Suzy Khimm reports on a proposal from the Bipartisan Policy Center that would establish a framework for reaching a grand bargain on deficit reduction in 2013. In short, the BPC proposes that Congress and the president in the lame duck session would agree to a procedural framework for guiding enactment of major spending and tax reforms in 2013. In enacting the framework, Congress and the president would also avert going over the fiscal cliff. In exchange, Congress and the president would make a small down payment on deficit reduction in the lame duck, and would authorize a legislative “backstop” of entitlement cuts and elimination of tax expenditures that would become law if Congress and the president failed in 2013 to enact tax and spending reforms.

The procedural elements of the BPC’s proposal bear some attention. The BPC’s not-quite-yet-a-catchphrase is “accelerated regular order.” Although it sounds like a nasty procedural disease, it’s akin to the fast-track procedures established in the Congressional Budget Act and in several other statutes. In short, the framework proposed by the BPC would instruct the relevant standing committees in 2013 to suggest to the chamber budget committees entitlement and tax reforms that would sum to $4 trillion dollars in spending cuts and new revenues (assuming extension of the Bush tax cuts). The House and Senate budget panels would each report a grand bargain bill for their chamber’s consideration that would be considered (without amendment) by simple majority vote after twenty hours of debate. Failure to meet the framework’s legislated deadlines would empower the executive branch to impose entitlement savings and to eliminate tax expenditures to meet the framework’s target.

Loyal Monkey Cage readers will recognize that the BPC proposal resembles in many ways the procedural solution adopted in the Deficit Control Act in August of 2011. But there are at least two procedural differences from the 2011 deficit deal. First, rather than a super committee, the BPC envisions “regular order,” meaning that the standing committees—not a special panel hand-selected by party-leaders—would devise the legislative package. Like the August deficit deal, the BPC proposal then offers procedural protection for the package by banning the Senate filibuster and preventing changes on the chamber floors (hence, an accelerated regular order). Second, rather than a meat-axe of sequestration that imposes only spending cuts, the BPC offers a “backstop,” giving what I take to be statutory authority to the executive branch to determine which tax expenditures to eliminate and which entitlement programs to cut back.

These differences from 2011 are subtle, but the BPC believes that they would improve the odds of success compared to the failed Super-committee plus sequestration plan. As a BPC staffer noted:

"One of the reasons the Joint Select Committee on Deficit Reduction failed, in our view, was because only 12 lawmakers were setting policy for the entire Congress,” said Steve Bell, Senior Director of BPC’s Economic Policy Project. “The framework we propose today would both ensure an acceleration of regular budget order in the House and Senate, and it would involve all committees of relevant jurisdiction.”

This is an interesting argument worth considering. Still, I’m not so sure that accelerated regular order would improve the prospects for an agreement.

First, it strikes me that the real barrier to a grand bargain hasn’t been the Senate’s filibuster rule. The super committee was guaranteed a fast-track to passage, but that still didn’t motivate the parties to reach an agreement. The more relevant obstacle in 2011 and 2012 has been the bicameral chasm between a Republican House and a Democratic Senate. To be sure, eliminating the need for a sixty-vote cloture margin would smooth the way towards Senate passage. But we could easily imagine that the 60th senator (in 2013, perhaps a GOP senator like Lisa Murkowski) might be willing to sign onto a deal that would still be too moderate to secure the votes of House Republicans (assuming no change in party control of the two chambers). As we saw over the course of the 112th Congress, House passage required more than the consent of the House median (an ideologically moderate Republican) and more than the support of a majority of the GOP conference. The big deals in the 112th Congress only passed if they could attract the votes of roughly 90% of the House GOP conference. Expedited procedures can protect hard-fought compromises from being unraveled on the chamber floors but by themselves don’t seem sufficient to generate compromise in the first place.

Second, and related, I’m somewhat skeptical that the small size of the super committee precluded a viable agreement. By balancing parties and chambers, the group was (in theory) a microcosm of the full Congress. If true, then delegating to the super committee was more akin to delegating to a mini-Congress. Perhaps the BPC’s idea of allowing the standing committees to generate proposals would broaden legislators’ willingness to buy-in to a final agreement. More likely, I suspect that the framework would produce a House bill perched on the right and a Senate bill left of center (since the filibuster ban would reduce Democrats’ incentives to produce a bipartisan bill). That leaves the bicameral chasm still to be bridged, suggesting that accelerated regular order might not bring Congress all that much closer to a bipartisan agreement in 2013. Consent of party leaders remains critical for an agreement.

