The Earned Income Tax Credit (EITC) provides a refundable tax credit to lower-income working families. In 2011, the EITC reached 27.9 million tax filers at a total cost of $62.9 billion. Almost 20 percent of tax filers receive the EITC, and the average credit amount is $2,254 (IRS 2013). After expansions to the EITC in the late 1980s through the late 1990s—under Democrat and Republican administrations—the EITC now occupies a central place in the U.S. safety net. Based on the Census Bureau’s 2012 Supplemental Poverty Measure (SPM), the EITC keeps 6.5 million people, including 3.3 million children, out of poverty (Center on Budget and Policy Priorities [CBPP] 2014a). No other tax or transfer program prevents more children from living a life of poverty, and only Social Security keeps more people above poverty.

Since the EITC is only eligible to tax filers who work, the credit’s impact on poverty takes place through encouraging employment by ensuring greater pay after taxes. The empirical research shows that the tax credit translates into sizable and robust increases in employment (Eissa and Liebman 1996; Meyer and Rosenbaum 2000, 2001). Thus, the credit reduces poverty through two channels: the actual credit, and increases in family earnings. This dual feature gives the EITC a unique place in the U.S. safety net; in contrast, many other programs redistribute income while, at least to some degree, discouraging work. Importantly, transferring income while encouraging work makes the EITC an efficient and cost-effective policy for increasing the after-tax income of low-earning Americans. Yet a program of this size and impact could be more equitable in its reach. Under the current design of the EITC, childless earners and families with only one child, for instance, receive disproportionately lower refunds. 

In 2014, families with two children (three or more children) are eligible for a maximum credit of $5,460 ($6,143) compared to $3,305 for families with one child. Married couples, despite their larger family sizes, receive only modestly more-generous EITC benefits compared to single filers. Childless earners benefit little from the EITC, and have a maximum credit of only $496—less than 10 percent of the two-child credit. 

Prominent proposals seek to mitigate these inequalities. President Obama’s fiscal year 2015 budget includes an expansion of the childless EITC, a concept outlined by John Karl Scholz in 2007 in a proposal for The Hamilton Project. Notably, MDRC is currently evaluating Paycheck Plus, a pilot program for an expanded EITC for workers without dependent children, for the New York City Center for Economic Opportunity (MDRC 2014). The recent Hamilton Project proposal for a secondary-earner tax credit addresses the so-called EITC penalty for married couples (Kearney and Turner 2013). And the more generous EITC credit for three or more children was recently enacted as part of the American Recovery and Reinvestment Act of 2009, and is currently scheduled to sunset in 2017. 

Considering this broad set of EITC reforms, and recognizing the demonstrated effectiveness of the program as an antipoverty program with numerous benefits, this policy memo proposes an expansion for the largest group of  EITC recipients: families with one child. In particular, I propose to expand the one-child schedule to be on par with the two-child schedule, in equivalence scale-adjusted terms. An equivalence scale captures the cost of living for a household of a given size (and demographic composition) relative to the cost of living for a reference household of a single adult, and is a standard component in defining poverty thresholds. The proposal expands the maximum credit for one-child families to $4,641, from $3,305 under current law, an increase of about 40 percent. The expansion will lead to a roughly $1,000 increase in after-tax income for taxpayers in the bottom 40 percent of the income distribution receiving the higher credit. As this paper outlines, the expansion is justified on equity and efficiency grounds. This expansion is anchored in the equity principle in that the generosity of the credit should be proportional to the needs of families of differing sizes; I use the equivalence scale implicit in the poverty thresholds of the Census SPM as a guide for household needs. This proposal is also supported by efficiency principles given the EITC’s demonstrated success at raising labor supply among single mothers. 

The target population for the proposal is low-income working families with children. Implementing this proposal requires legislative action by the federal government; it is important to note that altering the EITC schedule requires a simple amendment to the tax code, and not a massive overhaul of our nation’s tax system. The revenue cost of the proposal derives from additional federal costs of the EITC, less the additional payroll and ordinary federal income taxes. The private benefits include increases in after-tax income and reductions in poverty. The proposal would also generate social benefits through the spillover effects that the increase in income plays in improving health and children’s cognitive skills (Dahl and Lochner 2012; Evans and Garthwaite 2014; Hoynes, Miller, and Simon forthcoming).

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• Building on the Success of the Earned Income Tax Credit - Full Text

      

British debates about welfare reform have often been influenced by American ideas. The Clinton-era welfare reforms were echoed in some of Tony Blair’s alterations to British benefits. Gordon Brown, as Chancellor, introduced a new Working Tax Credit as a direct result of studying the Earned Income Tax Credit. Brown particularly liked the political advantages of a ‘tax cut for hard-working families’, as opposed to a ‘benefit handout to welfare families’.

But now the transatlantic traffic in ideas on welfare is going the other way. The U.K.’s introduction of a single, unified system of transfer payments – the Universal Credit – is getting quite a bit of attention in the wonkier regions of D.C. politics. Paul Ryan, at a Brookings summit on social mobility, mentioned the Universal Credit (UC) as a possible inspiration for a new round of welfare reform. (Ryan is giving a speech at AEI in a couple of weeks: we’re likely to hear more about his thinking then.) When the architect of the UC, Iain Duncan Smith, visited D.C. recently, he held a series of meetings with leading Republicans to discuss his reforms.

The main attractions of the Universal Credit are fourfold:

1. Simplicity. By unifying five cash benefits and an ‘in kind’ benefit (Housing Benefit) into a single, monthly payment, the complexity of the system from the point of view of the recipient will be greatly reduced.
   
   
2. Cost control. Housing Benefit is paid directly to the landlord, which reduces the tenant’s incentive to control costs.  Add that to the crazily overheated U.K. housing market, and should come as no surprise that Housing Benefit has become a major strain on the system, quintupling in cost in real terms over the last two decades to hit £24 billion a year (c. $41bn), to become the second-biggest element of the U.K.’s system, after pensions.  By including an allowance for housing in the single cash payment in UC, the recipient will be incentivized to control their own housing costs.
    
3. Stronger work incentives. The UC has a flatter ‘taper’ than existing benefits, meaning that cash payments are reduced more slowly as earnings rise. In particular, the UC will allow benefit recipients to work part-time (less than 16 hours a week), and still keep claiming. On the downside, incentives for second earners in two-adult families will be reduced. 
   
   
4. Tighter and more targeted work requirements. The UC will contain stronger requirements to seek work than existing benefits, and importantly, has a ‘sliding scale’ of requirements, depending on the position of the recipient. For example, parents with children under the age of 1 will be exempt from work requirements; those with children aged between  1 and 5 will be obliged to attend for interviews with a case worker to prepare for a return to work; those with children at school will be required to ‘actively seek work’.

Sounds pretty good, doesn't it? And in fact it is, on paper at least. In practice the introduction of UC has been marked with huge overspend and delay on the required new IT system. The whole exercise has also been made much harder by cuts in many of the relevant cash benefits, as well as the introduction of a ‘household cap’ on total welfare receipts. The Universal Credit as an idea has a lot of support. As so often, it has been putting the idea a reality that has been difficult.

What—if anything—can the U.S. take from the UC? Short answer: not much. 

Many of the problems the UC addresses do not really apply in the U.S. Work incentives are already pretty strong in the U.S., thanks to the relative generosity of the EITC, and the relative meanness of out-of-work welfare supports. Also, there are already much stronger work requirements in the U.S. system. Some want to go further, and add work requirements to the receipt of food stamps, for example. But this would not require a major overhaul.  As Melissa Boteach and her colleagues at the Center for American Progress write,“the primary problem that the Universal Credit is supposed to address in the United Kingdom—the lack of incentive for jobless workers to enter the labor force—is far less of an issue in the United States”.

The UC also further centralizes an already highly centralized system, by getting rid of Housing Benefit, which is currently administered by Local Authorities. The U.S. system is much less centralized, with states and cities having a high degree of control over the way TANF and SNAP are administered. It is hard to see how anything like a UC could work in the U.S. at anything higher than State level. A Wisconsin Universal Credit makes sense in a way that a U.S. Universal Credit does not.  But if shifting towards block grants to states is really what this is about (see Marco Rubio’s ‘flex fund’ idea),that’s a whole different debate.

A final point. Simplicity and ease of use for the recipient is a key goal of the UC, and a worthy one. The stress and difficulties faced by low-income families just in applying for assistance is unacceptable in the 21st century. But it is not clear that the whole system has to be upended to achieve this goal. Technology ought to allow a single access point to the system, with the complexity out of sight of the user. 

In the U.K. the Universal Credit has a strong rationale, despite the implementation challenges. In the U.S., it is a solution in search of a problem. 

      

      

      

April 15 is tax day, but not many Americans will be lining up at the post office or logging onto TurboTax as midnight approaches. Taxpayers who receive refunds often file well ahead of the April 15 deadline. And according to new research, many of those refund dollars are already spent or spoken for.

Early filing is particularly common among taxpayers who claim the Earned Income Tax Credit (EITC), which supplements earnings for low-income workers and their families. EITC recipients often receive substantial refunds, especially in relation to their income. According to new data available through our EITC Interactive, nationwide 26.8 million taxpayers benefited from the EITC for the 2013 tax year, and they claimed a total of $64.7 billion from the credit. Combined with other credits and over-withholding these families received, the average refund for EITC filers topped $4,100 that year. As the accompanying map shows, that amount approached $4,500 or more in many southern states.

I thought of those large refunds while reading a fascinating new book by sociologist Kathryn Edin and her colleagues, titled, It’s Not Like I’m Poor: How Working Families Make Ends Meet in a Post-Welfare World. The book provides insights from in-depth interviews with 115 families with children in the Boston area who claimed the EITC. It examines their household budgets and how the families view and use the credit. The authors find that these families rely greatly on their tax refunds to close the gap between the wages they earn and the daily costs of living in an expensive region like Greater Boston. For some, a large tax refund also enabled them to purchase something normally confined to middle-class families, such as a special birthday present for a child or dinner out at a restaurant.

One of the authors’ central findings, however, was that EITC recipients bear a considerable amount of debt—95 percent of the families studied had debt of some kind. The most common (66%) was credit card debt, with the typical family owing nearly $2,000. Considerable shares of families also had utility, car, or student loan debt.

Their indebtedness was not surprising given that wages covered on average only about two-thirds of monthly expenditures. The authors classified one-quarter of families’ refund spending as dedicated to debt/bills, but other ways families  spend the money—such as repairing a car or paying ahead on bills—point to the lack of financial cushion EITC recipients endure throughout the year.

For the families Edin and colleagues studied, the average tax refund represented a staggering three months of earnings. Despite that, the authors report that many families expressed that they preferred the "windfall" versus receipt of payments over several months, partly because the lump sum held out the prospect of helping them save. But one has to wonder if the EITC, now routinely referred to as the nation's most effective anti-poverty policy, best supports families' financial security in this form, as its recipients fall further behind each month.

We should experiment with new ways of delivering EITC recipients' tax refunds that preserve some of its windfall aspect while also periodically delivering portions of the credit throughout the year. A small periodic payment pilot is underway in Chicago, and early findings suggest that advance payments of taxpayers' anticipated EITC helped them meet basic needs, pay off debt, and reduce financial stress relative to similar families not receiving such payments. It’s time to try making the EITC more than an annual boom in a bust-filled financial cycle for low-income families. 

       

Each year millions of low- to moderate-income Americans supplement their income by claiming the Earned Income Tax Credit (EITC) during tax season. Last year, 1 in 5 taxpayers claimed the credit and earned an average of nearly $2,400.

This tax season, some of those eligible for the EITC may also be able to claim, for the first time, a new credit created by the Affordable Care Act (ACA) to offset the cost of purchasing health insurance for lower-income Americans. It’s called the ACA premium tax credit.

To qualify for the ACA premium tax credit, filers need first to have an annual income that falls between 100 and 400 percent of the federal poverty line (between $11,670 and $46,680 for a single-person household in 2014). Beyond the income requirements, however, filers must also be ineligible for other public or private insurance options like Medicaid or an employer-provided plan.

Why the tax credit overlap matters

Identifying the Americans eligible for both credits is important because it sheds light on how many still need help paying for health insurance even after the ACA extended coverage options.

In a recent study of the EITC-eligible population, Elizabeth Kneebone, Jane R. Williams, and Natalie Holmes estimated what share of EITC-eligible filers might also qualify for the ACA premium tax credit this year.

Below, see a list of the top 10 states with the largest overlap between filers eligible for the EITC and those estimated to qualify for the ACA premium tax credit.* Notably, none of these states has expanded Medicaid coverage to low-income families after the passage of the ACA.

Nationally, an estimated 7.5 million people (4.2 million “tax units”) are likely eligible for both the ACA premium tax credit and the EITC. Nearly 1.3 million of those tax units are from the following ten states.

