There is a marriage gap in America. This is not just a gap in choices and actions, but in norms and attitudes. Each generation is more liberal, on average, when it comes to issues like premarital relationships, same-sex marriage, and divorce. But generational averages can obscure other divides, including ideology—which in many cases is a more powerful factor.

Take opinions on the most important prerequisites for marriage, as explored in the American Family Survey conducted earlier this year by Deseret News and the Center for the Study of Elections and Democracy (disclosure: I am an adviser to the pollsters). There is widespread agreement that it is best to have a stable job and to have completed college before tying the knot. But there is less agreement in the 3,000-person survey on other questions, including premarital cohabitation.

In response to the question of whether it is “important to live with your future spouse before getting married,” a clear gap emerges between those who identify as Democrats and those who identify as Republicans. This gap trumps the generational one, with younger Republicans (under 40) more conservative than Democrats over the age of 40:

The importance of family stability for a child’s wellbeing and prospects is well-documented, not least in Isabel Sawhill’s book, Generation Unbound. The question is not whether stability matters, but how best to promote it. To the extent that biological parents stay together and provide a stable environment, it doesn’t much matter if they are married. For children living with both biological parents, there is no difference in outcomes between those being raised by a married couple compared to a cohabiting couple, according to research by Wendy Manning at Bowling Green State University.

But people who marry are much more likely to stay together:

Marriage, at least in America, does seem to act as an important commitment device, a “co-parenting” contract for the modern world, as I’ve argued in an essay for The Atlantic, “How to Save Marriage in America.”

Cohabitation can signal radically different situations. A couple who plan to live together for a couple of years, then marry, and then plan the timing of having children are very different from a couple who start living together, accidentally get pregnant, and then, perhaps somewhat reluctantly, get married.

There is some evidence that cohabitation is in fact becoming a more common bridge to marriage and commitment. First-time premarital cohabiting relationships are also lasting longer on average and increasingly turn into marriage: around seven in ten cohabiting couples are still together after three years, of whom four have married.

In the end what matters is planning, stability, and commitment. If cohabitation is a planned prelude to what some scholars have labeled “decisive marriages,” it seems likely to prove a helpful shift in social norms, by allowing couples to test life under the same roof before making a longer-term commitment. Sawhill’s distinction between “drifters” and “planners” in terms of pregnancy may also be useful when it comes to thinking about cohabitation, too.

“There is room for everybody in America,” wrote French-American author Hector St. John de Crèvecœur in 1782’s Letters from an American Farmer.

Like most of the founding generation, Crèvecœur believed the sheer size of the new nation meant for a prosperous future. But he was also celebrating an attitude of openness, a willingness to embrace new citizens from around the world into what he called the “melting pot” of American society.

The embrace of openness has survived, in spite of occasional outbreaks of anti-immigrant sentiment, for the intervening two and a half centuries. The United States remains an immigrant nation, in spirit as well as in fact. (A fact for which, as an immigrant from the Old Country, I am grateful). My wife is American, and my high schoolers have had U.S. passports since being born in London. Right now I'm applying for U.S. citizenship. I want America to be my home not just my residence. My story is of course very different to most immigrants - but the point is, all of our stories are different. What unites us is our desire to be American.

But this spirit may be waning. Thanks only in part to Donald Trump, immigration is near the top of the political agenda – and not in a good way.

Trump has brilliantly exploited the imagery of The Wall to tap into the frustrations of white middle America. But America needs immigration. At the most banal level, this is a question of math. We need more young workers to fund the old age of the Baby Boomers. Overall, immigrants are good for the economy, as a recent summary of research from Brookings’ Hamilton Project shows.

Of course, while immigration might be good for the economy as a whole, that does not mean it is good for everyone. Competition for wages and jobs will impact negatively on some existing residents, who may be more economically vulnerable in the first place. Policymakers keen to promote the benefits of immigration should also be attentive to its costs.

But the value of immigration cannot be reduced to an actuarial table or spreadsheet. Immigrants do not simply make America better off. They make America better. Immigrants provide a shot in the nation’s arm.

Immigrants are now twice as likely to start a new business as native-born Americans. While rates of entrepreneurialism are declining among natives, they are rising among immigrants. Immigrant children typically show extraordinary upward mobility, in terms of income, occupation and education. Among children born in Los Angeles to poorly-educated Chinese immigrants, for example, an astonishing 70% complete a four-year-college degree.

As the work of my Brookings colleague William Frey shows, immigrants are migrants within the U. S., too, moving on from traditional immigrant cities — New York and Los Angeles — to other towns and cities in search of a better future.

New Americans are true Americans. We need more of them. But Trump is tapping directly and dangerously into white fears of an America growing steadily browner. According to a 2011 Pew Research Center survey, more than four in ten white seniors say that a growing population of immigrants is a "change for the worse;" half of white boomers believe immigration is "a threat to traditional American customs and values."

Immigration gets at a deep question of American identity in the 21st century. Just like people, societies age. They might also settle down, lose some dynamism. They might trade a little less openness for a little more security. In other words, they get a bit stuck in their ways. Immigrants generate dynamism and aspiration, but they are also unsettling and challenging.

Where this debate ends will therefore tell us a great deal about the trajectory of the nation. An America that closes its doors will be an America that has chosen to settle down rather than grow, allowing security to eclipse dynamism.

Disruption is not costless. But America has always weighed the benefits of dynamism and diversity more heavily. Immigration is an important way in which America hits the refresh button and renews herself. Without immigration, the nation would not only be worse off, but would cease, in some elemental sense, to be America at all.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As a rhetorical ideal, greater opportunity is hard to beat. Just about all candidates for high elected office declare their commitments to promoting opportunity – who, after all, could be against it? But opportunity is, to borrow a term from the philosopher and political theorist Isaiah Berlin, a "protean" word, with different meanings for different people at different times.

Typically, opportunity is closely entwined with an idea of upward mobility, especially between generations. The American Dream is couched in terms of a daughter or son of bartenders or farm workers becoming a lawyer, or perhaps even a U.S. senator. But even here, there are competing definitions of upward mobility.

It might mean being better off than your parents were at a similar age. This is what researchers call "absolute mobility," and largely relies on economic growth – the proverbial rising tide that raises most boats.

Or it could mean moving to a higher rung of the ladder within society, and so ending up in a better relative position than one's parents.

Scholars label this movement "relative mobility." And while there are many ways to think about status or standard of living – education, wealth, health, occupation – the most common yardstick is household income at or near middle age (which, somewhat depressingly, tends to be defined as 40).

As a basic principle, we ought to care about both kinds of mobility as proxies for opportunity. We want children to have the chance to do absolutely and relatively well in comparison to their parents.

On the One Hand…

So how are we doing? The good news is that economic standards of living have improved over time. Most children are therefore better off than their parents. Among children born in the 1970s and 1980s, 84 percent had higher incomes (even after adjusting for inflation) than their parents did at a similar age, according to a Pew study. Absolute upward income mobility, then, has been strong, and has helped children from every income class, especially those nearer the bottom of the ladder. More than 9 in 10 of those born into families in the bottom fifth of the income distribution have been upwardly mobile in this absolute sense.

There's a catch, though. Strong absolute mobility goes hand in hand with strong economic growth. So it is quite likely that these rates of generational progress will slow, since the potential growth rate of the economy has probably diminished. This risk is heightened by an increasingly unequal division of the proceeds of growth in recent years. Today's parents are certainly worried. Surveys show that they are far less certain than earlier cohorts that their children will be better off than they are.

If the story on absolute mobility may be about to turn for the worse, the picture for relative mobility is already pretty bad. The basic message here: pick your parents carefully. If you are born to parents in the poorest fifth of the income distribution, your chance of remaining stuck in that income group is around 35 to 40 percent. If you manage to be born into a higher-income family, the chances are similarly good that you will remain there in adulthood.

It would be wrong, however, to say that class positions are fixed. There is still a fair amount of fluidity or social mobility in America – just not as much as most people seem to believe or want. Relative mobility is especially sticky in the tails at the high and low end of the distribution. Mobility is also considerably lower for blacks than for whites, with blacks much less likely to escape from the bottom rungs of the ladder. Equally ominously, they are much more likely to fall down from the middle quintile.

Relative mobility rates in the United States are lower than the rhetoric about equal opportunity might suggest and lower than people believe. But are they getting worse? Current evidence suggests not. In fact, the trend line for relative mobility has been quite flat for the past few decades, according to work by Raj Chetty of Stanford and his co-researchers. It is simply not the case that the amount of intergenerational relative mobility has declined over time.

Whether this will remain the case as the generations of children exposed to growing income inequality mature is not yet clear, though. As one of us (Sawhill) has noted, when the rungs on the ladder of opportunity grow further apart, it becomes more difficult to climb the ladder. To the same point, in his latest book, Our Kids – The American Dream in Crisis, Robert Putnam of Harvard argues that the growing gaps not just in income but also in neighborhood conditions, family structure, parenting styles and educational opportunities will almost inevitably lead to less social mobility in the future. Indeed, these multiple disadvantages or advantages are increasingly clustered, making it harder for children growing up in disadvantaged circumstances to achieve the dream of becoming middle class.

