The greatest tragedy of the Israeli-Palestinian gridlock, aside from the many lives lost, is that the parameters of any future agreement are already known to all sides involved. These are the common parameters of then-Prime Minister Ehud Barak’s proposal at Camp David II in 2000, the Clinton Parameters of December of that year, and former Prime Minister Ehud Olmert’s initiative in 2008.

Broadly speaking, Israel would be required to forfeit the dream of a Greater Israel, to agree to the two-state solution based on the 1967 borders with land swaps, and to accept some Palestinian presence in the Arab neighborhoods of East Jerusalem and in the Holy Basin. The Palestinians would have to agree to an end of conflict and an end of claims, a solution for the Palestinian refugee problem only within the borders of a future Palestinian state (not Israel), and limitations on their sovereignty due to security concerns. Unfortunately, national narratives and aspirations, religious beliefs, perceptions of historic justice, and the practical lessons each side learned in the recent past have all prevented the leaders of both sides from convincing their publics of the need for such concessions—which are necessary for an agreement.

Plans A and B

Reaching an agreement is harder today than it was in either 2000 or 2008. Even the moderates among the Palestinians are unwilling to concede a right of return, to acknowledge an “end of conflict and end of claims,” to recognize Israel as a Jewish state, or to allow basic security arrangements that will ease Israel’s justified concerns. It appears that in 2016, the Palestinians do not view a two-state solution, along the Clinton Parameters, as a preferred outcome. Instead, their discourse is rooted in a "return of rights" in historic Palestine as a whole (including Israel), in accordance with both the Hamas and Palestine Liberation Organization (PLO) charters. Indeed, the Palestinian positions have not budged much since Camp David II in 2000.

Photo courtesy of REUTERS/Carlo Allegri

Instead, the Palestinians have an attractive (in their view) “Plan B,” which is to get the Israeli concessions in international decisions, without having to make their own concessions—all while denouncing Israel and delegitimizing it in international forums. Since 2008, there are strong indications that the international route was actually the Palestinian "Plan A"—hence their intransigence in entering the talks and in the negotiations themselves. 

A sustainable—but undesirable—status quo

The continuation of the status quo—which appears so problematic to many Israelis and Americans—represents for the Palestinians a favorable strategic avenue that would lead, eventually, to an Arab-majority, one-state outcome. When Americans, Europeans, and even elements of the Israeli public repeatedly warn that Israel will be “lost” if it allows the status quo to persist, it does not encourage Palestinian moderation or willingness to compromise. Instead, it strengthens the underlying Palestinian assumption that a failure of negotiations is a reasonable option from their perspective. For the Palestinian leadership, all paths lead to the same destination: either Israel accepts their conditions (which, through flooding Israel with refugees, will lead to the demise of Israel as a Jewish state) or the status quo persists and Israel is supposedly lost.

Photo courtesy of REUTERS/Amir Cohen

Moreover, any demand made of Israel that it alter the status quo must convince the Israelis that their situation will not deteriorate further. The days of the Second Intifada—a terror campaign initiated by Yasser Arafat after the failure of Camp David with dozens of dead each month—are still etched in the collective Israeli memory. Similarly, Israelis are unwilling to accept a West Bank that would be a base for rocket launching, tunnels, and a continuation of terrorism against Israel, as is Gaza, which Israel fully evacuated. Only a move that would provide Israel security and full legitimacy to act against future Palestinian terrorism will create public support in Israel to move toward a two-state solution. 

Yet, while the status quo is much more sustainable than the conventional wisdom claims—for reasons beyond the scope of this post—it is certainly not desirable, since it furthers Israel from its goal of a Jewish, democratic, safe, and just state of Israel. It is therefore important that Israel have a viable alternative plan that is not merely a continuation of the status quo. 

Four paths for an Israeli alternative

There are more than two options, muddling through in the status quo or accepting Palestinian demands in full. If Israelis cannot get peace in terms that secure an end of conflict, security, and no "right of return," we must look for another option—an Israeli Plan B. 

An Israeli Plan B would consist of a proactive effort to formulate the future borders of the state of Israel in one of four paths in order of preference: 1) a negotiation process resulting in a final status agreement, 2) a regional agreement, 3) an interim bilateral agreement, or 4) in the case a negotiated agreement cannot be realized, an independent Israeli determination of its own borders. 

First, Israel should present an initiative for a final agreement with the Palestinians, based on the Clinton Parameters: generous borders for a future Palestinian state, demilitarized Palestinian state and no compromises on Israeli security, a commitment to an end of conflict and end of claims, and a Palestinian relinquishment of implementing a “right of return.” This should be followed by a comprehensive effort to reach an agreement on the basis of the Israeli proposal. Such a move should be led by the leadership on both sides in order to foster genuine relations based on trust. 

Photo courtesy of REUTERS/Asmaa Waguih

Should the (preferable) bilateral track fail, Israel should move to a regional track, including the moderate Arab states—led by Egypt, Saudi Arabia, and Jordan—in an effort to reach a final status agreement. This effort could be grounded in an updated version of the Arab Peace Initiative—as a starting point rather than a take-it-or-leave-it proposition. Such a plan should be decoupled from the issue of the Golan Heights (given the situation in Syria today and in the foreseeable future) and should not be conditional on a solution to the refugee problem according to U.N. Security Council Resolution 194 from 1949. 

The pragmatic Arab states have the capacity to add much-needed value to the table in order to move the negotiations beyond a zero-sum game on the territorial, financial, security, and ideological levels. However, if the moderate Arab states are unwilling or unable to contribute, Israel can aim to secure interim agreements with the Palestinians. Interim agreements would necessitate abandoning the principle of “nothing is agreed until everything is agreed” and shifting the paradigm to a principle of gradual implementation of any area of agreement, deferring talks on more contentious subjects to a later time. 

Only if all these paths fail, Israel should embark on a long-term independent strategy for shaping its borders. This strategy should be innovative and creative, removing the effective veto Palestinians have through negotiations on Israel future. It would require as much coordination as possible with the United States and the international community. It would leave open the option for a return to the negotiating table and to a negotiated settlement, and reinforces the agreed two-state solution paradigm. Likewise, this route undermines and prevents the most problematic outcomes, namely the continuation of the status quo or a final agreement without an end of conflict and security arrangements, and the flooding of Israel with refugees. 