Third, the BPC proposal is unclear on the precise nature of the legislative backstop. But would either party agree in advance to the framework if they didn’t know whose ox would be gored by the administration when it exercised its power to reform entitlements and eliminate tax expenditures? Perhaps delegating such authority to the executive branch would allow legislators to avoid voters’ blame, making them more likely to vote for the framework. (That said, it’s somewhat ironic that the BPC’s embrace of accelerated regular order flows from its desire to broaden the set of legislators whose fingerprints are visible on the grand bargain.) Regardless, the prospects for cuts in entitlement programs could lead both parties to favor kicking the can down the road again before it actually explodes.

Fast-track procedures have a decent track record in facilitating congressional action. (Steve Smith and I have extolled their virtues elsewhere.) But the most successful of these episodes involve narrow policy areas (such as closing obsolete military bases) on which substantial bipartisan agreement on a preferred policy outcome is already in place. Expecting a procedural device to do the hard work of securing bipartisan agreement may be asking too much of Congress’s procedural tool kit in a period of divided and split party control.

Spring has sprung and once again Publish What You Fund has issued its Aid Transparency Index (ATI). Once again most of the multilateral development banks (MDBs) receive high grades rated as very good. And once again I ask whether those grades are well deserved? At the heart of my question is whether aid agencies are disclosing sufficient information during the critical implementation stage of a project.

Last year we reviewed the practices of 8 aid agencies, 7 of which consistently receive the highest accolades in the ATI. What was evident from our review was the serious asymmetry of the type of aid data released to the public. A major target at Busan in 2011 when donors made commitments to aid transparency and in the establishment of the ATI has been the reporting of aid flows and the projects approved by each agency. There has been growing emphasis since then on reporting information on the results of those projects. But there has been very limited progress in the release of information during project implementation.

The importance of such information should be obvious. It is during project implementation that the various stakeholders need to monitor project progress, report on issues requiring attention, and make changes to ensure achievement of the desired results. It is insufficient to only disclose who wins a contract; consideration should be given to publishing the contracts, reporting on its execution, and disclosing amendments to the contracts. And it is not enough to simply publish the resettlement action plan for a project; how that plan is being implemented must be reported. Real time reporting is the key to being able to adapt and make changes as projects evolve.

It is very evident that the International Aid Transparency Initiative (IATI) and the ATI have had a major positive impact on raising the level of transparency of aid agencies. Discussions with various agencies illustrate how they are keen to getting higher scores each year, carefully analyzing the indicators to guide their actions. However, with only a limited focus and weighting of reporting on project implementation in the ATI, there is no incentive to fill this important gap. 

In its 2016 report, Publish What You Fund has indicated that it will be reviewing its indicators later this year and intends to raise the bar. It would be timely to include information on project implementation in those revisions. One challenge is how to develop indicators that are similarly relevant across a wide variety of aid agencies. Implementation information is most critical for agencies that finance longer-term projects, especially infrastructure, such as the MDBs.  One option is to consider a set of indicators to better “incentivize” the relevant agencies and refer to these as ATI+.

The MDB’s, in their major disclosure reforms since 2010, adopted a principle that “deliberative” information would not be disclosed in order to foster candid and open dialogue within the organization and between the organization and the client country. As per the World Bank’s policy, “The Bank, like any institution or group, needs space to consider and debate, away from public scrutiny.” This excludes emails, notes, and other exchanges either internally or with member countries.

As a result, the project supervision reports, which managements use to monitor projects under execution and are generally published twice a year, were divided between disclosed versus undisclosed sections. The undisclosed sections would offer space for reporting on confidential project concerns including potential corruption. Our review of the disclosed reports suggests that most aid agencies’ task managers tend to take a cautious approach, placing most information in the undisclosed sections. Stakeholders outside the MDB, such as local civil society groups, then, often only see truncated information.

While the adoption of the “deliberative” principle is understandable, its application places a serious responsibility on management to ensure that this is applied with considerable restraint. The MDBs should review the application of this principle and assess the type of information released during implementation.

It is indeed time to raise the bar on transparency and to focus on the most critical information required to ensure results. This is not the moment for complacency with high grades.

Recent reports have highlighted how mobile-based financial services are transforming banking and payments in Kenya, Bangladesh, and Peru, and all the hype about how they are about to explode everywhere else. For all of the promise that digital financial systems have for lowering costs and helping people all over the globe, it is unfortunate that their development is hampered by regulation that protects the interests of the largest providers. These regulations create significant barriers and raise the total costs to achieve universal financial inclusion.

