mongolia has gained deeper trust with both Koreas over the past two decades, NAPCI activities could benefit from Mongolia’s unique position in its relations with the DPRK. Ulaanbaatar potentially can serve as a neutral meeting ground, literally and metaphorically, for Pyongyang and Seoul. Moreover, given that the NAPCI seeks to maintain a cooperative relationship with other multilateral bodies and places emphasis on complementarity and inclusiveness, working with and supporting successful rounds of the UB Dialogues would be a principled move on the part of South Koreans. Moreover, engagement with North Korea through the UB Dialogue most likely represents an easier path to increasing inter-Korean trust than bilateral efforts and even easier than the NAPCI. South Korea’s domestic divisions and bitter left-right infighting tend to weaken the government’s position in approaches to the North. Seoul’s military standoff and competition with the North, its alliance with the United States, and participation in international sanctions regimes all cause suspicion in Pyongyang. In short, Seoul’s complex list of concerns and goals, some of which are contradictory to the spirit and practice of trust-building and cooperation with North Korea, create difficult conditions for progress through NAPCI alone.

In addition to lacking this baggage, Mongolia has unique standing with both North and South. It is a former Soviet satellite state that asserted full independence in 1990, and it is notable for successfully transitioning from a communist state to a vibrant democracy without civil war or bloodshed. President Elbegdorj’s 2013 speech in Pyongyang contained strong enunciation of the tenets of liberty. At the elite Kim Il Sung University in Pyongyang, he addressed students with these bold words: "No tyranny lasts forever. It is the desire of the people to live free that is the eternal power." And the Mongolian government has been keeping its border open to North Koreans who risk the arduous journey out of the DPRK and has permitted its airlines to transport them to South Korea.

Additionally, Mongolia has become a model of economic modernization and prosperous participation in the global economy. Although it faces some economic imbalances, its GDP rate was sky-high at 11.7 percent in 2013. There are good lessons to share with North Korea, and President Elberdorgj has made it clear that Mongolia would be very willing to work with the DPRK on economic development, IT, infrastructure, the management of mining precious earth resources and refineries. The two countries also engage in a worker exchange program, affording DPRK citizens the opportunity to breathe the air of freedom and to be exposed to South Korean television programming while they reside in Mongolia.

In recent years, Mongolia has pursued multiple types of people-to-people activities involving North Koreans, including academic exchanges, northeast Asian mayoral forums, and women’s parliamentary exchanges including female leaders from both Koreas. In June 2015, the second Track 2 conference of the UB Dialogue will convene in Ulaanbaatar with scholars from across the region and the United States with the theme of “Energy, Infrastructure, and Regional Connectivity.”

Sports and cultural initiatives in the past years have included international boxing matches in Ulaanbaatar with boxers from the DPRK, ROK, Mongolia, Russia and China. In 2013, Mongolia established an International Cooperation Fund which has supported children’s summer camps, basketball training and other exchanges with the DPRK in order to promote positive peace and people-to-people development in the region.

In the humanitarian arena, food aid to the DPRK has been channeled through international organizations, and the two countries have cooperated on physician exchanges. Prior research by Caprara and Ballen, conducted in cooperation with United Nations Special Envoy for Financing the Health Millennium Development Goals and for Malaria, has noted the additional soft power benefits of cooperative service development projects.

A recent global development forum hosted at the United Nations Asia-Pacific headquarters in Bangkok launched an Asia Pacific Peace Service Alliance which could build on these bilateral and regional exchanges in the critical area of humanitarian action and development in North Korea. An International Youth Leaders Assembly has been proposed in Ulaanbaatar for June, 2015, which would further the role of youth in fostering track two initiatives of service and dialogue.

Dr. Tsedendamba Batbayar, Mongolia’s Director of Policy Planning in the Ministry of Foreign Affairs and Trade, visited Washington in November, 2014 and noted the broad range of Mongolia-DPRK exchanges. Together with Mongolia Ambassador Bulgaa Altangerel, he emphasized his country’s desire to serve as a fair broker and mediator for the Northeast Asia region and to pursue prudent and practical measures to help build bridges of understanding between the people of North Korea and other parties.

But despite its uniquely constructive approach to dealing with the DPRK and other regional neighbors, Mongolia faces unique challenges in the mediator role it seeks to achieve. First, Ulaanbaatar has been able to gain Pyongyang’s trust because of the quiet diplomacy it has pursued, staying behind the scenes and out of the limelight. This has enabled a steady channel to the Pyongyang elite, and a focus on bilateral interests has been maintained. In short, drama has been avoided. But if Mongolia plays a more high-profile role with North Korea and multilateral actors, it will most likely be difficult to avoid some drama—posturing, rhetoric, and standoffs—emanating from various parties. Second, any increased or intensified involvement of China, Russia, and the United States in UB-led dialogue could come with the headache of big power arrogance and competition over leadership. The value of Mongolia’s role and activities for regional cooperation and peace stems from the fact that Ulaanbaatar does not assume airs or seek to dominate others. Whether China, Russia, and the United States would be able to refrain from seeking leadership and disproportionate influence in UB-led initiatives is highly questionable. Third, with respect to peninsular issues, for the UB Dialogues to gain more acceptance and credibility regionally and internationally requires that the DPRK become a consistent and collaborative presence at gatherings. Whether any nation or actor has the capacity to deliver consistent and collaborative participation by Pyongyang is an open question.

In addition, some observers believe that the impasse between North Korea and other nations is not simply the result of a trust deficit, but reflects mutually exclusive goals. While Mongolian mediation may not be able to solve the nuclear issue, it can be an effective channel – among others – for increasing communication, finding common ground, and beginning to ease tension.

Mongolia is the one Northeast Asian country that has kept its emotional cool and balanced policy interests with North Korea and other regional actors. It has not tripped over its own feet by politicizing historical grievances with its neighbors. Rather, it has exercised a calm can-do approach while its neighbors have engulfed themselves in hyper-nationalistic and ideological mire. And it has smartly used diplomacy and entrepreneurship to make friends and develop its own economy and people. These are significant assets that can be of benefit not only to UB but also to the region.

Recommendations

1. The Obama administration should actively support the Ulaanbaatar Dialogue process and encourage Seoul to find common cause in advancing greater regional dialogue and collaboration with the Mongolians through Track 2 and 1.5 processes. A precedent for this can be found in the case of Oman, which the current administration effectively tapped for back channel dialogue with Iran, kick-starting the present nuclear talks. Also, support by Washington would build on a prior exchange with Mongolia hosted by the Korea Institute for National Unification (KINU), where scholars noted potential benefits from three-way economic cooperation and the possibility of providing the North Koreans with a proven model of transformation from a closed statist system to a prosperous and more open system.

2. ROK President Park’s proposed regional cooperation mechanism should receive serious attention together with the Ulaanbaatar initiative. The two parallel efforts could benefit from being part of inter-connected strategies to defuse regional tension and forge greater trustpolitik.

3. The UN ESCAP headquarters can serve as an important multilateral bridge for humanitarian aid together with the multi-stakeholder Asia Pacific Peace Service Alliance (APPSA), which was launched at the UN headquarters in Bangkok last October. The U.S. Agency for International Development (USAID) could partner with UN ESCAP and the World Food Program to establish a verifiable humanitarian aid regime, building on prior food aid oversight protocols developed during the Bush administration. Mongolia also would be an excellent candidate for the training of an international volunteer corps for potential disaster and humanitarian relief and economic development projects concerning the DPRK and the broader Northeast Asia region. Mongolia has excellent working relations with the U.S. Peace Corps, which also helped facilitate the recent launch of the APPSA.

4. In the context of peninsula unification planning, regional economic cooperation on private and multi-stakeholder investment projects and the enabling of market-friendly policies could be further explored with Mongolia and other Northeast Asian partners in areas such as infrastructure, energy, and technology.5. Cultural and educational exchanges between Mongolia and the DPRK could be expanded on a multilateral basis over time to include the ROK, China, Russia, Japan and ASEAN nations together with UNESCO to further cultural bases and norms of peace.