The Geography of Opportunity

Another way to assess the amount of mobility in the United States is to compare it to that found in other high-income nations. Mobility rates are highest in Scandinavia and lowest in the United States, Britain and Italy, with Australia, Western Europe and Canada lying somewhere in between, according to analyses by Jo Blanden, of the University of Surrey and Miles Corak of the University of Ottawa. Interestingly, the most recent research suggests that the United States stands out most for its lack of downward mobility from the top. Or, to paraphrase Billie Holiday, God blesses the child that's got his own.

Any differences among countries, while notable, are more than matched by differences within Pioneering work (again by Raj Chetty and his colleagues) shows that some cities have much higher rates of upward mobility than others. From a mobility perspective, it is better to grow up in San Francisco, Seattle or Boston than in Atlanta, Baltimore or Detroit. Families that move to these high-mobility communities when their children are still relatively young enhance the chances that the children will have more education and higher incomes in early adulthood. Greater mobility can be found in places with better schools, fewer single parents, greater social capital, lower income inequality and less residential segregation. However, the extent to which these factors are causes rather than simply correlates of higher or lower mobility is not yet known. Scholarly efforts to establish why it is that some children move up the ladder and others don't are still in their infancy.

Models of Mobility

What is it about their families, their communities and their own characteristics that determine why they do or do not achieve some measure of success later in life?

To help get at this vital question, the Brookings Institution has created a life-cycle model of children's trajectories, using data from the National Longitudinal Survey of Youth on about 5,000 children from birth to age 40. (The resulting Social Genome Model is now a partnership among three institutions: Brookings, the Urban Institute and Child Trends). Our model tracks children's progress through multiple life stages with a corresponding set of success measures at the end of each. For example, children are considered successful at the end of elementary school if they have mastered basic reading and math skills and have acquired the behavioral or non-cognitive competencies that have been shown to predict later success. At the end of adolescence, success is measured by whether the young person has completed high school with a GPA average of 2.5 or better and has not been convicted of a crime or had a baby as a teenager.

These metrics capture common-sense intuition about what drives success. But they are also aligned with the empirical evidence on life trajectories. Educational achievement, for example, has a strong effect on later earnings and income, and this well-known linkage is reflected in the model. We have worked hard to adjust for confounding variables but cannot be sure that all such effects are truly causal. We do know that the model does a good job of predicting or projecting later outcomes.

Three findings from the model stand out. First, it's clear that success is a cumulative process. According to our measures, a child who is ready for school at age 5 is almost twice as likely to be successful at the end of elementary school as one who is not.

This doesn't mean that a life course is set in stone this early, however.

Children who get off track at an early age frequently get back on track at a later age; it's just that their chances are not nearly as good. So this is a powerful argument for intervening early in life. But it is not an argument for giving up on older youth.

Second, the chances of clearing our last hurdle – being middle class by middle age (specifically, having an income of around $68,000 for a family of four by age 40) – vary quite significantly. A little over half of all children born in the 1980s and 1990s achieved this goal. But those who are black or born into low-income families were very much less likely than others to achieve this benchmark.

Third, the effect of a child's circumstances at birth is strong. We use a multidimensional measure here, including not just the family's income but also the mother's education, the marital status of the parents and the birth weight of the child. Together, these factors have substantial effects on a child's subsequent success. Maternal education seems especially important.

The Social Genome Model, then, is a useful tool for looking under the hood at why some children succeed and others don't. But it can also be used to assess the likely impact of a variety of interventions designed to improve upward mobility. For one illustrative simulation, we hand-picked a battery of programs shown to be effective at different life stages – a parenting program, a high-quality early-edcation program, a reading and socio-emotional learning program in elementary school, a comprehensive high school reform model – and assessed the possible impact for low-income children benefiting from each of them, or all of them.

No single program does very much to close the gap between children from lower- and higher-income families. But the combined effects of multiple programs – that is, from intervening early and often in a child's life – has a surprisingly big impact. The gap of almost 20 percentage points in the chances of low-income and high-income children reaching the middle class shrinks to six percentage points. In other words, we are able to close about two-thirds of the initial gap in the life chances of these two groups of children. The black-white gap narrows, too.

Looking at the cumulative impact on adult incomes over a working life (all appropriately discounted with time) and comparing these lifetime income benefits to the costs of the programs, we believe that such investments would pass a cost-benefit test from the perspective of society as a whole and even from the narrower prospective of the taxpayers who fund the programs.

What Now?

Understanding the processes that lie beneath the patterns of social mobility is critical. It is not enough to know how good the odds of escaping are for a child born into poverty. We want to know why. We can never eliminate the effects of family background on an individual's life chances. But the wide variation among countries and among cities in the U.S. suggests that we could do better – and that public policy may have an important role to play. Models like the Social Genome are intended to assist in that endeavor, in part by allowing policymakers to bench- test competing initiatives based on the statistical evidence.

America's presumed exceptionalism is rooted in part on a belief that class-based distinctions are less important than in Western Europe. From this perspective, it is distressing to learn that American children do not have exceptional opportunities to get ahead – and that the consequences of gaps in children's initial circumstances might embed themselves in the social fabric over time, leading to even less social mobility in the future.

But there is also some cause for optimism. Programs that compensate at least to some degree for disadvantages earlier in life really can close opportunity gaps and increase rates of social mobility. Moreover, by most any reasonable reckoning, the return on the public investment is high.

Editor's note: This piece originally appeared in the Milken Institute Review.

In the last two months China has executed a decisive change in its policy for managing its currency, the renminbi. Ending an eight-year period of slow but relentless appreciation against the U.S. dollar, the People’s Bank of China (PBOC) engineered a swift devaluation of about 3 percent, and doubled the size of the currency’s daily trading band. These moves took financial markets by surprise and sowed confusion. Was Beijing simply trying to re-ignite export growth by making its currency cheaper? Or was it making a more fundamental shift?

The answer is straightforward. China has taken a huge step towards making its exchange rate more flexible and market determined. In doing so, the authorities have clearly signaled their intention to switch from a monetary policy that mainly targets the exchange rate, to one that mainly targets domestic interest rates. The change in renminbi policy is thus part of a broad and ambitious financial reform strategy, reflecting the agenda laid out last November in the “Decision” published following the Third Plenum of the 18th Party Congress. It is all about improving China’s macroeconomic management, and has little or nothing to do with boosting exports.

Four Phases of China’s Exchange Rate Management

To understand the significance of the new renminbi policy, some background is helpful. The history of China’s exchange rate management can be divided into four phases. In the first, from 1979 to 1994, there was a steady depreciation in order to wean the country off the artificially overvalued exchange rate inherited from the previous period of Communist autarky. During this period Beijing maintained a dual exchange rate system. This consisted of an official rate, still overvalued, but gradually converging toward reality, which essentially applied to the capital account; and a more market based “swap rate” which was available to exporters. The purpose of this arrangement was to enable a competitive (though rudimentary) export economy to develop while still keeping the local price of imported capital goods relatively low, and avoiding the collapse in living standards that a full-on depreciation would have caused.

The second phase was a brief transition period in 1994-1995 when the two exchange rates were combined and the currency was allowed to float more or less freely in order for fair value to be established. In late 1995 the value of the renminbi was fixed at a rate of 8.3 against the U.S. dollar, initiating the third phase—a hard peg against the U.S. dollar—which lasted until July 2005.

It’s important to recall that the first test of this regime was the refusal to devalue in 1998 in the wake of the Asian financial crisis, when the currencies of the countries with whom China was then competing for export orders all fell dramatically. Rather than devaluing to help out exporters, Beijing hardened its peg. This was costly: China’s exports flatlined in 1998, and arguably the relatively strong currency played a role in the deflation that China suffered for the next four years. One reason the government hardened the peg, rather than devaluing, was to establish that China was a dependable player in the world system and that its currency could be relied on as a store of value. The short-term hit to exports was more than offset by the strategic gain in China’s reputation as “responsible stakeholder” and a safe place for foreign direct investment.

The hard peg against a declining U.S. dollar led eventually to a depreciation of the trade-weighted, inflation-adjusted exchange rate (known as the real effective exchange rate, or REER) that contributed to the exploding exports and ballooning trade surpluses of the early 2000s. This in turn prompted the fourth phase of Chinese currency policy: a crawling peg against the U.S. dollar, starting in July 2005. Each day, the PBOC fixed a reference rate for the renminbi against the dollar, and permitted the currency’s value to fluctuate within a narrow band around the reference. The daily trading band was initially set at 0.3 percent (in either direction), and subsequently widened to 0.5 percent in 2007 and 1 percent in April 2012. Over eight years, the crawling-peg system delivered a 35 percent appreciation against the U.S. dollar and a 40 percent appreciation of the REER.

In light of the vociferous criticism China endured for its undervalued exchange rate, it is striking in retrospect how swift Beijing was to change its currency regime once a serious external imbalance appeared. As late as 2004, China’s merchandise trade balance was around 2.5 percent of GDP, just slightly above the 15-year average. In 2005 it jumped to 5.5 percent, and the decision to let the currency rise was immediate. At first the rise was too timid, and the trade and current account balances continued to expand. But by mid-2007 the appreciation pace picked up to 5 percent a year. The ultimate result of the crawling-peg regime was a reduction in the current account surplus from its peak of 10 percent of GDP in 2007 to the measly 0.8 percent recorded in the first quarter of 2014.