An independent route suffers from a bad reputation within Israeli society, as a consequence of the perceived failure of the unilateral withdrawal from Gaza in 2005. As discussed below however, the Gaza precedent can provide valuable lessons for the West Bank that can mitigate the potential pitfalls of such a move. 

Four lessons from the disengagement plan

Any independent move with unilateral elements suffers from strong negative connotations among Israelis because of the perceived failure of the "disengagement" from Gaza in 2005, though I know of no one in Israel who wants to regain control over the 1.7 million Palestinians in the Gaza Strip. Still, while then-Prime Minister Ariel Sharon was right to initiate the disengagement plan, it was riddled with strategic errors. Four major miscalculations also offer lessons for a future independent move:

1. The plan was initiated without securing a strong internal Israeli or international backing. Israel must show that it is ready for substantial concessions in certain areas in order to be able to put forward significant demands in others. Therefore, the first move in a future plan should begin with a genuine and generous peace proposal to the Palestinians. If the Palestinians again show intransigence, and if Israel demonstrates a willingness to accept compromise, then there will be a significantly increased likelihood for international acceptance of independent Israeli measures to work toward building a two-state reality.
2. The Israelis left an open border between the Gaza Strip and Sinai, evacuating the “Philadelphi line” on the Gaza's Strips border with Egypt, which Hamas subsequently used to rearm with smuggled weapons from Iran and Libya. This mistake must not be repeated in the West Bank, and so the Jordan Valley—that separates the West Bank from Jordan—must stay under Israeli control, preventing arms smuggling into the West Bank. These moves therefore offer a clear separation between ending the occupation and expanding Palestinian self-rule on the one hand, and taking decisive action to prevent the buildup of terrorism in the West Bank, on the other.
3. Sharon ordered the complete evacuation of all of the Gaza Strip in order to gain world recognition of an end of the occupation there. In reality, it did not achieve this outcome and left Israel without any bargaining chips for future negotiations. A future Israeli redeployment should only be to the security barrier, or close to it, leaving Israel in possession of the main settlement blocs and other strategic areas, some of which could be used as future bargaining chips.
4. There was a complete lack of communication between the Israeli leadership and the evicted Israelis, as well as the lack of planning that botched their resettlement to this day. In order for any future plan to succeed, there is a need for an open and serious conversation within Israeli society—including through elections or a referendum—that would gradually build the societal trust needed for such a move. 

Photo courtesy of REUTERS/Amir Cohen

So, an independent Israeli strategy would therefore involve:

• Israel’s willingness to hand over 80 to 85 percent of the West Bank—a willingness demonstrated by undertaking concrete steps on the ground. Israel would need to initiate further redeployments from the West Bank not including the Jordan Valley and East Jerusalem;
• The transfer of Area B and much of Area C to a full Palestinian responsibility;
• The full completion of the Security Barrier in areas that are currently lacking in order to provide Israel with a contiguous and defensible border;
• A full cessation of Israeli settlement construction beyond the declared lines;
• A plan, preferably under an agreement, to resettle Israelis living east of these lines into Israel-proper, preferably to the Galilee, the Negev, and the main settlements blocs; and 
• The responsibility for the security of Israel remaining in the hands of the Israeli Defense Forces (IDF) and the proper Israeli authorities. Israel must preserve its capacity to conduct preventive action, hot pursuit, border control, and air security. However, the IDF must try to minimize such operations in the evacuated territories.

Drawbacks of an independent strategy

The proposed independent course of action is not ideal, and has elements that will be difficult to implement. Its main weaknesses are:

• The difficulty of formulating a political plan that would be all-inclusive and that could feasibly garner wide acceptance within Israeli society. Today, the right wing in Israel would view such a plan as a capitulation to the Palestinians, a forfeiture of parts of the Land of Israel, and a withdrawal from territory without gaining anything in return. The left would also be appalled from the lack of agreement with the Palestinians. The Israeli public at large does not recognize the need to change the status quo.
• The widespread unpopularity of evacuating Israelis from the settlements. Since the 2005 Disengagement Plan, no Israeli government has dared to directly address this topic. Israel’s leadership would need to oversee prolonged financial, social, and political preparations for such a strategy. Likewise, it would require coordination with the settler leadership to ensure the maximum possible cooperation from the settler population.
• Obtaining international legitimacy—something that should not be taken for granted. Israel can mobilize the international community only if it shows that this course preserves the feasibility of a two-state solution. It must work to counter the perception in the international community that this two-state framework is rapidly becoming irrelevant. Halting settlement construction would provide a much-needed signal from Israel showing its sincere desire to end the conflict, and would promote international efforts to build a future Palestinian state.
• The inherent tension between Israel’s need to ensure its future security and its desire to provide the Palestinians with the essential tools for self-government. Balancing these two requirements would continue to pose major challenges for the future.

Photo courtesy of REUTERS/Amir Cohen

Try, try, try again

This independent strategy would allow Israel to pursue a solution from a point of strength, rather than being dictated by outside forces or waves of terror. It represents a long-term, paradigm-changing option which would preserve the two-state solution while removing several of the most serious obstacles to such a solution. 

Zionism always yearned for a future that has seemed impossible at times. Generations of people have strived to achieve it, often overcoming great obstacles amid harsh realities. In our generation, we too can succeed.

William Galston and E.J. Dionne, Jr. make the case for universal voting – a new electoral system in which voting would be regarded as a required, civic duty. Why not treat showing up at the polls in the same way we treat a jury summons, which compels us to present ourselves at the court? Galston and Dionne argue that universal voting would enhance the legitimacy of our governing institutions, greatly increasing turnout and the diversity of the American voter base, and ease the intense partisan polarization that weakens our governing capacity.

Citing the implementation of universal voting in Australia in 1924, the authors conclude that universal voting increases citizen participation in the political process. In the United States, they write, universal voting would promote participation among citizens who are not likely to vote—those with lower levels of income and education, young adults, and recent immigrants. By evening out disparities in the electorate, universal voting would put the state on the side of promoting broad civic participation.