Abstract

Most pollsters base their election projections off questions of voter intentions, which ask “If the election were held today, who would you vote for?” By contrast, we probe the value of questions probing voters’ expectations, which typically ask: “Regardless of who you plan to vote for, who do you think will win the upcoming election?” We demonstrate that polls of voter expectations consistently yield more accurate forecasts than polls of voter intentions. A small-scale structural model reveals that this is because we are polling from a broader information set, and voters respond as if they had polled twenty of their friends. This model also provides a rational interpretation for why respondents’ forecasts are correlated with their expectations. We also show that we can use expectations polls to extract accurate election forecasts even from extremely skewed samples.

I. Introduction

Since the advent of scientific polling in the 1930s, political pollsters have asked people whom they intend to vote for; occasionally, they have also asked who they think will win. Our task in this paper is long overdue: we ask which of these questions yields more accurate forecasts. That is, we evaluate the predictive power of the questions probing voters’ intentions with questions probing their expectations. Judging by the attention paid by pollsters, the press, and campaigns, the conventional wisdom appears to be that polls of voters’ intentions are more accurate than polls of their expectations.

Yet there are good reasons to believe that asking about expectations yields more greater insight. Survey respondents may possess much more information about the upcoming political race than that probed by the voting intention question. At a minimum, they know their own current voting intention, so the information set feeding into their expectations will be at least as rich as that captured by the voting intention question. Beyond this, they may also have information about the current voting intentions—both the preferred candidate and probability of voting—of their friends and family. So too, they have some sense of the likelihood that today’s expressed intention will be changed before it ultimately becomes an election-day vote. Our research is motivated by idea that the richer information embedded in these expectations data may yield more accurate forecasts.

We find robust evidence that polls probing voters’ expectations yield more accurate predictions of election outcomes than the usual questions asking about who they intend to vote for. By comparing the performance of these two questions only when they are asked of the exact same people in exactly the same survey, we effectively difference out the influence of all other factors. Our primary dataset consists of all the state-level electoral presidential college races from 1952 to 2008, where both the intention and expectation question are asked. In the 77 cases in which the intention and expectation question predict different candidates, the expectation question picks the winner 60 times, while the intention question only picked the winner 17 times. That is, 78% of the time that these two approaches disagree, the expectation data was correct. We can also assess the relative accuracy of the two methods by assessing the extent to which each can be informative in forecasting the final vote share; we find that relying on voters’ expectations rather than their intentions yield substantial and statistically significant increases in forecasting accuracy. An optimally-weighted average puts over 90% weight on the expectations-based forecasts. Once one knows the results of a poll of voters expectations, there is very little additional information left in the usual polls of voting intentions. Our findings remain robust to correcting for an array of known biases in voter intentions data.

The better performance of forecasts based on asking voters about their expectations rather than their intentions, varies somewhat, depending on the specific context. The expectations question performs particularly well when: voters are embedded in heterogeneous (and thus, informative) social networks; when they don’t rely too much on common information; when small samples are involved (when the extra information elicited by asking about intentions counters the large sampling error in polls of intentions); and at a point in the electoral cycle when voters are sufficiently engaged as to know what their friends and family are thinking.

Our findings also speak to several existing strands of research within election forecasting. A literature has emerged documenting that prediction markets tend to yield more accurate forecasts than polls (Wolfers and Zitzewitz, 2004; Berg, Nelson and Rietz, 2008). More recently, Rothschild (2009) has updated these findings in light of the 2008 Presidential and Senate races, showing that forecasts based on prediction markets yielded systematically more accurate forecasts of the likelihood of Obama winning each state than did the forecasts based on aggregated intention polls compiled by Nate Silver for the website FiveThirtyEight.com. One hypothesis for this superior performance is that because prediction markets ask traders to bet on outcomes, they effectively ask a different question, eliciting the expectations rather than intentions of participants. If correct, this suggests that much of the accuracy of prediction markets could be obtained simply by polling voters on their expectations, rather than intentions.

These results also speak to the possibility of producing useful forecasts from non-representative samples (Robinson, 1937), an issue of renewed significance in the era of expensive-to-reach cellphones and cheap online survey panels. Surveys of voting intentions depend critically on being able to poll representative cross-sections of the electorate. By contrast, we find that surveys of voter expectations can still be quite accurate, even when drawn from non-representative samples. The logic of this claim comes from the difference between asking about expectations, which may not systematically differ across demographic groups, and asking about intentions, which clearly do. Again, the connection to prediction markets is useful, as Berg and Rietz (2006) show that prediction markets have yielded accurate forecasts, despite drawing from an unrepresentative pool of overwhelmingly white, male, highly educated, high income, self-selected traders.

While questions probing voters’ expectations have been virtually ignored by political forecasters, they have received some interest from psychologists. In particular, Granberg and Brent (1983) document wishful thinking, in which people’s expectation about the likely outcome is positively correlated with what they want to happen. Thus, people who intend to vote Republican are also more likely to predict a Republican victory. This same correlation is also consistent with voters preferring the candidate they think will win, as in bandwagon effects, or gaining utility from being optimistic. We re-interpret this correlation through a rational lens, in which the respondents know their own voting intention with certainty and have knowledge about the voting intentions of their friends and family.

Our alternative approach to political forecasting also provides a new narrative of the ebb and flow of campaigns, which should inform ongoing political science research about which events really matter. For instance, through the 2004 campaign, polls of voter intentions suggested a volatile electorate as George W. Bush and John Kerry swapped the lead several times. By contrast, polls of voters’ expectations consistently showed the Bush was expected to win re-election. Likewise in 2008, despite volatility in the polls of voters’ intentions, Obama was expected to win in all of the last 17 expectations polls taken over the final months of the campaign. And in the 2012 Republican primary, polls of voters intentions at different points showed Mitt Romney trailing Donald Trump, then Rick Perry, then Herman Cain, then Newt Gingrich and then Rick Santorum, while polls of expectations showed him consistently as the likely winner.

We believe that our findings provide tantalizing hints that similar methods could be useful in other forecasting domains. Market researchers ask variants of the voter intention question in an array of contexts, asking questions that elicit your preference for one product, over another. Likewise, indices of consumer confidence are partly based on the stated purchasing intentions of consumers, rather than their expectations about the purchase conditions for their community. The same insight that motivated our study—that people also have information on the plans of others—is also likely relevant in these other contexts. Thus, it seems plausible that survey research in many other domains may also benefit from paying greater attention to people’s expectations than to their intentions.

The rest of this paper proceeds as follows, In Section II, we describe our first cut of the data, illustrating the relative success of the two approaches to predicting the winner of elections. In Sections III and IV, we focus on evaluating their respective forecasts of the two-party vote share. Initially, in Section III we provide what we call naïve forecasts, which follow current practice by major pollsters; in Section IV we product statistically efficient forecasts, taking account of the insights of sophisticated modern political scientists. Section V provides out-of-sample forecasts based on the 2008 election. Section VI extends the assessment to a secondary data source which required substantial archival research to compile. In Section VII, we provide a small structural model which helps explain the higher degree of accuracy obtained from surveys of voter expectations. Section VIII characterizes the type of information that is reflected in voters’ expectation, arguing that it is largely idiosyncratic, rather than the sort of common information that might come from the mass media. Section IX assesses why it is that people’s expectations are correlated with their intentions. Section VI uses this model to show how we can obtain surprisingly accurate expectation-based forecasts with non-representative samples. We then conclude. To be clear about the structure of the argument: In the first part of the paper (through section IV) we simply present two alternative forecasting technologies and evaluate them, showing that expectations-based forecasts outperform those based on traditional intentions-based polls. We present these data without taking a strong position on why. But then in later sections we turn to trying to assess what explains this better performance. Because this assessment is model-based, our explanations are necessarily based on auxiliary assumptions (which we spell out).

Right now, we begin with our simplest and most transparent comparison of the forecasting ability of our two competing approaches.

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• Forecasting Elections: Voter Intentions versus Expectations

Editor's Note: A new academic study by David Rothschild and Justin Wolfers concludes that poll questions about expectations—which ask people whom they think will win—have historically been better guides to the outcome of presidential elections than traditional questions about people’s preferences. David Leonhardt of The New York Times conducted an interview with Wolfers by e-mail, focusing on the implications of the study for current presidential polls.

