On March 5, Chinese President Xi Jinping spoke to the Shanghai delegates to the National People’s Congress (NPC) session in Beijing. China’s top leaders use these side meetings to convey policy guidance on a range of issues, and Xi used this particular one to offer his perspective on relations with Taiwan. There has been some nervousness in the wake of the January 16 elections, which swept the opposition Democratic Progressive Party (DPP) to power in both the executive and legislative branches. Because the Beijing government has always suspected that the fundamental objective of the DPP is to permanently separate Taiwan from China, observers were waiting expectantly to hear what Xi would have to say about Taiwan.

Well before the March 5 speech, of course, Xi’s subordinates responsible for Taiwan policy had already laid out what Taiwan President-elect Tsai Ing-wen and her party would have to do to prevent cross-Strait relations from deteriorating, and they continued to emphasize those conditions after Xi’s speech. But analysts believed that Xi’s own formulation would be the clearest indicator of Beijing’s policy. He is, after all, China’s paramount leader, and his words carry a far greater weight than those of other Chinese officials.

This is what Xi said to the Shanghai NPC delegation about Taiwan [translation by the author, emphasis added]:

Compatriots on the two sides of the Strait are blood brothers who share a common destiny, and are people for whom blood is thicker than water…Our policy towards Taiwan is correct and consistent, and will not change because of a change in [who heads] the Taiwan authorities. We will insist upon the political foundation of the “1992 consensus,” and continue to advance cross-Strait relations and peaceful development…If the historical fact of the “1992 consensus” is recognized and if its core connotation is acknowledged, then the two sides of the Strait will have a common political basis and positive interaction [virtuous circle] can be preserved. We will steadily push forward cross-Strait dialogue and cooperation in various fields, deepen cross-Strait economic, social, and financial development, and increase the familial attachment and welfare of compatriots [on both sides], close their spiritual gap, and strengthen their recognition that they share a common destiny. We will resolutely contain the separatist path of any form of Taiwan independence, protect state sovereignty and territorial integrity, and absolutely not allow a repetition of the historical tragedy of national separation. This is the common wish and firm intention of all Chinese sons and daughters, and is also our solemn pledge and obligation to history and to the people. The fruits of cross-Strait relations and peaceful development require the common support of compatriots on the two sides; creating a common and happy future requires the common effort of compatriots on the two sides; and realizing the great revival of the Chinese nation requires that compatriots on the two sides join hands to work with one heart.

The italicized sentences are key: They state what the new DPP government should do if it wishes to maintain healthy cross-Strait relations and affirms Beijing’s resolve to oppose any behavior it doesn’t like. Xi didn’t threaten specific actions, but he probably didn’t have to. As always, Beijing reserves the right to decide what DPP attitudes and actions constitute separatism and a quest for Taiwan independence. 

Xi didn’t threaten specific actions, but he probably didn’t have to.

Some background

There are two important points of reference contextualizing this statement from Xi. 

Xi on November 7, 2015. First, there are his reported remarks on the future of cross-Strait relations during his unprecedented meeting with current Taiwan president Ma Ying-jeou in Singapore last November 7. At that time, Xi first appealed to ethnic solidarity and national unity, as he did again on March 5. He asserted that the stakes to end the state of division between Mainland China and Taiwan were very high because it was a critical part of how he views rejuvenating the Chinese nation—a theme he repeated to the Shanghai delegation. 

Xi said Taiwan, under the new government, could either continue to follow the path it has walked for the last seven-plus years under the current Ma Ying-jeou administration (“peaceful development”), or it could take the path of renewed “confrontation,” “separation,” and zero-sum hostility. If Taiwan wished to follow the first path, Xi insisted, its leaders must adhere to the 1992 consensus and oppose “Taiwan independence.” Without this “magic compass that calms the sea,” Xi warned, “the ship of peaceful development will meet with great waves and even suffer total loss.” He was willing to overlook the DPP’s past positions and actions, but only if it identified with “the core connotation of the 1992 consensus” (a reference to the PRC view that the Mainland and Taiwan are both within the territorial scope of China, a view the DPP contests). Xi alluded to the “core connotation” on March 5 but did not re-state its content. Xi then made clear that if “disaster” occurred, it would be the DPP’s fault—it was therefore up to Tsai, he implied, to accommodate to Beijing’s conditions. 

In language and tone, Xi’s Singapore statement was far more strident and alarmist than what he said on March 5. He made that first statement more than two months before the election, when perhaps he thought that tough talk would weaken Tsai’s and the DPP’s appeal to voters. If that was his objective, he failed. The tone of his March 5 remarks was more modulated, but the substance was the same. Beijing would define the crossroads that Taiwan faced, and it was up to Tsai to take the right path—at least what it defined the right path.

Beijing would define the crossroads that Taiwan faced, and it was up to Tsai to take the right path—at least what it defined the right path.

Tsai on January 21, 2016. Second, there is an interview that Tsai gave to Liberty Times (Tzu-yu Shih Pao) on January 21—less than a week after the elections—in which she sought to meet Beijing partway. For the first time, she used the phrase “political foundation” and said it had four elements: 

• “The first is that the SEF-ARATS discussions of 1992 are a historical fact and both sides had a common acknowledgment to set aside differences and seek common ground;” 
• “The second is the Republic of China’s current constitutional order.”
• “The third is the accumulated results of the more than 20 years of cross-strait negotiations, exchanges, and interactions;” and
• “The fourth is Taiwan’s democratic principles and the will of the Taiwanese people to make sure that Taiwan voters understood the limits to his tolerance.”

So, Tsai accepts the 1992 meetings as a historical fact and acknowledges that the two sides did reach an agreement of sorts, but does not accept the 1992 consensus itself as a historical fact. She spoke more about process than content. The Republic of China’s “current constitutional order” is also part of the foundation, which some have read as Tsai’s acceptance that the Mainland and Taiwan are both parts of China’s territory (Beijing’s “core connotation”)—I, however, am not so sure. Tsai did not reject Xi’s requirements out of hand, but she framed them in her own way. 

So are ties growing friendlier?

Was Xi’s tonal moderation on March 5—relative to November 7—an indicator that mutual accommodation was going on? Perhaps. But the fact that the November meeting was ostensibly private while the March speech was public might explain the difference. 

Moreover, the stream of Chinese articles and statements since March 5 that explicitly restate Beijing’s long-standing preconditions are reason to doubt that much accommodation is actually occurring. The three basic scenarios I outlined last December—accommodation, limited Chinese punishment of the Tsai administration, and comprehensive punishment—are still in play, and the key variable remains whether Xi and his subordinates trust Tsai Ing-wen’s basic intentions. That is, will they accept her recent formulations as a good-faith effort to avoid deterioration? The next milestone will be May 20, when Tsai Ing-wen gives her inaugural address and may provide a more detailed formulation of her approach to China.

       

       

       

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The world’s top economies had much to discuss at the G-20 summit in Brisbane, Australia last month, including reinvigorating global growth, the reduction of trade barriers, financial regulation reforms, and global infrastructure. The G-20 meeting took place at a key time for U.S. international economic policy, as it came on the heels of President Obama’s prior stops at the APEC summit and the ASEAN summit. As the U.S. joins its G-20 colleagues in aiming to boost G-20 GDP by an additional 2 percent by 2018, there remain many questions about how G-20 countries will follow through with the goals set in Brisbane.

On December 3, the Global Economy and Development program and the Economic Studies program at Brookings welcomed U.S. Treasury Undersecretary for International Affairs Nathan Sheets in his first public address since being confirmed in September. Following the recent G-20 meeting, Sheets discussed his perspectives on priorities for international economic policy in the years ahead across key areas including trade, the international financial architecture, and the United States’ evolving economic relationships.

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• U.S. Economic Engagement on the International Stage: A Conversation with U.S. Treasury Undersecretary Nathan Sheets

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• U.S. Economic Engagement on the International Stage: A Conversation with U.S. Treasury Undersecretary Nathan Sheets

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• 20141203_sheets_international_economic_engagement_transcript

      

“Although we are seeing a strengthening recovery in the United States, the overall performance of the global economy continues to fall short of aspirations,” said Treasury Undersecretary for International Affairs Nathan Sheets to a Brookings audience yesterday. In the event, hosted by the Global Economy and Development program and the Economic Studies program at Brookings, Undersecretary Sheets described six “pillars” that form his offices “core policy agenda for the years ahead” to support “a growing and vibrant U.S. economy.”

1. Strengthening and rebalancing global growth. Undersecretary Sheets noted the “persistent and deeper asymmetry in the international economic landscape,” and called for policymakers to “work together toward mutually beneficial growth strategies” such as boosting demand.
2. Deepening engagement with emerging-market giants, such as China, India, Mexico, and Brazil. On India, for example, the undersecretary noted that “faster growth, deeper financial markets, and greater openness to trade and foreign investment promise to raise incomes, reduce poverty, and bring many more Indians into the global middle class.”
3. Framing a resilient global financial system. “To be sustained,” he said, “growth must be built on a resilient financial foundation.” (See also Federal Reserve Governor Lael Brainard’s remarks yesterday on the Fed’s role in financial stability.)
4. Enhancing access to capital in developing countries. “Expanding access to financial services for the over 2 billion unbanked people in the world promises to open new possibilities as the financial wherewithal in these populations grows,” he said.
5. Promoting open trade and investment. Undersecretary Sheets explained that “Increased U.S. access to foreign markets, and the consequent rise in exports of our goods and services, is an important source of job creation in the United States.” He described current trade priorities, including the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP), the Information Technology Agreement (ITA) concerning China, and the Trade Facilitation Agreement (TFA) concerning India.
6. Enhancing U.S. leadership in the IMF. Undersecretary Sheets said that Treasury and the Obama administration “are firmly committed to securing approval for the 2010 IMF quota and governance reforms.” Citing the widespread support already in place for these policies, Sheets argued that “without these reforms, emerging economies may well look outside the IMF and the international economic system we helped design, potentially undermining the Fund’s ability to serve as a first responder for financial crises around the world, and also our national security and economic well-being.” He also called on the Senate to confirm six administration nominees as executive directors or alternate executive directors at the IMF and multilateral development banks.

Watch the video here:

 

Get a transcript of Undersecretary Sheets’ prepared remarks here.

Brookings expert Donald Kohn, the Robert S. Kerr Senior Fellow, moderated the discussion. The speaker was introduced by Senior Fellow Amar Bhattacharya.

      

       

The “green” or “clean” or low-carbon economy—defined as the sector of the economy that produces goods and services with an environmental benefit—remains at once a compelling aspiration and an enigma.

As a matter of aspiration, no swath of the economy has been more widely celebrated as a source of economic renewal and potential job creation. Yet, the clean economy remains an enigma: hard to assess. Not only do “green” or “clean” activities and jobs related to environmental aims pervade all sectors of the U.S. economy; they also remain tricky to define and isolate—and count.

The clean economy has remained elusive in part because, in the absence of standard definitions and data, strikingly little is known about its nature, size, and growth at the critical regional level.

Seeking to help address these problems, the Metropolitan Policy Program at Brookings worked with Battelle’s Technology Partnership Practice to develop, analyze, and comment on a detailed database of establishment-level employment statistics pertaining to a sensibly defined assemblage of clean economy industries in the United States and its metropolitan areas.

"Sizing the Clean Economy: A National and Regional Green Jobs Assessment" concludes that:

The clean economy, which employs some 2.7 million workers, encompasses a significant number of jobs in establishments spread across a diverse group of industries. Though modest in size, the clean economy employs more workers than the fossil fuel industry and bulks larger than bioscience but remains smaller than the IT-producing sectors. Most clean economy jobs reside in mature segments that cover a wide swath of activities including manufacturing and the provision of public services such as wastewater and mass transit. A smaller portion of the clean economy encompasses newer segments that respond to energy-related challenges. These include the solar photovoltaic (PV), wind, fuel cell, smart grid, biofuel, and battery industries.

The clean economy grew more slowly in aggregate than the national economy between 2003 and 2010, but newer “cleantech” segments produced explosive job gains and the clean economy outperformed the nation during the recession. Overall, today’s clean economy establishments added half a million jobs between 2003 and 2010, expanding at an annual rate of 3.4 percent. This performance lagged the growth in the national economy, which grew by 4.2 percent annually over the period (if job losses from establishment closings are omitted to make the data comparable). However, this measured growth heavily reflected the fact that many longer-standing companies in the clean economy—especially those involved in housing- and building-related segments—laid off large numbers of workers during the real estate crash of 2007 and 2008, while sectors unrelated to the clean economy (mainly health care) created many more new jobs nationally. At the same time, newer clean economy establishments— especially those in young energy-related segments such as wind energy, solar PV, and smart grid—added jobs at a torrid pace, albeit from small bases.

The clean economy is manufacturing and export intensive. Roughly 26 percent of all clean economy jobs lie in manufacturing establishments, compared to just 9 percent in the broader economy. On a per job basis, establishments in the clean economy export roughly twice the value of a typical U.S. job ($20,000 versus $10,000). The electric vehicles (EV), green chemical products, and lighting segments are all especially manufacturing intensive while the biofuels, green chemicals, and EV industries are highly export intensive.

The clean economy offers more opportunities and better pay for low- and middle-skilled workers than the national economy as a whole. Median wages in the clean economy—meaning those in the middle of the distribution—are 13 percent higher than median U.S. wages. Yet a disproportionate percentage of jobs in the clean economy are staffed by workers with relatively little formal education in moderately well-paying “green collar” occupations.

Among regions, the South has the largest number of clean economy jobs though the West has the largest share relative to its population. Seven of the 21 states with at least 50,000 clean economy jobs are in the South. Among states, California has the highest number of clean jobs but Alaska and Oregon have the most per worker.

Most of the country’s clean economy jobs and recent growth concentrate within the largest metropolitan areas. Some 64 percent of all current clean economy jobs and 75 percent of its newer jobs created from 2003 to 2010 congregate in the nation’s 100 largest metro areas.

The clean economy permeates all of the nation’s metropolitan areas, but it manifests itself in varied configurations. Metropolitan area clean economies can be categorized into four-types: service-oriented, manufacturing, public sector, and balanced. New York, through mass transit, embodies a service orientation; so does San Francisco through professional services and Las Vegas through architectural services. Many Midwestern and Southern metros like Louisville; Cleveland; Greenville, SC; and Little Rock—but also San Jose in the West—host clean economies that are heavily manufacturing oriented. State capitals are among those with a disproportionate share of clean jobs in the public sector (e.g. Harrisburg, Sacramento, Raleigh, and Springfield). Finally, some metros—such as Atlanta; Salt Lake City; Portland, OR; and Los Angeles— balance multi-dimensional clean economies.

Strong industry clusters boost metros’ growth performance in the clean economy. Clustering entails proximity to businesses in similar or related industries. Establishments located in counties containing a significant number of jobs from other establishments in the same segment grew much faster than more isolated establishments from 2003 to 2010. Overall, clustered establishments grew at a rate that was 1.4 percentage points faster each year than non-clustered (more isolated) establishments. Examples include professional environmental services in Houston, solar photovoltaic in Los Angeles, fuel cells in Boston, and wind in Chicago.

The measurements and trends presented here offer a mixed picture of a diverse array of environmentally-oriented industry segments growing modestly even as a sub-set of clean energy, energy efficiency, and related segments grow much faster than the nation (albeit from a small base) and in ways that are producing a desirable array of jobs, including in manufacturing and export-oriented fields.