1. Florida

Overlap: 22.5 percent / 405,924 tax units
State-based exchange? No Expanded Medicaid coverage? No

2. Texas

Overlap: 21.4 percent / 513,061 tax units
State-based exchange? No Expanded Medicaid coverage? No

3. South Dakota

Overlap: 20.5 percent / 15,124 tax units
State-based exchange? No Expanded Medicaid coverage? No

4. Georgia

Overlap: 19.8 percent / 186,020 tax units
State-based exchange? No Expanded Medicaid coverage? No

5. Louisiana

Overlap: 19.6 percent / 86,512 tax units
State-based exchange? No Expanded Medicaid coverage? No

6. Idaho

Overlap: 19.3 percent / 28,855 tax units
State-based exchange? Yes Expanded Medicaid coverage? No

7. Montana

Overlap: 18.9 percent / 18,138 tax units
State-based exchange? No Expanded Medicaid coverage? No

8. Wyoming

Overlap: 18.4 percent / 7,276 tax units
State-based exchange? No Expanded Medicaid coverage? No

9. Utah

Overlap: 18.1 percent / 42,284
State-based exchange? No (Utah runs a small businesses marketplace, but it relies on the federal government for an individual marketplace) Expanded Medicaid coverage? No

10. Oklahoma

Overlap: 18.0% / 63,045 tax units
State-based exchange? No Expanded Medicaid coverage? No

* For the purposes of this list, we measured the overlap in “tax units,” not people. One tax unit equals a single tax return. If a family of four together qualifies for the ACA premium tax credit, they would be counted as one tax unit, not four, since they filed jointly with one tax return.

       

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

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

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

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

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

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

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

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

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

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

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

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

EITC dollars support local economies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

References

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

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

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

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

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

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

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

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

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

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

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

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

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

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

       

From its modest beginnings in 1975, the Earned Income Tax Credit has grown into one of the nation’s most effective anti-poverty programs. Each year, the EITC supplements low-income workers’ earnings, encouraging work and lifting millions of people out of poverty.¹ It has positive lasting effects for parents, who have shown longer-run earnings increases and better health outcomes. At the same time, their children exhibit a host of benefits, from better school performance and higher rates of college enrollment to more hours worked and higher incomes in adulthood.² 

Moreover, the EITC supports economic stability in communities throughout the country where filers collectively receive millions of dollars in earnings supplements annually.³ These successes stem from a series of targeted expansions—supported by both Republicans and Democrats—over the EITC’s 40-year history, transforming it from a small credit into a significant income supplement for low-income working families.⁴

Yet more can be done to preserve and build on the effectiveness of the EITC, and a growing number of elected officials and policy experts have proposed  strengthening the credit. Three main recommendations have emerged from these proposals.

Preserve two key provisions of the EITC that are set to expire in 2017;

Expand the credit for workers without qualifying children; and

Offer filers options to receive a portion of the credit outside of tax time.

In this brief, we consider the first two recommendations, using our MetroTax model and detailed microdata from the 2014 American Community Survey to estimate the impact of these potential changes on workers and on the metropolitan areas and states where they live.⁵ A new analysis by Steve Holt will take an in-depth look at the issue of periodic payment.

If two key EITC provisions expire in 2017, 7.4 million filers would lose part or all of their EITC.

In 2009, Congress and the Obama administration enacted two targeted, but temporary, expansions to the EITC. The legislation reduced the “penalty” for married couples filing jointly by extending their eligibility for the credit $5,000 beyond that for unmarried filers, and it boosted the credit for families with three or more children (who are more likely to be low-income even when working).

If those provisions expire in 2017, the EITC would shrink for 6.7 million taxpayers, while a little under 700,000 filers would lose eligibility altogether. Two-thirds of filers who would be affected are married couples, 1.8 million of whom are also raising more than two kids (meaning they would be subject to both cuts). The remaining third are unmarried workers with at least three children. Most of these taxpayers (58 percent) have a high school diploma or less, and they are most likely to work in manufacturing, construction, and retail. The typical adjusted gross income of these filers is $28,000 a year, just above the poverty line for a family of four (roughly $24,000 in 2014).

States and metro areas in the Midwest and West would see the steepest cuts if these provisions expire. 

Every state stands to lose millions of dollars if these EITC provisions are not made permanent. States and metro areas with higher-than-average shares of married couples and larger families would be hardest hit. In the Intermountain West, Idaho and Utah could see a 10 percent drop in federal EITC dollars coming into the state (Table 1). The major population centers in those states—including metropolitan Provo and Ogden in Utah and Boise, Idaho—top the list of major metro areas that would experience the biggest cuts if these provisions expire.

While larger states like California and Texas would see their EITC claims drop by smaller percentages, the size of the EITC-eligible population in these states mean that the expiration of these two provisions would translate into a loss of more than half a billion dollars in California ($538 million) and over $400 million in Texas. Taxpayers in the Los Angeles metro area stand to lose an estimated $185 million in EITC receipts, while those in Dallas would forfeit nearly $100 million. (For detailed state and metro data see the appendix.)

Expanding the credit for workers without qualifying children would benefit more than 14.4 million filers. 

The EITC for childless workers is significantly smaller than the credit for families with children. In tax year 2013 (the most recent year for which detailed data are available), workers with qualifying dependents received $2,794 on average through the EITC, compared to the meager $281 claimed by the average childless worker.⁶ In fact, low-wage earning childless adults are the only group of taxpayers actually taxed into (or deeper into) poverty by the federal tax system.⁷

Both President Obama and House Speaker Paul Ryan have proposed expanding the EITC for these workers, as have legislators—including Sen. Patty Murray (D-Wash.), Rep. Richard Neal (D-Mass.), and Rep. Barbara Lee (D-Calif.)—and Republican presidential candidate Jeb Bush.⁸ (Republican presidential candidates Ted Cruz and John Kasich have also called for the EITC to be expanded but have not specified whom that expansion would target.⁹)

The proposals put forward by Obama, Ryan, Lee, and Bush are strikingly similar (although they differ considerably in how they would pay for it). These expansions would double the size of the credit for childless workers and the pace at which the credit phases in and out (Figure 1). They would also lower the minimum age of eligibility from 25 to 21.¹⁰

Together, these changes would boost the value of the credit for 8 million filers and extend eligibility to 6.4 million more taxpayers, increasing EITC dollars for these workers by $6.9 billion.¹¹

The filers who would benefit from these changes are largely unmarried workers (87 percent) who are most likely to be employed in service industries (retail, accommodation and food service, administrative services), health care, and construction. Half of these workers have a high school diploma or less. The typical adjusted gross income for these workers is just $8,300, well below the poverty threshold for individuals and married couples without children (e.g., $12,316 and $15,853, respectively, in 2014).

Several states and large metro areas in the Midwest and Northeast would see the number of childless workers eligible for the EITC more than double if the credit were expanded. 

The District of Columbia and Utah, each of which has above-average shares of the population between 21 and 24, would experience the largest percentage growth in the number of childless workers eligible for the EITC (135 and 134 percent, respectively). However, the bulk of states that would double their pool of eligible filers without qualifying children fall in the Midwest (North Dakota, Iowa, Nebraska, and Wisconsin) and Northeast (Rhode Island, Massachusetts, and Vermont), and tend have higher-than-average shares of one-person households and households without children.

Similarly, while the number of EITC-eligible childless workers in the Provo metro area would more than triple if the credit were expanded, most of the major metro areas that would at least double the number of eligible workers without qualifying children are in the Midwest (e.g., Grand Rapids, Milwaukee, and Toledo) and Northeast (e.g., Bridgeport, Boston, and Springfield) (Map 1).

In this era of partisan gridlock in Washington, it is rare to find a policy with the kind of bipartisan support the EITC has received—a testament to its effectiveness in encouraging work, alleviating poverty, and improving outcomes for workers and their children. By preserving key provisions of the EITC for working families and by making the EITC work better for workers without qualifying children, millions of Americans across the country stand to benefit.

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• State and Metro Data Appendix

       

Each year, one in five households filing a federal income tax return claims the Earned Income Tax Credit (EITC). Targeted primarily to lower-income workers with children, it is one of many credits and deductions filers take each year on their federal income tax forms. However, unlike typical credits and deductions, the EITC is a refundable credit, meaning that after offsetting what is owed to the government filers receive the remainder of the benefit as a refund.

By supplementing earnings for low- and moderate-income households, the EITC helps bridge the gap between what the labor market provides and what it takes to support a family. It encourages and rewards work and has become one of the nation’s largest and most effective anti-poverty programs. In contrast to other work support and poverty alleviation programs, it achieves this with very little bureaucracy beyond what otherwise exists to administer the tax code.

Although the EITC began in 1975 as a small credit (no more than $400), a number of targeted expansions in subsequent years mean that today the EITC’s assistance can be considerable. In 2015, a single parent with three children working full-time all year at the federal minimum wage ($7.25 an hour) is eligible for a credit of $6,242, a boost of more than 40 percent above her earnings of $15,080 (though combined it still leaves her 12 percent below the federal poverty level).

However, the only way to obtain these substantial benefits is to claim the EITC on the annual federal income tax return. While lump-sum payments have perceived benefits (such as being able to pay off debts, make larger purchases, or force savings), the EITC’s single annual disbursement can present a challenge for the working parent trying to make ends meet throughout the year. It can also be problematic for households wanting to stretch out their refund as an emergency savings reserve.

My 2008 paper, “Periodic Payment of the Earned Income Tax Credit,” proposed an option that would allow a family to receive a portion of the EITC outside of tax time, striking a balance between lump-sum delivery and the need for resources throughout the year. Specifically, half of the credit could be claimed in four payments spread out during the year, while the remaining credit would continue to be paid as part of the tax refund.

Since then, several significant developments have occurred. A little-used option for receiving some of the EITC in each paycheck ended in 2010. In 2014, the federal government initiated a new tax credit advance payment process to subsidize health insurance premiums through monthly disbursement of the Affordable Care Act’s Premium Tax Credit. Other countries providing assistance similar to the EITC have continued to innovate and offer access to benefits during the year. Finally, members of Congress and think tanks have proposed alternatives to a single lump-sum disbursement of the EITC, and others have begun to explore and experiment with alternatives, most notably in Chicago, where a 2014 pilot program made quarterly payments to 343 households.

In light of these developments, this paper reviews the author’s original EITC periodic payment proposal, examines emerging alternatives, and addresses the following key questions:

• What is the demand for periodic payment alternatives?
  
  
• What benefits will accrue from the availability of periodic payment?
  
  
• What risks are associated with periodic payment and how can they be managed?
  
  
• What is the administrative feasibility of periodic payment?

The emerging answers point a way forward for identifying different distribution options that would enhance the EITC’s value to low- and moderate-income working families.

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The Earned Income Tax Credit (EITC) supports millions of single parents and their children each year. Although the majority of these are single moms, Father’s Day provides a good reminder that single dads are also a significant part of the equation.

Using Brookings’ MetroTax model, we estimate that roughly half (49 percent) of all EITC-eligible tax filers in 2014 filed as head of household—a group that includes many single custodial parents. Of these estimated 13.1 million filers, 8.9 million were women, and 4.2 million were men. These female-headed households included an estimated 14.7 million qualifying children, while their male counterparts included 6 million qualifying children.

Although women head of household filers were more likely to be EITC-eligible (69 percent), male heads of household were not far behind, with an estimated 61 percent eligible to receive the EITC in 2014.

To learn more about the EITC-eligible population, visit Brookings’ EITC data interactive.

       

       

       

       

       

Policy Brief #178

One of the strongest narratives in U.S. history has been the contribution made by talented, hard-working and entrepreneurial immigrants whose skills and knowledge created a prosperous new country. Yet today, the nation’s immigration priorities and outmoded visa system discourage skilled immigrants and hobble the technology-intensive employers who would hire them. These policies work against urgent national economic priorities, such as boosting economic vitality, achieving greater competitiveness in the global marketplace and renewing our innovation leadership.

In the long term, the nation needs comprehensive immigration reform. In the short term, policymakers should focus on reforms that are directly related to increasing the "brain gain" for the nation—creating new jobs and producing economic benefits—to produce tangible and achievable improvements in our immigration system.

	RECOMMENDATIONS
	Rebalance U.S. immigration policies to produce a "brain gain," with changes to visas that will allow employers to access workers with the scientific and technological skills they need to improve economic competitiveness, employment and innovation Tie immigration levels to national economic cycles to meet changing levels of need Use digital technologies to modernize the current visa system

Background

Immigrants are now one-tenth of the overall U.S. population—a situation that defies facile stereotyping. Immigrants have made significant contributions to American science and economic enterprise, most notably in the areas of high-tech and biotech.

• Immigrants’ productivity raises the U.S. Gross Domestic Product (GDP) by an estimated $37 billion per year
   
• More than a quarter of U.S. technology and engineering businesses launched between 1995 and 2005 had a foreign-born founder
   
• In Silicon Valley, more than half of new tech start-up companies were founded by foreignborn owners
   
• In 2005, companies founded by immigrants produced $52 billion in sales and employed 450,000 workers
   
• Nearly a quarter of the international patents filed from the United States in 2006 were based on the work of foreign-born individuals (more than half of whom received their highest degree from an American university)
   
• Economists calculate that, as a result of immigration, 90 percent of native-born Americans with at least a high-school diploma have seen wage gains
   
• Historically, immigrants have made outsize contributions to American science and technology, with Albert Einstein perhaps the leading example. One-third of all U.S. winners of Nobel prizes in medicine and physiology were born in other countries Far from "crowding out" native-born workers and depressing their wages, well-educated, entrepreneurial immigrants do much to create and support employment for Americans.