David Leonhardt:In the article, I discussed only briefly the expectations polls about the 2012 race, and some of the Twitter feedback was eager for more. By my count, there have been five recent major polls asking people whom they expect to win — by ABC/Washington Post, Gallup, Politico/George Washington University, New York Times/CBS News, and the University of Connecticut. There is also sixth from Rand asking people the percentage chances they place on each candidate winning. How consistent are the polls?

Justin Wolfers: There’s a striking consistency in how people are responding to these polls. The most recent data are from the Gallup poll conducted Oct. 27-28, and they found 54 percent of adults expect Obama to win, versus 34 percent for Romney. Around the same time (Oct. 25-28), there was a comparable New York Times/CBS poll in which 51 percent of likely voters expect Obama to win, versus 34 percent for Romney.

But these results aren’t just stable across pollsters, they’ve also been quite stable over the past few weeks, even as the race appeared to tighten for a while. Politico and George Washington University ran a poll of likely voters on Oct. 22-25, finding 54 percent expect Obama to win, versus 36 percent for Romney. The University of Connecticut/Hartford Courant poll of likely voters got a somewhat higher share not venturing an answer, with 47 percent expecting Obama to win versus 33 percent for Romney. Finally, the ABC/Washington Post poll of registered voters run Oct. 10-13 found 56 percent expect Obama to win, compared to 35 percent for Romney.

I’m rather surprised by the similarities here – across time, across pollsters, across how they word the question, and across different survey populations (likely voters, registered voters, or adults) – but I suspect that is part of the nature of the question. You just don’t see the noise here that you see in the barrage of polls of voter intentions, which are extremely sensitive to all of these factors.

I always throw out the folks who don’t have an opinion, and count the proportions as a share of only those who have an opinion. By this measure, the proportion who expect Obama to win is: 61 percent (Gallup), 60 percent (The New York Times), 60 percent (Politico), 59 percent (Hartford Courant), 62 percent (ABC). The corresponding proportions who expect Romney to win are: 39 percent, 40 percent, 40 percent, 41 percent and 38 percent. Taking an average across all these polls: 60.3 percent expect Obama to win. Or if you prefer that I focus only on the freshest two polls, 60.7 percent expect him to win.

DL: The results do seem have tightened somewhat since the first debate, which Romney was widely seen to have won, right? Do the patterns — or lack of patterns — in the numbers help solve the issue of what most people are thinking of when they answer the expectation question: Private information (their friends’ voting plans, yard signs in their neighborhood, etc.) or public information (media coverage, speeches, etc.)?

JW: The results of the polls of voter intentions seem to have tightened a bit since the first debate. There’s an interesting school of thought in political science that basically says: voters are pretty predictable. But they don’t think too hard about how they’re going to vote until right before the election. So what happens is that public opinion through time just converges to where it “should” be. And viewed through this lens, the first debate was just an opportunity for people who really should always have been in Romney’s camp to figure out that they’re in Romney’s camp.

So why did the expectations polls move less sharply than intentions polls? One possibility is that your expectations are explicitly forward-looking, and perhaps people saw the race tightening as they saw that some of the support for Obama was a bit soft. Let me put this another way: There are two problems with how we usually ask folks how they plan to vote. First, the question captures the state of public opinion today, while the expectations question effectively asks you where you think public opinion is going. And second, polls typically demand a yes or no answer, when the reality may be that we know that our support is pretty weak, and it may change, or we aren’t even sure whether we’ll turn up to the polls. The virtue of asking about expectations is that you can think about each of your friends, and think not just about who they’re supporting today, but also whether they may change their minds in the future.

I worry that it sounds a bit like I haven’t answered your question, but that’s because I don’t have a super-sharp answer. If I had to summarize, it would be: expectations questions allow you to think about how the dynamics of the race may change, and so they are less sensitive to that change when it happens.

DL: Based on your research and the current polls, what does the expectations question suggest is the most likely outcome on Tuesday?

JW: If a majority expects Obama to win, then right there, it says that I’m forecasting an Obama victory.

But by how much? Here’s where it gets tricky. The fact that 60 percent of people think that Obama is going to win doesn’t mean that he’s going to win 60 percent of the votes. And it doesn’t mean that he’s a 60 percent chance to win. Rather, it simply says that given the information they have, 60 percent of people believe that Obama is going to win. Can we use this to say anything about his likely winning margin?

Yes. I’ll spare you the details of the calculation, but it says that if 60.3 percent of people expect Obama to beat Romney, then we can forecast that he’ll win about 52.5 percent of the two-party vote. That would be a solid win, though not as impressive as his seven-point win in 2008.

The proportion who expect Obama to win right now looks awfully similar to the proportion who expected George W. Bush to win in a Gallup Poll at a similar point in 2004. Ultimately Bush won 51.2 percent of the two-party vote.

Right now, Nate Silver is predicting that Obama will win 50.5 percent of the popular vote, and Romney 48.6 percent. As a share of the two-party vote, this says he’s forecasting Obama to win 51 percent of the vote. Now Silver’s approach aggregates responses from hundreds of thousands of survey respondents, while I have far fewer, so his estimate still deserves a lot of respect. I don’t want to overstate the confidence with which I’m stating my forecast. So let me put it this way: My approach says that it’s likely that Obama will outperform the forecasts of poll-based analysts like Silver.

DL: We’ll find out soon enough. Thanks.

Republican presidential candidate Mitt Romney has been strategically slippery about his tax plan, largely refusing to explain how he would pay for the sweeping tax cuts that represent his primary promise to voters.

In the second debate, though, he offered just enough detail for us to sketch the outlines of his program. If you’re poor or worried about the state of the U.S. government’s finances, the picture is not pretty.

The first course in Romney’s plan is dessert: Tax breaks for everyone! He would start by extending the tax cuts put in place by former President George W. Bush. He would then cut everyone’s rates by another 20 percent, repeal the alternative minimum tax, and get rid of the estate tax.

How would he pay for this? Mainly by limiting the amount people can deduct from their taxable income. Here’s the most detailed statement Romney has made: “One way of doing that would be say everybody gets—I’ll pick a number—$25,000 of deductions and credits, and you can decide which ones to use. Your home mortgage interest deduction, charity, child tax credit and so forth, you can use those as part of filling that bucket, if you will, of deductions.”

Big Shortfall

Putting both halves of Romney’s plan together, we compared the impact of the tax cuts with the offsetting effect of limiting itemized deductions. The result: While a cap on deductions is an interesting idea, it couldn’t possibly raise enough revenue to make up for the big tax giveaways Romney has promised. The shortfall would be a whopping $3.7 trillion over the next decade. Lowering the deduction limit to, say, $17,000 wouldn’t much change the math. The gap would still be $3.4 trillion.

Romney’s plan is most striking in its distributional implications (see chart). The greatest benefit would go to the rich. The top one-fifth of households would enjoy a staggering $16,000 average tax cut, offset by a tax increase of $4,000 due to the deduction cap. Net gain: $12,000. Actually, though, most of this group wouldn’t see that large of a benefit. About half of the spoils would go directly to the top 1 percent, which would get an average net tax cut of $100,000 a year.

The further one goes down the income scale, the worse Romney’s plan looks. The average household in the middle of the income distribution—the heart of the middle class—would get a cut of a little more than $800, which wouldn’t be much changed by the limit on deductions. The poor would actually pay slightly more tax, because Romney would end stimulus-related measures—such as an expansion of the Earned Income Tax Credit—that have benefited them.

True, any across-the-board tax cut would give more money to the rich in dollar terms, because they pay most of the taxes in the first place. But Romney’s plan goes further. It would reduce the amount the richest Americans pay relative to their income more than for anyone else. Specifically, the richest fifth would go from paying 26 percent of their income in taxes to 22 percent. The middle fifth would go from 16 percent to 15 percent. The tax burden on the poor would rise.