As to what governments, policymakers, and regional leaders should do to catalyze faster and broader growth across the U.S. clean economy, it is clear that the private sector will play the lead role, but governments have a role too. In this connection, the fact that significant policy uncertainties and gaps are weakening market demand for clean economy goods and services, chilling finance, and raising questions about the clean innovation pipeline reinforces the need for engagement and reform. Not only are other nations bidding to secure global production and the jobs that come with it but the United States currently risks failing to exploit growing world demand. And so this report concludes that vigorous private sector-led growth needs to be co-promoted through complementary engagements by all levels of the nation’s federal system to ensure the existence of well-structured markets, a favorable investment climate, and a rich stock of cutting-edge technology—as well as strong regional cast to all efforts. Along these lines, the report recommends that governments help:

Scale up the market by taking steps to catalyze vibrant domestic demand for low-carbon and environmentally-oriented goods and services. Intensified “green” procurement efforts by all levels of government are one such market-making engagement. But there are others. Congress and the federal government could help by putting a price on carbon, passing a national clean energy standard (CES), and moving to ensure more rational cost recovery on new transmission links for the delivery of renewable energy to urban load centers. States can adopt or strengthen their own clean energy standards, reduce the initial costs of energy efficiency and renewable energy adoption, and pursue electricity market reform to facilitate the use of clean and efficient solutions. And localities can also support adoption by expediting permitting for green projects, adopting green building and other standards, and adopting innovative financing tools to reduce the upfront costs of investing in clean technologies.

Ensure adequate finance by moving to address the serious shortage of affordable, risk-tolerant, and larger-scale capital that now impedes the scale-up of numerous clean economy industry segments. On this front Congress should create an emerging technology deployment finance entity to address the commercialization “Valley of Death” and also work to rationalize and reform the myriad tax provisions and incentives that currently encourage capital investments in clean economy projects. States, for their part, can supplement private lending activity by providing guarantees and participating loans or initial capital for revolving loan funds targeting clean economy projects using new or improved technologies. And for that matter regions and localities can also help narrow the deployment finance gap by helping to reduce the costs and uncertainty of projects by expediting their physical build-out, whether by managing zoning and permitting issues or even pre-approving sites.

Drive innovation by investing both more and differently in the clean economy innovation system. With the needed major scale-up of investment levels unlikely for now, Congress at least needs to embrace continued incremental growth of key energy and environmental research, development, and demonstration (RD&D) budgets. At the same time, Congress should continue its recent institutional experimentation through measured expansion of such recent start-ups as the Energy Frontier Research Centers, ARPA-E, and Energy Innovation Hubs programs. Two worthy additional experiments would be the creation of a water sciences innovation center and the establishment of a regional clean economy consortia initiative. States can also advance the clean economy through maintaining and expanding their own RD&D efforts, perhaps by tapping state clean energy funds where they exist. All should be focused and prioritized through a rigorous, data-driven analysis of the nature, growth, and strengths of local clean economy innovation clusters.

In addition, the “Sizing the Clean Economy“ emphasizes that in working on each of these fronts federal, state, and regional leaders need to:

Focus on regions, meaning that all parties need to place detailed knowledge of local industry dynamics and regional growth strategies near the center of efforts to advance the clean economy. While the federal government should increase its investment in new regional innovation and industry cluster programs such as the Economic Development Administration’s i6 Green Challenge, states should work to improve the information base about local clean economy industry clusters and move to support regionally crafted initiatives for advancing them. Regional actors, meanwhile, should take the lead in using data and analysis to understand the local clean economy in detail; identify competitive strengths; and then move to formulate strong, “bottom up” strategies for overcoming key clusters’ binding constraints. Employing cluster intelligence and strategy to design and tune regional workforce development strategies will be a critical regional priority.

***

The measurements, trends, and discussions offered here provide an encouraging but also challenging assessment of the ongoing development of the clean economy in the United States and its regions. In many respects, the analysis warrants excitement. As the nation continues to search for new sources of high-quality growth, the present findings depict a sizable and diverse array of industry segments that is—in key private-sector areas—expanding rapidly at a time of sluggish national growth. With smart policy support, broader, more rapid growth seems possible. At the same time, however, the information presented here is challenging, most notably because the growth of the clean economy has almost certainly been depressed by significant policy problems and uncertainties.

That question is: Will the nation marshal the will to make the most of those industries?

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• Methodology Appendix
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• Sizing the Clean Economy

       

For all the debate, speculation, and controversy that has surrounded the hoped-for growth of the so-called “clean” economy and “green jobs” one thing has been in pretty short supply: facts. 

For all the talk of its alluring promise, the clean or green economy remains an enigma, in large part due to the continued absence of standard national definitions and data.

Today that changes with a new report assessing the current nature, size, and growth of the “green” or “clean” economy in U.S. regions. 

Developed by the Brookings Metropolitan Policy Program in partnership with Battelle’s Technology Partnership Practice, our report and its underlying database--entitled “Sizing the Clean Economy”--are not perfect accountings. Still, I think you will agree they offer a compelling new national and metropolitan look at a sector of the economy that has remained at once an important aspiration and a frustrating enigma. Do look over the report; watch video of our release discussion; and check out the special interactive mapping tool we’ve developed--both of which are aimed at shedding further light on the geography of this hard-to-assess sector.

Over the last 18 months we’ve developed and analyzed a detailed database of establishment-level employment statistics pertaining to a sensibly defined assemblage of low-carbon and environmentally oriented industries in the United States and its metropolitan areas.

Covering the years 2003 to 2010 for larger U.S. metros, the resulting information provides a new source of timely information that is both consistently applied so as to allow cross-region comparisons but detailed enough to be of some use to inform national, state, and regional leaders on the dynamics of the U.S. low-carbon and environmental goods and services super-sector as they are transpiring in U.S. regions.

To be sure, localized drill-downs in particular places may capture a fuller profile in some regions. But overall, our new information provides what we believe is a plausible, useful, first-of-its-kind measure of the size and growth of the clean economy as it is occurring in the nation’s 100 largest metropolitan areas. 

What is more, our definition, approach, and data have been structured as much as possible to anticipate the Bureau of Labor Statistics’ own forthcoming “green jobs” count, due next year at somewhat broader levels of geography.  It’s time that all U.S. regions begin to have access to some at least rough order-of-magnitude facts about the size and shape of their clean economies.

       

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To access a curated stream of tweets from the #CleanEcon event, please visit this Storify page. Below you will find this event's full webcast archive--or, you may view one of four segments taken from that webcast.

No swath of the U.S. economy has been more widely celebrated as a source of economic renewal than the “clean” or “green” economy. However, surprisingly little is really known about these industries’ nature, size and growth—especially at the regional level. As a result, debates on transitioning to a green or clean economy are frequently short on facts and long on speculation as the nation searches for new sources of economic growth.

On July 13, the Metropolitan Policy Program at Brookings brought together business, economic development and political leaders to review the progress of clean industries, identify policy issues and opportunities, and consider how faster and broader growth of the clean economy could be encouraged at the national, state and regional level. A report and first-of-its-kind database, produced in collaboration with Battelle’s Technology Partnership Practice, was released at the event, providing new measures of the clean economy at the national and metropolitan levels. Also featured was an interactive web tool that allows users to track jobs, growth, segments, and other variables nationally, by state and by region.

Brookings Managing Director William Antholis welcomed participants and Bruce Katz, vice president and director of the Metropolitan Policy Program, presented the findings of this major new report on the status of the U.S. clean economy. Panel discussions followed, presenting the corporate and regional perspective.

After each panel, the speakers took audience questions.

Go to the report »

Go to the interactive web tool »

Video

• Introducing the Metropolitan Clean Economy
• Panel One: The Clean Economy, Firm by Firm
• Panel Two: The Clean Economy, Region by Region
• Clean Economy Closing Dialogue
• Growing the Clean Economy in Philadelphia

Audio

• Sizing the Clean Economy: A National and Regional Green Jobs Assessment
• Sizing the Clean Economy: A National and Regional Green Jobs Assessment
• Sizing the Clean Economy: A National and Regional Green Jobs Assessment
• Sizing the Clean Economy: A National and Regional Green Jobs Assessment

       

Editor's Note: During an event to launch a new report assessing the clean economy, Bruce Katz delivered a presentation highlighting the clean sector’s contribution to boosting exports and increasing manufacturing jobs. Katz's presentation also is featured in an iBook for the iPad.

Thank you, [Brookings Managing Director] Bill [Antholis] for that introduction, and for your leadership in this institution and more broadly in the national debate on climate change.

Before proceeding, I want to first thank my colleagues, Mark Muro, Jonathan Rothwell, Devashree Saha, and our friends at Battelle, particularly Mitch Horowitz and Marty Grueber for their creativity, collegiality, and painstaking attention to detail through a long and rigorous research effort. 

I’d also like to offer a special thanks to the Nathan Cummings Foundation, the General Electric Foundation, Living Cities, and the Surdna Foundation for their support and guidance of the program’s Clean Economy work, as well as the Rockefeller Foundation, who is supporting our policy and practice work around the clean economy in states and metropolitan areas.  

Today, we celebrate not just the release of a report, “Sizing the Clean Economy” but the unveiling of an interactive web site to spur further research, policy and practice, all freely available at www.brookings.edu/cleaneconomy.

We want today’s forum to be a participatory event and urge all of you in the audience and following on our webcast to engage online early and often. Please comment on Twitter via the hashtag created for this event (#cleanecon) and feel free to engage directly with me at @Bruce_Katz and Mark at @MarkMuro1 and send us any questions at MetroQ@brookings.edu.

 

The question before us: at a time of economic uncertainty and federal polarization, can America’s cities and metropolitan areas lead the nation to a clean economy—to create jobs in the near term and retool and restructure our economy for the long haul?

 

There is no doubt in our minds that moving to a clean economy is an environmental and energy imperative.  But consumers, companies, and cities are also sending an unequivocal signal: this is a market proposition and an economic transformation as profound as the information revolution.

Consumers around the globe are starting to demand lower carbon, energy efficient products and services: one in four drivers in the U.S., Europe, China, and Japan plans to buy electric vehicles when they are readily available. That would put about 50 million electric cars on the road in places from Baltimore to Beijing, Torino to Tokyo.

Companies see the clean economy as a growth sector: three quarters of major global corporations plan to increase “cleantech” budgets from 2012 to 2014. Global private investment in clean energy alone is up more than 6 fold since 2004, reaching $154 billion in 2010.

Cities and their metropolitan areas, early adapters of sustainable practice, are now competing to build out their special niches in the clean economy. I will provide details later on Greater Seattle’s bold strategy to be the global hub of clean IT. 

For two years, the Brookings Metro Program has hammered home the notion that the United States must pursue a different growth model post recession, a “next economy” that is driven by exports, powered by low carbon, fueled by innovation and rich with opportunity—and delivered by the large metropolitan areas that drive our economy.

Today, we will literally flip the dial and place the clean economy in the center of our macro vision and unveil the scale, scope and spatial geography of this promising growth engine. 

We have three sharp and timely findings.

First, the clean economy is a significant, diverse emerging market in the United States, already populated by some 2.7 million jobs. It is disproportionately manufacturing and export intensive—and offers better prospects for low and middle skilled workers than the national economy as a whole. This is exactly the kind of economy we want to build post-recession.

Second, metropolitan areas are on the vanguard of the clean economy due to their concentration of innovative drivers, as well as the built environment in which most people live, work and play. As in exports, metros specialize in different sectors of the clean economy—and the clustering of firms is catalyzing productive and sustainable growth.

Third, the U.S. must unleash the entrepreneurial energies and dynamism of our metropolitan engines to accelerate growth of the clean economy. That will require a strategic mix of private sector innovation and public policy that is stable, supportive, and predictable.  Given the nature and scale of global competition, U.S. governments, at all levels, must “get in the game” rather than “get out of the way.”  Smart public action can leverage private investment, create desperately needed jobs, and cement our position as the leading edge of innovative growth.

The stakes are very high. Make no mistake—we have a lot to do here and we are falling behind globally. Our competitors in mature and rising economies—Germany, Japan, and China—fully understand the potential of clean, and they are working at warp speed to set favorable conditions for rapid growth and grab their share of the next market revolution. We need to get our public-private act together—in cities and metros, in state capitals, at the now polarized federal level.

So let’s start with our first finding: the clean economy is a significant, diverse emerging market in the United States  

In total, we find there are 2.7 million clean economy jobs all across the United States. To put that number in perspective: the clean economy is nearly twice the size of the biosciences field and 60 percent of the 4.8 million strong IT sector. As you can tell, the clean economy also has more jobs than fossil fuel related industries.  

 Our definition of the clean economy is as follows:

“Any economic activity—measured in terms of establishments and jobs—that produces goods and services with an environmental benefit, or adds value to such products using skills or technologies that are uniquely applied to those products.”

This definition yields a broad and varied picture of economic activity: old and new, public and private, “green” and “blue.”

At the highest level, we find establishments and jobs grouping together in 5 discernible categories: Renewable Energy; Energy and Resource Efficiency; Greenhouse Gas Reduction; Environmental Management, and Recycling; Agricultural and Natural Resources Conservation; and Education and Compliance. Here we follow the categorization the Bureau of Labor Statistics is using for its own “green jobs” assessment due next year.

These categories then naturally break down into fine-grained segments, ultimately 39 in all.

Renewable Energy, for example, has nine segments, including Solar and Geothermal power, and Renewable Energy Services.

Energy and Resource Efficiency has 13 separate segments, from Electric Vehicle Technology to Water Efficient Products.

Greenhouse Gas Reduction, Environmental Management, and Recycling has 12 segments including Green Chemical Products and Professional Environmental Services.

And so on—you get the idea.

Each of the segments, in turn, has a distinct economic profile (cutting across multiple activities, occupations and skills) and a distinct spatial geography given the special assets and attributes of different places.

Let’s drill down a little so we all get on the same page.

Under renewable energy, let’s look at solar photovoltaic, a young rapidly innovating area. This segment employs more than 24,000 people in 555 establishments.

The list includes two major solar manufacturing firms, First Solar—with a major plant in Toledo—and BP Solar—with a facility in the Washington, DC metro, and Bombard Electric in Las Vegas, which helps businesses in that region—casinos, hotels, shopping centers—shift their energy use.

Under Greenhouse Gas Reduction, let’s take a look at Professional Environmental Services, an example of the role that expert services can play in domestic and global markets. This segment boasts some 140,000 workers in 5,400 establishments.

CH2M Hill in Denver provides environmental consulting services throughout the U.S. and the world, Ecology & Environment is a science and technical services firm with a large presence in Los Angeles, and Black & Veatch, out of Kansas City, is an engineering firm specializing in areas from environmental permitting to remediation.

One more definitional cut to consider: we have identified a group of young, super innovative “Cleantech” industries that cross multiple categories and show enormous growth potential. These industries are populated by companies with a median age of 15 years or less.

Most notably, this portfolio of segments—including wind power, battery technologies, bio fuels, and smart grid—grew about 8 percent a year since 2003, or twice as fast as the rest of the economy.

The clean economy, however, is not just broad and diverse, it is disproportionately productive.

The clean economy is export intensive, already taking advantage of the demand for clean goods and services coming from abroad.

In 2009, clean economy establishments exported almost $54 billion, including about $49.5 billion in goods and an additional $4.5 billion in services.