It is indeed conceivable that purely digital financial transactions could be handled at vanishingly small unit costs, from anywhere. But the cost that won´t go away is that at the interface between the new digital payment system and the legacy payment system – hard cash. Cash in/cash out (CICO) points are like tollgates at the edge of the digital payments cloud.

Cash is Still King

Even in areas with flourishing mobile banking usage, people tend to cash in every time they want to make a mobile payment, and to cash out immediately and in full every time they receive digital money. Rather than displacing cash, digital platforms have made local cash ecosystems more efficient. Without full backward compatibility with cash, digital payment systems could not take root.

The bigger issue is not the size of the CICO toll, but the fact that small players cannot expect to have the transaction volume to sustain a widespread CICO network. The incumbent banks and telecommunications firms have built in competitive advantages. They can quickly form agreements with brick and mortar shops, attract users from the current customer base, threaten new entrants, and aggregate enough transactions to induce CICO outlets to maintain sufficient liquidity on hand.

Therefore, the competition in digital financial services will not be determined primarily by what happens within the digital payments market itself, but rather by what happens in the contiguous cash market. The power of digital services is their ability to transcend geography, and yet success in the digital payments space will go to whoever has the best physical CICO footprint.

Regulators treat the digital payments service and the CICO service as conjoined twins: each digital financial service provider must have its own base of contractually bound CICO outlets. When the two services are bundled it is not surprising that the tough economics of CICO —and, therefore, the incumbent— dominates.

A Two Market Regulatory Approach

In a recent paper, I argue it is necessary to split up these two markets, from a regulatory point of view. The market for effecting electronic payments (issuing payment instructions and debiting and crediting electronic accounts accordingly) is logically distinct from the market for exchanging two forms of money (hard cash versus electronic value).

Most regulators approve of stores receiving electronic money from customers in exchange for packs of rice on a store shelf. But, if that same electronic money was exchanged for cash then it would violate the law in many countries.

In the latter case, the store is presumed to be an agent of the customer’s financial service provider, and the store cannot offer the CICO service without an agency contract from that provider. But why? The cash that was offered was the store’s as is the account that would receive the electronic payment, and the transaction would have occurred entirely through a secure, real-time technology platform that banks offer all their clients.

A Regulatory Fix

Of course, purely financial transactions are usually held to higher consumer protection standards than normal commercial transactions. My proposal is not to deregulate CICO, but to create a new license type for CICO network managers. Holders of this license would carry certain consumer protection obligations (such as ensuring that tariffs are explicitly posted at all CICO outlets, and that they have a call center to handle any complaints that customers may have on individual CICO outlets) – entirely reasonable expectations for retailers, even if we normally don´t ask them of rice sellers.

But once you have a CICO license, then you could sign up any store you wanted and crucially, offer CICO services on the platform of any financial institution in which you have an account. In other words, you wouldn’t have to beg the incumbent to give you a special agent contract. All you would need to do is to open a normal customer account with them, which the incumbent couldn´t deny you.

This one little change would completely shift the competitive dynamics of digital financial services. Under the current direct agency model, incumbent firms have no incentive to make it easier for competitors to create CICO outlets. Whereas under the independent CICO network manager model, all licensed CICO networks would have the incentive to offer CICO services for all providers, no matter their size: with a full suite of available services, they will find it easier to sign up stores to work for them, and these stores will find it easier to convince more users to walk into their stores.

Incumbents would still be free to establish their own proprietary CICO networks, as today. But they would have to compete with independent CICO networks that are now able to aggregate business from all financial service providers, creating true competition.

All players could then claim a comparable physical presence as the incumbent. They would all benefit from the same branded competition between CICO networks. They could compete strictly on the basis of the quality of their digital financial services offering.

Unbundling the regulatory treatment of digital financial services would help competition reach every segment of the business; the current integrated model only serves the interests of the largest telecommunication companies and banks in the land.

America is becoming a more class-stratified society, contrary to the nation’s self-image as a socially dynamic meritocracy. In particular, the barriers are hardening between the upper middle class and the majority below them. As New York Times contributor Tom Edsall writes (“How the Other Fifth Lives"), “The self-segregation of a privileged fifth of the population is…creating a self-perpetuating class at the top, which is ever more difficult to break into.”