As the above account makes clear, mercantilist motives historically played a secondary role in China’s exchange rate policies—and after 2007 China pursued an anti-mercantilist policy of deliberately shrinking its trade surplus. Beijing’s bigger concerns were the exchange rate’s role in facilitating a broad shift from administered to market prices (1978-1995), as an anchor for monetary policy (1995-2013) and as instrument for correcting an external imbalance and promoting a shift in favor of domestic demand (2007-2013). Lying in the background was the idea that a relatively stable exchange rate was strategically beneficial. After the Asian crisis, foreign investors were reassured that China was a safe place for direct investment; and after the 2008 global crisis the case for the renminbi as an international trade-settlement and portfolio investment currency was strengthened.

Given this history, we can safely rule out the theory that this year’s devaluation is a tactic to boost exports at a time of flagging domestic demand. An explanation that better fits both the recent facts and the historical context is that, in line with the Third Plenum Decision, Beijing wanted to make the exchange rate more flexible and market-determined. But it faced a problem: for almost 18 months from September 2012, the daily market rate of the renminbi was at or near the top of the 1 percent trading band, because investors assumed (rightly) that the Chinese currency would always go up: it was a “one-way bet.” The one-way bet caused large-scale capital inflows that were routinely much larger than the monthly trade surplus. Under these conditions, if the central bank had simply widened the daily trading band, traders would quickly have pushed the value of the currency to the top of the new band, and even more capital would have flowed in. To prevent this outcome, the PBOC in late February starting pushing down its daily fixing, and ordered Chinese state-owned banks to sell renminbi and buy dollars. In mid-March, when the “one-way bet” psychology had been chased out of the market, PBOC doubled the daily trading band to 2 percent.

Welcome to the Managed Float

It is clear that China has entered a new phase of currency management, and the rulebook that has worked well since 2005 must be heavily revised. Two observations inform this judgment. First, the main aims of the strong renminbi policy have been achieved. The current account surplus has been virtually eliminated, and at least one serious technical study of the currency (by Martin Kessler and Arvind Subramaniam of the Peterson Institute for International Economics), the structural undervaluation of the renminbi has been eliminated.

Second, the adoption of a 2 percent daily trading band means that, on a day-to-day basis, the renminbi rate can now be determined mainly by the market most of the time (since only at times of extreme stress do currencies move more than 2 percent in a day). This newfound capacity seems consistent with the broad aim articulated in the Communist Party’s reform agenda last November, of having market forces play a “decisive role” in resource allocation. A willingness to let the currency float more freely is also consistent with the apparent agenda to liberalize deposit interest rates within in the next two years, which implies shifting from a monetary policy that mainly targets the exchange rate to one that mainly targets a domestic money-market interest rate.

It is also clear, however, that the renminbi will not simply be left to its own devices: the float will be a heavily managed one. Mechanically, it will likely operate much like the Singapore dollar “basket, band and crawl,” or BBC system, with an undisclosed trade-weighted index target, a 2 percent daily trading band puts a limit on extreme movements and a periodic readjustment of the slope of the policy band to prevent a major misalignment of the currency emerging (as it did at the end of China’s hard-peg era).

Strategically, the two most important aims of Beijing’s exchange rate regime will be maintaining stability of both the current and capital accounts, and providing support for the emergence of the renminbi as a serious international currency. (For an analysis of the renminbi-internationalization drive, see China’s Global Currency: Lever For Financial Reform.)

The first factor basically means that when capital flows (in or out) threaten to become destabilizing, the PBOC will use the exchange rate to reverse those flows; the same applies to extreme movements in the current account. In effect, Beijing will try to keep both parts of the balance of payments in roughly neutral position, while it undertakes deep reforms of the domestic economy.

The second aim means that sustained depreciation is unlikely to be tolerated, since as the new kid on the block the renminbi still must convince global investors that it is a reliable store of value over the medium to long term. Yet intolerance for sustained depreciation is perfectly compatible with significant short-term depreciations lasting several months or more, to correct current or capital account imbalances. The days of the one-way bet are over.

The bottom line is that Beijing has made a decisive commitment to a much more flexible and far more market-driven exchange rate—exactly what the U.S. Treasury Department and the International Monetary Fund have been suggesting for years. This commitment means that the exchange rate will cease to be a major point of friction between China and its trading partners. The interesting question now is how quickly China will follow up with the even bigger task of liberalizing its domestic financial system.

Just how much economic trouble is China in? To judge by global markets, a lot. In the first few weeks of the year, stock markets around the world plummeted, largely thanks to fears about China. The panic was triggered by an 11 percent plunge on the Shanghai stock exchange and by a small devaluation in the renminbi. Global investors—already skittish following the collapse of a Chinese equity-market bubble and a surprise currency devaluation last summer—took these latest moves as confirmation that the world’s second-biggest economy was far weaker than its relatively rosy headline growth numbers suggested.

In one sense, markets overreacted. China’s economy grew by 6.9 percent in 2015; financial media headlines bewailed this as “the lowest growth rate in a quarter century,” but neglected to mention that this is still by a good margin the fastest growth of any major economy except for India. Even at its new, slower pace, China continues to grow more than twice as fast as developed economies. Some doubt the reliability of China’s economic statistics, of course, but most credible alternative estimates (based on hard-to-fake indicators of physical output) still suggest that China is growing at around 6 percent, and that if anything there was a slight pickup in activity in late 2015.

It’s true that construction and heavy industry, which drove China’s growth from 2000 to 2013, are now nearing recession levels. But services—which now account for over half of China’s economy—and consumer spending remain strong, underpinned by solid employment and wage gains. The latest Nielsen survey of consumer confidence ranked China eighth of 61 countries in consumer optimism, and confidence actually increased in the last quarter of 2015. All in all, another year of 6 percent-plus growth should be achievable in 2016.

Markets also exaggerate the risk of financial crisis, with their breathless talk of capital fleeing the country. Most of this so-called “capital flight” is simply a matter of companies prudently paying down foreign-currency debts, or hedging against the possibility of a weaker renminbi by shifting their bank deposits into dollars. In the main, these deposits remain in the mainland branches of Chinese banks. Domestic bank deposits grew by a healthy 19 percent in 2015 and now stand at $21 trillion—double the country’s GDP and seven times the level of foreign exchange reserves. The continued fast rise in credit is an issue that policymakers will need to address eventually. But they have time, because lending to households and companies is backed one-for-one by bank deposits. By contrast, the United States on the eve of its crisis in 2008 had nearly four dollars of loans for every dollar of bank deposits. As long as China’s financial system stays so securely funded, the chance of a crisis is low.

Yet while we should not worry about an imminent economic “hard landing” or financial crisis, there are reasons to be seriously concerned about the country’s economic direction. The core issue is whether China can successfully execute its difficult transition from an industry- and investment-intensive economy to one focused on services and consumption, and how much disruption it causes to the rest of the world along the way. History teaches us that such transitions are never smooth. And indeed, China’s transition so far has been much rougher than the gradual slowdown in its headline GDP numbers suggests.

Remember that when China reports its GDP growth, this tells you how much its spending grew in inflation-adjusted renminbi terms. But to measure China’s impact on the rest of the world in a given year, it is better to look at its nominal growth—that is, not adjusted for inflation—in terms of the international currency: the U.S. dollar. This is because nominal U.S.-dollar figures better show how much demand China is pumping into the global economy, both in volume terms (buying more stuff) and in price terms (pushing up the prices of the stuff it buys).

When we look at things this way, China’s slowdown has been precipitous and scary. At its post-crisis peak in mid-2011, China’s nominal U.S.-dollar GDP grew at an astonishing 25 percent annual rate. During the four-year period from 2010 to 2013, the average growth rate was around 15 percent. By the last quarter of 2015, though, it had slowed to a tortoise-like 2 percent (see chart). In short, while investors are wrong to complain that China distorts its GDP data, they are right to observe that, for the rest of the world, China’s slowdown feels far worse than official GDP numbers imply.

This dramatic fall in the growth of China’s effective international demand has already hit the global economy hard, through commodity prices. In the past 18 months, the prices of iron ore, coal and oil, and other commodities have all fallen by about two-thirds, thanks in part to the slowdown in Chinese demand and in part to the glut of supply built up by mining companies that hoped China’s hunger for raw materials would keep growing forever. This has badly hurt emerging economies that depend on resource exports: Brazil, for instance, is now mired in its worst downturn since the Great Depression. The slowdown also hurts manufacturers in rich countries like the United States and Japan, which rely on sales of equipment to the mining and construction industries.

This helps explain why markets react so fearfully at every hint the renminbi might fall further in value: A weaker currency reduces the dollar value of the goods China can buy on international markets, creating more risk of a further slowdown in an already languid world economy.

There is a silver lining: The flattening of its commodity demand shows China has turned its back on an unsustainable growth model based on ever-rising investment. The question now is whether it can succeed in building a new growth model based mainly on services and consumer spending. As we noted above, growth in services and consumer spending is solid. But it is still not strong enough to carry the whole burden of driving the economy. For that to happen, much more reform is needed. And the pace of those reforms has been disappointing.