Significantly, clean economy establishments are by our calculations twice as export intensive as the national economy: over $20,000 worth of exports is sold for every job in the clean economy each year compared to just $10,400 worth of exports for the average U.S. job.

The export orientation of the clean economy today provides a platform for more exports tomorrow. With rising nations rapidly urbanizing, the demand for sustainable growth in all its dimensions will only grow, and the U.S. has the potential to serve that demand.

The clean economy also supports a production-driven innovation economy.

We find it employs a higher percentage of scientists than the national economy. Ten percent of clean economy jobs are in science and engineering, compared to 5 percent in U.S. economy generally.

As we now know, manufacturing and innovation are inextricably linked. This provides a stark challenge to the U.S.: we will innovate less unless we produce more.

By our account, the clean economy is a vehicle for production.

Twenty six percent of all clean economy jobs are involved in manufacturing, compared to just 9 percent of jobs in the economy as a whole.

Manufacturing accounts for a majority of the jobs in over half of the clean economy segments, with many sectors having a supermajority of production-oriented jobs.

Solar and wind energy, for example, have more than two thirds of their jobs in manufacturing. And some segments, including appliances, water efficient products, and electric vehicle technologies have over 90 percent of their jobs in manufacturing.

The good news: clean manufacturing is growing, even in the face of national declines in manufacturing employment. 

Finally, the clean economy is opportunity rich, providing prospects for a wide range of workers, and good wages up and down the skills ladder.

The clean economy is easy to enter, available to people of all skill levels: 45 percent of all clean jobs are held by workers with a high school diploma or less, compared to only 37 percent of U.S. jobs.

Once a worker enters the field, he or she is more likely to receive career-building training, as 41 percent of clean jobs offer medium to long-term training, compared to 23 percent of U.S. jobs.

The payoff is higher wages: the median wage in the clean economy is almost $44,000 for the average occupation, significantly higher than the national equivalent of $38,000 and change.

In summary, the clean economy is the kind of economy we want to build: export oriented, innovation fueled, opportunity rich, and balanced.

So here is our second major finding, metros are on the vanguard of the clean economy

Here is the heart of the American economy: 100 metropolitan areas that after decades of growth take up only 12 percent of our land mass, but harbor two-thirds of our population and generate 75 percent of our gross domestic product. 

These communities form a new economic geography, enveloping cities and suburbs, exurbs and rural towns.

Our research shows the extent to which these top 100 metros, in the aggregate, are driving growth in the Clean Economy.

In 2010, they constitute an increasing share of clean economy jobs, almost 64 percent.

And they include an outsized share, 74 percent, of jobs in cleantech industries, including extraordinarily high shares in solar photovoltaic, battery technologies, smart grid, and wind energy.

Innovative clean jobs are predominately in the top 100 metros because these places concentrate the assets that drive innovation, from initial research through commercialization through ultimate deployment

The major metros are also leading the growth of clean economy jobs around the built environment. They harbor 78 percent of jobs in public mass transit, and 90 percent of the jobs in green architecture, design and construction since moving people more efficiently and making buildings energy efficient will primarily be a metropolitan act, given where most people live and travel, and businesses locate.

Incredibly, metros also include a decent share of clean jobs that are traditionally rural, with at least 23 percent of jobs in resource-intensive activities like hydropower, sustainable forestry products, and biofuels, and more than half of organic food and farming jobs.

Metro economies, of course, do not exist in the aggregate; they have distinctive starting points and distinctive assets, attributes and advantages. 

Our research digs deep to profile the clean economy potential of each of the top 100 metro areas.

Four metro areas—New York, L.A., Chicago and Washington—are supersized job centers, with more than 70,000 jobs apiece in the clean economy in 2010. The New York metro alone has more than 152,000 clean economy jobs.

Other major metros—Philadelphia, San Francisco, Atlanta, Boston, Houston and Dallas—are also key players, with more than 38,000 jobs apiece as of that year.

Yet this is not just about the largest metros. As we see here, a different group of small and medium sized metros have more than 3.3 percent of their jobs situated in the clean economy. Albany leads the way, with an impressive 6.3 percent of its jobs in the clean economy.

The power of metros is the power of agglomeration, networks and clusters. 

Our report finds that clusters—the proximity of firms to businesses in related industries—boost metros’ growth performance in the clean economy, and metros facilitate clustering.

Examples include professional environmental services in Houston, solar photovoltaic in Los Angeles, fuel cells in Boston, wind in Chicago, water industries in Milwaukee, and energy efficiency in Philadelphia.

We can talk about clusters in the abstract, but its best to see them in practice from the ground up.

So let’s travel to the Philadelphia metropolis—the nation’s fifth largest—which includes the city of Philadelphia and surrounding counties.

Philadelphia is the fifth largest clean economy job center in the country.

Here we can find the advanced research engines of the University of Pennsylvania and Drexel in University City, who have partnered together on clean energy research and have provided a steady stream of talented workers to public, private and nonprofit firms and intermediaries.

These universities are part of the Greater Philadelphia Innovation Cluster, based at the Navy Yard, on the Delaware River.  This consortium received $129 million in federal funding from multiple agencies to demonstrate the efficacy of new building energy efficient components, systems and models.

The consortium includes strong support of City Hall, led by Mayor Michael Nutter, who has pioneered smart skills training in the energy efficient sector as well as the Philadelphia Industrial Development Corporation, which has been an investor in the Navy Yard.

And then, of course, there are firms and companies, the fuel of the economy, located throughout the Philadelphia metropolis.

Downtown we find Veridity Energy, a small smart grid firm with powerful technology tools. The density of Center City supports a healthy mix of highly skilled service firms. Just around the corner is Realwinwin, which provides finance services to companies making capital investments in energy efficiency.

But metropolitan economies cross city and county borders because different kinds of firms require different urban and suburban footprints—so if we look out to the suburb of Radnor, just past Bryn Mawr and I-476, we find Iberdrola, the second largest wind operator in the United States and a subsidiary of a major Spanish renewable energy company and an example of the wave of foreign direct investment that can help the U.S. build out the clean economy.   

The Philadelphia story reveals why cities and metro areas power our economy: they are hyper linked networks of private firms and public and nonprofit institutions that fertilize ideas, share workers, extend innovation, enhance competitiveness and catalyze growth.

Which leads to our final proposition: to build the next economy the U.S. must unleash the entrepreneurial energies and dynamism of our metropolitan engines.

We compete in a fiercely competitive world.

While America continues to debate the legitimacy of global warming research, our competitors in established nations like Germany, Japan and the U.K. and rising nations like China are taking transformative steps to grow their clean economies in the precise places—Munich, Tokyo, London, Shanghai—that drive their national economies. 

The United States can compete with these and other nations. No other nation can match us in domestic demand, advanced research, venture capital, the power of metro concentration.

But our potential will not be realized unless we provide a strong policy platform for the build out of the clean economy. 

Four steps are essential:  

Step one: scale-up markets by catalyzing demand for clean economy goods and services.  

Step two: drive innovation by investing in advanced R&D at scale, over a sustained period and via new distributed networks.

Step three: catalyze finance to produce and deploy more of what we invent. 

And step four: align with cities and metros to realize the synergies of clustering and place.  

Our competitors know that economy shaping of this magnitude should start at the national scale.

And so, in a perfect world, we would have our federal government create a framework for growth and success.

We have seen some of that leadership in the past few years, through: the procurement driven, market scaling efforts of the Department of Defense, the creation of new innovation vehicles like ARPA-E, some of the financial investments of the Department of Energy’s Loan Guarantee Program, and the metro-supporting investments in new energy regional innovation clusters—like the Greater Philadelphia example—supported by agencies with diverse sets of missions and resources, including DOE, Commerce, Labor, Education, and SBA. 

But with our global competitors continuously upping their goals and expanding their commitments, we desperately need our federal government to go further and act with vision and ambition and consistency.

To scale-up markets, Congress should enact a national clean energy standard (CES) that signals a long term, consistent commitment to alternative energy sources.

To drive innovation, Congress should embrace the call by the American Energy Innovation Council, led by corporate titans like Bill Gates and Jeff Immelt, to invest $16 billion annually in clean energy research and development through ARPA-E and networks of institutions that are multi-disciplinary and engage seamlessly with the private sector.

To catalyze finance, Congress should authorize a technology deployment finance entity—a Green Bank for short—to provide finance of the right scale and risk tolerance to ensure that ideas generated in America lead to products made in America.

Congress should also rationalize, reform, and selectively extend the myriad tax provisions and incentives that currently support the clean economy but which are now chaotic, unstable, inconsistent, and obtuse about evoking innovation and steady price declines from maturing clean technologies.

And to align with regions, Congress should more than double the number of energy innovation hubs and clusters that are seeded and funded.

Frankly, it is not difficult to lay out what reforms and investments are needed to grow the clean economy. Our competitors have given us clear guidance on that score. The only issue is whether our federal government, riven by excessive partisanship and ideological polarization, can muster the will to get anything done.  

Fortunately in the U.S. we have a default proposition when our national government falters, our states act as our “laboratories of democracy” and, as California Lt. Governor Gavin Newsom recently observed, our cities and metros act as the laboratories of innovation.

And so that’s how, for the time being, we will need to build our clean economy in the United States, the hard way, from the ground up.

The good news: there is no shortage of policy innovation and political commitment at the state and metro scale.

To scale up markets, California has set an aggressive renewable portfolio standard of 33 percent renewable energy by 2020. With this strong foundation, San Jose and other cities and counties are doing their part to facilitate consumer adoption: streamlining or even eliminating building permitting for solar panels.

To drive innovation, Wisconsin has created the School of Freshwater Sciences at the University of Wisconsin-Milwaukee to leverage that metro’s rising position in the blue economy. The Milwaukee Water Council is building on this, spearheading a network of scientists and companies to realize Milwaukee’s ambition to be a global hub for freshwater research, firm creation, and business expansion. 

To catalyze finance, Connecticut recently created the Connecticut Clean Energy Finance and Investment Authority. Capitalized with some $50 million annually, this Green Bank could accelerate the generation, transmission, and adoption of alternative energy.

At the municipal level, New York City has capitalized an Energy Efficiency Corporation to spur the financing of energy efficiency in the building sector.

And, finally, smart metros are now moving to build out their distinctive industry clusters.  In Greater Seattle, for example, the Puget Sound Regional Council has developed a business plan to cement that metro’s natural position as a global hub of energy efficient building technologies. This smart public-private initiative includes the establishment of a facility to test, integrate and verify promising energy efficient products and services before launching them to market.

Significantly, this metro vision is being supported by the State of Washington, which has committed to match any federal investment in the testing network.

Let me conclude with this vision: Let’s imagine a world in 20 years where the clean economy permeates every aspect of our economic and social fabric and, in the process, enhances productivity and competitiveness, lowers energy use, spurs further innovation, and provides quality work for a broad cross section of our citizenry. 

We believe today’s research—and the power of millions of consumers, tens of thousands of companies and hundreds of cities and metros—gives us the hope that this vision can become reality.

We have the data to set a platform for sustainable growth.

We have the roadmap to set the foundation for smart investment.

We have the entrepreneurs in all sectors to innovate and replicate. 

Let’s build the clean economy—worker by worker, firm by firm, metro by metro.

Thank you.

       

A new report and interactive map, "Sizing the Clean Economy: A National and Regional Green Jobs Assessment" includes a first-of-its-kind database providing new measures of the clean economy at the national and metropolitan levels. Although the clean economy employs millions of people and exists in every U.S. region, market challenges hinder its ability to keep pace with global competitors. Mark Muro talks about how this economy is a driver of growth and innovation.

Video

• Sizing the Clean Economy

       

Editor's Note: During an appearance on the Platts Energy Week program, Mark Muro discussed jobs in the green sector, using findings from the "Sizing the Clean Economy" report.

Host BILL LOVELESS: Green jobs – what are they? And can they make much of a contribution to the economy? It’s an ongoing debate in Washington, and the rest of the U.S. for that matter, and it’s a knotty one because defining the term “green jobs” is difficult.

But now the Brookings Institution has taken a crack at it with a new report, “Sizing the Clean Economy.” One of the authors, Mark Muro, with the Brookings Metropolitan Policy Program, joins me now. Mark, do you think you’ve defined, once and for all, what the clean economy is?

MARK MURO: The answer to that is “no.” This has been an ongoing discussion for decades, really. On the other hand, I do think that we have done is tried to embrace good precedents, good sensible precedents from Europe. The European Statistical Agency comes at it similar to the way we did. But we’ve also anticipated where the Bureau of Labor Statistics, here in the U.S., will be next year when it offers our first U.S. official definition.

LOVELESS: A summer preview, maybe. I know the Bureau of Labor Statistics is working on that. Should this report ... tell me a little bit about this report — where the jobs are and should this in any way change the way we look at green jobs.

MURO: I think one thing that comes from this is that it’s a broad swath of, sometimes not very glamorous, industries that are very familiar. Wastewater, mass transit – those are properly viewed as green jobs because they take pressure off the environment. They keep our environment clean.

Watch Mark Muro's full interview with Platts Energy Week »

       

"Sizing the Clean Economy,” which is based on the Brookings-Battelle Clean Economy Database, is a signature project of the Metropolitan Policy Program at Brookings. The database is a collaborative effort of Brookings Metro and the Battelle Technology Partnership Program and aims to explore the size, growth, and geography of the "clean" or green economy through the production of detailed data on U.S. establishments and workers engaged in producing goods and services that benefit the environment, especially in the nation’s large metropolitan areas."

These data are subject to further review and possible update.  For questions and comments please contact:

Mark Muro
mmuro@brookings.edu

Jonathan Rothwell
jrothwell@brookings.edu

       

       

       

     

     

       

       

       

       

       

In advance of President Obama’s trip to East Africa on July 23, the Africa Growth Initiative has prepared short travel companions on the economic environments in both Ethiopia and Kenya. The president’s visit to Kenya, one of the larger economies on the continent and a major driver of growth in the East Africa region, underlies the United States’ commitment to trade and investment on the continent. Below are key facts on Kenya’s economy to consider as President Obama travels to the region. Facts on Ethiopia can be found here.

Kenya enjoys middle-income status. Earlier this month the World Bank confirmed Kenya’s lower-middle-income country status according to their latest estimates of the gross national income per capita. This followed from the statistical reassessment of GDP figures that increased the size of its economy by 25 percent  ($53.3 billion up from $42.6 billion) last September, making it the continent’s ninth-biggest economy, accounting for over 2 percent of the continent’s GDP.

Kenya has undertaken initiatives to attract private sector investment. According to the late Brookings Senior Fellow Mwangi Kimenyi, the nation’s strong private sector evolved under relatively market-friendly policies for most of the post-independence era. Foreign direct investment is further expected to take the lead in growth acceleration, especially in the extractive sector if the newly discovered oil deposits are found to be commercially viable. Large-scale infrastructure projects, such as the Mombasa-Kigali standard-gauge railway and the Lamu Port and Southern Sudan and Ethiopia Transport (LAPSSET) corridor, also incentivize private sector engagement. Kenya has been among the top recipients of external financing for infrastructure investment during 2009-2012, primarily led by Private Participation in Infrastructure (PPI) Financing.

Kenya was the first African country to build geothermal energy sources. Geothermal energy provides 51 percent of Kenya’s energy, allowing electricity bills to decrease by 30 percent since 2014 (World Bank).