In addition to expanding voter participation, universal voting would improve electoral competition and curb hyperpolarization. Galston and Dionne assert that the addition of less partisan voters in the electorate, would force candidates to shift their focus from mobilizing partisan bases to persuading moderates and less committed voters. Reducing partisan rhetoric would help ease polarization and increase prospects for compromise.. Rather than focusing on symbolic, political gestures, Washington might have an incentive to tackle serious issues and solve problems.

Galston and Dionne believe that American democracy cannot be strong if citizenship is weak. And right now, they contend citizenship is strong on rights but weak on responsibilities. Making voting universal would begin to right this balance and send an important message: we all have the duty to help shape the country that has given us so much.

Galston and Dionne recognize that the majority of Americans are far from ready to endorse universal voting. By advancing a proposal that stands outside the perimeter of what the majority of Americans are likely to support, Galston and Dionne aim to enrich public debate—in the short term, by advancing the cause of more modest reforms that would increase participation; in the long term, by expanding public understanding of institutional remedies to political dysfunction. 

Downloads

• Download the paper

Audio

• Dionne and Galston discuss their paper on universal voting

In a new research paper—The case for universal voting: Why making voting a duty would enhance our elections and improve our government—Brookings scholars E.J. Dionne, Jr. and William Galston make the case for universal voting—an electoral system in which voting would be regarded as a required, civic duty. Why not treat showing up at the polls in the same way we treat, say, a jury summons? Dionne and Galston argue that universal voting’s benefits would include enhancing the legitimacy of our governing institutions, increasing turnout and the diversity of the American voter base, and easing the intense partisan polarization that weakens our governing capacity.

What do you think of Dionne and Galston’s proposal? Specifically, if voting and registration rules were made easier, should voting in national elections be universal and mandatory for all eligible citizens?

To voice your opinion, click the image below and vote. We will share the results on social media.

One of the foundational notions of digital financial services has been the distinction between payment rails and services running on the rails. This is a logical distinction to make, one easily understood by engineers who tend to think in terms of hierarchies (or stacks) of functionalities, capabilities, and protocols that need to be brought together. But this distinction makes less sense when it is taken to represent a logical temporal sequencing of those layers.

It is not too much of a caricature to portray the argument —and, alas, much common practice— like this: I’ll first build a state-of-the art digital payments platform, and then I’ll secure a great agent network to acquire customers and offer them cash services. Once I have mastered all that, then I’ll focus on bringing new services to delight more of my customers. The result is that research on customer preferences gets postponed, and product design projects are outsourced to external consultants who run innovation projects in a way that is disconnected from the rest of the business.

This mindset is understandable given limited organizational, financial and human resource capabilities. But the problem with such narrow sequencing is that all these elements reinforce each other. Without adequate services (a.k.a. customer proposition), the rails will not bed down (a.k.a. no business case for the provider or the agents). In businesses such as digital payments that exhibit strong network effects, it’s a race to reach a critical mass of users. You need to drive the entire stack to get there, as quickly as possible. Unless, you develop a killer app early on, as M-PESA seems to have done with the send money home use case in the Kenyan environment.

It is tough for any organization to advance on all these fronts simultaneously. Only superhero organizations can get this complex job done. I have argued in a previous post that the piece that needs to be parceled off is not the service creation but rather cash management: that can be handled by independently licensed organizations working at arms length from the digital rails-and-products providers.

What are payment rails?

Payment rails are a collection of capabilities that allow value to be passed around digitally. This could include sending money home, paying for a good or a bill, pushing money into my or someone else’s savings account, funding a withdrawal at an agent, or repaying a loan. The first set of capabilities relates to identity: being able to establish you are the rightful owner of the funds in your account, and to designate the intended recipient in a money transfer. The second set of capabilities relates to the accounting or ledger system: keeping track of balances held and owed, and authorizing transactions when there are sufficient funds per the account rules. The third set of capabilities relates to messaging: collecting the necessary transaction details from the payment initiator, conveying that information securely to the authorizing entity, and providing confirmations.

Only the third piece has been transformed by the rise of mobile phones: we now have an increasingly inclusive and ubiquitous real-time messaging fabric. Impressive as that is, this messaging capability is still linked to legacy approaches on identity and accounting. Which is why mobile money is still more an evolution than a revolution in the quest for financial inclusion.

The keepers of the accounts —traditionally, the banks— are, of course, the guardians of the system’s choke points. There is now recognition in financial inclusion circles that to expand access to finance it is not enough to proliferate the world with mobile phones and agents: you need to increase the number and type of account keepers, under the guise of mobile money operators, e-money issuers or payment banks. But that doesn’t change the fundamental dynamics, which is that there still are choke point guardians who need to be convinced that there is a business case in order to invest in marketing to poor people, that there are opportunities to innovate to meet their needs, and that perhaps all players can be better off if only they interoperated. A true transformation would be to open up these ledgers, so anyone can check the validity of any transaction and write them into the ledger.

That’s what crypto-currencies are after: decentralizing the accounting and transaction authorization piece, much in the same way as mobile phones have decentralized the transaction origination piece. Banks seek to protect the integrity of their accounting and authorizations systems —and hence their role as arbiters of financial transactions— by hiding them behind huge IT walls; crypto-currencies such as Bitcoin and Ripple do the opposite: they use sophisticated protocols to create a shared consensus for all to see and use.

The other set of capabilities in the digital rails, identity, is also still in the dark ages. Let me convince you of that through a personal experience. My wallet was stolen recently, and it contained my credit card. I can understand the bank wanting to know my name, but why is the bank announcing my name to the thief by printing it on the credit card, thereby making it easier for him to impersonate me? The reason is, of course, that the bank wants merchants to be able to cross check the name on the card with a piece of customer ID. But as you can imagine, my national ID got stolen along with my credit card, and because of that the thief knows not only my name but also my address. That was an issue because I also kept a key to my house in the wallet. None of this makes sense: why are these “trusted” institutions subverting my sense of personal security, not to mention privacy?

The problem is that the current financial regulatory framework is premised on a direct binding of every transaction to my full legal identity. As David Porteous and I argue in a recent paper, what we need is a more nuanced digital identity system that allows me to present different personas to different identity-requesting entities and choose precisely which attributes of myself get revealed in each case, while still allowing the authorities to trace the identity unequivocally back to me in case I break the law.