In order to fully reap the benefits of the worldwide talent market, U.S. immigration policy must be reoriented. Current policy is significantly—and negatively—affected by the unintended consequences of the 1965 Immigration and Nationality Act that made family unification its overarching goal. Although the law may have contributed to the high-tech boom by removing long-standing, country-specific quotas and expanding immigration from places with strong science and engineering education programs, its main effect was to enable immigrants to bring in family members, without regard for the new immigrants’ education, skill status or potential contributions to the economy.

Thus, in 2008, almost two-thirds of new legal permanent residents were family-sponsored and, over the past few years, the educational attainment of new immigrants has declined.

U.S. employers have a large, unmet demand for knowledge workers. They are eager to fill jobs with well-trained foreign workers and foreign graduates of U.S. universities—particularly those with degrees in the sciences, technology, engineering and mathematics—the "STEM" fields that continue to attract too few U.S.-born students. In 2008, the "Tapping America’s Potential" business coalition reported that the number of U.S. graduates in STEM had been stagnant for five years, and that number would have to nearly double by 2015 to meet demands.

Meanwhile, the United States is falling behind in the pace of innovation and international competitiveness. Evidence for the decline in innovation is the decreasing U.S. share of international patents. In 2009, for the first time in recent years, non-U.S. innovators earned more patents (around 96,000) than did Americans (93,000). Only a decade earlier, U.S. innovators were awarded almost 57 percent of all patents.

To date, Congress—for a variety of reasons, including partisanship—has stalled in addressing the problems of immigration and immigration policy. Unfortunately, this inaction extends to problems hampering the nation’s economy that, if remedied, could help the United States grow employment, pull out of the current recession more quickly and improve its position in the global economy.

Game-Changing Policy Reforms

Rebalance Fundamental Goals

The goals of U.S. immigration policy should be rebalanced to give priority to immigrants who have the education and talent to enhance America’s economic vitality, by stimulating innovation, job creation and global competitiveness. At the same time, it should decrease emphasis on family reunification (other than parents and children of U.S. citizens). Changing the composition of the immigration stream, even without increasing its size, would result in a "brain gain" for the United States.

Other countries, such as Canada, the United Kingdom and Australia, strategically craft immigration policy to attract skilled and unskilled workers, making the benefits easy to see and strengthening public support for immigration in the process. Canada, for example, explicitly targets foreign workers to fill positions for which there are not enough skilled Canadians. Applicants for admission to the country accumulate points based on their field of study, educational attainment and employment experience. Upon reaching the requisite number of points, the applicant is granted a visa. Some 36 percent of all Canadian immigrant visas are in the "skilled-worker" category, as opposed to only 6.5 percent in the United States.

An interesting by-product of this strategy—which is both clearly articulated and of obvious benefit to the national economy—is that Canadians see the benefits of the policy and, as a result, immigration is far less controversial than in the United States. In 2005 polling by The Gallup Organization, only 27 percent of Canadians wanted to decrease immigration, whereas 52 percent of U.S. citizens did. And, three times as many Canadians (20 percent) as Americans (seven percent) actually wanted to increase it.

An obvious place to begin the rebalancing process would be with the many foreign students who come to the United States for education in scientific and technology fields. They are familiar with our culture and speak English. Many would like to stay and build careers here. But, under current visa rules, most are sent home as soon as they graduate. A complete policy reversal is needed, with automatic green cards for foreign graduates of U.S. science and technology programs.

In fact, the United States should make it as easy as possible for these highly trained students to stay, since the expansion of job opportunities in India, China and other growth-oriented countries now offers them attractive options. Our current counterproductive policy, quite simply, puts the United States in the position of training our global competitors.

New York City mayor Michael Bloomberg, in a December 2009 Meet the Press interview, said about immigration: "We’re committing what I call national suicide. Somehow or other, after 9/11 we went from reaching out and trying to get the best and the brightest to come here, to trying to keep them out. In fact, we do the stupidest thing, we give them educations and then don’t give them green cards."

Universities collectively invest huge sums in the development of these students. In addition, research suggests that increasing the number of foreign graduate students would increase U.S. patent applications by an estimated 4.7 percent and grants of university patents by 5.3 percent.

Another strategic policy change would be for the federal government to take U.S. workforce and economic conditions into account when setting immigration levels and annual H-1B visa numbers for scientists and engineers. Such a flexible approach would reflect labor market needs, protect American workers’ jobs and wages, and dampen public concerns about employment losses during lean economic times.

Revamp the Antiquated Visa System

Increase the Number of Visas for Highly-skilled Workers

Today’s visa programs for high-skilled workers are not large enough to fill the numerical demand for such employees and are too short in duration. For example, H-1B visas for workers in "specialty occupations" are valid for a maximum of six years. Between fiscal years 2001 and 2004, the federal government increased the annual allocation of H-1B visas for scientists and engineers to 195,000. The rationale was that scientific innovators were so important for the country’s long-term economic development that the number set aside for those specialty professions needed to be high. Since 2004, that number has returned to its former level, 65,000—only a third of the peak, despite rapid technologic change in almost every field, such as information, medicine, energy and logistics.

Most of these visas are allocated within a few months of becoming available. Even in recessionplagued 2009, applications exceeded the supply of visas within three months. Almost half of the visa requests came from U.S. employers, most of them in high-tech industries. Clearly the demand for visas is greater than the supply, and a minimal step would be to raise the set-aside for high-skilled workers to the previous, 195,000 level.

Only a small percentage of aliens with student visas and aliens with H-1B visas are able to change directly to legal permanent resident status—about seven percent of each category, according to a study published in 2005—although about half of H-1B visa-holders eventually become legal permanent residents. Such an uncertain path is not conducive to career (or employment) planning in a competitive environment.

Several additional small programs support talented scientists and entrepreneurs. These, too, could be aligned with economic goals, expanded or more effectively promoted:

• The O-1 "genius" visa program allows the government to authorize visas for people with "extraordinary abilities in the arts, science, education, business, and sports." In 2008, around 45,000 genius visas were granted. The clear intent is to encourage talented people to migrate to America. However, the current program is too diffuse to have much impact on the level of scientific and technological innovation talent in the United States.
   
• The EB-5 visa program offers temporary visas to foreigners who invest at least $500,000 in the nation’s rural or "targeted employment areas" or at least $1,000,000 in other areas. If the investment creates at least ten jobs, the visa automatically becomes a permanent green card. The program is authorized by Congress to offer approximately 10,000 visas per year, but it is significantly underutilized—about 500 EB-5 visas a year were granted between 1992 and 2004. In 2009, 3,688 people did become legal permanent residents under the "employment creation (investors)" category, a number that includes spouses and children.

According to a March 2009 report from the Department of Homeland Security, the causes of the persistent underutilization of this program include "program instability, the changing economic environment, and more inviting immigrant investor programs offered by other countries." The report makes a number of recommendations designed to streamline program administration and encourages greater efforts to promote the program overseas.

Update the Visa System Infrastructure

Aside from questions about the number of visas allowed, the infrastructure for considering and granting visas needs a major upgrade. Currently, the U.S. visa process requires people seeking entry to provide paper copies of sometimes hard-to-obtain documents. Often these are lost in the system and must be submitted repeatedly. Obtaining a visa can take months and, in some cases, years. Implementation of the USA PATRIOT Act has slowed the process even further.

The visa system should adopt digital technology to reduce both errors and delays. Further, if the nation’s immigration policy moves toward a more credential-based approach, any new electronic processes should be designed to minimize the potential that false documents regarding an individual’s education and experience will be accepted.

Tie Immigration Levels to National Economic Indicators

To ease U.S.-born workers’ understandable worries about job competition from immigrants, Congress should tie overall annual levels of immigration to the unemployment rate and growth in the Gross Domestic Product. Immigration levels can be adjusted up or down depending on the level of economic conditions. These fluctuations should occur automatically, triggered by authoritative statistical reports.

Political Hurdles to Immigration Reform

U.S. news reporting on immigration focuses heavily on illegality and largely ignores the benefits of immigration. Sadly, important news organizations follow the tradition set in the 19th century, when many journalists railed against groups of newcomers, such as immigrants from Ireland and China. Immigration opponents’ unfavorable media narratives, often widely publicized, have a discernible impact on public opinion and affect policymaking. The economic, social, and cultural benefits of immigration are rarely reported.

The State of Public Opinion

Immigration does not rank high on Americans’ lists of the country’s most important problems. In 2008, only four percent of Americans (mostly people from Southwestern border states concerned about illegal entry) thought immigration was the country’s most important problem. Even during 2007’s acrimonious national debate about comprehensive reform, 60 percent of Americans believed new arrivals benefit the country. But public opinion can shift quickly, which makes politicians wary. Fifty-seven percent of voters in the November 2010 mid-term election considered immigration a "very important" issue, ranking it 7th and on a par with taxes and national security/war on terror, according to the Rasmussen report.

The Need for Reform Follow-Through

Administration and enforcement of immigration laws and visa programs are complex, in part because federal, state and local officials are involved in various aspects and are overseen by multiple federal agencies. Aligning the goals of these different entities to put an emphasis on the brain gain can help build support for policy improvements.

As the report of a 2009 Brookings Forum on Growth Through Innovation pointed out with regard to promoting innovation more broadly, "while the actions we need to take are clear and reasonably simple to outline, our political culture erects insurmountable barriers to long-term planning, funding and implementation."

Achieving an Improved Immigration Policy

It will be difficult to achieve comprehensive, coherent policy reform in the face of many competing goals and interest groups and in the current polarized political environment. The task is made more difficult by the divided authority over immigration matters within Congress, involving several committees and subcommittees with competing interests and different political dynamics. Individual members of Congress tend to focus on local concerns, forestalling consideration of broad, long-term national interests.

In the past, elected officials have overreacted to specific episodes of problems related to immigrants or anti-immigrant sentiments in developing policy, rather than taking into account long-term national economic priorities. Just as deleterious, stalemate and inaction have prevented needed reforms, despite a frustrating status quo for employers who need talented scientists and engineers, and who could hire many more Americans if they could fill key slots with skilled workers they cannot find in their local workforce.

A spectrum of experts has suggested creation of a broadly representative, independent federal immigration commission that could develop specific policies under parameters set by Congress. Proposals for such a body have the common themes of depoliticization, insulating members from parochial political pressures and relying on technical experts. Given past missteps and the current policy stalemate, it makes sense to consider such proposals seriously, in the hope that all aspects of immigration—especially those that affect U.S. economic vitality—receive the thoughtful attention they need.

Conclusion

The immigration policy reforms in this paper focus on those that would have swift and direct positive impact on the nation’s economy. Clearly, these are not the only reforms the system needs. A fairer, more comprehensive immigration policy also would:

• Develop more effective and cost-effective border control strategies
   
• Strengthen the electronic employment-eligibility ("e-verify") system and add an appeals process
   
• Improve the immigration courts system and the administration of immigration law
   
• Work harder to integrate immigrants into American life and teach them English and
   
• Create a path to citizenship for illegal immigrants with requirements that applicants learn English, pay back taxes, and pay fines.

Meanwhile, a number of the needed corrections to the system as it affects national economic goals, employment, innovation, and global competitiveness can be addressed, including:

• Tying visa and immigration levels to U.S. economic indicators, in order to assuage American workers’ concerns about threats to employment and wage levels
   
• Creation of an automatic green card for foreign graduates of U.S. science, technology, engineering, and mathematics educational programs and other steps to make staying in the United States a desirable option
   
• Expansion of visa programs (especially H-1B for highly skilled workers) and making more effective the O-1 and EB-5 visa programs and
   
• Creating a modern, electronic visa system.

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Policy Brief #185

The unprecedented surge in incarceration since 1980 has stimulated a national debate between those who claim that locking up over 2 million people is necessitated by public safety concerns, and those who say the human and financial burden of imprisoning so many of our citizens is intolerable.

But framing the incarceration debate as a tradeoff between public safety and public finance is far too narrow. The best evidence suggests the prison population would be substantially reduced with negligible effects on crime rates. Crime could actually be reduced if the savings were put to use in strengthening other criminal justice programs and implementing other reforms. Making this case requires that we confront widespread skepticism about the possibility of reducing criminal behavior on the outside.

The research community has made real progress in identifying the causal effect of various crime-related policies in recent years, providing us with proven alternatives to prison for controlling crime. The key has been to make greater use of experimental methods of the sort that are common in medicine, as well as "natural experiments" that arise from naturally occurring policy or demographic shifts.

	RECOMMENDATIONS
	The resources currently dedicated to supporting long prison sentences should be reallocated to produce swifter, surer, but more moderate punishment. This approach includes hiring more police officers -we know now that chiefs using modern management techniques can make effective use of them.   Increased alcohol excise taxes reduce not only alcohol abuse but also the associated crime at very little cost to anyone except the heaviest drinkers. Federal and state levies should be raised.   Crime patterns and crime control are as much the result of private actions as public. The productivity of private-security efforts and private cooperation with law enforcement should be encouraged through government regulation and other incentives.   While convicts typically lack work experience and skills, it has proven very difficult to increase the quality and quantity of their licit employment through job creation and traditional training, either before or after they become involved with criminal activity. More effective rehabilitation (and prevention) programs seek to develop non-academic ("social-cognitive") skills like self-control, planning, and empathy.   Adding an element of coercion to social policy can also help reduce crime, including threatening probationers with swift, certain and mild punishments for illegal drug use, and compulsory schooling laws that force people to stay in school longer.