Kenya acts as a hub for regional integration and the East African Community (EAC). Among the six Country Policy and Institutional Assessment (CPIA) indicators of the African Development Bank, infrastructure and regional integration registered the score of 4.6 in Kenya, the second best in Africa. As a regional export and financial hub, Kenya plays a leading role in the EAC and regional integration. Two Kenyan cities, Nairobi and Mombasa, are the biggest city and port (respectively) between Cairo and Johannesburg, making Kenya the commercial and transportation hub of East Africa.

Kenya has experienced service-led growth over the last decade. Kenya’s market-based economy enjoys some of the strongest service-sector industries, including the financial and the information and communication technology sectors, which play key roles in economic transformation and job creation in Kenya. Besides, travel and tourism made up 12.1 percent of Kenya’s GDP in 2013, and the nation is frequently cited as one of the best tourist destinations in Africa.

More than two-thirds of the adult population engages in mobile commerce, making Kenya the world leader in mobile payments. At 86 percent mobile payments penetration among Kenyan households, M-Pesa is redefining the way Kenyans perform transactions and has also facilitated financial inclusion by promoting savings and financial transactions among the unbanked.

Nearly one out of every two women in Kenya is a member of a women’s saving group, which are voluntary groups formed to  help women overcome barriers to financial participation. Called chamas, these groups allow women to mobilize savings and collectively invest to improve their livelihoods by contributing a certain amount of money to a pooled fund.

Kenya has a thriving manufacturing sector. Kenya is slowly diversifying exports away from agricultural commodities and increasing value-added processing. In 2014, roughly 70 percent of Kenya’s exports to the U.S. were textile- and garment-based, in which the African Growth and Opportunity Act (AGOA) has played a key role. The recent extension of AGOA for another decade opens up further opportunities for growth and revival of the textile and apparel industry in Kenya.

Kenya’s well-diversified economy and sound economic reform program are important steps in its quest to reach emerging market status. However, the following key challenges could undermine economic development:

Youth in Kenya are experiencing much higher unemployment rates than the rest of the Kenyan population. Though Kenya boasts of its young, educated and English-speaking human resource pool (especially in the urban areas), it continues to struggle with high unemployment rate among young people, which is estimated to be double the national level of unemployment of 12.7.

Spatially unbalanced growth in the Kenyan economy continues to be evident. Kenya has made substantial progress towards achieving towards achieving the targets associated with the Millennium Development Goals, including child mortality and near universal primary school enrolment. However, it still has a long way to reach the set targets: Over 40 percent of its 44 million population continues to be extremely poor living on less than $1.25 a day, with women being particularly at risk.

Implementation challenges of fiscal decentralization remain. Under the new constitution, county governments are entitled to not less than 15 percent of the total national revenue collected by the Kenyan central government. This fiscal devolution can bolster social cohesion, by increasing accountability in the management of public resources, and improving the quality of services delivery. However, it is crucial that this devolution is implemented successfully with equitable access to resources to all parts of the country. AGI’s Kenya Devolution and Revenue Sharing Calculator serves as a web interactive allowing users to explore and adjust the government of Kenya’s allocation formula for revenue distribution to county governance structures.

Kenya’s infrastructure remains insufficiently developed in spite of the fact that over the last five years, nearly 27 percent of the national budget has been allocated to transport, energy, water and sanitation, and environment-related infrastructure. Kenya was a pioneer in the use of infrastructure bonds in Africa, with its first issuance in 2009 of a 12-year bond which raised $ 232.6 million but further substantial investment in infrastructure is critical to achieving  Kenya Vision 2030 to become a globally competitive country.

      

Recent developments in the U.S. economy present opportunities and challenges for how to effectively promote widely shared economic prosperity in a changing labor market. The proliferation of nontraditional and contingent employment relationships, fostered in part by new technology platforms, creates new opportunities, but also new regulatory, legal, and public policy challenges. Consumers and workers alike now use online technology and apps to contract for specific, on-demand services such as cleaning, handiwork, shopping, cooking, driving, and landscaping. These developments constitute what has been referred to as the “online gig” or “on-demand” economy, where work is taking place in a series of one-off gigs, rather than in an ongoing relationship with a single employer. The emergence of the online gig economy has increased policy interest in the issue of contingent work arrangements, which broadly include independent contractors as well as part-time, temporary, seasonal, or subcontracted workers.

In some respects, these on-demand gigs benefit both workers and the economy, and help to support job growth and household incomes in the post–Great Recession labor market recovery. Such gigs often feature flexible hours, low or no training costs, and generally few barriers to worker entry. These features have enabled gig-economy workers, including those with other jobs, to generate new income or to supplement their primary incomes during difficult times in a strained job market. Moreover, customers purchasing such on-demand services have benefited from the convenience and availability of services as well as the low cost at which they are often offered.

However, other aspects of the gig economy have raised some concerns. First, these jobs generally confer few employer-provided benefits and workplace protections. This stands in contrast to traditional employer–employee relationships that often come with manifold assurances and protections, such as overtime compensation, minimum wage protections, health insurance, disability insurance, unemployment insurance, maternity and paternity leave, employer-sponsored retirement plans, workers’ compensation for injuries, paid sick leave, and the ability to engage in collective action. Second, technological developments occurring in the workplace have come to blur the legal definitions of the terms “employee” and “employer” in ways that were unimaginable when employment regulations like the Wagner Act of 1935 and the Fair Labor Standards Act of 1938 were written. The evolution of the work relationship over time has led to important regulatory gaps. Some observers perceive that the online gig economy is leading to a rise in the share of work arrangements that are precarious, as compared to traditional employer–employee arrangements, and that the enhanced flexibility of the marketplace has come at a cost of economic security for many workers. In fact, systematic and timely data on contingent work arrangements are hard to come by so economists are still trying to figure out how common and widespread they are and what their impact on workers’ economic security might be. The absence of systematic data makes it all the more difficult to analyze the costs and benefits of contingent work arrangements for workers and businesses, and thus inform the appropriate policy and regulatory response. While the online gig economy is bringing this challenge to the fore, the broader issues surrounding classification and protection of contingent workers are not new or isolated. Importantly, the use of subcontracted and temporary workers, and workers with irregular or on-call shifts, also may require new regulatory frameworks.

In this framing paper, The Hamilton Project describes the broader economic context of contingent employer–employee relationships and where the emerging on-demand gig economy fits in this context. It also highlights the regulatory and measurement gaps that need to be resolved.

Downloads

• Full paper

       

       

       

       

       

       

       

       

       

      

The mayoral election in Baltimore has brought local economic development strategies to the forefront. In a city in which inequality—by income, by race, and between neighborhoods—has increased in the past five years, the candidates have made it clear that more action must be taken to close disparities and improve economic outcomes for all residents. In a podcast segment, I commend the much-needed focus on equity but argue that the mayoral candidates should not lose sight of another critical piece of the equity equation: economic growth. Citing lessons from my recent paper, I outline strategies that Baltimore’s presumptive leaders should pursue—as well as several they should abandon—to place the city’s residents on the path to a more prosperous, equitable future.

Listen to the full podcast segment here: 

       

Income and wealth inequality in the U.S. is a stark reality.  Research from a variety of fields demonstrates that children born into poor families tend to end up less educated, less healthy, more prone to contact with the police, and less likely to accumulate wealth over a lifetime.  In contrast, children born into well-off families tend to exhibit better outcomes on all of these dimensions.

How should social scientists and policymakers understand and address intergenerational mobility in the U.S.? This question is difficult to answer—and highly politicized.  To start with, there are several possible mechanisms driving high intergenerational persistence of economic outcomes.  These are often characterized as factors related either to “nurture” or “nature.” 

The “nurture” hypothesis asserts that poor parents lack critical resources such as wealth or information.  Such parents may therefore find it difficult to make the education and time investments that would promote better economic outcomes for their children.  If this is true, then children born into poor families never reach their full potential because of a lack of household resources. 

A second possible mechanism is often referred to as the “nature” hypothesis.  Economically successful parents might be more likely to have successful children.  Such an account hinges on the idea that there are heritable biological traits or abilities that more successful parents “pass on” to their children.

To complicate the matter further, the mechanisms of nature and nurture almost certainly operate at the same time.  Moreover, it is likely that abilities and investments interact in complicated ways. For example, a particular investment might do more to improve the outcomes of a lower-ability child than a higher-ability child, or vice versa.  Understanding this process, and how it affects intergenerational mobility, is notoriously difficult.  However, greater clarity is precisely what is needed to guide effective policy. 

If a lack of investment is the dominant mechanism explaining intergenerational persistence in economic outcomes, then we as a society may be wasting human potential.  Policies correcting under-investments in human capital could therefore be justified as economically efficient. In contrast, if the intergenerational transmission of ability plays a role, then investments in poor children’s human capital may not be enough.  To clarify, it is critical to state that the distinction we make here between “high-ability” and “low-ability” individuals should not be interpreted as a claim that some people are naturally or biologically superior to others.  We use “ability” as shorthand to describe those traits that are rewarded in the existing labor market.  Even if these abilities are linked to heritable biological factors, this does not mean that their impact on life outcomes is immutable or fixed.  Modifying environments could substantially affect genetic disparities. The case of vision and eyeglasses offer one classic example.  There may well be biological factors that explain variation in eyesight “ability,” but these biological differences will matter more or less for life outcomes depending on the availability of glasses and other medical interventions.  In short, it is very possible that the consequences of biological differences can be moderated by appropriate changes in the environment.     

Until now, researchers have typically used variables such as cognitive test scores to measure ability endowments related to human capital.  Yet, these traditional measures are subject to the critique that they are the products of earlier investments in human capital. This makes it difficult to distinguish between the “nature” and “nurture” hypotheses using such data.  Two individuals with similar ability endowments but different levels of household resources are likely to exhibit different cognitive test scores, for example. 

Using genetic information to measure ability endowments can help us better understand the intergenerational transmission of human capital.  As a measure, genetic information has a clear advantage over cognitive test scores because it is fixed at conception. Advances in measuring differences in DNA across individuals, together with very recent advances in behavioral genetics research, now make it possible to link genetic differences across people to behavioral traits.  These new discoveries have even extended to educational attainment, which was once thought to be too complicated and removed from direct biological processes for genetic analysis.

In a recent research paper, we use genetic information to better understand the nature of intergenerational mobility.  We follow the cutting edge in behavioral genetics research, which guides us in computing a type of genetic “score” for any individual.  We compute this so-called “polygenic score” for each person in a sample of over 8,000 individuals from the Health and Retirement Study (HRS). The score, which appears to be related to cognition, personality, and facility with learning, has some predictive power for educational attainment. In particular, it explains between 3.2 percent and 6.6 percent of the variation across individuals (depending on the specification). Thus, knowing the exact value of an individual’s score will tell you very little about that person (over 90 percent of the variation is explained by other factors).  However, the average relationship in the population between the score and human capital outcomes can offer some important lessons.  

Using the polygenic score, we believe we can gain new insights into how ability endowments interact with an individual’s environment to generate economic outcomes.  There is a long-standing debate in the economics literature about how ability and investments interact.  One idea is that both ability and investments are needed for success, i.e., that they complement one another. Though our findings show evidence of this type of interaction, the story that emerges from our analysis is somewhat more nuanced.  We show that ability and the environment (measured by parents’ socioeconomic status or SES) complement one another for generating higher degrees, such as college completion, but substitute for one another in generating lower levels of educational attainment such as a high school degree.  In other words, our findings suggest that ability or being born into a well-off family are enough to get an individual through high school.  For college, however, ability and a well-off family are important predictors of success.

"In other words, our findings suggest that ability or being born into a well-off family are enough to get an individual through high school. For college, however, ability and a well-off family are important predictors of success."

Another set of results concerns the wages of high-ability individuals.  We show that individuals who completed college earned substantial returns on their ability starting in the early 2000s.  Individuals without a college degree did not. The post-2000 rise in returns may be driven in part by “skill-biased technological change.”   As new technologies are adopted in the workplace, the people who benefit most are those with the skills required to adapt to and master new ways of working.  It is not difficult to imagine that people with genetic variants associated with higher education may have found it easier to adapt to computers and other new technologies.  However, we also find that a higher polygenic score was not helpful for individuals who did not complete college, likely because the lack of a college degree shut them out of careers that would have allowed them to creatively use new technologies.  This is a troubling finding given the role of childhood SES in predicting college completion.  It means that poor children with high abilities are less likely to attend college and, subsequently, are less likely to benefit from their ability.  Again, these findings suggest wasted human potential.

Using genetic data to compare individuals from different socioeconomic backgrounds, we also find that children from lower SES backgrounds systematically acquire less education when compared to similarly capable individuals from high SES backgrounds.  Among other things, this suggests that access to education may be an important obstacle, even for the highest ability children.  Our analysis offers some suggestive evidence regarding which environments are especially harmful. For example, acute negative events like physical abuse in childhood can lead to a dramatic loss of economic potential—reducing financial wealth in late adulthood for the highest ability individuals by over 50 percent.

Of course, one must be very cautious when interpreting any genetic association.  In particular, it is important to think carefully about correlation versus causality.  The same parents that pass along genetic material predicting educational attainment may also be more likely to have the resources to invest in their children.  Still, since we base our comparisons on individuals from different socioeconomic backgrounds, but with similar polygenic scores, we offer evidence that economic disparities are not solely due to nature.

In summary, recent advances in behavioral genetics have identified specific genetic variants that predict educational attainment.  The fact that such genes exist confirms previous work (largely using data on twins) showing that “nature” matters for economic outcomes.  Our research demonstrates that “nurture” matters, too.  Perhaps more importantly, our research demonstrates that the roles of “nature” and “nurture” are intertwined and that understanding the role of “nurture” (in the form of human capital investments over the life-cycle) is key to understanding how “nature” (in the form of ability endowments) operates.  In particular, we show that similarly apt individuals with different childhood SES see very different returns to their ability.  This means that policies helping children born into disadvantaged circumstances may be justified not solely for ethical reasons rooted in social justice, but perhaps also as an economically efficient way to mitigate wasted human potential.

Finally, we believe that continued progress in understanding the mechanisms underlying how “nature” affects economic outcomes will eventually lead to policies that help people who are born with different abilities.  For example, our findings suggest that some individuals had more difficulty than others in adapting to new workplace technologies, such as computers. With a fuller understanding of this process, policymakers may be able to devise better training programs or improved school curricula that help individuals of all levels of ability to better respond to a changing technological environment.  In other words we believe that our research shows that learning more about the specifics of “nature” may help us to better “nurture” all individuals in society to help them to reach their full potential.      

Editor’s note: The authors contributed equally to this posting and to the research upon which the posting is based. They are listed alphabetically by last name.

       

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With a number elections now underway in Europe and the United States, populist politicians are gaining support by tapping into frustration with the lingering effects of the global financial crisis and the eurocrisis, mounting fears of terrorism, concerns surrounding record levels of migration, and growing doubt over political elites’ abilities to address these and other crises. The global economic order is already beginning to be impacted by the mounting political pressure against it. Trade deals such as the Trans-Pacific Partnership that form the cornerstone of the global economic order have met with significant resistance. Brexit’s reverberations have already been felt in international markets. Fissures within the European Union and American anxiety towards a U.S. global role could have a pronounced impact on the international economic system.