The much-celebrated success of mobile money has so far really only transformed one third (messaging) of one half (payment rails) of the financial inclusion agenda. We ain’t seen nothin’ yet.

An American drone strike that killed leader of the Afghan Taliban Mullah Akhtar Mohammed Mansour may seem like a fillip for the United States’ ally, the embattled government of Afghanistan’s President Ashraf Ghani. But as Vanda Felbab-Brown writes in a new op-ed for The New York Times, it is unlikely to improve Kabul’s immediate national security problems—and may create more difficulties than it solves.

The White House has argued that because Mansour became opposed to peace talks with the Afghan government, removing him became necessary to facilitate new talks. Yet, as Vanda writes in the op-ed, “the notion that the United States can drone-strike its way through the leadership of the Afghan Taliban until it finds an acceptable interlocutor seems optimistic, at best.”

[T]he notion that the United States can drone-strike its way through the leadership of the Afghan Taliban until it finds an acceptable interlocutor seems optimistic, at best.

Mullah Mansour's death does not inevitably translate into substantial weakening of the Taliban's operational capacity or a reprieve from what is shaping up to be a bloody summer in Afghanistan. Any fragmentation of the Taliban to come does not ipso facto imply stronger Afghan security forces or a reduction of violent conflict. Even if Mansour's demise eventually turns out to be an inflection point in the conflict and the Taliban does seriously fragment, such an outcome may only add complexity to the conflict. A lot of other factors, including crucially Afghan politics, influence the capacity of the Afghan security forces and their battlefield performance.

Nor will Mansour’s death motivate the Taliban to start negotiating. That did not happen when it was revealed last July’s the group’s previous leader and founder, Mullah Mohammad Omar, had died in 2013. To the contrary, the Taliban’s subsequent military push has been its strongest in a decade—with its most violent faction, the Haqqani network, striking the heart of Kabul. Mansour had empowered the violent Haqqanis following Omar’s death as a means to reconsolidate the Taliban, and their continued presence portends future violence. Mansour's successor, Mawlawi Haibatullah Akhundzada, the Taliban’s former minister of justice who loved to issue execution orders, is unlikely to be in a position to negotiate (if he even wants to) for a considerable time as he seeks to gain control and create legitimacy within the movement.

The United States has sent a strong signal to Pakistan, which continues to deny the presence of the Afghan Taliban and the Haqqani network within its borders. Motivated by a fear of provoking the groups against itself, Pakistan continues to show no willingness to take them on, despite the conditions on U.S. aid.

Disrupting the group’s leadership by drone-strike decapitation is tempting militarily. But it can be too blunt an instrument, since negotiations and reconciliation ultimately depend on political processes. In decapitation targeting, the U.S. leadership must think critically about whether the likely successor will be better or worse for the counterinsurgency endgame.

Please note that this Engelberg Center for Health Care Reform Health Policy Issue Brief first appeared in the Health Affairs Blog on July 31, 2014. Click here for the Health Affairs Blog version.

Abstract

Individual patient expanded access is a process by which patients can obtain investigational drugs that have not been approved by the Food and Drug Administration (FDA) outside of a clinical trial setting from biopharmaceutical companies when no other alternative therapy is available. Currently, no industry-wide structural principles exist to help companies navigate this process while balancing the needs of getting a drug to the market as quickly as possible with providing potentially life-saving treatment to individual patients. The Engelberg Center convened a stakeholder group to identify common themes and identify common principles related to expanded access, as none currently exist. The result was 4 A’s - Anticipation, Accessibility, Accountability, and Analysis – to help assist patients, providers, and companies with expanded access. Process and capacity building recommendations for the FDA also were proposed to assist companies with sustaining expanded access programs.

Call to Action: The Importance of Expanded Access Programs

Individual patient expanded access, sometimes termed “compassionate use,” refers to situations where access to a drug still in the development process is granted to patients on a case-by-case basis outside of a clinical trial, prior to completion of mandated clinical trials and approval by the Food and Drug Administration (FDA). This typically involves filing a single patient or emergency investigational new drug (IND) request with the Food and Drug Administration and voluntary release of the drug by the manufacturer. Generally, the following criteria must be met: there is reasonable expectation of meaningful benefit despite the absence of definitive clinical trial data, the patient has a serious or life-threatening condition, there are no comparable or satisfactory treatment alternatives, and there are no suitable clinical trials for the drug available to the patient. This form of expanded access, which is the focus of this paper, is different from the situation in which a drug is discharged to a large group of needy patients in the interval between successful phase 3 trials and presumed FDA approval, a strategy often termed a “treatment” IND or protocol, which was initially used in the 1980s for releasing zidovudine to patients with acquired immune deficiency syndrome.

The Engelberg Center for Health Care Reform at the Brookings Institution recently invited senior leaders from several pharmaceutical companies, two bioethicists, a senior FDA representative, and a patient advocate to share experiences and discuss organizational strategies related to expanded access (see acknowledgements). A driving factor for this meeting was a recent flurry of highly public cases of desperate patients seeking access to experimental drugs, which lead to social media campaigns and media coverage. Such cases included 7-year-old Josh Hardy (brincidofovir from Chimerix for disseminated adenovirus infection), 45-year-old Andrea Sloan (BMN673 from BioMarin for ovarian cancer), 41-year-old Nick Auden (pembrolizumab from Merck for melanoma), and 6-year-old Jack Fowler (intrathecal idursulfase from Shire for Hunter Syndrome). Expanded access requests to the FDA for new patients are increasing, from 1,000 patients nationwide in 2010 to more than 1,200 in 2012.[i] (This is likely an underestimate, since it does not include appeals made directly to companies.)

