Executive Summary

Government information technology is subject to a variety of rules, regulations, and procurement policies.  Computing is treated differently depending on whether the platform is based on desktops, laptops, mobile devices, or remote file servers known as cloud computing.  There are differences between the executive, legislative, and judicial branches of government, as well as in the level of privacy and security expected for various applications.  

Some people perceive higher security on desktop or laptop computers and lower security with the cloud because the latter’s information is stored remotely through third-party commercial providers.  In reality, though, there are serious security threats to all electronic information regardless of platform, and cloud server providers often take security more seriously than mass consumers or government officials employing weak passwords on their local computers. 

In this paper, I review current federal IT policy and discuss rules, practices, and procedures that limit innovation.  There are a variety of obstacles that make it difficult for policymakers to take full advantage of the technological revolution that has unfolded in recent years.  After outlining these issues, I make recommendations on policy changes required to improve the efficiency and effectiveness of federal computing. 

My specific recommendations include:

1. Public officials should develop more consistent rules on computing across desktop, laptop, mobile, and cloud platforms.  
2. The use of video, collaboration, and social networking should be authorized for congressional offices.  This would make legislative branch policy consistent with that of the executive branch.
3. Judicial branch computing should be modernized, with greater emphasis on cloud computing. 
4. There should be a more uniform certification process for federal agencies.  Right now, each agency is responsible for certifying its own applications.  It makes sense to have a “joint authorization board” with the power to review management services and certify particular products for use across the government. 
5. Congress should update the Electronic Communications Privacy Act to change the process by which law enforcement agents obtain electronic information.  Instead of using a prosecutor’s subpoena, legislation should require a “probable cause” search warrant that is approved by a judge.  This would provide greater safeguards in terms of online content, pictures, geolocation data, and e-mails.
6. Privacy rights should be placed on the same footing regardless of whether a person is using desktop or cloud computing.  It makes little sense to have weaker standards on one platform than another.  Consumers and government decision-makers expect the same level of protection whether they are accessing information on a desktop, laptop, mobile, or cloud storage system. 
7. Congress should amend the Computer Fraud and Abuse Act to strengthen penalties for unwanted intrusion into computing systems.  The law has inconsistent penalties and prosecutors have found that it is hard to prosecute cyber-crimes. 
8. Apps.gov represents a big step forward and government use should be expanded because it makes procurement easier and speeds public sector innovation.  It is a model of how the government can reinvent itself through digital technology in ways that improve efficiency and effectiveness.
9. Countries need to harmonize their laws on cloud computing so as to reduce current inconsistencies in regard to privacy, data storage, security processes, and personnel training,  
10. There should be mechanisms for data exchange that encourage portability across platforms.  We should avoid vendor lock-in that precludes data exchange.
11. Data on uptime, downtime, recover time, archiving, and maintenance schedules would help build public trust by providing information on computing performance.

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Event Information

The U.S. government spends billions of dollars each year on computer hardware, software and file servers that may no longer be necessary. Currently, the public sector makes relatively little use of cloud computing, even though studies suggest substantial government savings from a migration to more Internet-based computing with shared resources.

On July 21, the Center for Technology Innovation at Brookings hosted a policy forum on steps to enhance public sector adoption of cloud computing innovations. Brookings Vice President Darrell West moderated a panel of experts, including David McClure of the General Services Administration, Dawn Leaf of the National Institute for Standards and Technology, and Katie Ratte of the Federal Trade Commission. West released a paper detailing the policy changes required to improve the efficiency and effectiveness of federal computing.

Audio

• Moving to the Cloud: How the Public Sector Can Leverage the Power of Cloud Computing

Transcript

• Uncorrected Transcript (.pdf)
• Download Dawn Leaf's PowerPoint Presentation (.pdf)
• Download David McClure's PowerPoint Presentation (.pdf)

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INTRODUCTION

In August, 2010 the government of Kenya adopted a new constitution. This followed a referendum in which an overwhelming majority of Kenyans voted for change. The decisive impetus for reform came from the widespread violence and political crisis that followed the 2007 election. While claims of electoral fraud provided the immediate catalyst for violence, the deeper causes were to be found in the interaction of a highly centralized ‘winner-take-all’ political system with deep social disparities based in part on group identity (Hanson 2008).

Provisions for equity figure prominently in the new constitution. Backed by a bill of rights that opens the door to legal enforcement, citizenship rights have been strengthened in many areas,including access to basic services. ‘Equitable sharing’ has been introduced as a guiding principle for public spending. National and devolved governments are now constitutionally required to redress social disparities, target disadvantaged areas and provide affirmative action for marginalized groups.

Translating these provisions into tangible outcomes will not be straightforward. Equity is a principle that would be readily endorsed by most policymakers in Kenya and Kenya’s citizens have provided their own endorsement through the referendum. However, there is an ongoing debate over what the commitment to equity means in practice, as well as over the pace and direction of reform. Much of that debate has centered on the constitutional injunction requiring ‘equitable sharing’ in public spending.

On most measures of human development, Kenya registers average outcomes considerably above those for sub-Saharan Africa as a region. Yet the national average masks extreme disparities—and the benefits of increased prosperity have been unequally shared.

There are compelling grounds for a strengthened focus on equity in Kenya. In recent years, the country has maintained a respectable, if less than spectacular, record on economic growth. Social indicators are also on an upward trend. On most measures of human development, Kenya registers average outcomes considerably above those for sub-Saharan Africa as a region. Yet the national average masks extreme disparities—and the benefits of increased prosperity have been unequally shared. Some regions and social groups face levels of deprivation that rank alongside the worst in Africa. Moreover, the deep fault lines running through society are widely perceived as a source of injustice and potential political instability.