The unprecedented surge in incarceration since 1980 has stimulated a national debate between those who claim that locking up over 2 million people is necessitated by public safety concerns, and those who say the human and financial burden of imprisoning so many of our citizens is intolerable. This debate played itself out vividly in the U.S. Supreme Court's May 2011 decision (Brown v. Plata) requiring California to dramatically scale back the size of its prison population. The majority's decision written by Justice Anthony Kennedy focused on inhumane conditions in California's prisons. In dissent, Justice Antonin Scalia emphasized the "terrible things [that were] sure to happen as a consequence of this outrageous order," while Justice Samuel Alito argued the majority was "gambling with the safety of the people of California." These dissenting opinions will sound familiar to states considering cutbacks in incarceration to balance dwindling state budgets.

However, framing the incarceration debate as a tradeoff between public safety and public finance is far too narrow. Prison is not the only option we have for controlling crime. But making the case for alternative approaches has historically been an uphill battle. What noted crime expert and UCLA professor Mark Kleiman calls the "brute force" strategy of locking up lots of people in prison has an obvious logic to it. The perception that "prison works" is reinforced by today's crime rates, now at a 50-year low.

In contrast, there is an abiding skepticism about the effectiveness of other efforts to change criminal behavior on the outside. One reason for this skepticism is the difficulty of distinguishing cause from effect in crime data. For decades, criminologists have maintained that one obvious alternative to prison - putting more police on the streets to help deter crime - doesn't work, because the numbers suggest a positive association between the crime rate and the number of police. (This is analogous to the association between the large numbers of physicians in areas with high concentrations of sick people, such as hospitals.)

Confidence in rehabilitation through social programs also is low, because recidivism rates are so high, even among inmates who participate in re-entry programs. In a recent interview, for example, the Los Angeles District Attorney told Time that, with respect to rehabilitation for gang-involved inmates, "we predict with some degree of confidence . . . it will fail in many, many, many cases."

Fortunately, in recent years researchers have made real progress in identifying the impact of various crime-related policies. The key has been to make greater use of experimental methods of the sort common in medicine, as well as "natural experiments" that arise from naturally occurring policy or demographic shifts.

The over-riding conclusion of the best new research is that there is "money on the table"; we can reduce the financial and human costs of crime without stimulating resurgence in crime rates.

Prisons and crime

Much of the reluctance to reduce the prison population reflects a belief that the extraordinary reduction in crime that occurred in the 1990s was caused by a surge in imprisonment. But even a casual look at the actual statistics challenges the view that prison trends get all or most of the credit for the crime drop.

Looking at three periods from recent history, we see that the crime drop of the 1990s did coincide with a large increase in the prison population. But the large crime increase during the prior period was also associated with a jump in imprisonment - and so was the relatively static crime pattern since 2000. If the prison surge of the 1990s gets credit for the crime drop, then fairness requires that the prison surge of the 1980s gets the blame for the crime increase of that period, while the prison increase of the 2000s was largely irrelevant. This type of armchair analysis supports almost any conclusion.

PERCENTAGE CHANGE
	Prisoners/cap	Robbery rate
1984-1991	+66	+33
1991-2000	+42	-47   (the crime drop)
2000-2008	+10	0

Studies suggest that increased use of imprisonment indeed should receive part of the credit for the crime drop of the 1990s, in the sense that crime was lower than it would have been had we taken all the funds devoted to prison increases and spent it for purposes other than crime control. But is that the right counterfactual? If the vast increase in prison expenditures came at the expense of alternative crime-control efforts that might be even more effective, then the net effect of the imprisonment boom is not so clear, even qualitatively.

Alternatives to prison

Prison alternatives can be organized into two large and somewhat overlapping bins of crime-control activities, which we label "changing individual propensities towards crime" and "changing the offending environment." Under each heading, we identify particularly promising programs, based on recent assessments of costs and benefits. We conclude with rough calculations that highlight the potential magnitude of the inefficiency within our current policy approach - that is, how much extra crime-prevention could be achieved by simply reallocating resources from less-efficient to more-efficient uses.

Changing individual propensities towards crime

1. The difficulties of changing poverty and adverse mental health: While a large body of criminological and psychological theory has emphasized the role of economic disadvantage and mental health problems in contributing to criminal behavior, empirical evidence suggests that job training and mental health courts are not the most cost-effective ways to control crime - not because these disadvantages don't matter, but because they are so difficult to modify in practice.
    
2. Coercive social policy: The average high school graduation rate in the America's 50 biggest urban school systems is about 53 percent. One of the few levers available to policymakers to ensure youth stay in school is to raise the compulsory schooling age - although it is natural to wonder what good schooling will do for youth who are being forced to go against their will. It is thus striking that we have strong quasi-experimental evidence from both the United States and Great Britain that cohorts exposed to an increased compulsory schooling age have reduced crime involvement. That benefit augments the usual list of benefits associated with more schooling, and it complements the benefits of early childhood interventions like Perry Preschool (a two-year preschool program for disadvantaged 3- and 4-year-olds) and Head Start (the large-scale federal preschool program).
    
3. Social-cognitive skill interventions: Most of the economics-of-crime literature has focused on ways of reducing crime by changing the incentives that confront potential offenders, with very little attention devoted to helping people respond to the incentives they already face. A growing body of evidence shows that social-cognitive skills - for example, impulse control, inter-personal skills and future orientation - influence people's response to incentives and predict criminal involvement, schooling and employment participation.

Moreover, intervention research also suggests that targeted efforts to improve the social-cognitive skills of young people at risk and to modify the social systems that may contribute to or reinforce delinquency can reduce crime. The benefits of such efforts can far exceed their costs.

Changing the offending environment

1. Swiftness and certainty, not severity, of punishment: Much of the increase in America's prison population since the 1970s comes from an increase in average sentence lengths. Yet new data from the randomized Hawaii Opportunity Probation with Enforcement (HOPE) experiment found that frequent drug testing, followed immediately by a very short jail stay for dirty urine, substantially reduced drug use and criminality among probationers. Studies of the federal government's Community Oriented Policing Services (COPS) police hiring grants provides further empirical support for the growing suspicion that swiftness and certainty of punishment may actually be most important for controlling crime. The notion that crime is reduced by simply putting more police on the streets without changing what they do, and that deterrence (rather than simply incapacitation) may be an important mechanism behind this result, also overturns the conventional wisdom that prevails in many criminology circles.
    
2. Demand curves for criminogenic goods are negatively sloped: The federal and state excise taxes on beer and liquor have declined markedly (in real terms) since World War II. These rates are considerably below the marginal external social cost, even if effects on crime are not considered. Many people outside the economics profession are skeptical that modest changes in the price of alcohol can do much to change use, given the social context in which drinking so frequently occurs; the possibility that many of highest-risk alcohol users have some level of dependency; and how little attention so many people pay to a 5, 10 or even 20 percent change in prices. Yet the empirical evidence that raising taxes and prices would reduce some types of crime is very strong.
    
3. Private co-production: Most of the research on crime control strategies focuses on the role played by government and non-profit interventions. But private citizens and businesses account for a surprisingly large share of resources devoted to preventing crime. State and local governments can help reduce crime indirectly by encouraging private actions that make law enforcement more productive. Two examples for which benefits exceed costs by an order of magnitude are building the police-tracking infrastructure for Lojack, and creating the legal framework for Business Improvement Districts (where local businesses are subject to tax payments that go in part toward making the neighborhood clean and safe).

It bears repeating that the goal is not to identify the "best" alternative to prison, but rather the best portfolio of options.

What the status quo costs us

Our review of the best available social science suggests that America's current approach to crime control is woefully inefficient. Much greater crime control could be achieved at lower human and financial cost. To illustrate the potential gains from improving the efficiency of the current system, consider the following hypothetical policy experiment.

Imagine that we changed sentencing policies and practices in the United States so that the average length of a prison sentence reverted to what it was in 1984 - i.e., midway through the Reagan administration. This policy change would reduce our current prison population by around 400,000 and total prison spending (currently $70 billion annually) by about $12 billion per year.

What would we give up by reducing average sentence lengths back to 1984 levels? In terms of crime control: not all that much. Assume that society "breaks even" on the $12 billion we spend per year to have average sentence lengths at 2009 rather than 1984 (so that the benefits to society are just worth $12 billion), although more pessimistic assumptions are also warranted.

What could we do instead with our newly acquired $12 billion? One possibility would be to put more police on the streets. Currently, the United States spends around $100 billion per year on police protection, so this hypothetical policy switch would increase the nation's police budget by 12 percent, enabling deployment of as many as 100,000 more police officers. The estimated elasticity of crime with respect to police is far larger (in absolute value) than even the most optimistic assessment of what the elasticity of crime would be with respect to increased sentence lengths. This resource reallocation would lead to a decline of hundreds of thousands of violent and property crime victimizations each year.

A different way to think about the potential size of this efficiency gain is to note that the benefit-cost ratio for increased spending on police may be on the order of 4:1. If the benefit-cost ratio for marginal spending on long prison sentences is no more than 1:1, then reducing average sentence lengths to 1984 levels in order to increase spending on police could generate net benefits to society on the order of $36 billion to $90 billion per year.

Suppose instead that we devote the resources from a $12 billion cut in prison spending to supporting high-quality preschool programs. This would enable a large increase in federal spending on preschool services - for example, $12 billion would represent a 150 percent increase in the annual budget for Head Start (currently around $8 billion per year). Currently Head Start can enroll only around half of eligible 3 and 4-year-olds, and provides early childhood education services that are far less intensive than successful, widely-cited model programs like the Perry Preschool and Abecedarian. Head Start children participate in the program for shorter periods (usually one year, versus two to five years for the others), and the educational attainment of Head Start teachers is lower.

A 150 percent increase in Head Start's budget could dramatically expand the program on both the extensive and intensive margins. Given available data, the benefit-cost ratio of this expenditure would fall in the range of 2:1 to 6:1 - that is, from two to six dollars in long-term benefit for every dollar spent. Reallocating resources from long prison sentences to early childhood education might generate from $12 billion to $60 billion in net benefits to society.

If crime reduction is a key goal, we might do better still by focusing on human capital investments in the highest-risk subset of the population - through efforts to address social-cognitive skill deficits of young people already involved in the criminal justice system. Marvin Wolfgang's seminal cohort studies found that only a small fraction of each cohort commits the bulk of all crime. While early intervention programs target children during the time of life in which they are most developmentally "plastic," interventions with adolescents and young adults can be more tightly targeted on those whose arrest histories suggest they are likely to end up as serious offenders. Another benefit of targeting criminally active teens and adults is an immediate crime reduction payoff.

What sort of social-cognitive skill development could we provide to high-risk young people with $12 billion per year?

With around $1 billion, we could provide functional family therapy (FFT) to each of the roughly 300,000 youths on juvenile probation. E.K. Drake and colleagues estimate that FFT costs something less than $2,500 per youth, with a benefit-cost ratio that may be as high as 25:1 from crime reduction alone.

With the remaining $11 billion we could provide multi-systemic therapy (MST) to almost every arrestee age 19 and under. The cost of MST is around $4,500 per year, with a benefit-cost ratio of around 5:1.

Estimates such as these indicate that diverting $12 billion from long prison sentences to addressing social-cognitive skill deficits among high-risk youth could generate net social benefits on the order of $70 billion per year. Even if FFT and MST, when implemented at large scale, are only half as effective as previous experiments suggest, this resource switch would still generate substantial societal benefits.

The preceding calculations are intended to be illustrative rather than comprehensive benefit-cost analyses, and, clearly, they are subject to a great deal of uncertainty. Nevertheless, they strongly suggest the enormous efficiency gains that could result from reallocating resources from prisons to other uses that will, among other beneficial outcomes, reduce crime.

A key challenge we currently face is that our government systems are not well suited to converting the fifth year of a convicted drug dealer's prison term into an extra year or two of Head Start for a poor child. Government agency heads have strong incentives to maximize the budgets of their agencies, and pour any resources that are freed-up from eliminating ineffective program activities back into their own agencies. This is the intrinsic difficulty of rationalizing policies across domains, agencies, and levels of government. If we could solve this problem - and orient the policy system to up-weight evidence from design-driven research - then in our quest for effective crime control, it appears possible that we could have more for less.

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This speech focuses on the issue of affordable housing. It is a tough issue that is misunderstood and often maligned. It doesn't receive the kind of national or even local attention that it deserves. It is rarely discussed in a metropolitan context, even though many people realize that housing markets are metropolitan not local.

And it is not just about shelter or social justice. It is about economic competitiveness. It is about quality neighborhoods. It is about rewarding work and building wealth. And it is about community cohesion and continuity.

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Executive Summary

Tax increment finance (TIF) is a popular and potentially powerful tool for places that need economic development the most yet have the least to spend. By allowing jurisdictions to use portions of their tax base to secure public-sector bonds, the mechanism allows fiscally strapped localities to finance site improvements or other investments so as to "level the playing field" in economic development.