In the wake of these events, it became clear that many biopharmaceutical companies had varying experiences and policies related to such access. From the domestic regulatory standpoint, the FDA revised its expanded access regulations in 2009, which define criteria that must be met to authorize expanded access, list requirements for expanded access submissions, describe safeguards that will protect patients, and preserve the ability to develop meaningful data about the use of the drug. Biopharmaceutical companies typically face a complex global environment in which legal and regulatory frameworks can differ substantially. At the meeting, a senior FDA representative indicated the agency has approved over 99 percent of expanded access requests submitted via single patient or emergency INDs since 2009, suggesting the regulatory agency is not a major barrier to expanded access. As such, provided the access request is reasonably related to the potential benefits of the drug, the biopharmaceutical company is almost solely responsible for the decision and liability regarding whether to grant expanded access to an individual. Still, the public belief persists that the FDA is the main bottleneck that restricts access. In April 2014, Representative Morgan Griffith (R-VA) proposed H.R. 4475, The Compassionate Freedom of Choice Act of 2014, designed to restrict the FDA’s ability to prevent the use of investigational drugs in terminally ill patients. Similarly, some states have passed “Right to Try” legislation to reduce FDA oversight, but contains no requirement that companies must make drugs available.[ii]

The goal of our meeting was to identify common themes and possibly broad outlines to suggest industry-wide policies related to expanded access, as none currently exist. The group first discussed background issues related to expanded access and agreed on definitions. The meeting then focused on three topics. First, the group participants who play key roles in evaluating expanded access requests were invited to share narrative experiences in specific clinical cases, in an effort to lay the groundwork for trust and open discussion. Second, the group was asked to identify internal industry-specific structural barriers, such as the existence of clear procedures or tracking mechanisms within companies to handle requests. Finally, the participants reflected on situations in which expanded access may not be appropriate, or where regulatory barriers or liability concerns may hinder expanded access. This paper reflects the authors’ observations and assessment of the internal and external landscape, based upon information provided by the meeting participants.

Laying the Groundwork with Shared Experiences

The FDA allows companies to provide drugs and charge individual patients that do not meet the enrollment criteria for clinical trials geared towards regulatory approval through expanded access programs.[iii] These programs are meant to provide the drug directly to treat the patient’s condition, rather than having the primary goal of collecting efficacy or detailed safety data in support of approval. Before 1987, the FDA lacked formal recognition of expanded access, although investigational drugs were provided informally.[iv] Since then, the FDA has instituted novel classes of individual INDs so that a company sponsor or licensed physician can legally obtain treatment access from the FDA to provide a drug while it is still in the approval process.[v] Essentially, this provides companies a legal exception from the law to ship unapproved drugs across state lines, and if they desire, to charge for them. These INDs are designed solely for the potential benefit of desperate patients and not intended to formally collect safety or efficacy data that could potentially inform a regulatory decision, but can have regulatory impact, nonetheless.

At the outset, several participants objected to the term “compassionate use,” since it introduces inherent value decisions, can emotionally charge discussions, and does not recognize that there may be valid and ethically appropriate reasons for denial. The generally agreed upon term “expanded access,” is used throughout this paper. (One participant suggested the term “early access.”) Ideally, the term would make it obvious that this is access to an unapproved drug, in order to temper expectations of favorable results. Somewhat confusingly, the FDA uses the terms “expanded access,” “access,” and “treatment use” interchangeably to refer to the use of a drug, and of which none clearly identify the stage of development.[vi]

Participants shared numerous examples of requests for expanded access and explained that their companies handle anywhere from a handful to several hundred requests per year. The following selected stories illustrate the wide range of experiences and situations that companies encounter when navigating the complex decisions involved in administering an expanded access program. Several other examples were discussed and the specific participants expressed that they would be willing to share these particular examples publicly.

Chimerix, a 54-employee company based in Durham, North Carolina, is developing the drug brincidofovir and previously had created an intermediate expanded access protocol for the drug (CMX001-350) as encouraged by the FDA following over 200 emergency INDs granted for access to brincidofovir.[vii] One such case was for an armed services member with previously undiagnosed acute myelogenous leukemia who developed life-threatening vaccinia infection following smallpox vaccination in 2009.[viii] The patient received the drug from Chimerix through an emergency IND. After two years, the company had not secured FDA approval for the drug and eliminated expanded access in February 2012 in order to focus on studies which would inform a regulatory decision. In March 2014, Chimerix originally rejected an emergency IND request for 7-year old, Josh Hardy, who was critically ill from disseminated adenovirus infection after bone marrow transplantation. A highly public social media campaign targeted the company in the wake of this decision, and the experience was traumatizing for many of the employees. Following discussion with the FDA, Chimerix initiated a new clinical trial for the treatment of adenovirus infection in order to collect safety and efficacy data to support an NDA submission. Hardy was the first patient enrolled in the clinical trial, and his family reported through several media outlets that he recovered from the adenovirus infection and was discharged home.

One biopharmaceutical company representative described receiving a middle-of-the-night telephone call directly at home, with an emergent, time-sensitive request for an experimental therapy for a critically ill child with a rare acute disease in a foreign pediatric intensive care unit, where regulatory standards were different from those in the U.S. The ideal pediatric dosage was unknown, and only limited safety data and clinical details were available. Urgent efforts were made to gather more information and the request was approved, but despite these efforts the patient did not survive.

Bristol-Myers Squibb began a clinical trial for a cancer drug several years ago.[ix] A woman with pancreatic cancer enrolled in the trial and saw that her tumor was no longer growing. After the 3.5 year trial, the study closed because the drug was deemed ineffective for all other patients and was not approved for further development. However, the company continued to provide the drug for the one woman for whom the drug was effective through a single patient IND for an additional 9 years.

To demonstrate the volume of expanded access requests, one participant showed several messages on his mobile device during the half-day discussion, directly from patients who had located his email addresses through on-line searches, to plead for expanded access to an anticancer therapy.

Development of Structural Principles: The Four A's 

Broadly, no specific industry-wide consensus on expanded access procedures exists. As a result, there is significant variation in company policies and procedures. During this phase of discussion, participants shared their own company strategies and suggested possible areas of consensus that might form the basis for shared principles and industry-wide practices. These suggestions fell into four categories, which we termed the 4 “A’s”: Anticipation, Accessibility, Accountability, and Analysis (see Figure 1).

First, the group agreed that large and small companies should anticipate the need for and creation of expanded access programs when developing drugs expected to generate expanded access requests and as part of the drug development plan. This is particularly important for drugs that might be considered for priority or breakthrough designation during FDA approval. In these cases, companies should strongly consider developing a written expanded use policy with clear guidelines for inclusion and exclusion, which would also feature a defined review process, clear decision making criteria, and a defined time frame for response to requests. This also allows companies to plan for the demands that may be placed on their supply chain and staff resources to ensure sufficient supply for investigational and expanded use purposes. Identifying a decision maker within each company and for each disease area/product will also help patients or physicians reach the appropriate contact when requesting a drug, as well as assist the company in gaining expertise in responding to these requests. For example, one large company identifies one point of contact for all expanded access requests regarding each product and posts that individual’s contact information on the website.