Romney has explicitly denied that his tax plan would favor the rich: “I will not, under any circumstances, reduce the share that’s being paid by the highest-income taxpayers.”

If this was truly his intention, he could have proposed tax cuts that were proportional to income—say, by offering simply to cut everyone’s tax rates by a few percentage points, rather than by a certain percentage. This would give the rich a bigger tax cut in dollar terms while preserving the distributional structure of our tax system.

Benefit Distribution

As it stands, Romney’s plan would result in 48 percent of the net tax cut going to the richest 1 percent (see pie chart). Another 32 percent would go to the next richest 4 percent of the population. All told, 94 percent of the benefit would go to the top 10 percent of the income distribution, leaving only 6 percent for the rest.

Many of Romney’s biggest boosters argue that he would be a more moderate president than he has been a candidate. Perhaps that’s plausible. On taxes, though, he has left himself little room to maneuver. His constituency would expect him to deliver on the very specific tax cuts he has promised. Meanwhile, his vagueness on the offsetting deduction limits would leave him with no mandate to get rid of the most popular tax breaks, such as those for charitable giving, mortgage interest or health insurance.

Hence, the most probable outcome would be a tax system that is radically less progressive, achieved through cuts that would create a much larger long-run budget deficit. Both outcomes would be colossal failures at a time in which true tax reform is greatly needed.

My first response to the GDP report was “holy cow!”-- it’s not often that the U.S. economy contracts, and the headline says that this just happened in the final quarter of 2012. Many had expected weak growth; none had seen a contraction coming. But once you take a deep breath, read past the headline, and delve into the numbers, you’ll see that this is actually a pretty good (though not great) report. The internals are much better than the top-line belies. Under the hood, we see solid growth in both consumption and investment and as a result, private spending was humming along. Last quarter’s decline in U.S. GDP was all about inventories (which subtracted 1.3 percentage points from growth), as well as sharp cuts in defense spending. Neither of these are expected to persist.

And let’s not forget that this is the "advance" GDP estimate, which is only an early (an often inaccurate) guess as to what was happening. Typically, this estimate misses the mark by a full 1.3 percentage points.

I'm sure we will start seeing the use of the dreaded "R" word (recession). That's premature, and almost certainly wrong. The U.S. economy is growing, although probably slower than potential. Don’t let me overstate my sunny optimism though—the recovery is still precarious, and Congress could still blow it up.

Overall, there's nothing in today's GDP report to change my view: The U.S. economy was doing OK -- maybe even pretty well -- but definitely not great in the final quarter of 2012. While this morning's negative growth number is an attention grabber, realize it's for last quarter, it's an early guess, and it's contradicted by most other data which point to an economy that is still growing, although perhaps not fast enough.

And finally, a trivia question: When is the last time that the first big hint of bad economic news came from an advance GDP report? Answer: Never.

The headlines seem pretty good. Unemployment fell a tick to 7.3 percent. And jobs growth continued, with payrolls expanding by 169,000 in August, which is just shy of the 175,000 new jobs that analysts were expecting.

But beneath the headline: blech!

The most important news was the revisions to what we had previously thought was a healthy and perhaps self-sustaining recovery. Instead, jobs growth in July was revised from 162,000, to a weak 104,000, and June was also revised downward. Taken together, this month's revisions means we've created 74,000 fewer jobs than previously believed. And the previous jobs report subtracted another 26,000 jobs through revisions. Moreover, for reasons that remain a mystery, revisions have tended to be pro-cyclical, meaning that the healthy recovery we thought we were having might have been expected to yield further upward revisions. All this means that analysts are hastily revising their views.

The other bad news comes from the household survey, where employment fell 115,000, leading the employment-to-population ratio to decline by 0.1 percentage points. So the decline in the unemployment rate isn't due to folks getting jobs; instead, it's due to people dropping out of the labor force.

I have two simple metrics I use to measure the "underlying" pace of jobs growth. The first puts 80% weight on the (more accurate) payrolls survey, and 20% weight on the noisier household survey. That measure suggests employment grew by only 112,000 in August. The alternative is to focus on the 3-month average of payrolls growth, which suggests we're creating slightly around 148,000 jobs per month.

Bottom line: This report says that we're barely creating enough jobs to keep the unemployment rate falling from its current high levels. Policymakers have been looking for a signal that the recovery has become self-sustaining. This report doesn't provide it. And until we're confident that the recovery will keep rolling on, we should delay either any monetary tightening, further fiscal cuts, and definitely postpone the legislative shenanigans that Congress is threatening.

Event Information

Forty years after its initial publication, Equality and Efficiency: The Big Tradeoff remains an influential work from one of the most important macroeconomists over the last century, Arthur M. Okun (1928-1980). Okun’s theory on market economies reminds readers of an engaging dual theme: the market needs a place, and the market needs to be kept in its place. Articulated in a way that remains relevant even during today’s discussions on broadening gaps in income inequality, Okun emphasized that institutions in a capitalist democracy prod us to get ahead of our neighbors economically after telling us to stay in line socially.

On May 4, The Brookings Institution Press re-released Okun’s classic work with a new foreword from Former Treasury Secretary Lawrence H. Summers, in addition to “Further Thoughts on Equality and Efficiency,” a paper published by Okun in 1977. The event included opening remarks from Brookings Senior Fellow George Perry, with a keynote address from Larry Summers. Following these remarks, David Wessel moderated a panel discussion with former Chair of the Council of Economic Advisers Greg Mankiw, Economic Studies’ Melissa Kearney and Justin Wolfers, and Washington Center for Equitable Growth's Heather Boushey regarding the history and impact of Okun’s work.

Download a copy of Lawrence Summers' opening remarks.

Ted Gayer, Vice President and Director of Economic Studies and Joseph Pechman Senior Fellow, reads Lawrence Summers's opening remarks.

David Wessel (right), Director of the Hutchins Center on Fiscal and Monetary Policy, moderates a panel discussion with N. Gregory Mankiw, Melissa Kearney, and Heather Boushey.

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, listens to the discussion from the audience. To Yellen's right is former Congressional Budget Office director, Doug Elmendorf.

Video

• 40 years later- The relevance of Okun’s "Equality and Efficiency: The Big Tradeoff"

Audio

• 40 years later- The relevance of Okun’s "Equality and Efficiency: The Big Tradeoff"

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20150504_okun_equality_efficiency_transcript
• 050415 Summers Okun Speech

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 »

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Israeli society is diverse, dynamic, vibrant, and challenged. Israel’s long-held social solidarity faces new pressure from growing internal fissures and from the ongoing conflict with the Palestinians.

In bold and candid remarks earlier this year, Israeli President Reuven Rivlin identified four “tribes” in Israeli society, representing different worldviews, and called for a new effort to find common ground among secular, national-religious and ultra-Orthodox Jewish Israelis, and Arab citizens of Israel. How might Israel’s diverse society coalesce in the coming years? How will the future of Israeli society affect its democracy, its relations with its neighbors and with the United States?

On December 10, the Center for Middle East Policy at Brookings hosted President Reuven Rivlin to discuss his vision for the future of Israeli society and the U.S.-Israeli relationship. Bruce Jones, vice president and director of Foreign Policy at Brookings, gave welcoming remarks, and Tamara Cofman Wittes, senior fellow and director of the Center for Middle East Policy at Brookings, introduced President Rivlin.

Following President Rivlin’s remarks, Natan Sachs, fellow at the Center for Middle East Policy at Brookings, engaged the president in conversation.

Join the conversation on Twitter at #IsraelsFuture.

Video

• The new Israeli society: From melting pot to partnership

Audio

• The new Israeli society: From melting pot to partnership

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20151210_israel_rivlin_transcript

Once upon a time, ambitious young people with a knack for math and science went to work in manufacturing. They designed planes, computers, and furniture, figured out how to lay out an assembly line, helped to make new cars faster and refrigerators more efficient, pushed the limits of computer chips, and invented new medicines. But, as the role of manufacturing diminished in advanced economies, the brightest talents tended to gravitate to finance and other service fields that were growing rapidly – and paying well.

But here’s some news: global manufacturing has the potential to stage a renaissance and once again become a career of choice for the most talented.