On July 14, the Brookings Project on International Order and Strategy (IOS) hosted an event tied to the recent publication of Nonresident Senior Fellow Daniel Drezner’s new paper, “Five Known Unknowns about the Next Generation Global Political Economy.” The event was an opportunity to discuss the future of the global economic order given rising populism and discontent with globalization. Panelists included Nonresident Senior Fellow Daniel Drezner, professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University; Caroline Atkinson, head of Google’s global public policy team and former White House deputy national security advisor for international economics; and David Wessel, director of the Brookings Hutchins Center on Fiscal and Monetary Policy.

Thomas Wright, director of IOS, provided brief opening remarks and moderated the discussion.

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• The future of the global economic order in an era of rising populism

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• The future of the global economic order in an era of rising populism

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• Uncorrected Transcript (.pdf)

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• 20160714_global_economic_order_transcript

       

       

       

In his state of the union and his budget, the President spoke of the stagnation of middle class incomes. Whatever growth we have had has not been broadly shared.  More than 78% of the growth in GDP between 1979 and 2013 has gone to the top one percent. Even Republicans are beginning to worry about this issue although they have yet to develop concrete proposals to address it.

Slow Growth in Incomes

Middle class incomes were growing slowly before the recession and have actually declined over the past decade.   In addition, according to the New York Times, the proportion of the population with incomes between $35,000 and $100,000 in inflation-adjusted terms fell from 53% in 1967 to 43% in 2013.  During the first four decades this was primarily because more people were moving into higher income groups, but more recently it was because they have moved down the ladder, not up.  One can define the middle class in many different ways or torture the data in various ways, but there is plenty of evidence that we have a problem.

What to Do

The most promising approach is what I call “the second earner solution.”  For many decades now, the labor force participation rate of prime age men has been falling while that of women has been rising.  The entry of so many women into the labor force was the major force propelling whatever growth in middle class incomes occurred up until about 2000. That growth in women’s work has now levelled off.  Getting it back on an upward track would do more than any policy I can think of to help the middle class.

Imagine a household with one earner making the average wage of today’s worker and spending full-time in the job market.  That household will have an income of around $34,000. But if he (or she) has a spouse making a similar amount, the household’s income will double to $68,000. That is why the President’s focus on a second-earner credit of $500, a tripling of the child care tax credit, expanding the Earned Income Tax Credit, and providing paid leave are so important. These policies are all pro-work and research shows they would increase employment.

No Marriage = No Second Earner

One problem, of course, is that fewer and fewer households contain two potential workers.  So it would also help to bring back marriage or at least its first cousin, a stable cohabiting relationship.  My ideas on this front are spelled out in my new book, Generation Unbound. In a nutshell, we need to empower women to not have children before they have found a committed partner with whom to raise children in a stable, two-parent family. Whatever the other benefits of two parents, they have twice as much time and potentially twice as much income.    

Other Needed Responses

Shouldn’t we also worry about the wages or the employment of men?  Of course.  But an increase in, say, the minimum wage or a better collective bargaining environment or more job training will have far smaller effects than “the second earner solution.”  In addition, the decline in male employment is related to still more difficult problems such as high rates of incarceration and the failure of men to take advantage of postsecondary education as much as women have. 

Still the two-earner solution should not be pursued in isolation. In the short-term, a stronger recovery from the recession is needed and in the longer-term, more effective investments in education, research, infrastructure, and in labor market institutions that produce more widely-shared growth, as argued by the Commission on Inclusive Prosperity. But do we really expect families to wait for these long-term policies to pay off?  It could be decades. 

In the meantime, the President’s proposals to make work more appealing to existing or potential second earners deserves more attention.  

      

This originally appeared in “Insight,” a publication of Grantmakers for Children, Youth, and Families.

For many in the United States, American poverty conjures images of urban blight or remote Appalachian hardship that motivated the War on Poverty in the 1960s. But the geography of poverty in the U.S. has shifted well beyond its historical confines (Kneebone and Berube, 2013). During the first decade of the 2000s, the poor population living in suburbs of the nation’s largest metropolitan areas for the first time outstripped the poor population living in central cities, and poverty continues to grow faster today in the suburbs.¹ This trend has been even more pronounced for those living below twice the federal poverty line—equivalent to $48,500 for a family of four in 2015—which roughly mirrors the population eligible to receive the federal Earned Income Tax Credit (EITC).

Although it was not originally billed as an antipoverty program, in its 40 years, the EITC has become one of the nation’s most effective tools for lifting low-income workers and their families above the poverty line. In 2013 alone, Brookings estimates that the EITC lifted 6.2 million people, including 3.1 million children, out of poverty (Kneebone and Holmes, 2014). What follows is a discussion of the EITC’s growing importance to recipients in light of the new geography of poverty, its role in boosting local economies, and how expanding participation in the program and paying the credit differently could enhance its effectiveness as a local economic stabilizer.

The shifting geography of poverty challenges traditional approaches to combat poverty through investments in place.

When President Johnson declared a War on Poverty in 1964, poverty in the U.S. was primarily urban or rural. This was also the case in 1975 when the EITC was created: Nearly a million more low-income individuals at that time lived in rural areas or big cities than in the suburbs of major metropolitan areas.² Place-based antipoverty interventions dating to the War on Poverty were thus designed with these two geographies—especially cities—in mind. Brookings estimates that today, the federal government spends about $82 billion per year across more than 80 place-focused antipoverty programs, spread across 10 agencies (Kneebone and Berube, 2013). Many are not well-suited to suburban contexts, for several reasons.

First, suburban poverty is more geographically diffuse than urban poverty. Suburban communities tend to be less densely populated than cities and larger in size, and cover more total area. Whereas centralized services might be appropriate in an urban context because they are easily accessible to many in need, it is more difficult to achieve those economies of scale in the suburbs, where residents live farther apart and have limited access to transit. Many competitive federal grant programs allocate points based on population served and population density, implicitly favoring large central cities.

Second, suburban municipalities may lack the experience and administrative capacity needed to sustain services for low-income families and communities. Cities have dealt with poverty longer, and have had more time to develop strategies and structures to support their poor populations. Some of this capacity stemmed explicitly from Community Action Agencies, one of the original War on Poverty programs, which was intended to spur local innovation. Small suburban communities by and large did not have this same experience. Because of their relatively small size, suburban governments may not be able to achieve the administrative scale needed to deliver effective safety-net programs.

Third, many suburban communities lack the economic scale and fiscal structure needed to fund services for low-income residents. Because many small municipalities are limited in how they are permitted to raise revenues—typically through a combination of property and sales taxes—they are especially prone to financial instability caused by the very economic conditions that also generate greater need for services. As poverty suburbanizes, small suburban communities simultaneously face rising demand and falling tax revenues to support those services. Moreover, tax “competition” among many small suburbs within a metro area can further erode the fiscal capacity and political will for these jurisdictions to support people in need.

The new geography of poverty makes direct investments in low-income individuals and families—like the EITC—even more important.

The mismatch between existing place-based antipoverty strategies and the places where poverty is growing fastest heightens the importance of investing directly and effectively in low-income individuals and families through programs such as the EITC. Following its expansion in the mid-1990s, the EITC became the most significant cash transfer program available to low-income working families. The Internal Revenue Service (IRS, 2014) estimates that approximately 79 percent of EITC-eligible taxpayers nationally claim the credit each year—a remarkably strong participation rate among federal safety-net programs.

The high program participation rate and growth over time in EITC expenditures reflects both increases in the credit’s generosity and growing need. In 2000, according to our analysis of IRS Stakeholder Partnerships, Education and Communities (IRS-SPEC) data, total EITC expenditures topped $42 billion (in 2013 dollars). In 2013, they approached $65 billion, equivalent to approximately 80 percent of the amount spent by the federal government on place-based poverty interventions.³

Analysis of IRS-SPEC data further suggests that the EITC’s geographic incidence closely tracks the shifting geography of need. From 2000 to 2013, the number of suburban filers claiming the EITC rose by 62 percent, compared to 33 percent in cities. Changes in the distribution of EITC claims mirrored changes in the location of poor and near-poor populations, particularly growth in the suburbs.⁴ And because lower-income suburban communities (where at least 40 percent of residents are poor or near-poor) are becoming more diverse, too—60 percent of their residents are non-white or Hispanic—the EITC also effectively reduces growing race-based income gaps in suburbs.⁵

EITC dollars support local economies.

The EITC benefits not only low-income families, but also the wider communities in which they live. Although it is widely regarded today as one of the country’s most successful antipoverty programs, the EITC was originally designed to be a temporary economic stimulus measure, in the Tax Reduction Act of 1975 (Nichols and Rothstein, 2015). During the 2000s, more local and state governments made a concerted push to expand participation in the EITC among eligible filers, in part to inject more federal dollars into their local economies (Berube, 2006a).

There are several mechanisms through which the EITC could benefit local economies. California State University researchers categorize the local economic impact of EITC refunds as the sum of direct effects (EITC recipients spending their refunds), indirect effects (business spending in response to EITC recipient spending), and induced effects (changes in household income and spending patterns caused by direct and indirect effects). Together, these effects represent the local “multiplier” effect (Avalos and Alley, 2010). Their estimates for California counties suggest that, in many cases, the credit creates local economic impacts equivalent to at least twice the amount of EITC dollars received.

Direct economic effects result from EITC recipients spending a portion of their refund locally, supporting local businesses and jobs. Consumer surveys show that low-income families spend a relatively large share of their income on groceries and other necessities, which tend to be purchased locally. Analysis of those surveys links tax refund season to increased likelihood of consumer activity as well as larger purchases (Adams, Einav, and Levin, 2009). People spend more, and more frequently, during tax refund season.

The EITC also supports local communities in less obvious ways. The concept of “tax incidence” reflects that the party being taxed, or receiving a tax credit, may not bear its full costs (or reap its benefits) because others shift their behavior in response to the tax. Along these lines, Jesse Rothstein estimates that as much as 36 cents of every dollar of EITC received flows to employers, because by enabling workers to better make ends meet on low wages, the credit effectively lowers the cost of labor. Those lower labor costs may, in turn, allow local employers to hire more local workers (Nichols and Rothstein, 2015).

Finally, emerging evidence suggests that progressive tax expenditures like the EITC can enhance intergenerational income mobility for local children, possibly by counteracting credit constraints that many low-income families face (Chetty, Hendren, Kline, and Saez, 2015). In areas with larger state EITCs, low-income children are more likely to move up the income ladder over time.

The local impact of the EITC depends on how, and how many, eligible filers claim the credit.

The local impact of the EITC also depends on whether eligible workers and families file tax returns and claim the credit. As noted above, the IRS estimates that 79 percent of those eligible to receive the EITC nationally claim it. Given local variation in characteristics associated with uptake, there is likely also considerable local variation in EITC participation (Berube, 2005). Efforts to increase participation locally can thus increase the level of investment communities receive from the program.

Research has identified several factors associated with EITC participation rates among the eligible population. Eligible filers less likely to claim the credit include those who live in rural areas, are self-employed, do not have qualifying children, do not speak English well, are grandparents, or recently changed their filing status (IRS, 2015). One study suggests that communities with moderately sized immigrant populations may exhibit lower EITC participation rates, due perhaps to less robust social networks or more dispersed/heterogeneous populations that may limit awareness of the credit (Berube, 2006b).

Recent research also suggests that EITC participation is higher in areas with more tax preparers, who may promote greater local awareness of the credit (Chetty, Friedman, and Saez, 2012). While individuals who enlist the help of tax preparers are more likely to receive the EITC, they may face significant fees that blunt the credit’s overall impact (Berube, 2006a). Expanding access to volunteer tax preparation services or simple, free online filing could help preserve more of the credit’s value for low-income families and their communities.

To maximize the EITC’s role as a local economic stabilizer, we should consider periodic payment options.

 The EITC already functions as an important antipoverty tool for low-income workers and families, and a boon to local economic stability. Communities should nonetheless be interested in efforts to connect taxpayers to a portion of their EITC throughout the year, rather than only as a lump-sum refund at tax time.

Debt features significantly on the balance sheets of EITC recipients. Recent research finds that about 95 percent of EITC recipients have debt of some kind, and that large shares of refunds are dedicated to debt payments or deferred expenses (such as car repair). Recipients do not use the majority of EITC refunds to pay for monthly expenses, despite the fact that their wages typically cover only two-thirds of those expenses (Halpern-Meekin, Edin, Tach, and Sykes, 2015).

Paying a portion of filers’ anticipated EITC periodically (and directly, rather than through employers like the defunct Advance EITC program) in smaller amounts over the course of a year could help them cope with these spending constraints and avoid taking on debt (Holt, 2008). By enabling families to better keep up with spending on regular items most often purchased locally—rent, food, vehicle maintenance—periodic payments could also support local economies. And by improving families’ liquidity, such payments could reduce reliance on high-cost financial products such as payday loans.

The EITC continues to gain importance as place-based strategies lag behind poverty’s suburbanization, and communities seek ways to maximize public investment in the face of budget constraints at all levels. The program lifts millions of working individuals and families out of poverty each year regardless of their location, and in doing so also supports community financial stability. An expanded EITC—at the federal, state, or local level—with options for periodic payment and better alternatives to high-cost tax preparation could provide even stronger support to low-income families and the places where they live.

References

Adams, W., Einav, L., and Levin, J. (2009). Liquidity constraints and imperfect information in subprime lending. American Economic Review. 99(1), 49–84. Retrieved from http://web.stanford.edu/~jdlevin/Papers/Liquidity.pdf

Avalos, A., and Alley, S. (2010). The economic impact of the Earned Income Tax Credit (EITC) in California. California Journal of Politics and Policy. 2(1). Retrieved from http://escholarship.org/uc/item/2jj0s1dn

Berube, A. (2005). Earned income credit participation—What we (don’t) know. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/metro/eitcparticipation.pdf

Berube, A. (2006a). Using the Earned Income Tax Credit to stimulate local economies. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/~/media/research/files/reports/2006/11/childrenfamilies-berube/berube20061101eitc.pdf

Berube, A. (2006b). ¿Tienes EITC? A study of the Earned Income Tax Credit in immigrant communities, Washington, DC: Brookings Institution. Retrieved from  http://www.brookings.edu/~/media/research/files/reports/2005/4/childrenfamilies-berube02/20050412_tieneseitc.pdf

Chetty, R., Friedman, J., and Saez, E. (2012). Using differences in knowledge across neighborhoods to uncover the impacts of the EITC on earnings (NBER Working Paper Series no. 18232). Retrieved from http://eml.berkeley.edu/~saez/chetty-friedman-saezNBER13EITC.pdf

Chetty, R., Hendren, N., Kline, P., and Saez, E. (2015). The economic impacts of tax expenditures: Evidence from spatial variation across the U.S. Retrieved from http://www.irs.gov/pub/irs-soi/14rptaxexpenditures.pdf

Halpern-Meekin, S., Edin, K., Tach, L., and Sykes, J. (2015). It’s not like I’m poor: How working families make ends meet in a post-welfare world, Oakland, CA: University of California Press.

Holt, S. D. (2008). Periodic payment of the Earned Income Tax Credit. Washington, DC: Brookings Institution. Retrieved from http://www.brookings.edu/research/papers/2008/06/0505-metroraise-supplement-holt

Internal Revenue Service. (2014). Statistics for tax returns with EITC. Retrieved from http://www.eitc.irs.gov/EITC-Central/eitcstats

Internal Revenue Service. (2015). About EITC. Retrieved from http://www.eitc.irs.gov/EITC-Central/abouteitc

Kneebone, E., and Berube, A. (2013). Confronting suburban poverty in America. Washington, DC: Brookings Institution Press.