In the early stages of drug development, supplies of investigational drugs are extremely limited. This is often because the technically-challenging process of optimizing drug product manufacture takes a considerable amount of time. Low yielding manufacture batches are not uncommon at the early phases of research. Some companies do not approve expanded access requests because they do not have enough of the drug in stock to supply these external requests and meet the needs of investigational study patients and individuals participating in clinical trials, an issue which may be particularly acute for biologics. Smaller companies may have more resource constraints, such as inadequate staff to manage requests or supply chain and logistics issues. One representative suggested that if a company had early transparency from regulators about the final numbers of subjects they would be willing to accept to achieve drug development milestones, it would make it much easier for the company to feel less reservation about its drug supply. (It may be beneficial for companies to analyze their financial ability to provide drugs potentially at no cost or when there is not a large enough supply, ideally in a transparent manner.)

Once an expanded access policy is anticipated and developed, the second key principle the group identified was making the policy accessible to all individuals who may qualify. First, for patients, with guidance from their treating physician, the company making the drug should always steer the patient to enter a clinical trial (if they meet eligibility criteria). If the contacted company cannot accommodate the patient, they should steer them to other open trials if possible, even if sponsored by another company. Many of our participants noted that this already occurs.

The group was particularly cognizant of the disparity in access to drug companies and their expanded access programs: patients with savvy social media strategies are more likely to succeed in navigating across organizational constraints than without similar sophistication. The group believes that increased accessibility would assist in making opportunities for expanded access more equitable. In addition, these policies could help educate patients and physicians about submitting legitimate expanded access requests and help decrease the costs of reviewing inappropriate requests on the company (for example, if there are other proven therapies or the situation is not life threatening).

If the patient is ineligible for a trial, the patient should be able to easily access the written expanded access policy online. For example, both large and small companies like Pfizer, Bristol-Myers Squibb, Shire, and Merck post their expanded access policies on their websites, though the terminology may in some cases be complex. In addition, Janssen has developed a video explaining their policies in non-technical terms. Ideally, such policies should be available in some web based or public facing platform to both patients and physicians and written in a clear manner that is jargon free and accessible to individuals at various education levels. Most participants felt strongly that requests for expanded access should originate from a medical provider, not from a patient, since expertise is needed to first screen appropriate candidates. This is consistent with current FDA regulations for an IND, in which a physician or qualified medical expert must sponsor an IND or serve as an investigator under an existing IND for expanded access.

Third, companies should have accountability to the requesting party for expanded use requests that they receive and review them within a specified, transparent amount of time. If the request could not be approved, the company should consider clear communication and provide an explanation of why the request was turned down. In these cases, some participants suggested that the company might also consider instituting an appeals process by which a patient can receive an additional review if not approved, potentially from a non-binding third party such as an independent, multidisciplinary body or a regulatory agency like the FDA. (Two participants, however, were uncomfortable with any third party review.)

The final principle would encourage companies to release timely analysis of data from expanded access patients. In addition to tracking communication, companies should keep a database of the number of requests and outcomes, in a manner that doesn’t slow getting drugs to needy patients rapidly. One company refined its internal tracking tools to determine who was requesting drugs, for what conditions, and where they lived. Where possible, companies might be encouraged to share anecdotal or preliminary safety or efficacy data from expanded access in peer-reviewed or other refereed venues in a prudent time frame following collections, if this is available or known. This is not always possible, because emergency INDs do not require provision of safety or outcome data to the company.

There are several challenges associated with operationalizing this in the current model, namely the appropriateness of anecdotal data, the level of detailed safety and efficacy data currently available through expanded access, suitability for publication, and funding for these activities in the current budget climate. One potential approach to address this is funding from federal or state regulatory agencies or payers for the reasonable costs of follow-up and reporting outcomes.

Regulatory Considerations

The participants then discussed the types of risks, including regulatory and financial, that may affect companies’ expanded access policies. When a company is considering expanded access requests, they consider the risks-benefits of providing the drug outside of a clinical trial as well as the potential for any regulatory issues in an era of litigation and an increased threshold for demonstration of safety. While a company’s provision of a drug for expanded access is voluntary, the FDA does require the company to collect and report safety data. Notably, none of the representatives felt that the FDA is a major regulatory barrier to processing and approving expanded access requests once the sponsor has reviewed the request, assessed the benefit-risk, and determined the request meets FDA requirements and evidentiary standards. In addition, the attendees felt that adverse effects and related liability risk were not of particular concern given that the drugs are assessed on a risk-benefit analysis.

However, companies that make drugs in particularly limited markets with small numbers of patients (for example, for unusual diseases with less than 200,000 patients nationwide which may justify a special designation called “orphan status”) may be more concerned about restrictive labeling if an unusual adverse event occurred even in one or two patients during expanded access of an orphan or small market therapy. However, there is no data of which participants were aware and no public reports that an adverse event during expanded access has harmed regulatory approval.[x] The group opinion was that that safety data would be available eventually in any event and an FDA “safe harbor” provision would not necessarily affect companies’ willingness to accept more requests for expanded access. A final concern was that there is no regulatory mechanism to consider data from expanded access in the evidence generation process for approval.

An Expanded Role for the FDA

While the FDA may not serve as a strong barrier to expanded access, the group considered strategies to promote equitable and fair access. For example, some argued that the breakthrough or priority review categories for FDA review might identify products that could have high potential for expanded access requests. This designation expedites “the development and review of drugs for serious or life-threatening conditions.”[xi] As of mid-April 2014, the FDA had received nearly 180 requests for breakthrough designation, with 44 requests granted.[xii] By hastening the drug development process, the FDA has already begun to bring drugs that have a reasonable expectation of benefit to the market faster. In order to receive breakthrough therapy designation, current legislation might be amended so companies could be asked to provide evidence that the 4 A’s are being followed in some capacity.