High levels of inequality in Kenya raise wider concerns. There has been a tendency in domestic debates to see ‘equitable sharing’ as a guiding principle for social justice, rather than as a condition for accelerated growth and enhanced economic efficiency. Yet international evidence strongly suggests that extreme inequality—especially in opportunities for education— is profoundly damaging for economic growth. It follows that redistributive public spending has the potential to support growth.

The current paper focuses on a group of 12 counties located in Kenya’s Arid and Semi-Arid Lands (ASALs). They are among the most disadvantaged in the country. Most are characterized by high levels of income poverty, chronic food insecurity and acute deprivation across a wide range of social indicators.

Nowhere is the deprivation starker than in education. The ASAL counties account for a disproportionately large share of Kenya’s out-of-school children, pointing to problems in access and school retention. Gender disparities in education are among the widest in the country. Learning outcomes for the small number of children who get through primary school are for the most part abysmal, even by the generally low national average standards.

Unequal public spending patterns have played no small part in creating the disparities that separate the ASAL counties from the rest of Kenya—and ‘equitable sharing’ could play a role in closing the gap. But what would a more equitable approach to public spending look like in practice?

This paper addresses that question. It looks in some detail at education for two reasons. First, good quality education is itself a powerful motor of enhanced equity. It has the potential to equip children and youth with the skills and competencies that they need to break out of cycles of poverty and to participate more fully in national prosperity. If Kenya is to embark on a more equitable pattern of development, there are strong grounds for prioritizing the creation of more equal opportunities in education. Second, the education sector illustrates many of the wider challenges and debates that Kenya’s policymakers will have to address as they seek to translate constitutional provisions into public spending strategies. In particular, it highlights the importance of weighting for indicators that reflect need in designing formulae for budget allocations.

Our broad conclusion is that, while Kenya clearly needs to avoid public spending reforms that jeopardize service delivery in wealthier counties, redistributive measures are justified on the grounds of efficiency and equity.

The paper is organized as follows. Part 1 provides an overview of the approach to equity enshrined in the constitution. While the spirit of the constitution is unequivocal, the letter is open to a vast array of interpretations. We briefly explore the implications of a range of approaches. Our broad conclusion is that, while Kenya clearly needs to avoid public spending reforms that jeopardize service delivery in wealthier counties, redistributive measures are justified on the grounds of efficiency and equity. Although this paper focuses principally on basic services, we caution against approaches that treat equity as a matter of social sector financing to the exclusion of growth-oriented productive investment.

Part 2 provides an analysis of some key indicators on poverty, health and nutrition. Drawing on household expenditure data, the report locates the 12 ASAL counties in the national league table for the incidence and depth of poverty. Data on health outcomes and access to basic services provide another indicator of the state of human development. While there are some marked variations across counties and indicators, most of the 12 counties register levels of deprivation in poverty and basic health far in excess of those found in other areas.

Part 3 shifts the focus to education. Over the past decade, Kenya has made considerable progress in improving access to basic education. Enrollment rates in primary education have increased sharply since the elimination of school fees in 2003. Transition rates to secondary school are also rising. The record on learning achievement is less impressive. While Kenya lacks a comprehensive national learning assessment, survey evidence points to systemic problems in education quality. In both access and learning, children in the ASAL counties—especially female children—are at a considerable disadvantage. After setting out the national picture, the paper explores the distinctive problems facing these counties.

In Part 4 we look beyond Kenya to wider international experience. Many countries have grappled with the challenge of reducing disparities between less-favored and more-favored regions. There are no blueprints on offer. However, there are some useful lessons and guidelines that may be of some relevance to the policy debate in Kenya. The experience of South Africa may be particularly instructive given the weight attached to equity in the post-apartheid constitution.

Part 5 of the paper explores a range of approaches to financial allocations. Converting constitutional principle into operational practice will require the development of formulae-based approaches. From an equitable financing perspective there is no perfect model. Any formula that is adopted will involve trade-offs between different goals. Policymakers have to determine what weight to attach to different dimensions of equity (for example, gender, income, education and health), the time frame for achieving stated policy goals, and whether to frame targets in terms of outcomes or inputs. These questions go beyond devolved financing. The Kenyan constitution is unequivocal in stipulating that the ‘equitable sharing’ provision applies to all public spending. We therefore undertake a series of formula-based exercises illustrating the allocation patterns that would emerge under different formulae, with specific reference to the 12 ASAL focus counties and to education.

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Event Information

The Brookings Institution and the American Enterprise Institute (AEI) collaborated to ask: if you were to redesign Medicare without spending more money, what would you keep and what would you change? A new report on a Center for Healthcare Decisions program provided insight into the public’s willingness to restructure Medicare in the face of tightening budget constraints. Using an interactive, computer-based system, program participants faced the challenge of making Medicare more responsive to the needs of current and future beneficiaries.

Were participants willing to accept limits on their choice of provider or reduced coverage of low-value medical care? Would they accept the need for greater personal responsibility in their use of health services? Would they agree that Medicare should adopt other policies to promote fiscal responsibility?

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Introduction

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

Issues around Retirement Saving

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

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

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

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

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

Implications for the DoL’s proposed conflicted interest rule

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

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

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

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

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

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

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

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

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

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