However, poorly designed TIF programs can cause problems. Not only can they increase the incentives for localities to engage in inefficient, zero-sum competition for tax base with their neighbors. Also, lax TIF rules may promote sprawl by reducing the costs of greenfield development at the urban fringe. It is therefore critical that state legislatures design TIF rules well.

In view of this, an analysis of the way TIF is designed and utilized in Missouri shows that:

• Missouri law creates the potential for overuse and abuse of TIF. Vague definitions of the allowable use of TIF permit almost any municipality, including those market forces already favor, to use it. Weak limits on its use for inefficient inter-local competition for tax base touch off struggles between localities. And the inclusion of sales tax base in the program tilts it toward lower-wage jobs and retail projects, which rarely bring new economic activity into a region.
  
  
• Thanks to these flaws, TIF is used extensively in high-tax-base Missouri suburban areas with little need for assistance in the competition for tax base. This is especially true in the St. Louis metropolitan area. There, TIF money very frequently flows to purposes other than combating "blight" in disadvantaged communities' its classic purpose. In fact, less than half of the 21 St. Louis-area cities that were using TIF in 2001 were disadvantaged or "at-risk" when evaluated on four indicaters of distress. On another measure, just seven of the 20 suburban areas using TIF fell into the "at-risk" category.
  
  
• TIF is also frequently being used in the outer parts of regions' particularly in the St. Louis area. Most notably, only nine of the St. Louis region's 33 TIF districts lie in the region's core. Conversely, 14 of the region's 38 TIF districts lie west of the region's major ring road (I-270). These districts, moreover, contain 57 percent of the TIF-captured property tax base in the region. By contrast, the Kansas City region shows a pattern more consistent with the revitalization goals of TIF. The vast majority of the districts lie in the region's center city, though the huge size of the city means many are still geographically far-flung.

In sum, poorly designed TIF laws are being misused at a time when state and local fiscal pressures require every dollar be spent prudently. As a result, a potentially dynamic tool for reinvestment in Missouri's most disadvantaged communities threatens to become an engine of sprawl as it is abused by high-tax-base suburban areas that do not need public subsidies.

For these reasons, Missouri would be well-served by significant reforms in the laws governing TIF:

• The allowable purposes for TIF should be more strictly defined to target its use to places with the most need for economic development.
  
  
• Higher level review of local determinations that TIF subsidies will support net contributions to the regional or state economy (the "but-for" requirement) should be implemented.
  
  
• Local TIF administrators should be required to show that TIF subsidies are consistent with land-use and economic development needs both locally and in nearby areas.

If such reforms were put in place, TIF could be returned to its attractive main purpose: that of providing resources that would not otherwise be available to localities that badly need them to promote needed economic development and redevelopment.

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Antimicrobial resistance is one of the most significant threats to public health globally. It will worsen in the coming decades without concerted efforts to spur the development of new antibiotics, while ensuring the appropriate use of existing antibiotics. Antimicrobial therapy is essential for treating and preventing bacterial infections, some of which can be life-threatening and acquired as a result of
critical medical interventions, including surgery, chemotherapy and dialysis. However, the international rise in antimicrobial resistance has weakened our antibiotic armamentarium and multi-resistant bacteria now cause over 150,000 deaths annually in hospitals around the world (WHO, 2013). Unfortunately, the evolution of drug-resistant pathogens is unavoidable due to random genetic changes in the pathogens that can render antibiotics ineffective. While antibiotic therapy can succeed in killing susceptible pathogens, it also inadvertently selects for organisms that are resistant. Because each exposure to antibiotics contributes to this process, efforts to restrict antibiotic usage only slow the development of resistance. Ultimately, innovative antimicrobial drugs with diverse mechanisms of action will be needed to treat emerging resistant pathogens.

Combating resistance

Inappropriate use of antibiotics contributes significantly to the acceleration of resistance. Needlessly exposing patients to antibiotics (for example, for viral or mild infections likely to resolve on their own), the use of overly broad-spectrum antibiotics and suboptimal doses of appropriate therapy hasten the evolution of resistant pathogens. While affordable, rapid and accurate point-of-care diagnostics are essential for determining appropriate therapy for many bacterial diseases, routine clinical use will be limited if the tests are too expensive or not accessible during routine clinical encounters. In the absence of a clear diagnostic result, many health care providers prescribe empiric broadspectrum therapy without knowing exactly what they are treating. Although inappropriate use is widespread in many parts of the world, where antibiotics are available without a prescription or oversight by a health care provider or stewardship team, overuse abounds even where antibiotic prescribing is more tightly regulated.

Studies conducted in the USA indicate that around 258 million courses of antibiotics are dispensed annually for outpatient use (Hicks, 2013) and up to 75 per cent of ambulatory antibiotic prescriptions are for the treatment of common respiratory infections, which may or may not be bacterial in origin (McCaig,1995). Recent evidence suggests that over half of these prescriptions are not medically indicated. For example, 60 per cent of US adults with a sore throat receive an antibiotic prescription after visiting a primary care practice or emergency department, despite the fact that only ten per cent require treatment with antibiotics. This is particularly troubling given the availability of rapid tests that can detect Group A Streptococcus, the bacteria responsible for the ten per cent of cases that require antibiotic treatment.

The overuse of antibiotics has been driven largely by their low cost and clinical effectiveness, which has led many patients to view them as cure-alls with few risks. This perception is reinforced by the fact that antibiotics are curative in nature and used for short durations. However, the clinical effectiveness of these drugs decreases over time, as resistance naturally increases, and this process is accelerated with inappropriate use. Moreover, there are numerous consequences associated with the use of antibiotics, including over 140,000 emergency department visits yearly in the USA for adverse incidents (mostly allergic reactions; CDC, 2013a). In addition, antibiotics can eliminate protective bacteria in the gut,
leaving patients vulnerable to infection with Clostridium difficile, which causes diarrhoeal illness that results in 14,000 deaths every year in the USA (CDC, 2013b). It is estimated that antimicrobial resistance costs the US health care system over US$20 billion annually in excess care and an additional $35 billion in lost productivity (Roberts et al., 2009).

The inappropriate use of antimicrobial drugs is particularly concerning because highly resistant pathogens can easily cross national borders and rapidly spread around the globe. In recent years, strains of highly drug-resistant tuberculosis, carbapenem-resistant Enterobacteriaceae and other resistant pathogens have spread outside their countries of origin within several years of their detection. Because resistant bacteria are unlikely to stay isolated, stewardship efforts must be improved globally and international attention is needed to improve surveillance of emerging pathogens and resistance patterns.

A major challenge for clinicians and regulators will be to find stewardship interventions that can be scaled-up and involve multiple stakeholders, including providers, drug manufacturers, health care purchasers (insurers), governments and patients themselves. Such interventions should include practical and costeffective educational programmes targeted towards providers and patients that shift expectations for antibiotic prescriptions to a mutual understanding of the benefits and risks of these drugs.

Educational programmes alone, however, will not be sufficient to lower prescribing rates to recommended levels. Pushing down the inappropriate use of antibiotics also warrants stronger mechanisms that leverage the critical relationships between the stakeholders. For example, health care purchasers can play an important role by using financial disincentives to align prescribing habits with clinical guidelines that are developed by infectious disease specialists in the private and public sectors. This type of approach has the potential to be effective because it includes multiple stakeholders that share responsibility for the appropriate use of antibiotics and, ultimately, patient care.

Key obstacles to antibiotic development

The continual natural selection for resistant pathogens despite efforts to limit antibiotic use underscores the need for new antibiotics with novel mechanisms of action. To date, antimicrobial drug innovation and development have not kept pace with resistance. The number of approved new molecular entities (NME) to treat systemic infections has been steadily declining for decades (see Figure 1). Some infections are not susceptible to any antibiotic and in some cases the only effective drugs may cause serious side effects, or be contra-indicated due to a patient’s allergies or comorbidities (e.g. renal failure). There is significant unmet medical need for therapies that treat serious and life-threatening bacterial diseases caused by resistant pathogens, as well as some less serious infections where there are few treatment alternatives available (e.g. gonorrhoea).

Antibiotic development for these areas of unmet medical need has been sidelined by a number of scientific, regulatory and economic obstacles. While the costs and complexity of any clinical trial necessary for approval by drug regulators can be substantial, in part due to the large study samples needed to demonstrate safety and efficacy, the infectious disease space faces a number of unique clinical challenges. Patients with serious drug-resistant infections may be in need of urgent antibiotic therapy, which can preclude efficient consent and timely trial enrolment procedures; prior therapy can also confound treatment effects if the patient is later enrolled in a trial for an experimental drug. In addition, many patients with these pathogens are likely to have a history of longterm exposure to the health care setting and may have significant comorbidities that render them less likely to meet inclusion criteria for clinical trials.

Emerging infections for which there are few or no treatment options also tend to be relatively rare. This makes it difficult to conduct adequate and well-controlled trials, which typically enrol large numbers of patients. However, clinical drug development can take many years and waiting until such infections are more common is not feasible. Another issue is that it may also not be possible to conclusively identify the pathogen and its susceptibility at the point of enrolment due to the lack of rapid diagnostic technologies. Ultimately, uncertainty about the aetiology of an infection may necessitate trials with larger numbers of patients in order to achieve sufficient statistical power, further compounding the challenge of enrolling seriously ill infectious disease patients in the first place.

The need to conduct large trials involving acutely ill patients that are difficult to identify can make antibiotic development prohibitively expensive for drug developers, especially given that antibiotics are relatively inexpensive and offer limited opportunities to generate returns. Unlike treatments for chronic diseases, antibiotic therapy tends to last no longer than a few weeks, and these drugs lose efficacy over time as resistance develops, leading to diminishing returns. The decline in antimicrobial drug innovation is largely due to these economic obstacles, which have led developers to seek more durable and profitable markets (e.g. cancer or chronic disease) in recent decades. There are only a handful of companies currently in the market and the development pipeline is very thin. Changes to research infrastructure, drug reimbursement and regulation are all potentially needed to revitalise antibiotic innovation.

Opportunities to streamline innovative antibiotic development

In the USA, several proposals have been made to expedite the development and regulatory review of antibiotics while ensuring that safety and efficacy requirements are met. In 2012, the US President’s Council of Advisors on Science and Technology recommended that the US Food and Drug Administration (FDA) create a ‘special medical use’ (SMU) designation for the review of drugs for subpopulations of patients with unmet medical need. Drug sponsors would be required to demonstrate that clinical trials in a larger patient population would need much more time to complete or not be feasible. A drug approved under the SMU designation could be studied in subgroups of patients that are critically ill, as opposed to the broader population, under the condition that the drug’s indication would be limited to the narrow study population. The SMU designation was discussed at an expert workshop convened by the Brookings Institution in August 2013. Many participants at the meeting agreed that there is a pressing need to develop novel antibiotics and that such a limited-use pathway could support the appropriate use of newly approved drugs.

The Infectious Diseases Society of America developed a related drug development pathway called the Limited Population Antibacterial Drug (LPAD) approval mechanism. The LPAD approach calls for smaller, faster and less costly clinical trials to study antibiotics that treat resistant bacteria that cause serious infections. Both the SMU and LPAD approaches would allow drug developers to demonstrate product safety and efficacy in smaller patient subpopulations and provide regulatory clarity about acceptable benefit–risk profiles for antibiotics that treat serious bacterial diseases. The US House of Representatives is currently considering a bill¹ that incorporates these concepts.

A recent proposal from the drug manufacturer industry for streamlined antibiotic development is to establish a tiered regulatory framework to assess narrow-spectrum antibiotics (e.g. active versus a specific bacterial genus and species or a group of related bacteria) that target resistant pathogens that pose the greatest threat to public health (Rex, 2013: pp. 269–275). This is termed a ‘pathogen-focused’ approach because the level of clinical evidence required for approval would be correlated with the threat level and feasibility of studying a specific pathogen or group of pathogens. The pathogen-focused approach was also highlighted at a recent workshop at the Brookings Institution (Brookings Institution, 2014). Some experts felt that the approach is promising but emphasised that each pathogen and experimental drug is unique and that it could be challenging to place them in a particular tier of a regulatory framework. Given that pathogen-focused drugs would likely be marketed internationally, it will be important for drug sponsors to have regular interactions and multiple levels of discussion with regulators to find areas of agreement that would facilitate the approval of these drugs.

Antibiotics with very narrow indications could potentially support stewardship as well by limiting use to the most seriously ill patients. Safe use of these drugs would likely depend on diagnostics, significant provider education, labelling about the benefits and risks of the product, and the scope of clinical evidence behind its approval. Because these antibiotics would be used in a very limited manner, changes would potentially need to be made to how they are priced and reimbursed to ensure that companies are still able to generate returns on their investment. That said, a more focused drug development programme with regulatory clarity could greatly increase their odds of success and, combined with appropriate pricing and safe use provisions, could succeed in incentivising antimicrobial drug development for emerging infections.

Endnote
1 H.R. 3742 – Antibiotic Development to Advance Patient Treatment (ADAPT) Act of 2013.