The FDA might also assist companies in establishing expanded access programs during open clinical trials in two main areas: process and capacity building. First, in terms of process, the FDA could be asked to create a defined path for regulatory approval with provisions that would encourage companies, both large and small, to include plans for expanded access programs when developing a drug. While FDA’s draft guidance related to INDs notes that larger expanded access programs could threaten enrollment in clinical trials,[xiii] and some participants agreed that this was a significant issue, not all companies have had difficulties enrolling patients in both clinical trials and expanded access programs. For example, one large pharmaceutical company left a Phase 1 clinical trial open for a promising therapy while concurrently enrolling individuals who didn’t qualify for open clinical trials into an expanded access program, without appreciable leakage of enrollees in their advanced phase trials that might affect the key development pathway.

Second, the FDA could support convening around capacity building and sharing best practices with companies. With the understanding that there are many small biotechnology or pharmaceutical companies with limited budgets and staff, the FDA could foster a partnership of large and small companies. This partnership could be achieved by convening meetings where companies share their experiences in creating and sustaining expanded access programs. This could be supported by creating a database for these shared ideas, as well as any expanded access data that can be made legally available, such as how many requests are granted or patient outcomes.

To ensure equitable, consistent, and transparent review of requests, some companies suggested the use of an impartial external advisory board. Similar to an unbiased review from an institutional review board (IRB), this committee could have an advisory or decision making function. Companies with supply constraints may feel that if they cannot give the drug to everyone who requests it, then they should give it to no one. This committee could help the company triage the patients who would benefit the most, and would be protected from liability.

Next Steps

The most efficient and equitable way to make new effective treatments to the largest number of needy patients is regulatory approval, accelerated or otherwise, following successful demonstration of efficacy and safety for a given indication in a specific population. Until that process is complete, access to an experimental therapy is by definition an additional risk, as the agreed necessary safety and efficacy have not yet been demonstrated. True informed consent in this setting is difficult to obtain (i.e. studies have shown that severely ill patients, such as those with life-threating circumstances requesting expanded access, had less retention of information discussed in the informed-consent process and less-clear understanding of the risks of therapy compared to healthier patients[xiv]).

One position companies and regulators can consider is that the default answer to expanded access requests should be affirmative, unless there are compelling reasons for not approving requests to patients with life-threatening illnesses. (Such reasons, for example, might include limited treatment supply or lack of reasonable expectation of benefits versus risks.) Such a position would require, however, that there be broader industry, clinician, regulatory, and patient advocacy agreement of shared principles. This paper outlines the experiences, structural principles, and regulatory considerations of a small group, but further meetings may convene a broader group of stakeholders to build upon these concepts. Such consensus-based approaches might lead to durable systems that meet the needs of desperate patients who have run out of options—while allowing innovation to continue to benefit those who may come afterwards.

Acknowledgements: We are grateful for the participation of the following representatives in the roundtable: Jeff Allen (Friends of Cancer Research), Michelle Berrey (Chimerix), Renzo Canetta (Bristol-Myers Squibb), Anne Cropp (Pfizer), Joseph Eid (Merck), Aaron Kesselheim (Harvard Medical School), Howard Mayer (Shire), Jeffrey Murray (FDA), Lilli Petruzzelli (Novartis), Amrit Ray (Janssen), and Robert Truog (Harvard Medical School). We thank Mark McClellan (Brookings Institution) for helpful discussions of this topic and comments on the manuscript, and to the Richard Merkin Foundation for support. The views and opinions expressed in this article were interpreted and organized by the staff of the Brookings Institution. They do not necessarily reflect the official policy or position of any individual roundtable representative, their companies, or their employers.

References

Downloads

• The Four A's of Expanded Patient Access

Increasingly, many Marylanders are unprepared for retirement.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Downloads

• Download the full report

Community colleges are a vital part of America’s opportunity structure, not least because they often provide a way into higher education for adults from less advantaged backgrounds. Each year there are around 10 million undergraduates enrolled at public, two-year colleges. Among first-generation students, nearly 38 percent attend community colleges, compared to 20 percent of students with college-educated parents.

Credentials from community colleges—whether short vocational courses or two-year associate degrees—can be valuable in the labor market. In theory, community colleges also provide an on-ramp for those seeking a bachelor’s degree; in fact, four out of five students enrolling intend to get a 4-year degree.

But the potential of community college is often unrealized. Many students are not ready. Quality varies. Pathways are often unclear and/or complex. Only about 40 percent of those enrolling earn a degree within six years. Just 15 percent acquire a 4-year degree, according to analyses by Doug Shapiro and Afet Dundar at the National Student Clearinghouse Research Center.

Transfers rates from community college vary dramatically by state

The degree of alignment and integration between community and four-year colleges is much greater in some states than others. Some use common course numbering for 2- and 4-year institutions, which helps students find the classes they need without racking up costly excess credits. In others, universities and community colleges have tried to align their curriculum to ensure that students’ transfer credits will be accepted.

Individual institutions like Queensborough College (part of the CUNY system) and Miami-Dade College have streamlined course sequences to help their students stay on track to transfer into 4-year schools, as Thomas Bailey, Shanna Jaggers, and Davis Jenkins describe in their book, Redesigning America’s Community Colleges. There’s some indirect evidence that these initiatives increased retention and graduation rates.

These policy differences help to explain the very different stories of transfer rates in different states, revealed in a recent study by Davis Jenkins and John Fink. One important measure is the proportion of students transferring out of community college with a certificate or associate degree already in hand:

Florida tops the list, partly because of state legislation requiring that community colleges grant eligible transfer students degrees—but also because of concerted investments at the state and institutional levels to improve 2-year institutions.

Another measure of success is the proportion of those who transfer ending up with a four-year degree. Again, there are significant variations between states:

Since community colleges serve so many more students from poor backgrounds, the importance of the transfer pathway for social mobility is clear. Many who struggle at high school may begin to flourish in the first year or two of post-secondary education. As their skills are upgraded, so their opportunities should widen. But too often they become trapped in the silos of post-secondary education. We should continue to support efforts like pathway programs that explicitly attempt to build bridges between community colleges and high-quality four year institutions through the creation of clear and consistent major-specific program maps. Such programs allow students starting out at community colleges to easily chart out the specific, clear, and coherent set of steps needed to eventually finish their post-secondary education with a four-year degree.

Tuning an American engine of social mobility

The mission of community colleges since their inception a century ago has been to broaden access to education. Today that means providing a solid education to all students, but also providing opportunities to move on to other institutions.