The crucial reforms all relate to increasing the role of markets, and decreasing the role of the state in economic activity. China has an unusually large state sector: OECD researchers have estimated that the value of state-owned enterprise assets is around 145 percent of GDP, more than double the figure for the next most state-dominated economy, India.[1] This large state sector functioned well for most of the last two decades, since the main tasks were to mobilize as many resources as possible and build the infrastructure of a modern economy—tasks for which state firms, which are not bound by short-term profit constraints, are well suited.

Now, however, the infrastructure is mostly built and the main task is to make the most efficient use of resources, maximize productivity, and satisfy ever-shifting consumer demand. For this job, markets must take a leading role, and the government must wean itself off the habit of using state-owned firms to achieve its economic ends. And the big worry is that, despite the promises in the November 2013 Third Plenum reform agenda, Beijing does not seem all that willing to let markets have their way.

The concerns stem from the government’s recent interventions in the equity and currency markets. Last June, when a short-lived stock market bubble popped, the authorities forced various state-controlled firms and agencies to buy up shares to stop the rout. This stabilized the market for a while, but left people wondering what would happen when these agencies started selling down the shares they had been forced to buy. To enable these holdings to be sold without disrupting the market, the authorities instituted a “circuit breaker” which automatically suspended stock-exchange trading when prices fell by 5 percent in one day. Instead of calming the market, this induced panic selling, as traders rushed to dump their shares before the circuit breaker shut off trading. The government canceled the circuit breaker, and the market remains haunted by the risk of state-controlled shareholders dumping their shares en masse.

Similarly, Beijing got into trouble in August when it announced a new exchange-rate mechanism that would make the value of the renminbi more market determined. But because it paired this move with a small, unexpected devaluation, many traders assumed the real goal was to devalue the renminbi, and started pushing the currency down. So the People’s Bank of China (PBOC) intervened massively in the foreign exchange markets, spending down its foreign-currency reserves to prop up the value of the renminbi. This stabilized the currency, but brought into question the government’s commitment to a truly market-driven exchange rate. 

Then, in December, PBOC made another change, by starting to manage the renminbi against a trade-weighted basket of 13 currencies, rather than against the dollar as in the past. Because the dollar has been strong lately, this in effect meant that PBOC was letting the renminbi devalue against the dollar. Again, PBOC argued that its intention was not to devalue, but simply to establish a more flexible exchange rate. And again, it undermined the credibility of this intention by intervening to prevent the currency from falling against the dollar.

One could argue that these episodes were merely potholes on the road to a greater reliance on markets. This may be so, but investors both inside and outside China are not convinced. The heavy-handed management of the equity and currency markets gives the impression that Beijing is not willing to tolerate market outcomes that conflict with the government’s idea of what prices should be. This runs against the government’s stated commitment in the Third Plenum decision to let market forces “play a decisive role in resource allocation.”

Another source of unease is the slow progress on state enterprise reform.  Momentum seemed strong in 2014, when provinces were encouraged to publish “mixed ownership” plans to diversify the shareholding of their firms. This raised hopes that private investors would be brought in to improve the management of inefficient state companies. Yet to date only a handful of mixed-ownership deals have been completed, and many of them involve the transfer of shares to state-owned investment companies, with no private-sector participation. Plans to subject the big centrally controlled state enterprises to greater financial discipline by putting them under holding companies modeled on Singapore’s Temasek have been incessantly discussed, but not put into action. Meanwhile the number of state firms continues to grow, rising from a low of 110,000 in 2008 to around 160,000 in 2014.

So long as Beijing continues to intervene in markets to guide prices, and fails to deliver on the key structural reforms needed to create a sustainable consumer-led economy, markets both inside and outside China will continue to be nervous about the sustainability of growth, and we will see more “China scares” like the one we endured in January. A clearer sense of direction is required, as is better communication.

For three decades, China sustained fast economic growth by steadily increasing the scope of markets, even as it preserved a large role for the state. Because investors were confident in the general trend towards more markets and more space for private firms, they were happy to invest in growth. Today neither private entrepreneurs in China, nor traders on global financial markets, are confident in such a trend. By the end of 2015 growth in investment by non-state firms had slowed to only about two-thirds the rate posted by state-owned firms, ending nearly two decades of private-sector outperformance.

Doubts are amplified by the government’s failure to communicate its intentions. During the last several months of confusion on foreign exchange markets, no senior official came forth to explain the goals of the new currency policy. No other country would have executed such a fundamental shift in a key economic policy without clear and detailed statements by a top policymaker. As China prepares for its presidency of the G-20, the government owes it both to its own people and to the global community of which it is now such an important member to more clearly articulate its commitment to market-oriented reforms and sustainable growth.

[1] P. Kowalski et al., “State-owned Enterprises: Trade Effects and Policy Implications,” OECD Trade Policy Papers No. 147 (2013). http://dx.doi.org/10.1787/5k4869ckqk7l-en

Event Information

Earlier this month, the Trans-Pacific Partnership Agreement was signed by its 12 member states in New Zealand, bringing the trade deal one step closer to fruition. The member states must now work on resolving their respective domestic issues tied to TPP. For Japan, one of the major issue areas involving TPP is agriculture.

On February 24, the Center for East Asia Policy Studies hosted Kazuhito Yamashita for a presentation in which he discussed the impact of Japan’s market access commitment on agriculture, the TPP countermeasures that the Japanese government announced for agriculture, and the types of agricultural policy reform that are being considered in Japan.

Transcript

• Transcript of Kazuhito Yamashita Presentation (.pdf)

Event Materials

• Yamashita Brookings presentation for website 022416
• Transcript Kazuhito Yamashita Presentation

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.

Event Information

On July 5, the Center for Universal Education at Brookings and the partners of the world’s first development impact bond for education held an online a discussion of the first year’s enrollment and learning results. The impact bond provides financing for Educate Girls, a non-profit that aims to increase enrollment for out-of-school girls and improve learning outcomes for girls and boys in Rajasthan, India. The UBS Optimus Foundation has provided upfront risk capital to Educate Girls and, contingent on program targets being met, will be paid back their principal plus a return by the Children's Investment Fund Foundation. Instiglio, a non-profit organization specializing in results-based financing mechanisms, serves as the program intermediary.

The webinar explored the experiences so far, the factors affecting the initial results, the key learnings, and ways these will inform the development of the programs it moves forward. The partners shared both positive and negative learnings to start a transparent discussion of the model and where, and how, it can be most effective.

Chaired by Emily Gustafsson-Wright, a fellow at the Center for Universal Education, the discussion featured Safeena Husain of Educate Girls, Phyllis Costanza of UBS Optimus Foundation, and Avnish Gungadurdoss of Instiglio. For further background on impact bonds as a financing mechanism for education and early childhood development in low- and middle-income countries, please see the Center for Universal Education’s report.

Further information on the outcome metrics and evaluation design in the Educate Girls Development Impact Bond » (PDF)

Watch a recording of the webinar via WebEx »

On July 5, the results from the first year of the world’s first development impact bond (DIB) for education in Rajasthan, India, were announced. The Center for Universal Education hosted a webinar in which three stakeholders in the DIB shared their perspective on the performance of the intervention, their learnings about the DIB process, and their thoughts for the future of DIBs and other results-based financing mechanisms.

Approximately 3 million girls ages 6 to 13 were out of school in India according to most recent data, 350,000 of which are in the state of Rajasthan. Child marriage is also a large issue in the state; no state-specific data exists, but nationwide 47 percent of girls ages 20 to 24 are married before age 18. According to Educate Girls, a non-governmental organization based in Rajasthan, girls’ exclusion is primarily a result of paternalistic societal mindsets and traditions. Given the evidence linking education and future life outcomes for girls, this data is greatly concerning.

The DIB finances a portion of the services provided by Educate Girls, which has been working to improve enrollment, retention, and learning outcomes for girls (and boys) in Rajasthan since 2007. The organization trains a team of community volunteers ages 18 to 30 to make door-to-door visits encouraging families to enroll their girls in school and to deliver curriculum enhancement in public school classrooms. Their volunteers are present in over 8,000 villages and 12,500 schools in Rajasthan. The DIB was launched in March of 2015 to finance services in 166 schools, which represents 5 percent of Educate Girls’ annual budget. The DIB is intended to be a “proof of concept” of the mechanism using this relatively small selection of beneficiaries.

The investor in the DIB is UBS Optimus Foundation, who has provided $238,000 in working capital to fund the service delivery. ID Insight, a non-profit evaluation firm, will evaluate the improvement in learning of girls and boys in the treatment schools in comparison to a control group and will validate the number of out of school girls enrolled. The Children’s Investment Fund Foundation serves as the outcome funder, and has agreed to pay UBS Optimus Foundation 43.16 Swiss francs ($44.37) for each unit of improved learning and 910.14 francs ($935.64) for every percentage point increase in the enrollment of girls out of school. Instiglio, a non-profit impact bond and results-based financing intermediary organization, provided technical assistance to all parties during the design of the DIB and currently provides performance management assistance to Educate Girls on behalf of UBS Optimus Foundation. 