References
Barnett, M. L. and Linder, J. A., 2014. ‘Antibiotic prescribing to adults with sore throat in the United States, 1997–2010’. JAMA Internal Medicine, 174(1), pp. 138–140.

Brookings Institution, 2013. Special Medical Use: Limited Use for Drugs Developed in an Expedited Manner to Meet an UnmetMedical Need. Brookings Institution. Available at: www.brookings.edu/events/2013/08/01-special-medical-use

Brookings Institution, 2014. Modernizing Antibacterial Drug Development and Promoting Stewardship. Available at: www.brookings.edu/events/2014/02/07-modernizing-antibacterialdrug-development [Accessed 11 March 2014].

CDC, 2013a. Antibiotic resistance threats in the United States,2013 [PDF] CDC. Available at: www.cdc.gov/drugresistance/threatreport-2013/pdf/ar-threats-2013-508.pdf#page=25 [Accessed 16 January 2014].

CDC, 2013b. Clostridium difficile. Antibiotic resistance threats in the United States, 2013 [PDF] CDC. Available at: www.cdc.gov/drugresistance/threat-report-2013/pdf/ar-threats-2013-508.pdf#page=50 [Accessed 16 January 2014].

Hicks, L. A. et al., 2013. ‘US Outpatient Antibiotic Prescribing, 2010’. New England Journal of Medicine, 368(15), pp. 1461–1463.
Infectious Disease Society of America, 2012.

Limited Population Antibacterial Drug (LPAD) Approval Mechanism. Available at: www.idsociety.org/uploadedFiles/IDSA/News_and_Publications/IDSA_News_Releases/2012/LPAD%20one%20pager.pdf [Accessed 5 March 2014].

Infectious Disease Society of America, 2012. Limited Population Antibacterial Drug (LPAD) Approval Mechanism [PDF] Infectious
Disease Society of America. Available at: www.idsociety.org/uploadedFiles/IDSA/News_and_Publications/IDSA_News_Releases/2012/LPAD%20one%20pager.pdf  [Accessed 18 January 2013].

Kumarasamy, K. K., Toleman, M. A., Walsh, T. R. et al.,2010. ‘Emergence of a new antibiotic resistance mechanism in India,
Pakistan, and the UK: A molecular, biological, and epidemiological study’. Lancet Infectious Diseases, 10(9), pp. 597–602.

McCaig, L. F. and Hughes, J. M., 1995. ‘Trends in antimicrobial drug prescribing among office-based physicians in the United
States’. Journal of the American Medical Association, 273(3), pp. 214–219.

President’s Council of Advisors on Science and Technology, 2012. Report to the President on Propelling Innovation in Drug
Discovery, Development and Evaluation. Available at:www.whitehouse.gov/sites/default/files/microsites/ostp/pcast-fdafinal.pdf    [Accessed 5 March 2014].

Rex, J. H. et al., 2013. ‘A comprehensive regulatory framework to address the unmet need for new antibacterial treatments’. Lancet Infectious Diseases, 13(3), pp. 269–275.

Roberts, R. R., Hota, B., Ahmad, I. et al., 2009. ‘Hospital and societal costs of antimicrobial – Resistant infections in a Chicago
teaching hospital: Implications for antibiotic stewardship’. Clinical Infectious Diseases, 49(8), pp. 1175–1184.

WHO (World Health Organization), 2010. Fact Sheet: Rational Use of Medicines [webpage] WHO. Available at:
www.who.int/mediacentre/factsheets/fs338/en [Accessed 28 February 2014].

WHO (World Health Organization), 2013. Antimicrobial Drug Resistance [PDF] WHO. Available at: http://apps.who.int/gb/ebwha/pdf_files/EB134/B134_37-en.pdf [Accessed 6 March 2014].

WHO (World Health Organization), 2013. Notified MDR-TB cases (number per 100,000 population), 2005–12. WHO. Available at:
https://extranet.who.int/sree/Reports?op=vs&path=/WHO_HQ_Reports/G2/PROD/EXT/MDRTB_Indicators_map [Accessed 28 February 2014].

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After decades of neglect, Latin American governments are increasingly focusing on urban slums. What often spurs their policy interventions is a desire to counter violent criminality leaking out from the poor marginalized slums controlled by gangs into the city centers the better-off residents want to keep safe. But tackling the socioeconomic dynamics of slums -- the trap of poverty, discrimination, lack of public goods and social services, and rule by nonstate actors -- is not only complex, but also costly. Governments, elites, and middle classes tend not to want to spend resources on slums. Effective policies have to be sustained for decades, and political will and tax revenues for such complex state-building are frequently scarce.

Focusing on a discreet intervention – providing low-cost housing – becomes tempting. Rarely is it sufficient. The condition of the buildings alone is not what makes a slum a slum. Moving residents from slums to better low-cost housing has encountered systematic challenges not just in Latin America, but also in other places where it has been tried, such as Kenya. Instead, policies need to focus on broader community dynamics, including public safety, legal job creation with sufficient income, human capital development, and robust connectivity of slums to economically-thriving areas, something residents of the latter often don’t want.

Paradoxically, real estate dynamics can have pernicious effects. If broader pacification does take hold and public safety in slums increases, some slum areas can become desirable real estate with vast development possibilities. Developers may well seek to buy the land by offering “better” low-cost housing to slum residents to get them to move. Since many slum residents do not have title to their residences, forced displacement also occurs, albeit under the cloak of being nice to the poor.

Instead of being limited to the provision of alternative residences, policies to address slums need to be about inclusion, economic growth, safety, and connectivity of slums with the thriving city parts, and accountability of city-governance authorities.

This commentary was originally published by the Inter-American Dialogue’s Latin America Advisor. 

      

       

       

       

       

       

       

       

       

       

       

       

       

Editors’ Note: According to a new Pew poll, half of Israeli Jews have come to seek not only a Jewish majority but even Jewish exclusivity in Israel. That doesn’t bode well for Arab-Jewish coexistence in Israel, writes Shibley Telhami—even aside from what happens in the West Bank and Gaza. This post originally appeared on the Monkey Cage blog.

When U.S. leaders and commentators warn that the absence of a two-state solution to the Israeli-Palestinian conflict will make it impossible for Israel to be both a Jewish and democratic state, they generally mean that a Jewish democracy requires a Jewish majority; if Israel encompasses the West Bank and Gaza, Arabs will become a majority. What they may not have realized is that, in the meantime, half of Israeli Jews have come to seek not only a Jewish majority but even Jewish exclusivity.

That is one of the most troubling findings of a new Pew poll in Israel. And it doesn’t bode well for Arab-Jewish coexistence in Israel—even aside from what happens in the West Bank and Gaza.

This major study was conducted from October 14, 2014, to May 21, 2015, among 5,601 Israeli adults ages 18 and older. (Disclosure: I served as an adviser to the project). It found that 48 percent of all Israeli Jews agree with the statement “Arabs should be expelled or transferred from Israel,” while 46 percent disagreed. Even more troubling, the majority of every non-secular Jewish group, including 71 percent of Datim (modern orthodox Jews) agreed with the statement.

While age is not much of a factor when it comes to attitudes toward expelling Arabs from Israel, younger Israelis are slightly more likely to agree with the statement that Arabs should be expelled than older Israelis.

These attitudes are anchored in a broader view of identity and of the nature of the Israeli state. Overall, only about a third of Israeli Jews say their Israeli identity takes precedence over their Jewish identity, with the overwhelming majority of every group, except for secular Jews, saying their Jewishness comes first.

This view has consequences for citizen rights. Not surprisingly, the overwhelming majority of all Jewish Israelis (98 percent) feel that Jews around the world have a birthright to make aliya (immigration to Israel with automatic Israeli citizenship). But what is striking is that 79 percent of all Jews, including 69 percent of Hilonim (secular Jews) say that Jews deserve “preferential treatment” in Israel—so much for the notion of democracy with full equal rights for all citizens.

These attitudes spell trouble for Arab citizens of Israel who constitute 20 percent of Israel’s citizens. It’s true that attitudes are dynamic; they are partly a function of Jewish-Arab relations within Israel itself, but also outside, especially within the broader Palestinian-Israeli conflict. Like their Jewish counterparts, Arab citizens of Israel (mostly Muslim, but also including Christians and Druze), identify themselves with their ethnicity (Palestinian or Arab) or religion above their Israeli citizenship. And these ethnic/religious identities intensify when conflict between Israel and the Palestinians in the West Bank and Gaza intensifies. There is no way to fully divorce the broader Palestinian-Israeli conflict from Arab-Jewish relations within Israel.

In recent years, this latter linkage has become central for two reasons: loss of hope for a two-state solution, and the rise of social media that has displayed extremist attitudes that used to be limited to private space. In the era of Facebook and Twitter, Arab and Jewish citizens post attitudes that deeply offend the other: An Arab expresses joy at the death of Israeli soldiers killed by Palestinians, while a Jew posts a sign reading “death to Arabs.” Hardly the stuff of co-existence. Leave it to opportunist politicians, extremists and incitement to do the rest.

But there is also an American responsibility—not so much with regard to failure of diplomatic efforts, but with the very positing of the nature of the conflict itself, and the nature of the state of Israel. As President Obama considers steps he could undertake on the Israeli-Palestinian conflict before leaving office, he may contemplate addressing what has become a distorting and detrimental discourse that serves to give a pass to non-democratic attitudes, and diversion of attention from core problems.

First, there is something wrong with positing the possibility of Arabs as constituting a demographic problem for Israel. It legitimizes the privileging of Jewishness over democracy. It also distorts the reason why Israel is obligated to end occupation of the West Bank and Gaza; it has nothing to do with the character of Israel as such, but with international law and United Nations resolutions.

Second, while states can define themselves as they wish (and are accepted by the international community accordingly), the American embrace of the “Jewishness” of Israel, cannot be decoupled from the Palestinian-Israeli context, or from the overarching American demand that all states must be for all their citizens equally.

In part, this is based on the notion that the UN General Assembly (Resolution 181) recommended in 1947 dividing mandatory Palestine into an “Arab” and a “Jewish” State. In part, it’s based on the notion that the Palestinian-Israeli conflict is a political conflict that can be resolved through two states, one manifesting the self-determination of Jews as a people, and one manifesting the right of self-determination of Palestinians as a people. The two were bound together. An embrace of a Jewish state that excludes a Palestinian state defeats the principle.

If two states become impossible, America chooses democracy over Jewishness. In fact, this has been consistently reflected in American public attitudes across the political spectrum, most recently in this November 2015poll; in the absence of a two-state solution, 72 percent of Americans would want a democratic Israel, even if it meant that Israel ceases to be a Jewish state with a Jewish majority.

More centrally, even with two states—one manifesting Jewish self determination and one Palestinian self-determination—an overarching, principled American position takes precedence: If Israel is a state of the Jewish people, it must also be above all a state of all its citizens equally; (and if Palestine is to be a state of the Palestinian people, it must also be a state of all its citizens equally). This democratic principle, highlighted front and center in a reformulated American position, can help avoid legitimizing undemocratic attitudes in the name of Jewish identity.

      

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Established by the Food and Drug Administration Safety and Innovation Act of 2012, breakthrough therapy designation (BTD) is one of several programs developed by the U.S. Food and Drug Administration (FDA) to speed up the development and review of drugs and biologics that address unmet medical needs. In order to qualify for this designation, the treatment must address a serious or life-threatening illness. In addition, the manufacturer (i.e., sponsor) must provide early clinical evidence that the treatment is a substantial improvement over currently available therapies. The FDA is working to further clarify how it applies the qualifying criteria to breakthrough designation applications.

On April 24, under a cooperative agreement with FDA, the Center for Health Policy convened a public meeting to discuss the qualifying criteria for this special designation. Using examples from oncology, neurology, psychiatry, and hematology, the workshop highlighted considerations for the BTD application process, the evaluation process, and factors for acceptance or rejection. The discussion also focused on key strategies for ensuring that the qualifying criteria are understood across a broad range of stakeholder groups.

Video

• Breakthrough therapy designation: Two and a half years in
• Applying the breakthrough therapy criteria: Oncology
• Applying the breakthrough therapy criteria: Neurology
• Applying the breakthrough therapy criteria: Anti-infective/psychiatry/hematology
• Summary and discussion of lessons learned

Event Materials

• Breakthrough Therapy Designation_final
• Breakthrough therapy slide deck

      

For the last several years, the US government has been negotiating a free-trade agreement known as the Trans-Pacific Partnership (TPP) with 11 other countries across the Asia-Pacific and Latin American regions, which could have major impact on the pharmaceutical market.  When finalized it will be the largest free-trade agreement in history, impacting up to one-third of world trade and roughly 40 percent of the global gross domestic product. The deal has attracted a fair share of criticism from a wide range of groups, including concerns over proposed regulations for biologic drugs in participating countries. Specifically, critics are concerned about the length of data exclusivity granted to the companies that hold the patents on these drugs. Below is a primer on biologics and how they are being addressed in the TPP.

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What are biologics and biosimilars?

Biologic drugs include any therapy derived from a biological source; a group which includes vaccines, anti-toxins, proteins, and monoclonal antibodies. Because they are typically much larger and more structurally complex than traditional ‘small-molecule’ drugs, they are also more difficult—and much more costly—to develop and manufacture. Biologics are also among the most expensive drugs on the market, costing an average of 22 times more than nonbiologic drugs. Avastin, a cancer drug, can cost more than $50,000 a year, while the rheumatoid arthritis drug Remicade can cost up to $2,500 per injection.