This separation of the upper middle class by income, wealth, occupation and neighborhood has created a social distance between those of us who have been prospering in recent decades, and those who are feeling left behind, angry and resentful, and more like to vote for To-Hell-With-Them-All populist politicians. As I told Charles Homans, also writing on class for the Times, “The upper middle class are surprised by the rise of Trump. The actual middle class is surprised we’re surprised.”

Edsall cited my earlier essay, “The Dangerous Separation of the American Upper Middle Class,” and quoted me as follows:

“The top fifth have been prospering while the majority lags behind. But the separation is not just economic. Gaps are growing on a whole range of dimensions, including family structure, education, lifestyle, and geography. Indeed, these dimensions of advantage appear to be clustering more tightly together, each thereby amplifying the effect of the other.”

Just as certain disadvantages can cluster together, creating multidimensional poverty, so advantages may cluster together, resulting in multidimensional advantage. Is there more clustering of advantages at the top of American society? Yes.

The top fifth of households by income obviously have more money than the 80 percent below them. What about other advantages? Let’s take just three: marriage, employment and education. (See Sean Reardon and Kendra Bischoff’s paper on the geographical segregation of affluence). You would expect people in top-quintile households to be more likely to have a graduate or professional degree; to have two earners in the family; and perhaps also to be married. You would be right.

The difference in the proportion of the top fifth with each of these other advantages compared to the bottom four-fifths is around 20 percentage points (we restrict our analysis to those aged 40-50). For example, in 1979 a forty-something year-old in the top income quintile was about 6 percentage points more likely to be married that one in the bottom 80 percent. Now the gap is 17 percentage points.

This is hardly surprising. More education and more earners in the home will increase the chances that you make it into the top quintile for your age cohort. But it is noteworthy that the extent to which these different dimensions of advantage overlap has been steadily increasing over time. Along with the increased association between top-quintile income and marriage, the differentials for graduate education and two-earner status have each increased by around 10 percentage points between 1979 and 2014.

Particularly striking is the increase in the “marriage gap” between the upper middle class and the rest. This is an important factor in the transmission of class status to the next generation, since married couples are more likely to stay together, and stable families predict better outcomes for children.

Similarly, the adults with high levels of education are likely to raise children who end up towards the top of the educational distribution. In fact, the intergenerational persistence of education is even greater than of income, as some of our earlier work shows (“The Inheritance of Education”). Almost half (46 percent) the children of parents in the top education quintile end up in the top education quintile themselves. Three in four (76 percent) stayed in one of the top two education quintiles.

F. Scott Fitzgerald famously said: "Let me tell you about the very rich. They are different from you and me.” Ernest Hemingway’s later response was: “Yes, they have more money.” Today what separates the rich from the rest is not just money, but family life, education, zip code, and so on. This is a point made by a number of scholars, including recently both Robert Putnam in Our Kids and Charles Murray in Coming Apart. Our empirical analysis confirms that different kinds of advantage are increasingly overlapping with each other.

The framing of inequality in terms of social class used to feel distinctly un-American. No longer.

Editor’s note: This piece originally appeared in Real Clear Markets.

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

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

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

Transfers rates from community college vary dramatically by state

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

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

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

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

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

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

Tuning an American engine of social mobility

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

Editor’s Note: This blog post is one in a series of posts in which guest bloggers respond to the Brookings paper, “The potential and limitations of impact bonds: Lessons from the first five years of experience worldwide."

In 2014, clause 5 (1) of the County Early Childhood Education Bill 2014 declared free and compulsory early childhood education a right for all children in Kenya. Early childhood education (ECE) in Kenya has historically been located outside of the realm of government and placed under the purview of the community, religious institutions, and the private sector. The disparate and unstructured nature of ECE in the country has led to a proliferation of unregistered informal schools particularly in underprivileged communities. Most of these schools still charge relatively high fees and ancillary costs yet largely offer poor quality of education. Children from these preschools have poor cognitive development and inadequate school readiness upon entry into primary school.

The Kenyan constitution places the responsibility and mandate of providing free, compulsory, and quality ECE on the county governments. It is an onerous challenge for these sub-national governments in taking on a large-scale critical function that has until now principally existed outside of government.

In Nairobi City County, out of over 250,000 ECE eligible children, only about 12,000 attend public preschools. Except for one or two notable public preschools, most have a poor reputation with parents. Due to limited access and demand for quality, the majority of Nairobi’s preschool eligible children are enrolled in private and informal schools. A recent study of the Mukuru slum of Nairobi shows that over 80 percent of 4- and 5-year-olds in this large slum area are enrolled in preschool, with 94 percent of them attending informal private schools.