The outcomes will be calculated in 2018, at the end of three years; however, preliminary results for the year since the launch of the DIB (representing multiple months of door-to-door visits and seven weeks of interventions in the classroom) were released last week. The payments for the DIB were structured such that the investor, UBS Optimus Foundation, would earn a 10 percent internal rate of return (IRR) on their investment at target outcome levels, which were based on Educate Girls’ past performance data. The table below presents the metrics, target outcome level, year-one result, and the progress toward the target. 

Table 1: Educate Girls DIB Results from first year of services

The DIB was challenging to implement and required DIB stakeholders to be resourceful.

First, the reliability of government data was a challenge, which necessitated flexibility in the identification of the target population and metrics. Second, given the number of stakeholders engaged and the novelty of this approach, the transaction costs were higher than they would have been for a traditional grant. This meant that strong and regular communication was crucial to the survival of the project.

The role of the outcome funder and investor were significantly different versus a grant.

The outcome funder spent more resources on defining outcomes, but spent fewer resources on managing grant activities. The investor utilized risk management and monitoring strategies informed by the activities in their commercial banking branch, which they have not used for other grants.

The DIB has changed the way the service provider operates.

In the video below, Safeena Husain from Educate Girls’ highlights the ways in which financing a portion of their program through a DIB differs from financing the program through grants. Safeena describes that in a grant, performance data is reported up to donors, but rarely makes it back down to frontline workers. The DIB has helped them to develop mobile dashboards that ensure performance data is reaching the front line and helping to identify barriers to outcomes as early as possible.

Based on the learnings from the implementation of the first DIB for education, this tool can be used to improve the value for money for the outcome funder and strengthen the performance management of a service provider. As the panelists discussed in the webinar, DIBs and other outcome-based financing mechanisms can help differentiate between organizations that are adept at fundraising and those that excel at delivering outcomes. However, service providers must be sufficiently prepared for rigorous outcome measurement if they plan to participate in a DIB; otherwise the high-stakes environment might backfire. In our research, we have closely examined the design constraints for impact bonds in the early childhood sector.

There are countless lessons to be learned from the stakeholder’s experience in the first DIB for education. We applaud the stakeholders for being transparent about the outcomes and true challenges associated with this mechanism. This transparency will be absolutely critical to ensure that DIBs are implemented and utilized appropriately moving forward.

In late October at the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP) headquarters in Bangkok, a multi-stakeholder coalition was launched to promote the role of youth and civil society in advancing post-2015 United Nations Sustainable Development Goals (SDGs). The youth initiatives, fostering regional integration and youth service impact in the Association of Southeast Asian Nations (ASEAN) and counterpart regions of Northeast and South Asia, will be furthered through a new Asia-Pacific Peace Service Alliance. The alliance is comprised of youth leaders, foundations, civil society entities, multilateral partners and U.N. agencies. Together, their initiatives illustrate the potential of youth and multi-stakeholder coalitions to scale impacts to meet SDG development targets through youth service and social media campaigns, and partnerships with multilateral agencies, nongovernmental organizations, corporations and research institutes.

The “Asia-Pacific Forum on Youth Volunteerism to Promote Participation in Development and Peace” at UN ESCAP featured a new joint partnership of the U.S. Peace Corps and the Korea International Cooperation Agency (KOICA) as well as USAID support for the ASEAN Youth Volunteering Program. With key leadership from ASEAN youth entitles, sponsor FK Norway, Youth Corps Singapore and Peace Corps’ innovative program in Thailand, the forum also furthered President Obama’s goal of Americans serving “side by side” with other nations’ volunteers. The multi-stakeholder Asia-Pacific alliance will be powered by creative youth action and a broad array of private and public partners from Thailand, Malaysia, Myanmar, Indonesia, Singapore, the Philippines, Australia, Korea, China, Mongolia, Japan, India, Nepal, Pakistan, the U.S. and other nations.

During the event, Dr. Shamshad Akhtar, ESCAP executive secretary, pointed out that “tapping youth potential is critical to shape our shared destiny, as they are a source of new ideas, talent and inspiration. For ESCAP and the United Nations, a dynamic youth agenda is vital to ensure the success of post-2015 sustainable development.”

Dr. Surin Pitsuwan, former ASEAN secretary-general, called for a new Asia-wide multilateralism engaging youth and civil society.  In his remarks, he drew from his experience in mobilizing Asian relief and recovery efforts after Cyclone Nargis devastated the delta region of Myanmar in May 2008. Surin, honorary Alliance chairman and this year’s recipient of the Harris Wofford Global Citizenship Award, also noted the necessity of a “spiritual evolution” to a common sense of well-being to redress the “present course of possible extinction” caused by global conflicts and climate challenges. He summoned Asia-Pacific youth, representing 60 percent of the world’s young population, to “be the change you want to see” and to “commit our youth to a useful cause for humanity.”

The potential for similar upscaled service efforts in Africa, weaving regional integration and youth volunteering impact, has been assessed in Brookings research and policy recommendations being implemented in the Common Market of Eastern and Southern Africa (COMESA). Recommendations, many of which COMESA and ASEAN are undertaking, include enabling youth entrepreneurship and service contributions to livelihoods in regional economic integration schemes, and commissioning third-party support for impact evidence research.

A good example of successful voluntary service contributions from which regional economic communities like ASEAN can learn a lot is the current Omnimed pilot research intervention in Uganda. In eastern Ugandan villages, 1,200 village health workers supported by volunteer medical doctors, Uganda’s Health Ministry, Peace Corps volunteers and Global Peace Women are addressing lifesaving maternal and child health outcomes furthering UNICEF’s campaign on “integrated health” addressing malaria, diarrheal disease and indoor cooking pollution. The effort has included construction of 15 secure water sources and 1,200 clean cook stoves along with randomized controlled trials.

Last week, the young leaders from more than 40 nations produced a “Bangkok Statement” outlining their policy guidance and practical steps to guide volunteering work plans for the new Asia-Pacific alliance. Youth service initiatives undertaken in “collective impact” clusters will focus on the environment (including clean water and solar villages), health service, entrepreneurship, youth roles in disaster preparedness and positive peace. The forum was co-convened by ESCAP, UNESCO, the Global Peace Foundation and the Global Young Leaders Academy.

On the heels of the U.N.’s adoption in late September of the Sustainable Development Goals (SDGs) for 2030, an Asia Pacific volunteering alliance recently convened a forum for hundreds of youth and development partners from northeast Asia at the Korea Council on Foreign Relations in Seoul.

In his keynote address highlighting the role of volunteers in global development, Young-Mok Kim, president of the Korean International Cooperation Agency (KOICA), stressed the key role of Peace Corps volunteers and the Saemaul Undong village self-help model in Korea’s 50-year rise from a low-income to a high-income nation.

Since 1970, Korea’s Saemaul Undong (“New Community Movement”) has tested a combination of local self-help cooperative action with national development policy addressing poverty, relying on the spirit of rural communities. Local volunteering teams engaging youth and women have been tapped to guide and implement grassroots development projects and counter rural over-migration to urban areas, engaging in housing, local infrastructure and irrigation, credit unions, and cooperative businesses, among other holistic areas while enhancing an overall community spirit of ownership.

“As the first country to escape poverty and achieve economic and social development as well as democratization, the SDGs present us with an opportunity to expand our footprint and visibility in the development arena and live up to international expectations. In Korea, thanks to Saemaul Undong, the poverty rate was reduced from 34.6 percent to 6 percent and rural households’ income reached parity with that of urban households during the period from 1967 to 1984.” The Saemaul Undong model has been adapted in African and other developing nations and was featured in a special high-level forum on rural development during the recent U.N. General Assembly.

Kim stated: “It is important that we facilitate participatory engagement by harnessing the power of volunteerism to meet the key principle of the SDGs” and he indicated that the World Friends Korea (WFK) volunteer program learned from the nation’s experience with the Peace Corps. WFK has sent more than 50,000 volunteers abroad in service projects and to provide technical training. Kim noted KOICA ranks second in the world with regard to the number of volunteers sent to developing countries, sending 4,500 annually to 50 countries.

KOICA was a founding participant in the Asia Pacific Peace and Development Service Alliance (APPDSA) that was launched at the U.N. Economic and Social Commission for Asia and the Pacific (ESCAP) headquarters in Bangkok in October 2014 with the support of FK Norway, the Global Peace Foundation, KOICA, the Peace Corps and other partners. Kim hailed the effort “to form an alliance of upgrading our volunteer program and fostering the force of young people who can play crucial roles in the development cooperation arena.”

The multi-stakeholder platform forged in Southeast Asia is now engaging thousands of volunteers in climate-related projects, including massive river clean-up campaigns in Thailand and Nepal and ongoing “green Asia” tree-planting and eco-camps working to address desertification in Mongolia.   

After the Seoul convening, which launched the Northeast Asia volunteering initiative, I travelled to Kathmandu to assess the progress of the South Asia APPDSA Alliance hub for volunteerism. Convened in Nepal just prior to the April earthquake that took more than 9,000 lives, the Alliance’s South Asia convening provided a ready base of volunteers to implement the Kathmandu Call to Action after the disaster struck and served as a springboard for Rise Nepal, a youth-led relief and rebuilding initiative. To date, more than 1,600 young Nepali volunteers have helped nearly 3,000 households with emergency provisions, including food, and medical and hygiene supplies, and have constructed around 600 transitional homes.    