Of course, any manufacturing rebound in the advanced economies will not generate mass employment; but it will create many high-quality jobs. There will be more demand for software programmers, engineers, designers, robotics experts, data analytics specialists, and myriad other professional and service-type positions. In some manufacturing sectors, more such people may be hired than will be added on the factory floor.

Exploding demand in developing economies and a wave of innovation in materials, manufacturing processes, and information technology are driving today’s new possibilities for manufacturing. Even as the share of manufacturing in global GDP has fallen – from about 20% in 1990 to 16% in 2010 – manufacturing companies have made outsize contributions to innovation, funding as much as 70% of private-sector R&D in some countries. From nanotechnologies that make possible new types of microelectronics and medical treatments to additive manufacturing systems (better known as 3D printing), emerging new materials and methods are set to revolutionize how products are designed and made.

But, to become a genuine driver of growth, the new wave of manufacturing technology needs a broad skills base. For example, it will take many highly-trained and creative workers to move 3D printing from an astounding possibility to a practical production tool.

Consider, too, the challenges of the auto industry, which is shifting from conventional, steel-bodied cars with traditional drive trains to lighter, more fuel-efficient vehicles in which electronics are as important as mechanical parts. The Chevrolet Volt has more lines of software code than the Boeing 787. So the car industry needs people fluent in mechanical engineering, battery chemistry, and electronics.

Manufacturing is already an intensive user of “big data” – the use of massive data sets to discover new patterns, perform simulations, and manage complex systems in real-time. Manufacturing stores more data than any other sector – an estimated two exabytes (two quintillion bytes) in 2010. By enabling more sophisticated simulations that discover glitches at an early stage, big data has helped Toyota, Fiat and Nissan cut the time needed to develop new models by 30-50%.

Manufacturers in many other branches are using big data to monitor the performance of machinery and equipment, fine-tune maintenance routines, and ferret out consumer insights from social-media chatter. But there aren’t enough people with big-data skills. In the United States alone, there is a potential shortfall of 1.5 million data-savvy managers and analysts needed to drive the emerging data revolution in manufacturing.

The shift of manufacturing demand to developing economies also requires new skills. A recent McKinsey survey of multinationals based in the U.S. and Europe found that, on average, these companies derive only 18% of sales from developing economies. But these economies are projected to account for 70% of global sales of manufactured goods (both consumer and industrial products) by 2025. To develop these markets, companies will need talented people, from ethnographers (to understand consumers’ customs and preferences) to engineers (to design products that fit a new definition of value).

Perhaps most important, manufacturing is becoming more “democratic,” and thus more appealing to bright young people with an entrepreneurial bent. Not only has design technology become more accessible, but an extensive virtual infrastructure exists that enables small and medium-size companies to outsource design, manufacturing, and logistics. Large and small companies alike are crowd-sourcing ideas online for new products and actual designs. “Maker spaces” – shared production facilities built around a spirit of open innovation – are proliferating.

And yet, across the board, manufacturing is vulnerable to a potential shortage of high-skill workers. Research by the McKinsey Global Institute finds that the number of college graduates in 2020 will fall 40 million short of what employers around the world need, largely owing to rapidly aging workforces, particularly in Europe, Japan, and China. In some manufacturing sectors, the gaps could be dauntingly large. In the U.S., workers over the age of 55 make up 40% of the workforce in agricultural chemicals manufacturing and more than one-third of the workforce in ceramics. Some 8% of the members of the National Association of Manufacturers report having trouble filling positions vacated by retirees.

Indeed, when the NAM conducted a survey of high-school students in Indianapolis, Indiana (which is already experiencing a manufacturing revival), the results were alarming: only 3% of students said that they were interested in careers in manufacturing. In response, the NAM launched a program to change students’ attitudes. But not only young people need persuading: surveys of engineers who leave manufacturing for other fields indicate that a lack of career paths and slow advancement cause some to abandon the sector.

Manufacturing superstars such as Germany and South Korea have always attracted the brightest and the best to the sector. But now manufacturers in economies that do not have these countries’ superior track record must figure out how to be talent magnets. Manufacturing’s rising coolness quotient should prove useful, but turning it into a highly sought-after career requires that companies in the sector back up the shiny new image with the right opportunities – and the right rewards.

Event Information

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

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

 Follow the conversation at @BrookingsEcon or #Finance.

Video

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

Audio

• Can the financial sector promote growth and stability?

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

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

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

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

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

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

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

Neel Kashkari, the newly appointed President of the Federal Reserve Bank of Minneapolis, is super-smart with extensive experience in the financial industry at Goldman Sachs and then running the government’s TARP program, but his call to break up the big banks misses the mark.

Sure, big banks, medium-sized banks and small banks all contributed to the devastating financial crisis, but so did the rating agencies and the state-regulated institutions (mostly small) that originated many of the bad mortgages.  It was vital that regulation be strengthened to avoid a repetition of what happened – and it has been.  There should never again be a situation where policymakers are faced with either bailing out failing institutions or letting them fail and seeing financial panic spread.

That’s why the Dodd-Frank Act gave the authorities a new tool to avoid that dilemma titled “Orderly Liquidation Authority,” which gives them the ability to fail a firm but sustain the key parts whose failure might cause financial instability.  Kashkari thinks that the authorities will not want to exercise this option in a crisis because they will be fearful of the consequences of imposing heavy losses on the original owners of the largest banks.  It’s a legitimate concern, but he underestimates the progress that has been made in making the orderly liquidation authority workable in practice.  He also underestimates the determination of regulators not to bail out financial institutions from now on.

To make orderly liquidation operational, the Federal Deposit Insurance Corporation (FDIC) devised something called the “single point of entry” approach, or SPOE, which provides a way of dealing with large failing banks.  The bank holding company is separated from the operating subsidiaries and takes with it all of the losses, which are then imposed on the shareholders and unsecured bond holders of the original holding company, and not on the creditors of the critical operating subs and not on  taxpayers.  The operating subsidiaries of the failing institution are placed into a new bank entity, and they are kept open and operating so that customers can still go into their bank branch or ATM and get their money, and the bank can still make loans to support household and business spending or the investment bank can continue to help businesses and households raise funds in securities markets.  The largest banks also have foreign subsidiaries and these too would stay open to serve customers in Brazil or Mexico.

This innovative approach to failing banks is not magic, although it is hard for most people to understand.  However, the reason that Kashkari and other knowledgeable officials have not embraced SPOE is that they believe the authorities will be hesitant to use it and will try to find ways around it.  When a new crisis hits, the argument goes, government regulators will always bail out the big banks.

First, let’s get the facts straight about the recent crisis.  The government did step in to protect the customers of banks of all sizes as well as money market funds.  In the process, they also protected most bondholders, and people who had lent money to the troubled institutions, including the creditors of Bear Stearns, a broker dealer, and AIG, an insurance company.  This was done for a good reason because a collapse in the banking and financial system more broadly would have been even worse if markets stopped lending to them.  Shareholders of banks and other systemically important institutions lost a lot of money in the crisis, as they should have.  The CEOs lost their jobs, as they should have (although not their bonuses).  Most bondholders were protected because it was an unfortunate necessity.

As a result of Dodd-Frank rules the situation is different now from what it was in 2007.  Banks are required to hold much more capital, meaning that there is more shareholder equity in the banks.  In addition, banks must hold long-term unsecured debt, bonds that essentially become a form of equity in the event of a bank failure.  It is being made clear to markets that this form of lending to banks will be subject to losses in the event the bank fails—unlike in 2008.  Under the new rules, both the owners of the shares of big banks and the holders of their unsecured bonds have a lot to lose if the bank fails, providing market discipline and a buffer that makes it very unlikely indeed that taxpayers would be on the hook for losses.

The tricky part is to understand the situation facing the operating subsidiaries of the bank holding company — the parts that are placed into a new bank entity and remain open for business.  The subsidiaries may in fact be the part of the bank that caused it to fail in the first place, perhaps by making bad loans or speculating on bad risks.  Some of these subsidiaries may need to be broken off and allowed to fail along with the holding company—provided that can be done without risking spillover to the economy.  Other parts may be sold separately or wound down in an orderly way.  In fact the systemically important banks are required to submit “living wills” to the FDIC and the Federal Reserve that will enable the critical pieces of a failing bank to be separated from the rest.