In early 2015, the Governor of Nairobi City County, Dr. Evans Kidero, commissioned a taskforce to look into factors affecting access, equity, and quality of education in the county. The taskforce identified significant constraints including human capital and capacity gaps, material and infrastructure deficiencies, management and systemic inefficiencies that have led to a steady deterioration of education in the city to a point where the county consistently underperforms relative to other less resourced counties. 

Nairobi City County now faces the challenge of designing and implementing a scalable model that will ensure access to quality early childhood education for all eligible children in the city by 2030. The sub-national government’s resources and implementation capacity are woefully inadequate to attain universal access in the near term, nor by the Sustainable Development Goal (SDG) deadline of 2030. However, there are potential opportunities to leverage emerging mechanisms for development financing to provide requisite resource additionality, private sector rigor, and performance management that will enable Nairobi to significantly advance the objective of ensuring ECE is available to all children in the county.

Social impact bonds (SIBs) are one form of innovative financing mechanism that have been used in developed countries to tap external resources to facilitate early childhood initiatives. This mechanism seeks to harness private finance to enable and support the implementation of social services. Government repays the investor contingent on the attainment of targeted outcomes. Where a donor agency is the outcomes funder instead of government, the mechanism is referred to as a development impact bond (DIB).

The recent Brookings study highlights some of the potential and limitations of impact bonds by researching in-depth the 38 impact bonds that had been contracted globally as of March, 2015. On the upside, the study shows that impact bonds have been successful in achieving a shift of government and service providers to outcomes. In addition, impact bonds have been able to foster collaboration among stakeholders including across levels of government, government agencies, and between the public and private sector. Another strength of impact bonds is their ability to build systems of monitoring and evaluation and establish processes of adaptive learning, both critical to achieving desirable ECD outcomes. On the downside, the report highlights some particular challenges and limitations of the impact bonds to date. These include the cost and complexity of putting the deals together, the need for appropriate legal and political environments and impact bonds’ inability thus far to demonstrate a large dent in the ever present challenge of achieving scale.

In the Kenyan context, especially at the sub-national level, there are two key challenges in implementing impact bonds.

To begin with, in the Kenyan context, the use of a SIB would invoke public-private partnership legislation, which prescribes highly stringent measures and extensive pre-qualification processes that are administered by the National Treasury and not at the county level. The complexity arises from the fact that SIBs constitute an inherent contingent liability to government as they expose it to fiscal risk resulting from a potential future public payment obligation to the private party in the project.

Another key challenge in a SIB is the fact that Government must pay for outcomes achieved and for often significant transaction costs, yet the SIB does not explicitly encompass financial additionality. Since government pays for outcomes in the end, the transaction costs and obligation to pay for outcomes could reduce interest from key decision-makers in government.

The above challenges notwithstanding, a combined approach of results-based financing and impact investing has high potential to mobilize both requisite resources and efficient capacity to deliver quality ECE in Nairobi City County. To establish an enabling foundation for the future inclusion of impact investing whilst beginning to address the immediate ECE challenge, Nairobi City County has designed and is in the process of rolling out a modified DIB. In this model, a pool of donor funds for education will be leveraged through the new Nairobi City County Education Trust (NCCET).

The model seeks to apply the basic principles of results-based financing, but in a structure adjusted to address aforementioned constraints. Whereas in the classical SIB and DIB mechanisms investors provide upfront capital and government and donors respectively repay the investment with a return for attained outcomes, the modified structure will incorporate only grant funding with no possibility for return of principal. Private service providers will be engaged to operate ECE centers, financed by the donor-funded NCCET. The operators will receive pre-set funding from the NCCET, but the county government will progressively absorb their costs as they achieve targeted outcomes, including salaries for top-performing teachers. As a result, high-performing providers will be able to make a small profit. The system is designed to incentivize teachers and progressively provide greater income for effective school operators, while enabling an ordered handover of funding responsibilities to government, thus providing for program sustainability.

Nairobi City County plans to build 97 new ECE centers, all of which are to be located in the slum areas. NCCET will complement this undertaking by structuring and implementing the new funding model to operationalize the schools. The structure aims to coordinate the actors involved in the program—donors, service providers, evaluators—whilst sensitizing and preparing government to engage the private sector in the provision of social services and the payment of outcomes thereof.

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

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

Specific strategies include:

Barcelona Activa »

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