IBM stepped in to provide IT support, equipping youths with software and other technology to facilitate their efforts to rebuild their nation beyond short-term earthquake relief. Since the recent adoption of Nepal’s new constitution, this support is being broadened to include young leadership training in citizenship and service addressing longer-term goals, including SDGs across the South Asia region.

A recent Gallup article noted the power of the more than 1 billion people around the world who engage in volunteer service and the need to marshal their efforts to help countries meet their SDG targets by 2030. Since the Seoul forum, efforts are underway across the Asia-Pacific region to step-up specific volunteerism initiatives, provide technology that will further empower young volunteers, and document the results of ongoing environmental service projects such as the restoration of the Bagmati River in Nepal and counterpart efforts in Bangkok, Mongolia, and the Philippines.  

The growth of such multi-stakeholder volunteering alliances, coupled with KOICA’s experience in forging volunteerism-based community outcomes measurably addressing poverty, hold great promise in marshaling requisite human capital and innovation to help achieve the next generation development goals.

Volunteerism remains a powerful tool for good around the world. Young people, in particular, are motivated by the prospect of creating real and lasting change, as well as gaining valuable learning experiences that come with volunteering. This energy and optimism among youth can be harnessed and mobilized to help meet challenges facing our world today and accomplish such targets as the United Nations 2030 Sustainable Development Goals (SDGs).

On June 14, young leaders and development agents from leading non-governmental organizations (NGOs), faith-based organizations, corporations, universities, the Peace Corps, and United Nations Volunteers came together at the Brookings Institution to answer the question on how to achieve impacts on the SDGs through international service.

This was also the 10th anniversary gathering of the Building Bridges Coalition—a multi-stakeholder consortium of development volunteers— and included the announcement of a new Service Year Alliance partnership with the coalition to step up international volunteers and village-based volunteering capacity around the world.

Brookings Senior Fellow Homi Kharas, who served as the lead author supporting the high-level panel advising the U.N. secretary-general on the post-2015 development agenda, noted the imperative of engaging community volunteers to scale up effective initiatives, build political awareness, and generate “partnerships with citizens at every level” to achieve the 2030 goals.  

Kharas’ call was echoed in reports on effective grassroots initiatives, including Omnimed’s mobilization of 1,200 village health workers in Uganda’s Mukono district, a dramatic reduction of malaria through Peace Corps efforts with Senegal village volunteers, and Seed Global Health’s partnership to scale up medical doctors and nurses to address critical health professional shortages in the developing world. 

U.N. Youth Envoy Ahmad Alhendawi of Jordan energized young leaders from Atlas Corps, Global Citizen Year, America Solidaria, International Young Leaders Academy, and universities, citing U.N. Security Council Resolution 2250 on youth, peace, and security as “a turning point when it comes to the way we engage with young people globally… to recognize their role for who they are, as peacebuilders, not troublemakers… and equal partners on the ground.”

Service Year Alliance Chair General Stanley McChrystal, former Joint Special Operations commander, acclaimed, “The big idea… of a culture where the expectation [and] habit of service has provided young people an opportunity to do a year of funded, full-time service.” 

Civic Enterprises President John Bridgeland and Brookings Senior Fellow E.J. Dionne, Jr. led a panel with Seed Global Health’s Vanessa Kerry and Atlas Corps’ Scott Beale on policy ideas for the next administration, including offering Global Service Fellowships in United States Agency for International Development (USAID) programs to grow health service corps, student service year loan forgiveness, and technical support through State Department volunteer exchanges. Former Senator Harris Wofford, Building Bridge Coalition’s senior advisor and a founding Peace Corps architect, shared how the coalition’s new “service quantum leap” furthers the original idea announced by President John F. Kennedy, which called for the Peace Corps and the mobilization of one million global volunteers through NGOs, faith-based groups, and universities.

The multi-stakeholder volunteering model was showcased by Richard Dictus, executive coordinator of U.N. Volunteers; Peace Corps Director Carrie Hessler-Radelet; USAID Counselor Susan Reischle; and Diane Melley, IBM vice president for Global Citizenship. Melley highlighted IBM’s 280,000 skills-based employee volunteers who are building community capacity in 130 countries along with Impact 2030—a consortium of 60 companies collaborating with the U.N.—that is “integrating service into overall citizenship activities” while furthering the SDGs.

The faith and millennial leaders who contributed to the coalition’s action plan included Jim Lindsay of Catholic Volunteer Network; Service Year’s Yasmeen Shaheen-McConnell; C. Eduardo Vargas of USAID’s Center for Faith-Based and Community Initiatives; and moderator David Eisner of Repair the World, a former CEO of the Corporation for National and Community Service. Jesuit Volunteer Corps President Tim Shriver, grandson of the Peace Corps’ founding director, addressed working sessions on engaging faith-based volunteers, which, according to research, account for an estimated 44 percent of nearly one million U.S. global volunteers

The key role of colleges and universities in the coalition’s action plan—including  linking service year with student learning, impact research, and gap year service—was  outlined by Dean Alan Solomont of Tisch College at Tufts University; Marlboro College President Kevin Quigley; and U.N. Volunteers researcher Ben Lough of University of Illinois Urbana-Champaign.

These panel discussion directed us towards the final goal of the event, which was a multi-stakeholder action campaign calling for ongoing collaboration and policy support to enhance the collective impact of international service in achieving the 2030 goals.

This resolution, which remains a working document, highlighted five major priorities:

1. Engage service abroad programs to more effectively address the 2030 SDGs by mobilizing 10,000 additional service year and short-term volunteers annually and partnerships that leverage local capacity and volunteers in host communities.
2. Promote a new generation of global leaders through global service fellowships promoting service and study abroad.
3. Expand cross-sectorial participation and partnerships.
4. Engage more volunteers of all ages in service abroad.
5. Study and foster best practices across international service programs, measure community impact, and ensure the highest quality of volunteer safety, well-being, and confidence.

Participants agreed that it’s through these types of efforts that volunteer service could become a common strategy throughout the world for meeting pressing challenges. Moreover, the cooperation of individuals and organizations will be vital in laying a foundation on which governments and civil society can build a more prosperous, healthy, and peaceful world.

Republican presidential candidate Mitt Romney has been strategically slippery about his tax plan, largely refusing to explain how he would pay for the sweeping tax cuts that represent his primary promise to voters.

In the second debate, though, he offered just enough detail for us to sketch the outlines of his program. If you’re poor or worried about the state of the U.S. government’s finances, the picture is not pretty.

The first course in Romney’s plan is dessert: Tax breaks for everyone! He would start by extending the tax cuts put in place by former President George W. Bush. He would then cut everyone’s rates by another 20 percent, repeal the alternative minimum tax, and get rid of the estate tax.

How would he pay for this? Mainly by limiting the amount people can deduct from their taxable income. Here’s the most detailed statement Romney has made: “One way of doing that would be say everybody gets—I’ll pick a number—$25,000 of deductions and credits, and you can decide which ones to use. Your home mortgage interest deduction, charity, child tax credit and so forth, you can use those as part of filling that bucket, if you will, of deductions.”

Big Shortfall

Putting both halves of Romney’s plan together, we compared the impact of the tax cuts with the offsetting effect of limiting itemized deductions. The result: While a cap on deductions is an interesting idea, it couldn’t possibly raise enough revenue to make up for the big tax giveaways Romney has promised. The shortfall would be a whopping $3.7 trillion over the next decade. Lowering the deduction limit to, say, $17,000 wouldn’t much change the math. The gap would still be $3.4 trillion.

Romney’s plan is most striking in its distributional implications (see chart). The greatest benefit would go to the rich. The top one-fifth of households would enjoy a staggering $16,000 average tax cut, offset by a tax increase of $4,000 due to the deduction cap. Net gain: $12,000. Actually, though, most of this group wouldn’t see that large of a benefit. About half of the spoils would go directly to the top 1 percent, which would get an average net tax cut of $100,000 a year.

The further one goes down the income scale, the worse Romney’s plan looks. The average household in the middle of the income distribution—the heart of the middle class—would get a cut of a little more than $800, which wouldn’t be much changed by the limit on deductions. The poor would actually pay slightly more tax, because Romney would end stimulus-related measures—such as an expansion of the Earned Income Tax Credit—that have benefited them.

True, any across-the-board tax cut would give more money to the rich in dollar terms, because they pay most of the taxes in the first place. But Romney’s plan goes further. It would reduce the amount the richest Americans pay relative to their income more than for anyone else. Specifically, the richest fifth would go from paying 26 percent of their income in taxes to 22 percent. The middle fifth would go from 16 percent to 15 percent. The tax burden on the poor would rise.

Romney has explicitly denied that his tax plan would favor the rich: “I will not, under any circumstances, reduce the share that’s being paid by the highest-income taxpayers.”

If this was truly his intention, he could have proposed tax cuts that were proportional to income—say, by offering simply to cut everyone’s tax rates by a few percentage points, rather than by a certain percentage. This would give the rich a bigger tax cut in dollar terms while preserving the distributional structure of our tax system.