Given these high costs, there is substantial interest in encouraging the development of biosimilars, a term used to describe follow-on versions of an original biologic. Estimates of the potential cost savings vary substantially, but some have predicted that competition from biosimilars could reduce US spending on biologics by $44 to $66 billion over the next ten years.  In the European Union, biosimilars have been on the market since 2006, and a 2013 analysis found that, for the 14 biosimilars on the market, the average price discount was about 25 percent. By 2020, the overall cost savings are projected to total $16-$43 billion.

After the Affordable Care Act (ACA) was passed in 2010, the US Food and Drug Administration (FDA) developed an accelerated approval pathway for biosimilars, modeled after the pathway used for the approval of small-molecule generics. In order to meet the criteria for biosimilarity, the drug must share the same mechanism of action for the approved condition of use, and there must be no clinically significant differences between the two drugs in terms of purity, safety, or potency. FDA recently approved its first biosimilar, Zarxio, which is a copy of the oncology drug Neupogen.

What issues are being raised over data exclusivity in the US?

Under current FDA regulations, biologic drugs are granted 12 years of data exclusivity following approval. During this period of exclusivity, the FDA may not approve a biosimilar application that relies on the data submitted as part of the original biologic application. This form of temporary monopoly is distinct from patent protection, which is granted well before approval and is not related to clinical data.  Data exclusivity does not prevent another company from generating the data independently, but drug companies are unlikely to go to the considerable (and costly) effort of replicating a full course of clinical trials for a drug that is already on the market. (Though biosimilars may need to undergo some additional clinical testing under current FDA regulations, the amount of data required to support approval would certainly be less than what is required for an original biologic approval.)

The 12-year exclusivity period for biologics was established in the ACA following intense debate, and has continued to attract criticism. (By contrast, the period of data exclusivity is just five years for small-molecule drugs.) Supporters argue that given the greater cost and difficulty of bringing a biologic to market a longer period of exclusivity is necessary to incentivize innovation. Others argue that the resulting restrictions on competition keep drug prices unnecessarily high, inevitably putting a strain on the health system and keeping potentially life-saving drugs out of reach for many patients.

How would the TPP affect data exclusivity?

For the 11 countries besides the U.S. that are involved in the TPP, current data exclusivity protections range from zero (Brunei) to eight years (Japan). Under the Obama Administration’s current proposal, participating countries would increase those periods to match the US standard of 12 years. Curiously, this proposal directly contradicts the administration’s ongoing domestic efforts to lower the period of data exclusivity. Since the ACA passed, the Obama administration has repeatedly proposed reducing it to seven, arguing that this would save Medicare $4.4 billion over the next decade. Some have noted that, once the 12-year period is enshrined in the TPP, it will become significantly more difficult to change it through the US legislative process. Furthermore, imposing US standards on the 11 member countries would inevitably restrict competition at the global level, and many patient advocacy and international humanitarian organizations have argued that doing so would undermine the efforts of US global health initiatives like the Vaccine Alliance and the Global Fund to Fight AIDS, Tuberculosis and Malaria, which rely on price competition to manage program costs.

It is unclear whether the US will be successful in its efforts. There have been reports that the issue of data exclusivity has become a significant point of contention, and the US delegation may seek to compromise on its demands. It may, for example, negotiate exceptions for the poorer countries involved in the negotiation, as the Washington Post notes. However, the details of the negotiations are largely confidential, which makes it challenging to assess the possibilities, their relative advantages, or how the US Trade Representative (which is leading the US negotiations) is balancing the need to ensure adequate incentives for innovation with the need to control drug costs and facilitate patient access to potentially life-saving therapies.

Editor's note: Elizabeth Richardson, a research associate in the Center for Health Policy, contributed to the research and writing of this post. 

       

Ghana attained middle-income status after rebasing its National Accounts, pushing per capita gross domestic product (GDP) of the country above $1,000 in 2007. After recovering from economic recession in 1984 on account of the Bretton Woods sponsored economic reform introduced at that time, Ghana’s growth has been remarkably strong, with its lowest economic growth of 3.3 percent recorded in 1994. The country’s growth rate reached its peak of 15 percent in 2011 on the back of the commencement of commercial production of oil, making it one of the fastest growing economies globally during that year. This has translated into increased per capita income, which reached a high of about $1,900 in 2013.

The concern, however, has been the ability of the country to sustain this growth momentum given the level and quality of education and skills, and, more importantly, the failure of this strong growth performance to be translated into the creation of productive and decent jobs, improved incomes and livelihoods. The structure of the economy remains highly informal, with a shift in the country’s national output composition from agriculture to low-value service activities in the informal sector. The commencement of commercial production of oil raised the share of the industrial sector in national output. However, the continuous decline in manufacturing value added undermines Ghana’s economic transformation effort to promote high and secure incomes and improve the livelihoods of the people.

Structural change towards higher value added sectors, and upgrading of technologies in existing sectors, is expected to allow for better conditions of work, better jobs, and higher wages. But the low level and quality of human resources not only diverts the economy from its structural transformation path of development but also makes it difficult for the benefits of growth to be spread through the creation of gainful and productive employment. Thus, productive structural economic transformation hinges on the level and quality of education and labor skills. A highly skilled, innovative and knowledgeable workforce constitutes a key ingredient in the process of structural economic transformation, and as productive sectors apply more complex production technologies and research and development activities increase the demand for education and skills. However, the observed weak human capital base does not provide a strong foundation for structural economic transformation of Ghana.

Ghana’s employment growth lags behind economic growth, with an estimated employment elasticity of output of 0.47, suggesting that every 1 percent of annual economic growth yields 0.47 percent growth of total employment.

There is also widespread concern about the quality of the country’s growth in terms of employment and inequality, as well as general improvement in the livelihood of the people (see Alagidede et al. 2013; Aryeetey et al. 2014; Baah-Boateng 2013). A key indicator for measuring the extent to which macroeconomic growth results in gains in the welfare of the citizenry is the quality of jobs that the economy generates. Ghana’s employment growth lags behind economic growth, with an estimated employment elasticity of output of 0.47 (see Baah-Boateng 2013), suggesting that every 1 percent of annual economic growth yields 0.47 percent growth of total employment. Besides the slow rate of job creation is the dominance of vulnerable employment and the working poverty rate in the labor market. In 2010, 7 out of 10 jobs were estimated to be vulnerable while only 1 out of 5 jobs could be considered as productive jobs that meet the standard of decent work (Baah-Boateng and Ewusi 2013). Workers in vulnerable employment tend to lack formal work arrangements as well as elements associated with decent employment such as adequate social security and recourse to effective social dialogue mechanisms (Sparreboom and Baah-Boateng 2011). The working poverty rate remains a challenge with one out of every five persons employed belonging to poor households.

The article seeks to provide an analytical assessment of Ghana’s economic growth as one of Africa’s growth giants over a period of more than two decades and the implication for labour market and livelihood outcomes. Growth of labor productivity at the national and sectoral level is examined, as well as the sectoral contribution to aggregate productivity growth. The article also analyses the effect of growth on employment and the employment-poverty linkage in terms of elasticity within the growth-employment-poverty nexus in Ghana. It also delves into a discussion of the constraints on growth and productive employment from both demand and supply perspectives, and identifies skills gaps and the opportunities offered in the country, which has experienced strong growth performance. The article has five sections, with an overview of Ghana’s economic growth performance in Section 2, after this introductory section. This is followed by an overview of the developments in the labor market, specifically in the area of employment, unemployment, poverty, and inequality in Ghana in Section 3. The growth-employment-poverty linkage analysis is carried out in Section 4 followed by a discussion of constraints to growth and employment generation in Section 5. Section 6 provides a summary and conclusion, with some policy suggestions for the future.

Downloads

• Download the full paper (PDF)

      

Over the past two decades, Ghana’s economy experienced an average annual growth rate of 5.8 percent, and became a low-middle income country in 2007. Though Ghana’s average annual employment growth between 1993 and 2013 has been higher than sub-Saharan Africa’s—3.7 percent versus 3.0 percent—its overall employment growth has not kept up with its economic growth. Notably, Ghana’s impressive economic growth has largely stemmed from crude oil exports, mining, and financial intermediation—all sectors and subsectors in which labor absorption is low. Given these trends, Ghana’s ability to transform its growth gains into better livelihoods for its citizens is being challenged.

In their paper, Understanding Ghana’s growth success story and job creation challenges, Ernest Aryeetey and William Baah-Boateng examine the sustainability of the high growth Ghana has experienced over the last two decades and advise Ghanaian policymakers to rethink their growth strategy.

For a more in-depth look at these and related topics, such as labor productivity, you can read the full paper here.

Ghana’s labor trends

Like in many other sub-Saharan African countries, the agriculture sector is the largest employer in Ghana, though its employment share is decreasing from 61.1 percent in 1984 to 44.7 percent in 2013. In addition, while industry’s employment share has slightly grown from 13.7 percent to 14.6 percent over the same period (and the manufacturing subsector has decreased from 10.9 percent to 9.1 percent), services has grown from 25 percent to 40.9 percent—leading to what the authors refer as a “missing middle.”

As noted above, the authors emphasize that the sectors that have been driving Ghana’s growth are not labor-intensive, namely mining, oil extraction, and finance. While labor has been moving from agriculture to services, the authors note that the trend “may not reflect a structural and productive transformation,” largely because the jobs created in the services sector are mostly informal and have low productivity. Indeed, services sector maintained the lowest annual average growth of labor productivity between 1992 and 2013. As part of these shifts, informal employment—which represented 88 percent of Ghanaian employment in 2013—grew by 3.7 percent on average while formal employment grew by only 2.6 percent during this period.

Unemployment in Ghana remains low, at 5.2 percent, though has experienced significant swings from 2.8 percent in 1984 to 10.4 percent in 2000 to 3.1 percent in 2006. The authors note, though, that these numbers might be deceptive due to the high numbers of informal, vulnerable, and “discouraged workers” (those who are jobless and available for work but fail to make the effort to seek work for various reasons) in Ghana. In fact, they state that, in 2006, after accounting for discouraged workers the unemployment rate more than doubled from 3.1 percent to 6.5 percent.

Vulnerable employment and the working poor

Despite Ghana’s relatively low unemployment rate, many laborers still live in poverty: According to the authors, 22 percent of working people are poor. Many others work in “vulnerable employment”—which the authors define as “a measure of people employed under relatively precarious circumstances indicated by their status in employment. It consists of own account and contributing family work that are less likely to have formal work arrangements, access to benefit or social protection programs, and are more ‘at risk’ to economic cycles (ILO 2009).” This definition is opposed to “productive employment,” or “paid employment and self-employed with employees.” Vulnerable workers are usually found in the informal sector and tend to have lower earnings—a situation exacerbating the ever-widening earnings gap and growing income inequality.

According to the authors, working poverty is closely linked with vulnerable employment, for which seven of 10 jobs in Ghana qualify (Table 1).  Some policies, which could combat working poverty, have been somewhat ineffective in reducing poverty: For example, Ghana has been consistent in raising its minimum wage, keeping it largely above the rate of inflation, but this policy tends to only affect those in the formal sector, leaving out workers in the informal sector. This trend has also increased Ghana’s inequality: The Gini coefficient increased from 35.4 percent in 1987/88 to 42.3 percent in 2013.

Table 1: Quantity and quality of employment (percent of employed)

Economic sector	1984	1992	1999	2000	2006	2010	2013
Employment-to-population (ratio, SSA)	—	64.3	64.1	64.1	64.9	65.2	65.5
Employment-to-population (ratio, Ghana)	80.2	72.9	73.9	66.9	67.7	67.4	75.4
Economic sector
Agriculture	61.1	62.2	55.0	53.1	54.9	41.6	44.7
Industry	13.7	10.0	14.0	15.5	14.2	15.4	14.6
Manufacturing (part of industry)	10.9	8.2	11.7	10.7	11.4	10.7	9.1
Service	25.2	27.8	31.0	31.5	30.9	43.0	40.9
Institutional sector
Public	10.2	8.4	6.2	7.2	5.7	6.4	5.9
Private	6.0	6.1	7.5	8.9	7.0	7.4	6.1
Informal	83.8	85.5	86.1	83.9	87.3	86.2	88.0
Type of employment
Paid employees	16.2	16.8	13.8	16.0	17.5	18.2	22.5
Self-employment	69.6	81.3	68.7	73.4	59.5	60.8	52.6
Contributing family worker	12.5	1.9	17.2	6.8	20.4	11.6	22.3
Other	1.7	—	0.3	3.8	2.6	9.4	2.6
Quality of employment
Gainful/productive employment*	20.9	—	—	21.2	22.0	23.1	28.7
Vulnerable employment**	77.4	82.5	80.8	74.9	75.4	67.5	68.7
Working poverty	—	48.7	35.4	—	25.6	—	22.3

Notes: * Gainful/productive employment comprises paid employment and self-employed with employees.