Kneebone, E., and Holmes, N. Fighting poverty at tax time through the EITC. Retrieved from http://www.brookings.edu/blogs/the-avenue/posts/2014/12/16-poverty-tax-eitc-kneebone-holmes

Nichols, A., and Rothstein, J. (2015). The Earned Income Tax Credit (EITC) (NBER Working Paper Series no. 21211). Retrieved from http://www.nber.org/papers/w21211.pdf

       

As the holiday season rolls around each year, it often carries a hefty price tag that can strain family budgets. In a survey of low-income taxpayers using volunteer tax preparation services, three-quarters of respondents listed December as a time of year when it’s hardest to make ends meet. But it’s not the only one. Low-income families go through a constant year-round balancing act of juggling bills, going without, asking family and friends for help, and taking on debt when they fall behind.

Many of these families benefit from the Earned Income Tax Credit, which supplements earnings for low-income workers. The EITC has proven to be one of the nation’s most effective anti-poverty programs, and for some families can represent up to 40 percent of their annual income. For the one in five American households that receive the EITC in their refunds, tax time gives them a chance to catch up financially as they start the New Year. But by summer, many recipients once again find themselves struggling paycheck to paycheck to shore up budget gaps, or scrambling to deal with unforeseen financial shocks, like a car breaking down or an unplanned medical expense.

Providing alternative payment options that deliver the credit outside of tax time would go a long way toward boosting economic stability year round for these families. In his new paper “Periodic payment of the Earned Income Tax Credit revisited,” Steve Holt explores the range of proposals that have emerged in recent years to provide more options for delivering the EITC during the year, and shares some lessons learned from early experiments to test those options.

Most notably, the Center for Economic Progress in Chicago recently completed a year-long pilot which offered 343 households the option of receiving half of their expected EITC in four payments in advance of tax time. The results of the pilot were overwhelmingly positive. Compared to EITC recipients in the control group, participants who received periodic payments missed fewer bills and racked up fewer late fees. They were less likely to resort to payday lenders or have to borrow money from family and friends. And they reported less food insecurity and decreased financial stress throughout the year. What’s more, after completing the pilot, 90 percent of the participants reported a preference for periodic payment over the standard lump sum.

More experimentation needs to be done to determine effective ways to replicate and expand on the advanced-payment pilot in Chicago. And future experimentation should also include pilots that test proposals for deferred savings mechanisms. These options, like CFED’s Rainy Day EITC proposal, would allow EITC filers to put a portion of their credit in a savings account and receive a bonus match as an incentive to save. Though structured differently than advanced payment options, the end goal of deferred savings proposals is the same: providing greater financial stability to low-income families outside of tax time.

A growing share of our economy’s jobs are in the low-wage industries and occupations in which many EITC-eligible taxpayers work (as illustrated by new national, state, and metro data from Brookings MetroTax model on characteristics of the EITC-eligible population). The EITC is an incredibly effective policy tool that helps bridge the gap between what the labor market provides and what it takes to support a family. But we can make the EITC work better for working families by offering alternative payment options that can help promote economic security year round.

       

       

       

EXECUTIVE SUMMARY

In November 2008, President George W. Bush convened the first G-20 summit in Washington to address the worst global financial economic crisis since the Great Depression. This summit provided a long-overdue opportunity for a dramatic and lasting change in global governance. This was followed by the election of Barack Obama, who had campaigned on a distinctly different foreign policy platform compared with his Republican rival, Senator John McCain. These two events were no mere coincidence.

The global crisis has moved the United States, along with the rest of the world, toward a new global economic order, with the G-20 summit as one of the principal manifestations of the new global governance system. Of course, movement toward this new economic arrangement and progress toward reformed global governance are not inevitable. It will take a clear and sustained commitment to a new set of values and strong leadership, especially from President Obama and the United States, to ensure that the G-20 summit is not a short-lived exception to what had been a long-standing stalemate in global governance reform. The effectiveness of the G-20 in addressing the global economic crisis could lay the foundation for a new global order and provide the impetus for the many other necessary global governance reforms. Whether or not this happens will depend to a significant extent on the direction chosen by President Obama.

The president’s vision of inclusion and openness and his approach to governing, which favors innovative and far-reaching pragmatic responses to key national and global challenges, make him a great candidate for this role. In due course the G-20 summit can also serve as a platform for addressing other pressing global issues, including trade, climate change, energy and food security and reform of global institutions. To achieve such an outcome, President Obama and other world leaders need to demonstrate a clear vision and strong leadership starting at the G-20 Summit in Pittsburgh and beyond.

“Old Economic Order” versus “New Economic Order”

From recent debates on foreign policy and global governance, we have identified two different perspectives or sets of principles underlying the approaches toward U.S. and global foreign policy. Table 1 summarizes the key elements of what we call the “Old Economic Order” in juxtaposition to the “New Economic Order.”

Table 1: Old versus New Economic Order

(Note: This table is adapted from one first presented by the authors in a seminar at the IMF in June 2007. See www.imf.org/external/np/seminars/eng/2007/glb/bl030607.pdf )

In the Old Order, the nation state is the point of departure, stressing the importance of sovereignty and national interest as the key principles driving a unilateral and assertive foreign policy. In contrast, the New Order’s starting point considers that we live in a global society, where interdependency and recognition of common interests are the key principles to be pursued in reciprocal relations and with mutual respect across borders. Under the Old Order the rules of national power politics prevail, as competing blocs and fixed alliances strive for predominance, with “hard power” if necessary. Instead, the New Order operates on the basis of a new multilateralism, which builds on the prevalence of global networks in all spheres of life and multiple coalitions across borders, where bargaining for compromise and the tools of “soft power” prevail. Finally, the Old Order promotes the notion that a single economic and political model should prevail, while the New Order accepts that different economic and political models coexist and compete side by side.

In the most simple terms, the Old Order broadly reflects the principles underlying the foreign policy agenda of the Bush administration and Senator John McCain’s presidential platform, while the New Order approximates those underpinning the platform of Senator Barack Obama’s presidential campaign and of his administration’s foreign policy stance. Key elements of the Old Order (except the last one) have also been attributed to the current foreign policy approach of Russia, while New Order principles can be ascribed to the European Union.

In fact, what is reflected in these two approaches is the difference between twentieth-century principles of foreign policy versus principles appropriate to today’s realities. We believe there are three interrelated sets of drivers of change that necessitate moving from the Old Order to the New Order. These drivers include the changing global demographic and economic balance, emerging global threats and the need for a more effective global governance system.

Drivers of Change

The first driver of change is the shifting global demographic and economic balance. By 2050, the world population is projected to reach 9.1 billion, up from 6.4 billion today, with the increase occurring almost entirely in today’s developing countries. China is widely predicted to be the largest economy in the early 2040s, with the U.S. economy in second place and India’s in third. Other emerging market economies, including Brazil, Indonesia and Russia, will be important economic players, while individual European countries will recede in importance. Continental Eurasia will be the new hub of global integration as China, India, Russia, the European Union and the Middle East’s energy-producing countries knit their economies ever closer together. The United States will remain a superpower, but only one among others. Together, the major world powers will have to confront the fact that people in poorer and weaker states will feel left behind. Simultaneously, cross-border networks—economic and political, public and private, elite and grassroots, legitimate and illegitimate—will continue to grow and will weaken the traditional hold states have over the economic, financial, social and political actions of their citizens. These networks will create bonds that will either reinforce or undermine global stability.

The second driver of change is a set of emerging global threats:

• The current financial and economic crisis—triggered by poor macroeconomic management and lax financial regulation—reflects the realities of long-term financial imbalances among key economies. It proves the difficulties of managing a highly interdependent global financial system in the absence of agreed-upon global financial surveillance, supervision and regulation. It is likely that risks of global financial stress will continue in the coming decades.
• Global disparities will increase as the rich and the rapidly growing economies do well, while many poor and stagnating countries are left behind. There is potential for rising disparities within countries, too. These inequities will reinforce risks of domestic and cross-border conflict and terrorism. At the same time, the United States and other industrialized countries face a progressive loss of traditional industries, jobs and wages. Aging populations and overburdened pension systems will challenge their fiscal stability and may lead to groundswells of anti-globalization sentiments.
• Rising food and energy prices, environmental threats and the risks of global epidemics—reinforced by population pressures—particularly affect the poorest countries.
• Growing global interdependencies across borders and sectoral lines mean that individual countries can no longer address these threats alone and that a global response has to be coordinated across sectors.

The third driver of change is the growing and widespread recognition that the current system of global governance has become increasingly fragmented, ineffective, outdated and resistant to change. This systemic weakness is reflected in the persistent stalemate on many of the pressing global issues—most notably the Doha trade round—but also on global poverty, climate change and the risk of pandemics. Moreover, global institutions have become unrepresentative in the face of the changed global economic and political balances. Hence their legitimacy is suffering badly, and yet there is stalemate in the reform of individual international organizations.

Together, these three factors have made the principles of the Old Order irrelevant and strongly point in the direction of a New Order. They represent the new reality for governments, citizens and international institutions and force them to adopt new principles and reform existing institutions.

While the drivers are strong and the new global reality is seemingly unassailable, change is not inevitable. Old habits die hard. In the United States, traditions of self-reliance and “exceptionalism” continue to shape Americans’ views of the rest of the world. At the same time, the widespread belief in the virtues of unfettered markets and low taxes, the influence of special interests for protection (agriculture, labor, old industry, banking) and the prevailing fractiousness of political decision-making may well undermine President Obama’s efforts to move toward a new global paradigm. Compounding the entrenchment of the Old Order, new nations that are still recovering from centuries of colonialism—facing economic and political instability and wishing to catch up with the successful industrial countries—are lured to a strong sovereign nation state, unfettered control over their borders and their citizens, and a confrontational approach to foreign policy. Even the much admired willingness of the Europeans to give up sovereignty in favor of supranational institutions has its limits, not least when it comes to giving up their prerogatives of dominating the governing boards of the international financial institutions and other global forums.

Leadership, conviction and persistence will be required among many actors on the global stage to ensure there is progress toward effective reform of global institutions. This potential for change is exemplified by the recent emergence of the G-20 summit as a vehicle for global governance.

The G-20 Summit—Origins, Options and Obstacles

Origins. The G-20 summit had its origins in the annual meetings of the G7—the leaders of a group of seven major Western industrial countries who gathered annually starting in the 1970s, initially to enhance economic and financial policy coordination in reaction to a major financial crisis. After the break-up of the Soviet Union, the G8 was formed by the addition of the Russian Federation. The G8 increasingly became preoccupied with global economic and political issues—in effect assuming the role of a global steering group. But widespread criticism began to mount about its role. The G8 summits were seen as ritualistic in process, ineffective in impact and increasingly unrepresentative in the face of global population and economic shifts, and hence lacking in legitimacy as a global steering group. The onset of the global financial crisis in mid-2008 pushed President George W. Bush into convening the G-20 Summit on November 15, 2008.

The ministerial-level G-20 was first created in the aftermath of the 1997-98 East Asia financial crisis. By convening representatives from 10 industrialized economies and 10 emerging market economies, the G-20 presented a much more geographically and culturally diverse group than the G8. With about 90 percent of the world’s economy and two thirds of the world’s population, the G-20 is also much more representative than the G8. Emerging market economies have been fully engaged in managing the proceedings of the meetings of G-20 finance ministers and central bank governors. It is therefore not surprising that there had been persistent calls by some experts and politicians for using the G-20 as a platform to replace the G8. While moving from G8 to G-20 summit might not create an optimal global steering group, it is a pragmatic and effective step, especially in response to crisis.

Options. Will the G-20 be a short-lived experiment or will it prove an effective tool of global governance? Various options are under debate among experts and practitioners. One possibility is to return to the G8 summits like the one Italy hosted in 2009 and Canada plans to host in 2010. There is concern that the G-20 format is too unwieldy for effective exchanges among the key players. Hence, there will be continuing debates about reducing the size of the summit to somewhere between thirteen and sixteen members, as reflected in the recent proposal by the French President, Nicolas Sarkozy, to create a G14. However, there are pressures to expand the number of participants to include more countries and to expand regional representation. Then there are proposals to develop a constituency-based approach to membership, with universal participation as in the case of the international financial institutions. Further, German Chancellor Angela Merkel and a United Nations Commission chaired by Nobel laureate Joseph Stiglitz propose to establish an Economic Security Council at the UN.

None of these options will likely materialize in the foreseeable future. Instead there are two probable outcomes: The first is the continuation of the G-20 summit with a gradually expanding mandate beyond the current crisis. For this to be successful, it is critical that the G-20 format proves its effectiveness in the coming months and years. This outcome has three requirements: that the number of participants does not expand; that participants focus on a limited number of action items; and that a small but effective secretariat is established to support and monitor the G-20 summit with logistics and technical expertise.

The most likely alternative to the G-20 summit is what is frequently referred to as “variable geometry.” Under this scenario, selected world leaders would convene on specific topics in shifting constellations, with participation of the most important actors decided separately for each topic. For example, the G-20 might continue to meet on global financial and economic matters for some time to come, while different groups would convene for action on climate change, nuclear proliferation or other topics. Support for this plan appears to be emerging from the Obama administration. It co-convened the summit on climate change at the tail-end of the 2009 G8 Summit, hosts the September 2009 G-20 economic summit in Pittsburgh and has called for a summit on nuclear non-proliferation in the spring of 2010. The challenge for summits of “variable geometry” is the ever-shifting number and composition of participants, the difficulty of systematic organization and follow-up and continuing debates about who would convene the summits, when, and with what participation.

Obstacles. As we look ahead, we see a number of challenges for the evolution of global summits beyond the G8, whether toward an effective G-20 or some alternative, especially summits of variable geometry. These challenges emanate from the diverging interests of four sets of players: the United States, Europe, the new emerging powers and the rest of the world.

For the foreseeable future, active U.S. leadership is needed to overcome inertia and collective action problems in addressing global challenges and breaking the stalemate in global governance reform. The Obama administration appears to strongly support a paradigm shift toward a new global order, but so far has not announced its position on summit modalities.

Europe is a key player and has proven a major obstacle to global governance reform as it continues to claim far too many chairs at the G-20 (and in other global forums and institutions) for its economic and demographic weight. In effect, Europeans can either retain their over-representation, which gives them a fragmented voice and weakens their influence while also weakening the global institutions; or they can bundle their votes, chairs and voice for greater impact and to ensure more effective international organizations. Unfortunately, the current stalemate on internal EU governance reform blocks any new European approach to global governance reform.

The new emerging powers, especially China, India and Brazil, will face the challenge of moving beyond their traditional role of the “excluded” and “representatives of the South.” They will need to accept co-responsibility for solving global problems and creating effective global governance institutions. They will have to look beyond issue-specific South-South coalitions to North-South coalitions where it is in their and the global interest (e.g., the push for international financial institution reform, for EU for consolidation, for the completion of the Doha Round, etc.). There are hopeful signs that this is beginning to happen. South Korea’s leadership of next year’s G-20 represents a critical test of whether the new powers are ready to participate and conduct a G-20 forum at the leaders’ level, not only ministerial.