Benefit Distribution

As it stands, Romney’s plan would result in 48 percent of the net tax cut going to the richest 1 percent (see pie chart). Another 32 percent would go to the next richest 4 percent of the population. All told, 94 percent of the benefit would go to the top 10 percent of the income distribution, leaving only 6 percent for the rest.

Many of Romney’s biggest boosters argue that he would be a more moderate president than he has been a candidate. Perhaps that’s plausible. On taxes, though, he has left himself little room to maneuver. His constituency would expect him to deliver on the very specific tax cuts he has promised. Meanwhile, his vagueness on the offsetting deduction limits would leave him with no mandate to get rid of the most popular tax breaks, such as those for charitable giving, mortgage interest or health insurance.

Hence, the most probable outcome would be a tax system that is radically less progressive, achieved through cuts that would create a much larger long-run budget deficit. Both outcomes would be colossal failures at a time in which true tax reform is greatly needed.

Event Information

On March 26, the Center for Universal Education at Brookings hosted an expert consultation on the development of the World Bank Group's new Education Strategy. The consultative meeting brought together a small group of experts from diverse fields. The purpose of the discussion was to gather input and suggestions aimed at strengthening the World Bank Group's work in the education sector.

Elizabeth King, Director of Education in the Human Development Network at the World Bank, opened the event by providing an overview of the Bank’s current approach to education, and how it has evolved over the last several decades. She described the Bank’s priorities as reconnecting education to the broader development agenda, supporting more equitable access, ensuring better learning, and strengthening education systems. The Bank’s main operating principals are taking a whole-sector approach, building the evidence base in education, and measuring the results and impact. Beginning with this extensive consultation process, the Bank is demonstrating its willingness to work with others in the development community to build a larger and more robust evidence base from which to draw lessons to improve the quality of limited staff to maximize the impact of Bank activities, to underscore its commitment to partnerships with other organizations and civil society groups, and to move toward improving the measurement of results so as to be able to further improve the Bank’s education programs around the world.

View the event summary »

Event Materials

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Editor's note: POLITICO Magazine released a list of the top 50 influential people in Washington, D.C., including Brookings Senior Fellow Robert Kagan and Assistant Secretary of State for European and Eurasian Affairs Victoria Nuland, described as "the ultimate American power couple."

Victoria Nuland and Robert Kagan fell in love “talking about democracy and the role of America in the world” on one of their first dates. It’s a shared passion that hasn’t faded over time.

It was just two years ago that President Obama was gushing to aides about an essay that Kagan, a historian and author, wrote about the myth of American decline—a theme Obama echoed in his State of the Union that January. This year, Kagan’s sprawling New Republic essay, “Superpowers Don’t Get to Retire,” insisted on America’s enduring responsibility to shape the world order—and issued a direct challenge to a president who has summarized his own foreign-policy doctrine with a minimalist “don’t-do-stupid-s—t” directive. Obama promptly invited Kagan in for a West Wing consult, but it was also clear that Kagan had helped rouse the president’s Republican critics, who have been increasingly adopting Kagan’s argument that just because it’s been a decade of wearying war in Iraq and Afghanistan doesn’t mean America can roll up its superpower carpet and stay home when new crises, from Iraq to Russia to Syria, beckon.

Nuland, overseeing European and Eurasian Affairs at the State Department, has been a strong advocate of the engaged approach her husband favors as a crisis with Russia has unfolded on her diplomatic turf this year. The point was made, rather sensationally, in February, when a leaked audio recording of her F-bomb-laden diatribe about the fecklessness of the European Union, which she accused of not exactly playing a constructive role trying to end the growing conflict in Ukraine, appeared on the Internet. Nuland, a career Foreign Service officer, has been an impassioned advocate for democracy-building in Eastern Europe, and while she got pushback from European counterparts over her “f—k the EU” comment, the United States has been leading the effort to impose sanctions on Russia since President Vladimir Putin seized Ukraine’s Crimean Peninsula and waged a proxy war in the country’s east—dragging a reluctant Europe along pretty much every step of the way.

No. We should exempt workers earning the lowest wages.

Social Security faces a serious funding problem. The program takes in too little money to pay all that has been promised to future beneficiaries. Government forecasters predict Social Security’s reserve fund will be depleted between 2030 and 2034. There are two basic ways we can eliminate the funding gap: cut benefits or increase contributions. A common proposal is to increase the age at which workers can claim full retirement benefits. For people nearing retirement today, the full retirement age is 66. As a result of a 1983 law, that age will rise to 67 for workers born after 1959.

When policymakers urge us to raise the retirement age, they are proposing to increase the full retirement age beyond 67, possibly to 70, for workers now in their 30s or 40s. This saves money, but it also cuts monthly retirement benefits by the same percentage for every worker, unless workers delay claiming benefits. The policy might seem fair if workers in future generations could all expect to share in gains in life expectancy. However, new research shows that gains in life expectancy have been very unequal, with the biggest improvements among workers who earn top incomes. Life expectancy gains for workers with the lowest incomes have been small or negligible.

If the full retirement age were raised, future retirees with high lifetime earnings can expect to receive some compensation when their monthly benefits are cut. Because they can expect to live longer than today’s retirees, they will receive benefits for a longer span of years after 65. For low-wage workers, there is no compensation. Since they are not living longer, their lifetime benefits will fall by the same proportion as their monthly benefits. Thus, “raising the retirement age” is a policy that cuts the lifetime benefits of future low-wage workers by a bigger percentage than it does of future high-wage workers.

The fact that low-wage workers have seen small or negligible gains in life expectancy signals that their health when they are past 60 is no better than that of low-wage workers born 20 or 30 years ago. This suggests their capacity to work past 60 is no better than it was for past generations. A sensible policy for cutting future benefits should therefore preserve current benefit levels for workers who have contributed to Social Security for many years but have earned low wages.

Editor's note: This piece originally appeared in CQ Researcher.

Financial advisors offer their clients many advantages, such as setting reasonable savings goals, avoiding fraudulent investments and mistakes like buying high and selling low, and determining the right level of risk for a particular household. However, these same advisors are often incentivized to choose funds that increase their own financial rewards, and the nature and amount of the fees received by advisors may not be transparent to their clients, and small-scale savers may not be able to access affordable advice at all.  What is in the best interest of an individual may not be in the best interest of his or her financial advisor.

To combat this problem, the Department of Labor (DoL) recently proposed a regulation designed to increase consumer protection by treating some investment advisors as fiduciaries under ERISA and the 1986 Internal Revenue Code.  The proposed conflict of interest rule is an important step in the right direction to increasing consumer protections.  It addresses evidence from a February 2015 report by the Council of Economic Advisers suggesting that consumers often receive poor recommendations from their financial advisors and that as a result their investment returns on IRAs are about 1 percentage point lower each year.   Naturally, the proposal is not without its controversies and it has already attracted at least 775 public comments, including one from us .

For us, the DoL’s proposed rule is a significant step in the right direction towards increased consumer protection and retirement security.  It is important to make sure that retirement advisors face the right incentives and place customer interests first.  It is also important make sure savers can access good advice so they can make sound decisions and avoid costly mistakes.  However, some thoughtful revisions are needed to ensure the rule offers a net benefit. 

If the rule causes advisors’ compliance costs to rise, they may abandon clients with small-scale savings, since these clients will no longer be profitable for them.  If these small-scale savers are crowded out of the financial advice market, we might see the retirement savings gap widen.  Therefore we encourage the DoL to consider ways to minimize or manage these costs, perhaps by incentivizing advisors to continue guiding these types of clients.  We also worry that the proposed rule does not adequately clarify the difference between education and advice, and encourage the DoL to close any potential loopholes by standardizing the general educational information that advisors can share without triggering fiduciary responsibility (which DoL is trying to do).  Finally, the proposed rule could encourage some advisors to become excessively risk averse in an overzealous attempt to avoid litigation or other negative consequences.  Extreme risk aversion could decrease market returns for investors and the ‘value-add’ of professional advisors, so we suggest the DoL think carefully about discouraging conflicted advice without also discouraging healthy risk.

The proposed rule addresses an important problem, but in its current form it may open the door to some undesirable or problematic outcomes.  We explore these issues in further detail in our recent paper.

Introduction

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

Issues around Retirement Saving

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

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

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

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

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

Implications for the DoL’s proposed conflicted interest rule

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

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

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

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

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

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

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

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

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

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Earlier this summer, we examined how the Big Four banks – Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo – performed before, during, and after the 2007-09 financial crisis.  We also blogged about the lending trends within these large banks, expressing concern about the growing gap between deposits taken and loans made by the Big Four, and calling on policymakers to explore the issue further.  We have conducted a similar analysis on the regional banks - The regional banks: The evolution of the financial sector, Part II - and find that these smaller banks are actually faring somewhat better than their bigger counterparts.

Despite the mergers and acquisitions that happened during the crisis, the Big Four banks are a smaller share of banking today than they were in 2007.  The 15 regionals we evaluated, on the other hand, are thriving in the post-crisis environment and have a slightly larger share of total bank assets than they had in 2007.  The Big Four experienced rapid growth in the years leading up to the crisis but much slower growth in the years since.  The regionals, however, have been chugging along: with the exception of a small downward trend during the crisis, they have enjoyed slow but steady growth since 2003.