** Vulnerable employment comprises own account and contribution family work.

Source: Computed from Ghana Living Standards Survey (GLSS) 3, 4, 5, and 6; Population Census 1984, 2000, and 2010.

Overall, though, Ghana has made great strides. Vulnerable employment has been declining, and productive employment has risen, gains the author attributes to the drop in working poverty—down from 48.7 percent in 1992 to 22.3 percent two decades later (Table 1). However, they also hint that these improvements could have been even larger had job growth been concentrated in paid employment and self-employed with employees.

The skills gap

In their paper, the authors posit that job creation has occurred in less productive sectors due to a lack of skills and education in the workforce—and skill-intensive jobs/vacancies are instead getting filled by foreign laborers. While the proportion of the labor force with no formal education has significantly fallen from 44.1 percent in 1992 to 25.6 percent in 2013, post-primary education rates have barely risen—from 5.7 percent to 12.1 percent during that same period for secondary, vocational, and technical education. Tertiary is even less—from 2 percent to 5.4 percent. Ghanaian universities have not been training engineers, scientists, and technical workers that could increase the productivity and grow the industrial sector. A shortage of technical and vocational skills also limits this sector. Thus, the authors note, employers are forced to look outside of the country to find the workers with the skills required to do the job. The authors emphasize:

[P]roductive structural economic transformation hinges on the level and quality of education and labour skills. A highly skilled, innovative, and knowledgeable workforce constitutes a key ingredient in the process of structural economic transformation, and as productive sectors apply more complex production technologies and research and development activities increase the demand for education and skills. However, the observed weak human capital base does not provide a strong foundation for structural economic transformation of Ghana.

At the same time, the more educated in Ghana also tend to be more likely to be unemployed due to limited job creation for them in the formal sector. In 2013, the unemployment rates for those with secondary education and above (including tertiary) was over 6 percent. The unemployment rate for those with basic education or less was under 3.3 percent. The authors suggest that this trend is due to the fact that those with less education are more likely to take an informal job, while more educated laborers struggle to find jobs in the small formal sector.

Recommendations

Though Ghana has outperformed many of its sub-Saharan neighbors in terms of job creation and growth, its challenges with declining manufacturing, high informal employment, and low education attainment endanger its momentum. To tackle these obstacles, the authors recommend:

1. Adjust the priorities of the growth strategy to promote manufacturing, and reconsider the goal of economic growth for growth’s sake by acknowledging that sustainable growth must be coupled with generation of productive and high-earning jobs for all.
2. Create a manufacturing and business-friendly environment by addressing the country’s high interest rates, high taxes, and chronic energy problems, among others.
3. Enact policies to enhance the high-productivity, high-labor-absorbing agricultural sector, such as improving agricultural extension, develop irrigation plans, among others.
4. Develop policies to increase the number of secondary school graduates as well as students studying science, technology, engineering, and math.

For further discussion and recommendations, read the full paper here.

Note: The African Lions project is a collaboration among United Nations University-World Institute for Development Economics Research (UNU-WIDER), the University of Cape Town’s Development Policy Research Unit (DPRU), and the Brookings Africa Growth Initiative, that provides an analytical basis for policy recommendations and value-added guidance to domestic policymakers in the fast-growing economies of Africa, as well as for the broader global community interested in the development of the region. The six papers, covering Mozambique, Kenya, Ghana, South Africa, Ethiopia, and Nigeria, explore the key constraints facing African economies as they attempt to maintain a long-run economic growth and development trajectory.

      

       

       

       

       

The Federal Reserve last week released transcripts of Federal Open Market Committee (FOMC) meetings that took place in 2008 amidst a worsening global financial crisis. Sarah Binder describes what was found amongst the transcripts. Alongside financial and economic crises facing the Fed that year, the Fed faced a crisis as a political institution.  

       

       

It is hard to find good news these days, especially coming from Sacramento, the capital of one of the most hard-pressed states in the country. Yet an evolving model of development is emanating from the metropolitan area that is being watched carefully around the country.

This model could inspire sweeping national transportation, energy and climate change legislation and future infrastructure investment and real estate development.

The model started with the much-admired Blueprint Project, led by the Sacramento Area Council of Governments. Next came Senate Bill 375, calling for regional transportation and development plans that minimize auto dependency, reduce climate change gas emissions and encourage walkable urban development. The next steps are the Sacramento Regional Transit Master Plan and Transit-Oriented Guidelines, to be released in May. Taken together, they offer a bold effort to give the market what it wants: the choice of the well-known drivable suburban or walkable urban development, the basis of the next American Dream.

For the past half-century, American households demanded and got only one way of living and working, the suburban way that meant driving. Basically, California invented this way of life and exported it across the country and around the world. We all reveled in it. The songs of the Beach Boys and Jan and Dean still echo through my mind, reminding me of a way of life and a way of developing our communities that was seductive at the time.

Little did we know of the unintended consequences of drivable suburban development pattern, including:

• Land consumption eight to 12 times that of population growth.
• Significant increase in car-miles driven and foreign oil consumed, mostly from hostile countries.
• The onset of the obesity, diabetes and asthma epidemics related to a car-dependent lifestyle, especially among our children who cannot even walk to school anymore.
• Household income diverted from wealth building to paying for a fleet of depreciating cars, taking at least 25 percent of income vs. less than 5 percent a century ago.
• The quality of life for the community goes down when more drivable suburban development occurs, such as the next strip mall. This leads to not-in-my-backyard opposition. According to a soon-to-be-released Brookings Institution study, car-dependent households emit three times the climate change gases, such as carbon dioxide, as a walkable urban household.

Yet these consequences, which evoke much hand-wringing, do not tend to motivate behavioral change. That change comes when consumers vote with their pocketbooks; this they have done. There is pent-up demand for walkable urban development, with evidence everywhere you look. This includes research of consumer preferences and market research showing that walkable urban housing has held its value during this recession while the bulk of price declines occurred in fringe suburban housing.

Unfortunately, many metropolitan areas enforce zoning laws that prohibit building higher-density, walkable urban development. There is great NIMBY opposition to it. And the necessary infrastructure for a choice of transportation options from walking and biking to riding transit, along with cars, is generally not available.

Yet Sacramento is showing the rest of the state and nation how to do it. The Blueprint is widely regarded as a state and national model of regional development planning. The proposed Regional Transit Master Plan, along with the Transit-Oriented Development Guidelines, will provide the extension of the transit system while helping to make walkable urban development acceptable around the stations.

Another step is to provide management to each of these walkable urban, Transit-Oriented Development places, such as Station 65, a proposed 500,000-square-foot mixed-used project to include residential units, office and retail space, and a hotel and restaurants. These management organizations would be modeled on the Downtown Sacramento Partnership. In fact, many of these Transit-Oriented Development places can subcontract with the partnership to provide services in the early years.

Finally, these walkable urban, transit-oriented places need to develop a conscious affordable housing strategy. The current affordable housing strategy in Sacramento is "drive until you qualify" – which is obviously bankrupt. It is crucial to have a conscious strategy since it is going to take a generation to catch up with the pent-up demand for walkable urban housing and commercial development.

According to Brookings Institution research, there should be eight to 12 regionally significant, walkable urban, transit-oriented places in the region. Today there are only three: downtown, midtown and Old Sacramento. The opportunity for locating and building five to nine additional walkable urban, transit-oriented places and building far more development in the existing three would be worth billions of dollars and would represent a more sustainable way of living.

Sacramento can provide a model for the country, one that we certainly need.

       

Drive through any number of outer-ring suburbs in America, and you’ll see boarded-up and vacant strip malls, surrounded by vast seas of empty parking spaces. These forlorn monuments to the real estate crash are not going to come back to life, even when the economy recovers. And that’s because the demand for the housing that once supported commercial activity in many exurbs isn’t coming back, either.

By now, nearly five years after the housing crash, most Americans understand that a mortgage meltdown was the catalyst for the Great Recession, facilitated by underregulation of finance and reckless risk-taking. Less understood is the divergence between center cities and inner-ring suburbs on one hand, and the suburban fringe on the other.

It was predominantly the collapse of the car-dependent suburban fringe that caused the mortgage collapse.

In the late 1990s, high-end outer suburbs contained most of the expensive housing in the United States, as measured by price per square foot, according to data I analyzed from the Zillow real estate database. Today, the most expensive housing is in the high-density, pedestrian-friendly neighborhoods of the center city and inner suburbs. Some of the most expensive neighborhoods in their metropolitan areas are Capitol Hill in Seattle; Virginia Highland in Atlanta; German Village in Columbus, Ohio, and Logan Circle in Washington. Considered slums as recently as 30 years ago, they have been transformed by gentrification.

Simply put, there has been a profound structural shift — a reversal of what took place in the 1950s, when drivable suburbs boomed and flourished as center cities emptied and withered.

The shift is durable and lasting because of a major demographic event: the convergence of the two largest generations in American history, the baby boomers (born between 1946 and 1964) and the millennials (born between 1979 and 1996), which today represent half of the total population.

Many boomers are now empty nesters and approaching retirement. Generally this means that they will downsize their housing in the near future. Boomers want to live in a walkable urban downtown, a suburban town center or a small town, according to a recent survey by the National Association of Realtors.

The millennials are just now beginning to emerge from the nest — at least those who can afford to live on their own. This coming-of-age cohort also favors urban downtowns and suburban town centers — for lifestyle reasons and the convenience of not having to own cars.

Over all, only 12 percent of future homebuyers want the drivable suburban-fringe houses that are in such oversupply, according to the Realtors survey. This lack of demand all but guarantees continued price declines. Boomers selling their fringe housing will only add to the glut. Nothing the federal government can do will reverse this.

Many drivable-fringe house prices are now below replacement value, meaning the land under the house has no value and the sticks and bricks are worth less than they would cost to replace. This means there is no financial incentive to maintain the house; the next dollar invested will not be recouped upon resale. Many of these houses will be converted to rentals, which are rarely as well maintained as owner-occupied housing. Add the fact that the houses were built with cheap materials and methods to begin with, and you see why many fringe suburbs are turning into slums, with abandoned housing and rising crime.

The good news is that there is great pent-up demand for walkable, centrally located neighborhoods in cities like Portland, Denver, Philadelphia and Chattanooga, Tenn. The transformation of suburbia can be seen in places like Arlington County, Va., Bellevue, Wash., and Pasadena, Calif., where strip malls have been bulldozed and replaced by higher-density mixed-use developments with good transit connections.

Reinvesting in America’s built environment — which makes up a third of the country’s assets — and reviving the construction trades are vital for lifting our economic growth rate. (Disclosure: I am the president of Locus, a coalition of real estate developers and investors and a project of Smart Growth America, which supports walkable neighborhoods and transit-oriented development.)

Some critics will say that investment in the built environment risks repeating the mistake that caused the recession in the first place. That reasoning is as faulty as saying that technology should have been neglected after the dot-com bust, which precipitated the 2001 recession.

The cities and inner-ring suburbs that will be the foundation of the recovery require significant investment at a time of government retrenchment. Bus and light-rail systems, bike lanes and pedestrian improvements — what traffic engineers dismissively call “alternative transportation” — are vital. So is the repair of infrastructure like roads and bridges. Places as diverse as Los Angeles, Phoenix, Salt Lake City, Dallas, Charlotte, Denver and Washington have recently voted to pay for “alternative transportation,” mindful of the dividends to be reaped. As Congress works to reauthorize highway and transit legislation, it must give metropolitan areas greater flexibility for financing transportation, rather than mandating that the vast bulk of the money can be used only for roads.

For too long, we over-invested in the wrong places. Those retail centers and subdivisions will never be worth what they cost to build. We have to stop throwing good money after bad. It is time to instead build what the market wants: mixed-income, walkable cities and suburbs that will support the knowledge economy, promote environmental sustainability and create jobs.

       

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Myanmar/Burma is in the fourth year of a historic transition out of military rule that began after the junta dissolved itself in March 2011, replaced by an elected parliament and the government led by President Thein Sein. New elections are expected in November for its second government under the 2008 constitution. While expressing commitment to holding a free and fair election, the Thein Sein government has left in place a constitutional obstacle to allowing Aung San Suu Kyi, leader of the opposition National League for Democracy (NLD), from becoming the country’s next president. The NLD seems likely to emerge from the new elections with the most seats in the legislature, but may fall short of its landslide victory in the 1990 election, which was not accepted by the ruling military junta.

On July 14, the Center for East Asia Policy Studies at Brookings hosted a discussion of Myanmar’s progress over the past four years and the prospects for strengthening democratic rule under the next government. Delphine Schrank, a former reporter with The Washington Post, spent four years among dissidents in Myanmar/Burma and has written a narrative nonfiction account about their epic multi-generational fight for democracy. Her book “The Rebel of Rangoon; A Tale of Defiance and Deliverance” (Nation Books, 2015) will set the stage for the discussion. Panelists included Brookings Senior Fellow Ted Piccone, Nonresident Senior Fellow Lex Rieffel, and Priscilla Clapp, former chief-of-mission to the U.S. Embassy in Burma (1999-2002). Richard Bush, senior fellow and director of the Center for East Asia Policy Studies, offered opening remarks and moderated the discussion.

Audio

• The struggle for democracy in Myanmar/Burma

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20150714_democracy_burma_transcript