Finally, there is the challenge of how to include the “excluded.” The G-20 is much more inclusive than the G8, but it still leaves out a majority of countries with a third of the world’s population. Options for associating the rest of the world with the summit include ad hoc outreach (as the G8 has done), expanding regional representation (as already practiced with the EU), introducing a constituency approach (as for the IFIs) and seeking a closer alignment with the UN (perhaps through an Economic Security Council). With the exception of the first two—which risk further expanding the number of participants at G-20 summits—none of the other options are likely to materialize soon. However, G-20 leaders will have to be sensitive to the needs of the “excluded” and ensure that the interests of the poorest countries are not neglected.

Conclusion

Great changes in the economic and political balance among countries, global threats and an antiquated global governance system confront the world community today. With the economic crisis as an immediate driver and a new U.S. president, the G-20 summit format has the potential to make a real shift in the global economic order in which a new set of values underpin the way countries and people cooperate across borders. To the extent that President Obama has articulated his vision of the global order and America’s role in it, we believe he is headed in the direction that stresses common interests in a global society, the need for multilateral action and understanding for alternative approaches to economic and political development. This is very promising. The effectiveness of the G-20 in addressing the global economic crisis could lay the foundation for a new global order and provide the impetus for the many other necessary global governance reforms.

However, Europe, China and India are also critical for progress. Moreover, if President Obama is believed to fail the test of competence at home or a major shock hits the United States, a reversal is possible in the U.S. In any case, significant changes in global governance will take time to transpire. We may well see a long period of transition with only gradual improvement in current institutions. In the meantime, pressures for increased regionalism, bilateral deals among the big players, geopolitical competition among power blocs and growing instability and threats from the “excluded” will undermine international cooperation and the whole idea of a global order.

The G-20 summit forum represents a great opportunity for world leaders to begin to put into action the principles of a new global order. It will allow them to address the immediate global financial and economic crisis in a collaborative spirit. And in due course the G-20 summit can also serve as a platform for addressing other pressing global issues, including trade, climate change, energy and food security, and reform of global institutions. To achieve such an outcome, President Obama and other world leaders need to demonstrate a clear vision and strong leadership at the G-20 Summit in Pittsburgh and beyond.

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Policy Brief #172

Why Institutions Matter

When experts and pundits are asked what the president and Congress should do to promote economic growth, they typically respond with a list of policies, often mixed with stylistic and political suggestions. Few focus on institutional change, which is too easy to conflate with yawn-inducing “governmental reorganization.”

This neglect of institutions is always a mistake, never more than in times of crisis. Throughout American history, profound challenges have summoned bursts of institutional creativity, with enduring effects. The dangerous inadequacies of the Articles of Confederation set the stage for a new Constitution. The Civil War resulted in three amendments that resolved—at least in principle—our founding ambivalence between the people and the states as the source of national authority, between the states and the nation as the locus of citizenship, and between slavery and the equality the Declaration of Independence had proclaimed and promised. Similarly, the Federal Reserve Board, Bretton Woods international economic system, Department of Defense, National Security Council, CIA, Congressional Budget Office and Department of Homeland Security all arose through changes occasioned by great challenges to the nation.

Today’s economic crisis is reflected in three distinct but linked deficits—the fiscal deficit, the savings deficit and the investment deficit. Meeting these challenges and laying the foundation for sustained economic growth will require institutional as well as policy changes. 

	RECOMMENDATIONS
	Today’s economic crisis is characterized by three distinct but linked deficits—the fiscal deficit, the savings deficit and the investment deficit. Meeting these challenges and laying the foundation for sustained economic growth will require institutional as well as policy changes. The following institution-based recommendations would help the nation meet the current economic crisis and could help prevent future crises of similar destructiveness. To promote fiscal sustainability, change longterm budget procedures and create empowered commissions—answerable to Congress but largely insulated from day-to-day politics. To boost savings, consider new mandatory individual retirement accounts as a supplement to Social Security. To improve public investment, create a National Infrastructure Bank with public seed capital—this entity would mobilize private investment and force proposed projects to pass rigorous cost-benefit analysis as well as a market test. Today’s polarized political system is an obstacle to reform in every area, including the economy. A multi-year collaboration between Brookings and the Hoover Institution produced a series of suggestions. At least two of those suggestions are worth adopting: Alter redistricting authority, so state legislatures can no longer practice gerrymandering. Experiment, in a few willing states, with compulsory voting—to move politicians away from the red-meat politics of appealing only to their bases, which now dominate elections, and toward a more moderate and consensual politics.

Institutional reform

Promoting fiscal sustainability

Setting the federal budget on a sustainable course is an enormous challenge. If we do nothing, we will add an average of nearly $1 trillion to the national debt every year between now and 2020, raising the debt/ GDP ratio to a level not seen since the early 1950s and sending the annual cost of servicing the debt sky-high. Restoring pay-as-you-go budgeting and putting some teeth in it are a start, but not nearly enough. We need radical changes in rules and procedures.

One option, recently proposed by a bipartisan group that includes three former directors of the Congressional Budget Office, would change the giant entitlement programs: Social Security, Medicare and Medicaid. The new rules would require a review every five years to determine whether projected revenues and outlays are in balance. If not, Congress would be required to restore balance through dedicated revenue increases, benefits cuts or a combination. After a financial crisis in the early 1990s, Sweden introduced a variant of this plan, which has worked reasonably well.A number of Brookings scholars—including Henry Aaron, Gary Burtless, William Gale, Alice Rivlin and Isabel Sawhill—have suggested a Value Added Tax (VAT) as part of a program of fiscal and tax reform. Burtless offers an intriguing proposal that would link a VAT to health care finance. Revenue from the VAT would be dedicated to—and would cover—the federal share of health care programs. If the federal cost rises faster than proceeds from the VAT, Congress would have to either raise the VAT rate or cut back programs to fit the flow of funds. The system would become much more transparent and accountable: because the VAT rate would appear on every purchase, citizens could see for themselves the cost of federal support for health care, and they could tell their representatives what balance they prefer between increased rates and reduced health care funding.

Another option draws on the experience of the Base Realignment and Closure Commission, which enables the military to surmount NIMBY politics and shut down unneeded bases. The basic idea is straightforward: once the independent commission settles on a list of proposed closures, Congress has the option of voting it up or down without amendment. A similar idea undergirds the president’s “fast-track” authority to negotiate proposed trade treaties, which Congress can reject but cannot modify.

Suitably adapted, this concept could help break longstanding fiscal logjams. Here is one way it might work. Independent commissions with members from both political parties could submit proposals in designated areas of fiscal policy. To increase bipartisan appeal, each proposal would require a super-majority of the commission. In the House and Senate, both the majority and the minority would have the opportunity to offer only a single amendment. This strategy of “empowered commissions” changes the incentive structure in Congress, reducing negative logrolling to undermine the prospects of proposals that would otherwise gain majority support.

Empowered commissions represent a broader strategy—using institutional design to insulate certain activities from regular and direct political pressure. For example, the Constitution mandates that federal judges, once confirmed, hold office during “good behavior” and receive salaries that Congress may not reduce during their term of service. (By contrast, many states subject judges to regular election and possible recall.) In another striking example, members of the Board of Governors of the Federal Reserve Board are appointed to 14-year non-renewable terms, limiting the ability of the executive branch to change its membership rapidly and removing governors’ incentives to trim their policy sails in hopes of reappointment. Additionally, action by neither the president nor any other entity in the executive branch is required to implement the Fed’s decisions, and Fed chairmen have been known to take steps that vex the Oval Office.

This strategy is controversial. Officials with populist leanings often argue that fundamental decisions affecting the economy should be made through transparent democratic processes. The counterargument: experience dating back to the founding of the republic suggests that when interest rates and the money supply are set at the whim of transient majorities, economic growth and stability are at risk.

Boosting savings

An adequate supply of capital is a precondition of long-term economic growth, and household saving is an important source of capital. During the 1960s, U.S. households saved 12 percent of their income; as recently as the 1980s, that figure stood at 8 percent. By 2005–2006, the savings rate dipped into negative territory, and today it stands at a meager 3 percent. In recent years, funds from abroad—principally Asia— filled the capital gap. But evidence is accumulating that foreign governments have reached the limit of their appetite (or tolerance) for U.S. debt. To avert a capital shortage and soaring interest rates, which would choke off growth, we must boost private savings as we reduce public deficits.

For a long time, tax incentives for saving have been the tool of choice. But as evidence mounts that these incentives are less effective than hoped, policy experts are turning to alternatives. One rests on a key finding of behavioral economics: default settings have a large impact on individual conduct and collective outcomes. If you require people to opt in to enter a program, such as 401(k) retirement plans, even a modest inconvenience will deter many of them from participating. But if you reverse the procedure— automatically enrolling them unless they affirmatively opt out—you can boost participation.

To achieve an adequate rate of private saving, we may need to go even further. One option is a mandatory retirement savings program to supplement Social Security. Workers would be required to set aside a fixed percentage of earnings and invest them in generic funds—equities, public debt, private debt, real estate, commodities and cash. For those who fail to designate a percentage allocation for each fund, a default program would take effect. (Participants always would have the option of regaining control.) As workers near retirement age, their holdings would be automatically rebalanced in a more conservative direction. One version of this proposal calls for “progressive matching,” in which low-earning individuals receive a subsidy equal to half their payroll contributions; those making more would get a smaller match along a sliding scale, and those at the top would receive no match at all.

This strategy requires careful institutional and programmatic design. To ensure maximum benefits to wage earners, the private sector would be allowed to offer only funds with very low costs and fees. To ensure that the program actually boosts net savings, individuals would be prohibited from withdrawing funds from their accounts prior to retirement; except in emergencies, they would not be allowed to borrow against their accounts; and they would be prohibited from using them as collateral. And a clear line would be drawn to prevent government interference in the private sector: while government-administered automatic default investments would be permitted, government officials could not direct the flow of capital to specific firms.

Improving public investment

The investment deficit has a public face as well. Since the early 19th century, government has financed and helped build major infrastructure projects—roads, bridges, ports and canals, among others, have spurred economic growth and opened new domestic and international markets. Recently, however, public infrastructure investment has fallen well short of national needs, and often has been poorly targeted. Americans travelling and working abroad are noticing that U.S. infrastructure is falling behind not only advanced countries’ but rapidly developing countries’ as well. A study by Emilia Istrate and Robert Puentes of Brookings’s Metropolitan Policy Program, presented in a December 2009 report entitled “Investing for Success,” documents three key shortcomings of federal infrastructure investment: it lacks long-term planning, fails to provide adequately for maintenance costs, and suffers from a flawed project selection process as benefits are not weighed rigorously against costs.

Istrate and Puentes explore several strategies for correcting these deficiencies. One of the most promising is a National Infrastructure Bank (NIB), to require benefit-cost analyses of proposed projects, break down financial barriers between related types of investment (facilitating inter-modal transportation, for example), and improve coordination across jurisdictional lines. The NIB could be funded through a modest initial infusion of federal capital designed to attract private capital. Projects receiving loans from the NIB would have to provide for depreciation and document the sources of funds to repay the face amount of each loan, plus interest. In short, the NIB would be more than a conduit for the flow of federal funds; it would function as a real bank, imposing market discipline on projects and making infrastructure investments attractive to private capital, partly by providing flexible subordinated debt.

Istrate and Puentes identify diverse problems that designers of an NIB would confront. Insulating the selection process from political interference would pose serious difficulties, as would providing federal seed capital without increasing the federal deficit and debt. Requiring the repayment of loans could skew project awards away from projects that cannot easily charge user fees—wastewater and environmental infrastructure projects, for example. Despite these challenges, a properly designed bank could increase the quantity of infrastructure investment while improving its effectiveness, reducing bottlenecks and promoting economic efficiency. The potential benefits for long-term growth would be considerable.

Creating the Political Conditions for Reform

The rise of political polarization in recent decades has made effective action much more difficult for the U.S. government. Polarization has impeded efforts to enact even the progrowth reforms sketched in this paper. A multiyear collaboration between the Brookings and Hoover Institutions—resulting in a two-volume report, Red and Blue Nation?, with Volume One published in 2006 and Volume Two in 2008— has mapped the scope of the phenomenon. This effort has shown that, while political elites are more sharply divided than citizens in general, citizens are more likely now to place themselves at the ends of the ideological spectrum than they were as recently as the 1980s. With a smaller political center to work with, even leaders committed to bipartisan compromise have been stymied. The fate of President Bush’s 2005 Social Security proposal illustrates the difficulty of addressing tough issues in these circumstances.

It might seem that the only cure for polarization is a shift of public sentiment back toward moderation. The Brookings-Hoover project found, however, that changes in institutional design could reduce polarization and might, over time, lower the partisan temperature. Here are two ideas, culled from a much longer list.

Congressional redistricting

While population flows account for much of the growth in safe seats dominated by strong partisans, recent studies indicate that gerrymanders account for 10 to 36 percent of the reduction in competitive congressional districts since 1982. This is not a trivial effect.

Few Western democracies draw up their parliamentary districts in so patently politicized a fashion as do U.S. state legislatures. Parliamentary electoral commissions, operating independently and charged with making reasonably objective determinations, are the preferred model abroad.

Given the Supreme Court’s reluctance to enter the thicket of redistricting controversies, any changes will be up to state governments. In recent years, voter initiatives and referenda in four states—Washington, Idaho, Alaska and Arizona—have established nonpartisan or bipartisan redistricting commissions. These commissions struggle with a complicated riddle: how to enhance competitiveness while respecting other parameters, such as geographic compactness, jurisdictional boundaries, and the desire to consolidate “communities of interest.” Iowa’s approach, where a nonpartisan legislative staff has the last word, is often cited as a model but may be hard to export to states with more demographic diversity and complex political cultures. Arizona has managed to fashion some workable, empirically based standards that are yielding more heterogeneous districts and more competitive elections.

Incentives to participate

Another depolarizing reform would promote the participation of less ideologically committed voters in the electoral process. Some observers do not view the asymmetric power of passionate partisans in U.S. elections as a cause for concern: Why shouldn’t political decisions be made by the citizens who care most about them? Aren’t those who care also better informed? And isn’t their intensive involvement an indication that the outcome of the election affects their interests more than it affects the interests of the non-voters? While this argument has surface plausibility, it is not compelling. Although passionate partisanship infuses the system with energy, it erects road-blocks to problem-solving. Many committed partisans prefer gridlock to compromise, and gridlock is no formula for effective governance.

To broaden the political participation of less partisan citizens, who tend to be more weakly connected to the political system, several major democracies have made voting mandatory. Australia, for one, has compulsory voting; it sets small fines for non-voting that escalate for recidivism, with remarkable results. The turnout rate in Australia tops 95 percent, and citizens regard voting as a civic obligation. Near-universal voting raises the possibility that a bulge of casual voters, with little understanding of the issues and candidates, can muddy the waters by voting on non-substantive criteria, such as the order in which candidates’ names appear on the ballot. The inevitable presence of some such “donkey voters,” as they are called in Australia, does not appear to have badly marred the democratic process in that country.

Indeed, the civic benefits of higher turnouts appear to outweigh the “donkey” effect. Candidates for the Australian Parliament have gained an added incentive to appeal broadly beyond their partisan bases. One wonders whether members of Congress here in the United States, if subjected to wider suffrage, might also spend less time transfixed by symbolic issues that are primarily objects of partisan fascination, and more time coming to terms with the nation’s larger needs. At least campaigns continually tossing red meat to the party faithful might become a little less pervasive.