Britain’s Conservative Party just tore itself apart over the EU referendum; David Cameron was forced to resign as prime minister. Yet the party in meltdown is Labour. Polling out this past weekend shows Labour drawing 31%, vs. 37% for Conservatives, if a general election were held tomorrow.

The Conservative Party, showing once again its extraordinary capacity for self-preservation, is closing ranks behind new Prime Minister Theresa May. Still, how can the Tories be riding so high after such a political omnishambles? One doesn’t have to look far for an answer: the hard-left Labour leader, Jeremy Corbyn.

Asked who is or would be the best prime minister, just 16% of British voters give Mr. Corbyn the thumbs-up, compared with 52% for Ms. May. Fewer than half of Labour supporters (48%) think Mr. Corbyn would be the best PM. In her first outing in the House of Commons, Ms. May easily trounced Mr. Corbyn. (Her performance was described by the left-leaning Guardian newspaper as a “brutally brilliant” debut.) No wonder most of his parliamentary colleagues have abandoned him, forcing a leadership contest.

Again, the Conservative Party has just presided over an amateurish, disastrous session of British political history. That Tories still dominate is less about their strength than their political opponents’ weakness.

So: What will happen? I’ve just been in London, and conversations with political insiders suggest that this is the most likely scenario to play out:

First, Jeremy Corbyn, having attracted many left-wingers onto party rolls, fends off challenger Owen Smith to retain the leadership of the Labour Party.

Next, the majority of Labour MPs set themselves up as a separate parliamentary group.

As the second-largest group in parliament, these MPs would become the official opposition. They could call themselves anything–say, New Labour Party. (Read this excellent summary of the constitutional implications by Meg Russell of the University College London). This means money and status. If the anti-Corbyn MPs can’t get a new leader, they’ll get a new party.

In the meantime, a few remaining anti-Corbyn MPs stay behind and try to recapture their party. The key here, for those interested in the details, is to take control of Unite, the U.K.’s largest trade union. (Unite’s leader, Len McCluskey, is a strong supporter of Mr. Corbyn and has rallied the union’s members behind him, but his term ends soon.)

If the Labour Party, reduced to a parliamentary rump, remains in Mr. Corbyn’s hands, the next general election would be the moment when the split becomes formal. The New Labour Party would try to attract Liberal Democrat and Green supporters, as well as pro-European conservatives.

Theresa May is likely to wait until the next scheduled general election, in 2020, to face voters. But if Labour were to split, she might decide to call a snap general election to take advantage of opponents’ disarray. Either way, it seems likely the Tories would win.

Center-left parties across the globe seem to be struggling to connect with the anxieties of ordinary voters, leaving them at the mercy of populist appeals. Between populist surges and volatile electorates, we are seeing destabilizing forces at work in politics. Strong political parties act as stabilizers in stormy waters. Whatever one’s individual politics, the fate of the Labour Party in Britain, and perhaps the Republican Party in the U.S., should concern us all.

Editor's note: This piece originally appeared in The Wall Street Journal. 

In partnership with the ESADE Business School and the City of Barcelona, the Metropolitan Policy Program planned and participated in three intensive days of learning in Barcelona in June 2011.  The focus of the session was to look at examples of strategies Barcelona, Spain and its greater metropolitan region is embracing to rebuild and re-invent their economies.  The goal is to share innovative ideas with U.S. metros engaged in similar initiatives as they face the challenge of moving to a new economic growth model.

This paper features brief synopses of the tours and meetings held with the City of Barcelona and the Catalonia Region on their economic development strategies.

Specific strategies include:

Barcelona Activa »

Click on any image below for a larger version

Downloads

• Download the Full Paper

Community banks play a key role in their local communities by offering traditional banking services to households and lending to nearby small businesses in the commercial, agriculture, and real estate sectors. Because of their close relationship with small businesses, they drive an important segment of economic growth. In fact, compared to all other banks (and to credit unions), small banks devote the greatest share of their assets to small business loans.

In this paper, titled "The community banks: The evolution of the financial sector, Part III," (PDF) Baily and Montalbano examine the evolution of community banks before, through, and after the financial crisis to assess their recovery.

The authors find that despite concerns about the long-term survival of community banks due a decline in the number of banks and increased Dodd-Frank regulations, they continue to recover from the financial crisis and are in fact out-performing the Big Four banks in several key measures.

Although the number of community banks has been steadily declining since before 2003, most of the decline has come from the steep drop in the smallest banking organizations—those with total consolidated assets of less than $100 million. Community banks with total consolidated assets that exceed $300 million have in fact increased in number. Most of the decline in community banks can be attributed to the lack of entry into commercial banking.

In a previous paper, Baily and Montalbano showed that the gap in loans and leases among the Big Four has widened since the financial crisis, but the new research finds that community banks seem to be returning to their pre-crisis pattern, although slowly, with the gap between deposits and loans shrinking since 2011. While total deposits grew gradually after 2011, though at a pace slower than their pre-crisis rate, loans and leases bottomed out in 2011 at $1.219 trillion.

The authors also examine community banks' return on assets (ROA), finding it was lower overall than for the Big Four or for the regionals, and has come back to a level closer to the pre-crisis level than was the case for the larger banks. The level of profitability was slightly lower for community banks in 2003 than it was for the larger banks—about 1.1 percent compared to 1.7 percent for the regional banks—but it did not dip as low, reaching a bottom of about -0.1 percent compared to -0.8 percent for the regional banks.

Baily and Montalbano also find that total assets of the community banks increased 22.5 percent (adjusted for inflation, the increase was 7 percent); the average size of community banks has increased substantially; total bank liabilities grew steadily from 2003-2014; the composition of liabilities in post-crisis years looked largely similar to the composition in the pre-crisis years; and securitization—which plays a relatively small role in the community banking model—has been steadily increasing in the time period both before and after the crisis. 

To read more, download the full paper here.

The paper is the third in a series that examines how the financial sector has evolved over the periods both before and after the financial crisis of 2007-2008. The first paper examines the Big Four banks, and the second takes a closer look at regional banks.

Downloads

• Download "The community banks: The evolution of the financial sector, Part III"

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

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

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

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

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

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

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

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

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

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