It is possible that markets will be reluctant to lend money to the new entity but the key point is that this new entity will be solvent because the losses, wherever they originated, have been taken away and the new entities recapitalized by the creditors of the holding company that have been “bailed in.”   Even if it proves necessary for the government to lend money to the newly formed bank entity, this can be done with reasonable assurance that the loans will be repaid with interest.  Importantly, it can be done through the orderly liquidation authority and would not require Congress to pass another TARP, the very unpopular fund that was used to inject capital into failing institutions.

There are proposals to enhance the SPOE approach by creating a new chapter of the bankruptcy code, so that a judge would control the failure process for a big bank and this could ensure there is no government bailout.  I support these efforts to use bankruptcy proceedings where possible, although I am doubtful if the courts could handle a severe crisis with multiple failures of global financial institutions.  But regardless of whether failing financial institutions are resolved through judicial proceedings or through the intervention of the FDIC (as specified under Title II of Dodd-Frank) the new regulations guaranty that shareholders and unsecured bondholders bear the losses so that the parts of the firm that are essential for keeping financial services going in the economy are kept alive.  That should assure the authorities that bankruptcy or resolution can be undertaken while keeping the economy relatively safe.

The Federal Reserve regulates the largest banks and it is making sure that the bigger the bank, the greater is the loss-absorbing buffer it must hold—and it will be making sure that systemically important nonbanks also have extra capital and can be resolved in an orderly manner.  Once that process is complete, it can be left to the market to decide whether or not it pays to be a big bank.  Regulators do not have to break up the banks or figure out how that would be done without disrupting the financial system.

Editor's note: This piece originally appeared in Bloomberg Government. 

For more than a decade, the economy’s rate of productivity growth has been dismal, which is bad news for workers since their incomes rise slowly or not at all when this is the case. Economists have struggled to understand why American productivity has been so weak. After all, with all the information technology innovations that make our lives easier like iPhones, Google, and Uber, why hasn’t our country been able to work more productively, giving us either more leisure time, or allowed us to get more done at work and paid more in return?

One answer often given is that the government statisticians must be measuring something wrong – notably, the benefits of Google and all the free stuff we can now access on our phones, tablets and computers. Perhaps government statisticians just couldn’t figure out how to include those new services in a meaningful way into the data?

A new research paper by Fed economists throws cold water on that idea. They think that free stuff like Facebook should not be counted in GDP, or in measures of productivity, because consumers do not pay for these services directly; the costs of providing them are paid for by advertisers. The authors point out that free services paid for by advertising are not new; for example, when television broadcasting was introduced it was provided free to households and much of it still is.

The Fed economists argue that free services like Google are a form of “consumer surplus,” defined as the value consumers place on the things they buy that is over and above the price they have paid. Consumer surplus has never been included in past measures of GDP or productivity, they point out. Economist Robert Gordon, who commented on the Fed paper at the conference where it was presented, argued that even if consumer surplus were to be counted, most of the free stuff such as search engines, e-commerce, airport check-in kiosks and the like was already available by 2004, and hence would not explain the productivity growth slowdown that occurred around that time.

The Fed economists also point out that the slowdown in productivity growth is a very big deal. If the rate of growth achieved from 1995 to 2004 had continued for another decade, GDP would have been $3 trillion higher, the authors calculate. And the United States is not alone in facing weak productivity; it is a problem for all developed economies. It is hard to believe that such a large problem faced by so many countries could be explained by errors in the way GDP and productivity are measured.

Even though I agree with the Fed authors that the growth slowdown is real, there are potentially serious measurement problems for the economy that predate the 2004 slowdown.

Health care is the most important example. It amounts to around 19% of GDP and in the official accounts there has been no productivity growth at all in this sector over many, many years. In part that may reflect inefficiencies in health care delivery, but no one can doubt that the quality of care has increased. New diagnostic and scanning technologies, new surgical procedures, and new drugs have transformed how patients are treated and yet none of these advances has been counted in measured productivity data. The pace of medical progress probably was just as fast in the past as it is now, so this measurement problem does not explain the slowdown. Nevertheless, trying to obtain better measures of health care productivity is an urgent task. The fault is not with the government’s statisticians, who do a tremendous job with very limited resources. The fault lies with those in Congress who undervalue good economic statistics.

Gordon, in his influential new book The Rise and Fall of American Growth, argues that the American engine of innovation has largely run its course. The big and important innovations are behind us and future productivity growth will be slow. My own view is that the digital revolution has not nearly reached an end, and advances in materials science and biotechnology promise important innovations to come. Productivity growth seems to go in waves and is impossible to forecast, so it is hard to say for sure if Gordon is wrong, but I think he is.

Fortune reported in June 2015 that 70% of its top 500 CEOs listed rapid technological change as their biggest challenge. I am confident that companies will figure out the technology challenge, and productivity growth will get back on track, hopefully sooner rather than later.

Editor’s note: This piece originally appeared in Fortune.

Event Information

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

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

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

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

Video

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

Audio

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

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

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

Twenty-five years ago, in March 1991, shaken by the fall of the Berlin Wall and the rise of nationalist-separatist movements in the Soviet Baltic and Caucasus republics, Mikhail Gorbachev held a historic referendum. He proposed the creation of a new union treaty to save the USSR. The gambit failed. Although a majority of the Soviet population voted yes, some key republics refused to participate. And so began the dissolution of the USSR, the event that current Russian President Vladimir Putin has called the “greatest geopolitical catastrophe” of the 20th century.

Today, in the wake of the referendum on leaving the European Union, British Prime Minister David Cameron seems to have put the United Kingdom on a similar, potentially catastrophic, path. Like the fall of the wall and the collapse of the Soviet Union, the fallout from Brexit could have momentous consequences. The U.K. is of course not the USSR, but there are historic links between Britain and Russia and structural parallels that are worth bearing in mind as the U.K. and the EU work out their divorce, and British leaders figure out what to do next, domestically and internationally.

A quick Russian history recap

The British and Russian empires formed at around the same time and frequently interacted. Queen Elizabeth I was pen pals with Ivan the Terrible. The union of the Scottish and English parliaments in 1707 that set the United Kingdom on its imperial trajectory coincided with the 1709 battle of Poltava, in which Peter the Great ousted the Swedes from the lands of modern Ukraine and began the consolidation of the Russian empire. The Russian imperial and British royal families intermarried, even as they jockeyed for influence in Central Asia and Afghanistan in the 19th century. The last Czar and his wife were respectively a distant cousin and granddaughter of British Queen Victoria. The Irish Easter Uprising and the Russian Revolution were both sparked by problems at home, imperial overstretch, and the shock of the World War I. 

Like the fall of the wall and the collapse of the Soviet Union, the fallout from Brexit could have momentous consequences.

Since the end of the Cold War, the U.K. and Russia have both had difficulty figuring out their post-imperial identities and roles. The U.K. in 2016 looks structurally a lot like the USSR in 1991, and England’s current identity crisis is reminiscent of Russia’s in the 1990s. After Gorbachev’s referendum failed to shore up the union, the Soviet Union was undermined by an attempted coup (in August 1991) and then dismantled by its national elites. In early December 1991, Boris Yeltsin, the flamboyant head of the Russian Federation, holed up in a hut deep in the Belarusian woods with the leaders of Ukraine and Belarus and conspired to replace the USSR with a new Commonwealth of Independent States (CIS). With Gorbachev and the Soviet Union gone by the end of December, the hangover set in. Boris Yeltsin was the first to rue the consequences of his actions. The CIS never gained traction as the basis for a new union led by Russia. 

The Ukrainians, Belarussians, and everyone else gained new states and new identities and used the CIS as a mechanism for divorce. Russians lost an empire, their geopolitical anchor, and their identity as the first among equals in the USSR. The Russian Federation was a rump state. And although ethnic Russians were 80 percent of the population, the forces of disintegration continued. Tatars, Chechens, and other indigenous peoples of the Russian Federation, with their own histories, seized or agitated for independence. Ethnic Russians were “left behind” in other republics. Historic territories were lost. Instead of presiding over a period of Russian independence, Boris Yeltsin muddled through a decade of economic collapse and political humiliation.