There is a gap between deposits and loans among the regionals, but it is smaller than the Big Four’s gap.  Tellingly, the regionals’ gap has remained basically constant in size during the recovery, unlike the Big Four’s gap, which is growing.  Bank loans are important to economic growth, and the regional banks are growing their loan portfolios faster than the biggest banks.  That may be a good sign for the future if the regional banks provide more competition for the big banks and a more competitive banking sector overall.

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

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

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

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

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

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

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

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

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

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

You were probably just thinking to yourself that the civil war in Syria isn’t complicated enough, that there aren’t enough warring parties, and that the constantly shifting sides have become predictable and tired. Well, don’t despair, there are now rumors emerging out of Turkey that may introduce enough new dimensions to the conflict to keep you confused well into the next decade.

The Turkish press is reporting that the Turkish government may be about to invade Syria along a 70-mile stretch of Turkey’s border with Syria to create a 20-mile deep safe zone. This issue is currently the subject of heated speculation and controversy in Ankara, making it quite difficult to figure out what is really happening.

But beyond the fevered speculation, why would Turkey want to invade Syria anyway?

Syria has long been a threatening mess, but neither Turkey nor anyone else has exactly been lining up to send their national armies into Syria. Sure, foreign fighters are plentiful in Syria and all of the regional powers, as well as the United States and Russia, have supported proxies there. But even after more than four years of bloody, destabilizing warfare, national armies have avoided it like the plague. The reason is quite simple: The complicated Syrian civil war has quagmire written all over it. As hard as it is to send a foreign army into Syria, it would be harder still to get it out.

In Turkey, particularly, the idea of military intervention into Syria remains very unpopular among the populace. The possibility that intervention might backfire and unleash Islamic State (or ISIS) terrorism within Turkey, or even reignite the bloody Kurdish insurgency in Turkey’s southeast, remains an ever-present fear.

Now, however, the theory goes that Syrian Kurdish advances against ISIS have caused such concern in Turkey that the Kurds will create some sort of state or autonomous region along Turkey’s southern border. To prevent that outcome, the Turkish government, we are told, is finally willing to intervene in Syria.

Well, maybe. But, in our view, the reason that Turkey might now finally be contemplating such a step says more about changes in the domestic and international standing of the Turkish government than about the course of events in Syria.

Domestically, the outcome of the Turkish election of June 7 has seriously scrambled Turkish politics. After nearly 13 years in power, the ruling Justice and Development Party (AKP) lost its absolute majority in parliament. The AKP, which still holds a plurality of seats in parliament, has 45 days to form a government with at least one of the minority parties. But it seems clear that Turkish President Recep Tayyip Erdoğan has very little interest in coalition government. The leaders of the two main opposition parties, the nationalist Nationalist Action Party (MHP) and the center-left Republican Peoples Party (CHP), have both demanded the re-opening of corruption cases against the AKP. Erdoğan may fear that those corruption cases may eventually touch even his family.

Erdoğan would undoubtedly prefer an early election to subjecting his party or even his family to the indignities of prying prosecutors. But to achieve a better outcome than the AKP managed in June, he needs to demonstrate to the population the pitfalls of weak, coalition governments. As the possibility of intervention in Syria increases, as the markets spooks on the prospects of war, and even if a few bombs were to go off in the Kurdish areas, the growing sense of national insecurity would only serve to make Erdoğan’s case that the country needs the firm hand of one-party leadership. With a big enough victory, it might even serve to bring back prospects of constitutional change to increase the powers of the presidency. At that point, an early election would be worth having.

Insecurity works

Internationally, Turkey may be driven by the sense the White House now prefers their Kurdish partners in Syria to Turkey. The Turkish government is extremely angry about the emerging alliance between the United States and the Syrian Kurds, especially the Kurdish Democratic Union Party (PYD), a Syrian affiliate of the Turkish Kurdistan Workers' Party (PKK). They attribute Kurdish success against ISIS to the American willingness to support Syrian Kurdish forces with air power and supplies. In the Turkish view, the PYD is simply a branch of the PKK, which both Turkey and the United States have branded a terrorist group. Allowing the PYD to unite the Kurdish areas of Syria would therefore represent an existential threat to Turkey.  

By threatening to intervene in Syria, the Turkish government seeks to change a U.S. policy that it finds potentially very damaging to Turkish interests. As Erdoğan no doubt reminded Vice President Biden when they talked the other day, Turkey has the ability to have a far greater impact on the fight against ISIS than the Kurds do. (The Turkish government might tell their domestic audiences that a prospective intervention in Syria is to stop the Kurds, but they will tell international audiences that it is to fight ISIS.)

Interestingly, to achieve both these international and domestic advantages, it is not necessary or even wise to actually go through with the intervention. Domestically, all that is necessary is to convince the population that the situation is sufficiently insecure to require firm, one-party leadership. Internationally, it just requires using the prospect of intervention to gain U.S. attention and convince the U.S. government to reduce its support of the PYD. At the current moment, the prospect of intervention is very useful for the Turkish government. Actual intervention, with all of the attendant risks of quagmire, is significantly less appealing.

So that means that it is probably not strictly necessary to spend your time trying to understand how the myriad factions within Syria will respond to the presence of the Turkish military on Syrian soil. On the bright side, you now have some really good reasons to enter into the nearly as confusing realm of Turkish domestic politics. Maybe start with our Turkish election series.

For another take on this issue, see the post from Kemal Kirisci and Sinan Ekim. 

This weekend’s election results in Turkey were a surprise to the vast majority of Turkish pollsters and pundits, myself included. The ruling Justice and Development Party (AKP) won nearly 50 percent of the popular vote. The party can now form a single-party government, even if it doesn’t have the supermajority necessary to remake the Turkish constitution. What happened?

As with much in life, the result does make sense in hindsight. Prior to the June 7 election, President Recep Tayyip Erdoğan and the AKP leadership had supported a Kurdish peace process, in part in the hope of gaining Kurdish votes. In that election, however, not only did the AKP fail to win new Kurdish votes, but support for the Nationalist Action Party (MHP)—a far-right Turkish nationalist party—swelled, apparently out of frustration among nationalist Turks with the AKP-led peace process with the Kurds. In other words, the AKP had the worst of both worlds.

Erdoğan and the AKP leadership, recognizing the political problem this posed for them, allowed the peace process to collapse amid mounting instability driven by the Syrian civil war. This, combined with disillusionment with the MHP leadership due to their perceived unwillingness to form a coalition government, drove about two million MHP voters to the AKP this weekend. The exodus shows, in a sense, what close substitutes the two parties can be among a more nationalist voting bloc.

The controlled chaos that resulted from the collapse of the peace process—combined with the escalating refugee crisis, the fear of ISIS attacks, and the struggling economy—helped the government politically. Voters evidently recalled that it had been the AKP that brought the country out of the very tough times of the 1990s.  

In contrast, the opposition parties seem to lack leadership and appear to promise only internal squabbles and indecisiveness. Craving security and stability, voters have now turned to the one party that appears to have the strength to provide it. In that sense, Erdoğan’s nationalist gambit—which was actually a well-conceived series of political maneuvers—worked. Even some one million conservative Kurdish voters returned to the AKP.

These voters perhaps did not notice the irony that the government had also engineered the instability they feared. In part, this success derives from government’s control over the media. These elections may have been free, in the sense that Turkish voters can cast a ballot for the candidates they want. But they were not fair. The state maintained tight control over traditional and social media alike. Freedom House and the Committee to Protect Journalists, among others, have cast doubt on Turkey’s press freedom credentials. Real opposition voices are difficult for media publish or voters to see on television. Thus, for example, Selahattin Demirtaş, the leader of the pro-Kurdish Peoples' Democratic Party (HDP) and the most charismatic opposition politician in Turkey, had essentially no air time during the campaign.

There are some important upsides to the election results. For one, HDP again passed the 10 percent threshold to remain in parliament. That will help mitigate—though hardly erase—the polarization that grips the country, and will hopefully make government reconsider its abandonment of the Kurdish peace process.

More significantly, the AKP does not have what it needs to convert Turkey’s government structure into a presidential system, which would be a bad move for the country. The election results will undoubtedly revitalize Erdoğan’s push for a presidential regime in Turkey. But that requires changing the constitution, and the AKP did not achieve the supermajority that it would need to do that on its own.

Critically, changing to a presidential system will require some support from the opposition and even more importantly popular support via a referendum. As political strategists around the world have learned, people tend not to vote on the actual referendum item, per se, but based on more general opinions of their leadership. So to win a referendum on the presidential system, Erdoğan and his AKP colleagues would need to show improvements in the economy, in the security situation, on the Kurdish issue, on Syrian refugees, and on national stability more generally. Instability in Turkey, particularly the renewal of violence in the Kurdish region, will deter investment and deepen the economic slump throughout the country.

With its new majority, AKP leaders are now in a position of strength to negotiate with the HDP over Kurdish issues. The refugee crisis also means the government also has more leverage with the EU. If it chooses to use its strength to reach positive agreements on those fronts, the outcomes could be very good for the Turkish people.

To actually win a referendum on the presidential system, Erdoğan would have to work to depolarize his country. While the presidential system itself would not be good for Turkey, the process of getting there might be.