The United States is not Australia, of course. Although both are federal systems, the U.S. Constitution confers on state governments much more extensive control over voting procedures. While it might not be flatly unconstitutional to mandate voting nationwide, it would surely chafe with American custom and provoke opposition in many states. Federalism American-style also has some unique advantages, including its tradition of using states as “laboratories of democracy” that test reform proposals before they are elevated to consideration at the national level. If a few states experiment with compulsory voting and demonstrate its democracy- enriching potential, they might, in this way, smooth the path to national consideration.  

Conclusion

In challenging times, political leaders undertake institutional reform, not because they want to, but because they must. Our own era—a period of profound economic crisis—is no exception. Even in circumstances of deep political polarization, both political parties have accepted the need to restructure our system of financial regulation.

As well, recognition is growing that we face three key challenges—a fiscal deficit, a savings deficit and an investment deficit—that have eluded control by existing institutions and, unless checked, will impede long-term economic growth. The question is whether we will be able to adopt the needed changes in an atmosphere of reflection and deliberation, or whether we will delay until a worse crisis compels us to act.

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Policy Brief #175

As the nation strives to recover from the “Great Recession,” job creation remains one of the biggest challenges to renewed prosperity. Small businesses have been among the most powerful generators of new jobs historically, suggesting the value of a stronger focus on supporting small businesses—especially high-growth firms—and encouraging entrepreneurship. Choosing the right policies will require public and private decision-makers to establish clear goals, such as increasing employment, raising the overall return on investment, and generating innovations with broader benefits for society. Good mechanisms will also be needed for gauging their progress and ultimate success. This brief examines policy recommendations to strengthen the small business sector and provide a platform for effective programs. These recommendations draw heavily from ideas discussed at a conference held at the Brookings Institution with academic experts, successful private-sector entrepreneurs, and government policymakers, including leaders from the Small Business Administration. The gathering was intended to spur the development of creative solutions in the private and public sectors to foster lasting economic growth.

	RECOMMENDATIONS
	What incentives and assistance could be made available to “gazelles” and to small business more generally? What policies are likely to work most effectively? In the near term, government policies aimed at bolstering the recovery and further strengthening the financial system will help small businesses that have been hard hit by the economic downturn. Spurred by the interchange of ideas at a Brookings forum on small businesses, we have identified the following more targeted ideas for fostering the health and growth of small businesses (and, in many cases, larger businesses) over the longer run: Improve access to public and private capital. Reexamine corporate tax policy with an eye toward whether provisions of our tax code are discouraging small business development. Promote education to help businesses struggling with shortages of workers with particular skills, and promote research to spur innovation. Rethink immigration policy, as current policy may be contributing to shortages of key workers and deterring entrepreneurs who wish to start promising businesses in our country. Explore ways to foster “innovation-friendly” environments, such as regional cluster initiatives. Strengthen government counseling programs.

The term “small business” applies to many different types of firms. To begin, the small business community encompasses an enormous range of “Main Street” stores and services we use every day, such as restaurants, dry cleaners, card shops and lawn care providers. When such a business fails, it is often replaced by a similar firm. The small business community also includes somewhat bigger firms—in industries such as manufacturing, consulting, advertising and auto sales—that may have more staying power than Main Street businesses, but still tend to stay relatively small, with under 250 employees. While these two kinds of small businesses contribute relatively little to overall employment growth, they are a steady source of mainstream employment. If economic conditions do not support the formation of new businesses to replace the ones that fail, there would be a significant net destruction of jobs and harm to local communities.

Yet another type of small business has an explicit ambition for rapid growth. These high-growth companies are sometimes known as “gazelles.” According to the Small Business Administration, small businesses account for two-thirds of new jobs, and the gazelles account for much of this job creation. The most striking examples—such as Google and eBay—have tended to be in high-tech industries and were gazelles for a significant time before they graduated to be very large businesses. However, gazelles exist in all industry types and in all regions of the country, and the large majority are not grazing in the nation’s technology-dominated Silicon Valleys. According to one expert, the three largest industry categories for high-growth companies are restaurant chains, administrative services and health care companies. One non-high-tech example is Potbelly Sandwiches, a restaurant chain that began in Chicago. Another is the San Francisco-based Gymboree Corporation, a provider of child development programs and children’s clothing.

 

Fostering the Development of High-Growth Companies

High-growth small businesses represent only about 5 percent of total startups, making it important to determine how to spot and foster them. A key common characteristic is that growth is critically dependent on the entrepreneurs who start these companies; they are people on a mission, charismatic leaders who can inspire creativity and commitment from their staffs.

The age of these firms is highly correlated with when their growth is highest. Generally, the most dramatic growth occurs after at least four years of existence—and coincidentally lasts about four years—before it slows again to a more typical pace for small businesses. Of course, some firms such as Google defy this pattern and continue to experience high growth for many years.

Although dynamic small businesses can be found nearly everywhere and in many industries, some regions spawn more of them than others. These regions may have especially supportive features, such as a critical mass of potential workers with relevant skills, a social climate and network that encourage idea generation, locally available venture capital, or some combination of these factors.

Unfortunately, attempts to anticipate which companies or even industries are likely to produce gazelles are prone to error. Thus, excessive emphasis on national industrial policies that favor specific industries are likely misplaced. Without knowing how to target assistance precisely, broad strategies, such as assistance with funding, knowledge, contacts and other essential resources, may be the best approach to fostering high-growth businesses. Such support has the added value of also aiding Main Street businesses.

Many of the most promising policies focus on removing obstacles that hinder entrepreneurs with solid business plans from launching and expanding their businesses.

Funding

As a result of the burst of the dot.com bubble in early 2000 and the recent financial crisis, small businesses have found the availability of venture capital funds drastically diminished. The crisis has also made it more difficult to obtain funding from banks and other conventional means. These trends particularly affect the “missing middle” of small businesses—roughly, those with between 10 and 100 employees.

The venture capital market. Historically, venture capital has financed only a relatively small portion of small businesses, but those financed have tended to be the ones with the greatest growth potential. In recent years, firms that eventually grew to where they could issue initial public stock offerings generally relied more heavily on venture capital financing than the average small business.

The dollar value of venture capital deals funded today is only about one-fifth the size it reached at its peak. While the peak amount may have been too large, today’s value is probably too small. With their capital heavily invested in a small range of industries and locales, it seems likely that venture capital firms have missed a high proportion of potential investment opportunities. Further, “once burned, twice shy” funders have increasingly focused on larger, later-stage ventures. Consequently, mezzanine financing, which new companies need to survive and thrive in the critical early stages, is scarce.

The funding problems partly stem from venture capital firms today having less money to invest. Some investors who formerly contributed to such firms have become more risk-averse, and worse performance figures have discouraged new investors. Lack of venture capital affects some industries more than others, and even some green energy companies—viewed by some as one of the nation’s more promising industry sectors—have moved to China, where financial support is more readily available.

Bank lending. In contrast to large businesses, which can turn to capital markets for funding, many small businesses are dependent on banks for financing. Although the worst of the 2008–09 credit crunch is behind us, many small businesses still find it difficult to obtain bank loans. Community banks, a key source of small business financing, have been hard hit by losses in commercial real estate, which have limited their lending capacity. Further, many small business owners who historically would have used real estate assets as collateral for expansion loans can no longer do so because of declines in real estate prices. In addition, small businesses that have, in the past, used credit cards to purchase equipment and supplies have been hindered by reductions in credit limits.

Overall economic conditions

The high degree of uncertainty currently surrounding the economic and financing climate may have prompted many entrepreneurs and would-be entrepreneurs to hold off on growth plans. Despite their reputation as high-flying risk-takers, good entrepreneurs take only calculated risks, where the benefits outweigh the dangers. Uncertainties about the future trajectory of the economy merely increase risk without raising potential rewards.

Government policies

Government policies affect the climate for small businesses in many ways. For example, small businesses face substantial hurdles when entering the complicated world of federal grants and contracts. At the state level, severe budget shortfalls mean that even well-designed initiatives to boost small businesses may founder.

The Small Business Administration (SBA) assists the full continuum of small businesses through a variety of means. These include: an $80 billion loan guarantee portfolio; specialized counseling and training centers; specialized business development programs targeting the socially and economically disadvantaged; oversight to ensure that at least 23 percent of federal government contracts go to small businesses (with certain preferences for minority and women-owned businesses); and the Small Business Innovation Research and Small Business Investment Companies programs.

The Obama administration is attempting to broaden support for small businesses by bringing the SBA into multi-agency initiatives that tackle common problems. For example, the Departments of Energy, Commerce, Housing and Urban Development, Education, and Labor, along with the National Science Foundation and the SBA, are supporting a five-year, nearly $130 million Energy Regional Innovation Cluster.

Strength of “social capital”

Through the 1990s, the United States was a worldwide leader in fostering innovation and entrepreneurship and reaped the reward of employment growth. Current international comparisons suggest that we are now closer to tenth place among some 70 nations in our ability to support innovation. Much of what has kept our nation from remaining in the top spot appears to relate to insufficient cultural support for entrepreneurship.

Strong social networks in specific geographic regions appear to substantially bolster the growth of innovative businesses. These networks are built around entrepreneurial dealmakers who serve as the nodes of the network, forming connections among researchers, entrepreneurs and investors. Unfortunately, many regions and industries lack strong networks.

Access to decision-making information. Entrepreneurs need an array of information and advice about how to tackle the problems that arise at different stages in business development. The SBA reports that companies that have taken advantage of their long-term counseling programs, for example, have higher growth than companies that have not.

Opportunity for all. Social networks are self-selecting, and some people have to work extra hard to gain entry to a region’s network of entrepreneurs. While various organizations exist to help women and people of color access entrepreneurial skills and information, these efforts may not suffice. Under-representation of any group presumably would filter out a number of potential high-growth companies.

Workforce issues

A long-time strength of the American workforce, worker mobility has declined. This trend has been attributed in part to an aging population and in part to the current difficulty people have in selling their homes. Businesses report difficulty finding employees with the right training, especially at the technician level, where straightforward vocational training could help.

Global competition

Increasing global competition for good projects, entrepreneurs and capital is a positive trend from an international perspective, but runs counter to the national goal of promoting rapid growth in U.S. industry and employment. Today, many entrepreneurs can choose among starting a business here, in their home country, or even in a third, more hospitable nation. At the same time, current U.S. immigration policy hinders entrepreneurs from coming here to launch their companies. A recent report from The Brookings- Duke Immigration Policy Roundtable concluded that “educated workers with the knowledge and skills to innovate are critical” to the United States and recommended increasing the annual number of skilled visas.

 

Policy Goals for Small Business

Measuring Results

More work is needed to identify key policy goals and priorities related to small business success. Critically, what would constitute “improvement” in public policy regarding small business employment, and how would we measure it? Clearly, increasing the total number of jobs created each year (by both small and large businesses, net of job destruction) would be a positive outcome, all else being equal. Another potential goal would be improving the “quality” of the jobs created, as measured by average compensation or by job creation in new industries or geographic areas where unemployment is high. Creating “good jobs” that bring generous compensation would seem to be always desirable, but this outcome could conflict with other social goals, for example, if the jobs created required skills out of the reach of groups that are traditionally difficult to employ.

Slowing job destruction could be as important as increasing the creation of new jobs, but discouraging layoffs without increasing performance would do more harm than good. The trick is to raise the quality of marginal firms so that their improved performance allows them to retain employees they would otherwise have to let go.

A final key factor in setting policy goals that would support small businesses is measuring the cost to taxpayers of the initiatives that flow from the goals. This includes the subsidy cost contained in the federal budget, as well as costs and tradeoffs in society at large.

Changing Key Policies

Small businesses face both short-run and long-run challenges. With regard to the former, many small businesses have been hard hit by the recession and appear to be lagging behind larger businesses in their recovery. The cyclical struggles of this sector in part reflect the dependence of many small firms on the still-strained banking system for their financing; they also reflect the high toll that our extremely soft labor markets have taken on demand for Main Street goods and services. Thus, government policies aimed at broadly bolstering the recovery and further strengthening the financial system will yield important benefits to small businesses.

The government, in conjunction with the private sector, can also take steps that will foster an economic environment that is supportive of entrepreneurship and economic growth over the long run. Specific policy steps that might help small businesses (and, in many cases, large businesses) include:

Improve access to public and private capital. Implementing serious financial reform will reduce the likelihood that we will see a repeat of the recent credit cycle that has been so problematic for the small business sector. When credit market disruptions do occur, policymakers should be attentive to whether temporary expansions of the SBA loan guarantee program are needed to sustain lending to creditworthy borrowers. The SBA should also consider expanding the points of access to its loan programs through an expansion of its lending partners. Finally, the SBA (or a similar entity) might encourage venture capital funds to broaden their investments beyond familiar areas by systematically bringing these investors together with entrepreneurs from neglected geographic regions and business sectors.

Reexamine corporate tax policy. More thinking is needed about whether provisions in our tax code discourage small business development in a way that is harmful to the broader economy and that places the United States at a relative disadvantage internationally. For example, Congress might consider whether it would be beneficial, on net, to lower employment taxes as a way of spurring hiring at businesses with high-growth potential. In addition, some analysts believe there would be gains from increasing tax credits for research and development and further lowering taxes on capital equipment. A design priority in all cases should be simplicity, as complicated rules can limit take-up among smaller firms that do not have extensive accounting or legal expertise.

Promote education and research. Entrepreneurs report difficulty in finding workers with the skills they need for manufacturing, technology and other jobs that do not require four-year college degrees. Access to such educational opportunities, including tailored vocational training, should be affordable and ubiquitous.

At the university level, improvements are needed in the way academic research is brought to the commercial market. Continued public and private support for basic research might be wise, particularly if we are in a trough between waves of innovation, as some analysts believe. The large investments by the National Science Foundation, National Institutes of Health, Defense Advanced Research Projects Agency, and other ambitious public and private programs laid the groundwork for many of the high-growth businesses of today. It may be worth exploring whether support for research in “softer” areas than the sciences might do an equal or better job of inspiring innovations.

Rethink immigration policy. A reconsideration of limits on H1-B visas might help entrepreneurs struggling with shortages of workers with particular skills. In addition, current immigration policy discourages immigrants who want to establish entrepreneurial businesses in America. Any efforts to expand immigration are frequently perceived as “taking jobs away from Americans,” but studies have shown that new businesses create jobs for Americans.

Explore ways to foster “innovation-friendly” environments. Some regions of the United States clearly do a better job of encouraging innovation. Silicon Valley is the classic example, but there may be as many as 40 such clusters scattered around the country. While clusters often arise organically, typically near major universities, some states have made an explicit commitment to innovation and entrepreneurship. Examples include the Massachusetts Technology Collaborative and California’s Biological Technologies Initiative, involving community colleges statewide. Federal, state and local policymakers should keep a keen eye on ways of adapting best practices from these initiatives as information becomes available about which elements are most effective.

Strengthen government counseling programs. The SBA might do more to expand and tailor its already successful growth counseling programs to better meet the needs of both Main Street and potential high-growth businesses, as well as firms at different developmental stages. Any effort to expand small businesses’ opportunities for federal grants and contracts should be accompanied by significant streamlining of the application process.

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