Separating the U.K. from Europe...could be as wrenching as pulling apart the USSR.

Is Britain laying the same trap?

Another Boris, the U.K.’s Boris Johnson, the former mayor of London and main political opponent of David Cameron, risks doing the same if he becomes U.K. prime minister in the next few months. Separating the U.K. from Europe institutionally, politically, and economically could be as wrenching as pulling apart the USSR. People will be left behind—EU citizens in the U.K., U.K. citizens in the EU––and will have to make hard choices about who they are, and where they want to live and work. The British pound has already plummeted. The prognoses for short- to medium-term economic dislocation have ranged from gloomy to dire. The U.K is a multi-ethnic state, with degrees of devolved power to its constituent parts, and deep political divides at the elite and popular levels. Scotland and Northern Ireland, along with Gibraltar (a contested territory with Spain), clearly voted to stay in the European Union. The prospect of a new Scottish referendum on independence, questions about the fate of the Irish peace process, and the format for continuing Gibraltar’s relationship with Spain, will all complicate the EU-U.K. divorce proceedings. 

Like Russia and the Russians, England and the English are in the throes of an identity crisis.

Like Russia and the Russians, England and the English are in the throes of an identity crisis. England is not ethnically homogeneous. In addition to hundreds of thousands of Irish citizens living in England, there are many more English people with Irish as well as Scottish ancestry––David Cameron’s name gives away his Scottish antecedents––as well as those with origins in the colonies of the old British empire. And there are the EU citizens who have drawn so much ire in the Brexit debate. 

As in the case of the USSR and Russia where all roads led (and still lead) to Moscow, London dominates the U.K.’s population, politics, and economics. London is a global city that is as much a magnet for international migration as a center of finance and business. London voted to remain in Europe. The rest of England, London’s far flung, neglected, and resentful hinterland, voted to leave the EU—and perhaps also to leave London. At the end of the divorce process, without careful attention from politicians in London, England could find itself the rump successor state to the United Kingdom. If so, another great imperial state will have consigned itself to the “dust heap of history” by tying its future to a referendum. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This weekend’s election results in Turkey were a surprise to the vast majority of Turkish pollsters and pundits, myself included. The ruling Justice and Development Party (AKP) won nearly 50 percent of the popular vote. The party can now form a single-party government, even if it doesn’t have the supermajority necessary to remake the Turkish constitution. What happened?

As with much in life, the result does make sense in hindsight. Prior to the June 7 election, President Recep Tayyip Erdoğan and the AKP leadership had supported a Kurdish peace process, in part in the hope of gaining Kurdish votes. In that election, however, not only did the AKP fail to win new Kurdish votes, but support for the Nationalist Action Party (MHP)—a far-right Turkish nationalist party—swelled, apparently out of frustration among nationalist Turks with the AKP-led peace process with the Kurds. In other words, the AKP had the worst of both worlds.

Erdoğan and the AKP leadership, recognizing the political problem this posed for them, allowed the peace process to collapse amid mounting instability driven by the Syrian civil war. This, combined with disillusionment with the MHP leadership due to their perceived unwillingness to form a coalition government, drove about two million MHP voters to the AKP this weekend. The exodus shows, in a sense, what close substitutes the two parties can be among a more nationalist voting bloc.

The controlled chaos that resulted from the collapse of the peace process—combined with the escalating refugee crisis, the fear of ISIS attacks, and the struggling economy—helped the government politically. Voters evidently recalled that it had been the AKP that brought the country out of the very tough times of the 1990s.  

In contrast, the opposition parties seem to lack leadership and appear to promise only internal squabbles and indecisiveness. Craving security and stability, voters have now turned to the one party that appears to have the strength to provide it. In that sense, Erdoğan’s nationalist gambit—which was actually a well-conceived series of political maneuvers—worked. Even some one million conservative Kurdish voters returned to the AKP.

These voters perhaps did not notice the irony that the government had also engineered the instability they feared. In part, this success derives from government’s control over the media. These elections may have been free, in the sense that Turkish voters can cast a ballot for the candidates they want. But they were not fair. The state maintained tight control over traditional and social media alike. Freedom House and the Committee to Protect Journalists, among others, have cast doubt on Turkey’s press freedom credentials. Real opposition voices are difficult for media publish or voters to see on television. Thus, for example, Selahattin Demirtaş, the leader of the pro-Kurdish Peoples' Democratic Party (HDP) and the most charismatic opposition politician in Turkey, had essentially no air time during the campaign.

There are some important upsides to the election results. For one, HDP again passed the 10 percent threshold to remain in parliament. That will help mitigate—though hardly erase—the polarization that grips the country, and will hopefully make government reconsider its abandonment of the Kurdish peace process.

More significantly, the AKP does not have what it needs to convert Turkey’s government structure into a presidential system, which would be a bad move for the country. The election results will undoubtedly revitalize Erdoğan’s push for a presidential regime in Turkey. But that requires changing the constitution, and the AKP did not achieve the supermajority that it would need to do that on its own.

Critically, changing to a presidential system will require some support from the opposition and even more importantly popular support via a referendum. As political strategists around the world have learned, people tend not to vote on the actual referendum item, per se, but based on more general opinions of their leadership. So to win a referendum on the presidential system, Erdoğan and his AKP colleagues would need to show improvements in the economy, in the security situation, on the Kurdish issue, on Syrian refugees, and on national stability more generally. Instability in Turkey, particularly the renewal of violence in the Kurdish region, will deter investment and deepen the economic slump throughout the country.

With its new majority, AKP leaders are now in a position of strength to negotiate with the HDP over Kurdish issues. The refugee crisis also means the government also has more leverage with the EU. If it chooses to use its strength to reach positive agreements on those fronts, the outcomes could be very good for the Turkish people.

To actually win a referendum on the presidential system, Erdoğan would have to work to depolarize his country. While the presidential system itself would not be good for Turkey, the process of getting there might be.

Terrorist attacks with high casualties usually create a sense of national solidarity and patriotic reaction in societies that fall victim to such heinous acts. Not in Turkey, however. Despite a growing number of terrorist attacks by the so-called Islamic State on Turkish soil in the last 12 months, the country remains as polarized as ever under strongman President Recep Tayyip Erdogan.

In fact, for two reasons, jihadist terrorism is exacerbating the division. First, Turkey's domestic polarization already has an Islamist-versus-secularist dimension. Most secularists hold Erdogan responsible for having created domestic political conditions that turn a blind eye to jihadist activities within Turkey.

It must also be said that polarization between secularists and Islamists in Turkey often fails to capture the complexity of Turkish politics, where not all secularists are democrats and not all Islamists are autocrats. In fact, there was a time when Erdogan was hailed as the great democratic reformer against the old secularist establishment under the guardianship of the military.

Yet, in the last five years, the religiosity and conservatism of the ruling Justice and Development Party, also known by its Turkish acronym AKP, on issues ranging from gender equality to public education has fueled the perception of rapid Islamization. Erdogan's anti-Western foreign policy discourse -- and the fact that Ankara has been strongly supportive of the Muslim Brotherhood in the wake of the Arab Spring -- exacerbates the secular-versus-Islamist divide in Turkish society.

Erdogan doesn't fully support the eradication of jihadist groups in Syria.

The days Erdogan represented the great hope of a Turkish model where Islam, secularism, democracy and pro-Western orientation came together are long gone. Despite all this, it is sociologically more accurate to analyze the polarization in Turkey as one between democracy and autocracy rather than one of Islam versus secularism.

The second reason why ISIS terrorism is exacerbating Turkey's polarization is related to foreign policy. A significant segment of Turkish society believes Erdogan's Syria policy has ended up strengthening ISIS. In an attempt to facilitate Syrian President Bashar Assad's overthrow, the AKP turned a blind eye to the flow of foreign volunteers transiting Turkey to join extremist groups in Syria. Until last year, Ankara often allowed Islamists to openly organize and procure equipment and supplies on the Turkish side of the Syria border.

Making things worse is the widely held belief that Turkey's National Intelligence Organization, or MİT, facilitated the supply of weapons to extremist Islamist elements amongst the Syrian rebels. Most of the links were with organizations such as Jabhat al-Nusra, Ahrar al-Sham and Islamist extremists from Syria's Turkish-speaking Turkmen minority.

He is trying to present the PKK as enemy number one.

Turkey's support for Islamist groups in Syria had another rationale in addition to facilitating the downfall of the Assad regime: the emerging Kurdish threat in the north of the country. Syria's Kurds are closely linked with Turkey's Kurdish nemesis, the Kurdistan Workers' Party, or PKK, which has been conducting an insurgency for greater rights for Turkey's Kurds since 1984.

On the one hand, Ankara has hardened its stance against ISIS by opening the airbase at Incirlik in southern Turkey for use by the U.S-led coalition targeting the organization with air strikes. However, Erdogan doesn't fully support the eradication of jihadist groups in Syria. The reason is simple: the Arab and Turkmen Islamist groups are the main bulwark against the expansion of the de facto autonomous Kurdish enclave in northern Syria. The AKP is concerned that the expansion and consolidation of a Kurdish state in Syria would both strengthen the PKK and further fuel similar aspirations amongst Turkey's own Kurds.

Will the most recent ISIS terrorist attack in Istanbul change anything in Turkey's main threat perception? When will the Turkish government finally realize that the jihadist threat in the country needs to be prioritized? If you listen to Erdogan's remarks, you will quickly realize that the real enemy he wants to fight is still the PKK. He tries hard after each ISIS attack to create a "generic" threat of terrorism in which all groups are bundled up together without any clear references to ISIS. He is trying to present the PKK as enemy number one.

Only after a peace process with Kurds will Turkey be able to understand that ISIS is an existential threat to national security.

Under such circumstances, Turkish society will remain deeply polarized between Islamists, secularists, Turkish nationalists and Kurdish rebels. Terrorist attacks, such as the one in Istanbul this week and the one in Ankara in July that killed more than 100 people, will only exacerbate these divisions.

Finally, it is important to note that the Turkish obsession with the Kurdish threat has also created a major impasse in Turkish-American relations in Syria. Unlike Ankara, Washington's top priority in Syria is to defeat ISIS. The fact that U.S. strategy consists of using proxy forces such as Syrian Kurds against ISIS further complicates the situation.

There will be no real progress in Turkey's fight against ISIS unless there is a much more serious strategy to get Ankara to focus on peace with the PKK. Only after a peace process with Kurds will Turkey be able to understand that ISIS is an existential threat to national security.

This piece was originally posted by The Huffington Post.

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An individual-based computational model of smallpox epidemics in a two-town county is presented and used to develop strategies for bioterror containment. A powerful and feasible combination of preemptive and reactive vaccination and isolation strategies is developed which achieves epidemic quenching while minimizing risks of adverse side effects. Calibration of the model to historical data is described. Various model extensions and applications to other public health problems are noted.

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During debates in Congress and in the legal battles testing its constitutionality, critics of the Bipartisan Campaign Reform Act of 2002 imagined a host of unanticipated and debilitating consequences. The law's ban on party soft money and the regulation of electioneering advertising would, they warned, produce a parade of horribles: A decline in political speech protected by the First Amendment, the demise of political parties, and the dominance of interest groups in federal election campaigns.

The forecast that attracted the most believers — among politicians, journalists, political consultants, election-law attorneys and scholars — was the claim that Democrats would be unable to compete against Republicans under the new rules, primarily because the Democrats' relative ability to raise funds would be severely crippled. One year ago, Seth Gitell in The Atlantic Monthly summarized this view and went so far as to call the new law "The Democratic Party Suicide Bill." Gitell quoted a leading Democratic Party attorney, who expressed his private view of the law as "a fascist monstrosity." He continued, "It is grossly offensive ... and on a fundamental level it's horrible public policy, because it emasculates the parties to the benefit of narrow-focus special-interest groups. And it's a disaster for the Democrats. Other than that, it's great."

The core argument was straightforward. Democratic Party committees were more dependent on soft money — unlimited contributions from corporations, unions and individuals — than were the Republicans. While they managed to match Republicans in soft-money contributions, they trailed badly in federally limited hard-money contributions. Hence, the abolition of soft money would put the Democrats at a severe disadvantage in presidential and Congressional elections.

In addition, the argument went, by increasing the amount an individual could give to a candidate from $1,000 to $2,000, the law would provide a big financial boost to President Bush, who would double the $100 million he raised in 2000 and vastly outspend his Democratic challenger. Finally, the ban on soft money would weaken the Democratic Party's get-out-the-vote efforts, particularly in minority communities, while the regulation of "issue ads" would remove a potent electoral weapon from the arsenal of labor unions, the party's most critical supporter.

After 18 months of experience under the law, the fundraising patterns in this year's election suggest that these concerns were greatly exaggerated. Money is flowing freely in the campaign, and many voices are being heard. The political parties have adapted well to an all-hard-money world and have suffered no decline in total revenues. And interest groups are playing a secondary role to that of the candidates and parties.

The financial position of the Democratic party is strikingly improved from what was imagined a year ago. Sen. John Kerry (D-Mass.), who opted out of public funding before the Iowa caucuses, will raise more than $200 million before he accepts his party's nomination in Boston. The unusual unity and energy in Democrats' ranks have fueled an extraordinary flood of small donations to the Kerry campaign, mainly over the Internet. These have been complemented by a series of successful events courting $1,000 and $2,000 donors.

Indeed, since Kerry emerged as the prospective nominee in March, he has raised more than twice as much as Bush and has matched the Bush campaign's unprecedented media buys in battleground states, while also profiting from tens of millions of dollars in broadcast ads run by independent groups that are operating largely outside the strictures of federal election law.

The Democratic national party committees have adjusted to the ban on soft money much more successfully than insiders had thought possible. Instead of relying on large soft-money gifts for half of their funding, Democrats have shown a renewed commitment to small donors and have relied on grassroots supporters to fill their campaign coffers. After the 2000 election, the Democratic National Committee had 400,000 direct-mail donors; today the committee has more than 1.5 million, and hundreds of thousands more who contribute over the Internet.

By the end of June, the three Democratic committees had already raised $230 million in hard money alone, compared to $227 million in hard and soft money combined at this point in the 2000 election cycle. They have demonstrated their ability to replace the soft money they received in previous elections with new contributions from individual donors.

Democrats are also showing financial momentum as the election nears, and thus have been gradually reducing the Republican financial advantage in both receipts and cash on hand. In 2003, Democrats trailed Republicans by a large margin, raising only $95 million, compared to $206 million for the GOP. But in the first quarter of this year, Democrats began to close the gap, raising $50 million, compared to $82 million for Republicans. In the most recent quarter, they narrowed the gap even further, raising $85 million, compared to the Republicans' $96 million.

Democrats are now certain to have ample funds for the fall campaigns. Although they had less than $20 million in the bank (minus debts) at the beginning of this year, they have now banked $92 million. In the past three months, Democrats actually beat Republicans in generating cash — $47 million, compared to $31 million for the GOP.

The party, therefore, has the means to finance a strong coordinated and/or independent-spending campaign on behalf of the presidential ticket, while Congressional committees have the resources they need to play in every competitive Senate and House race, thanks in part to the fundraising support they have received from Members of Congress.

Moreover, FEC reports through June confirm that Democratic candidates in those competitive Senate and House races are more than holding their own in fundraising. They will be aided by a number of Democratic-leaning groups that have committed substantial resources to identify and turn out Democratic voters on Election Day.

Democrats are highly motivated to defeat Bush and regain control of one or both houses of Congress. BCRA has not frustrated these efforts. Democrats are financially competitive with Republicans, which means the outcome will not be determined by a disparity of resources. Put simply, the doomsday scenario conjured up by critics of the new campaign finance law has not come to pass.