In a lively and wide-ranging debate that aired earlier this month on Al Jazeera English, Brookings Executive Vice President Martin Indyk sparred with Head to Head presenter Mehdi Hasan about American efforts to resolve the Israeli-Palestinian conflict and the United States’ relationship with Israel.

Indyk began by stressing that American support for Israel is what gives the United States an influential role in the peace process and the leverage to encourage Israel to move towards peace. Indyk added that this does not mean that the United States should act as “Israel’s attorney” in the negotiations, and cited a promise he made to Palestinian leaders during the 2013-2014 peace talks led by Secretary of State John Kerry that Washington would not coordinate positions with Israel in advance. 

Brookings Executive Vice President Martin Indyk in a Head to Head interview with Al Jazeera English's Mehdi Hassan.

He pointed out that the United States has traditionally relied on its close relationship with Israel to encourage its leaders to take steps for peace and make offers to the Palestinians, and that no other potential mediator has been able to produce serious offers from Israel. “[The United States is] not neutral, we don't claim to be neutral. We have an alliance with Israel,” Indyk said. “But in order to achieve another interest that we have, which is peace in the region…and a settlement that provides for the legitimate national rights of the Palestinians, we need to be able to influence Israel.”

In responding to questions from Hasan and the audience, Indyk explained that he believes that both Israelis and Palestinians had made important concessions for peace, citing Israel’s acceptance of the Clinton Parameters in 2000, and the Palestinian Liberation Organization’s historic recognition of Israel as part of the Oslo Accords. Indyk also described the dramatic shifts in the way the United States has addressed the Palestinian issue over the past few decades, “from treating it only as a refugee issue and insisting that it be dealt with through Jordan to recognizing Palestinian national rights.” 

When asked about U.S. support for Israel at the United Nations, Indyk responded that this support is definitely warranted given the history of hostility towards Israel at the UN. However, he added that he personally wouldn’t oppose a carefully-worded resolution condemning Israeli settlements “so that the settlers in Israel understand that [settlement expansion] isn’t cost free.” Indyk rejected the notion that Israel has turned from a U.S. strategic asset in the Middle East into a burden, but explained that “making progress on the Palestinian issue enhances America’s credibility in the region and failing to make progress…hurts America’s credibility in the region.” 

Indyk concluded the discussion by reiterating his commitment to achieving Israeli-Palestinian peace and emphasizing that he would “never give up on trying to resolve this conflict in a way that meets Palestinian legitimate national aspirations to an independent and viable contiguous state living alongside Israel, a Jewish state, in peace.” 

       

Many proposals to accelerate and improve medical product innovation and regulation focus on reforming the product development and regulatory review processes that occur before drugs and devices get to market. While important, such proposals alone do not fully recognize the broader opportunities that exist to learn more about the safety and effectiveness of drugs and devices after approval. As drugs and devices begin to be used in larger and more diverse populations and in more personalized clinical combinations, evidence from real-world use during routine patient care is increasingly important for accelerating innovation and improving regulation.

First, further evidence development from medical product use in large populations can allow providers to better target and treat individuals, precisely matching the right drug or device to the right patients. As genomic sequencing and other diagnostic technologies continue to improve, postmarket evidence development is critical to assessing the full range of genomic subtypes, comorbidities, patient characteristics and preferences, and other factors that may significantly affect the safety and effectiveness of drugs and devices. This information is often not available or population sizes are inadequate to characterize such subgroup differences in premarket randomized controlled trials.

Second, improved processes for generating postmarket data on medical products are necessary for fully realizing the intended effect of premarket reforms that expedite regulatory approval. The absence of a reliable postmarket system to follow up on potential safety or effectiveness issues means that potential signals or concerns must instead be addressed through additional premarket studies or through one-off postmarket evaluations that are more costly, slower, and likely to be less definitive than would be possible through a better-established infrastructure. As a result, the absence of better systems for generating postmarket evidence creates a barrier to more extensive use of premarket reforms to promote innovation.

These issues can be addressed through initiatives that combine targeted premarket reforms with postmarket steps to enhance innovation and improve evidence on safety and effectiveness throughout the life cycle of a drug or device. The ability to routinely capture clinically relevant electronic health data within our health care ecosystem is improving, increasingly allowing electronic health records, payer claims data, patient-reported data, and other relevant data to be leveraged for further research and innovation in care. Recent legislative proposals released by the House of Representatives’ 21st Century Cures effort acknowledge and seek to build on this progress in order to improve medical product research, development, and use. The initial Cures discussion draft included provisions for better, more systematic reporting of and access to clinical trials data; for increased access to Medicare claims data for research; and for FDA to promulgate guidance on the sources, analysis, and potential use of so-called Real World Evidence. These are potentially useful proposals that could contribute valuable data and methods to advancing the development of better treatments.

What remains a gap in the Cures proposals, however, is a more systematic approach to improving the availability of postmarket evidence. Such a systematic approach is possible now. Biomedical researchers and health care plans and providers are doing more to collect and analyze clinical and outcomes data. Multiple independent efforts – including the U.S. Food and Drug Administration’s Sentinel Initiative for active postmarket drug safety surveillance, the Patient-Centered Outcomes Research Institute’s PCORnet for clinical effectiveness studies, the Medical Device Epidemiology Network (MDEpiNet) for developing better methods and medical device registries for medical device surveillance and a number of dedicated, product-specific outcomes registries – have demonstrated the potential for large-scale, systematic postmarket data collection. Building on these efforts could provide unprecedented evidence on how medical products perform in the real-world and on the course of underlying diseases that they are designed to treat, while still protecting patient privacy and confidentiality.

These and other postmarket data systems now hold the potential to contribute to public-private collaboration for improved population-based evidence on medical products on a wider scale. Action in the Cures initiative to unlock this potential will enable the legislation to achieve its intended effect of promoting quicker, more efficient development of effective, personalized treatments and cures.

What follows is a set of both short- and long-term proposals that would bolster the current systems for postmarket evidence development, create new mechanisms for generating postmarket data, and enable individual initiatives on evidence development to work together as part of a broad push toward a truly learning health care system.

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Increasing educational attainment is likely to reduce conflict risk, especially in countries like Pakistan that have very low levels of primary and secondary school enrollment. Education quality, relevance and content also have a role to play in mitigating violence. Education reform must therefore be a higher priority for all stakeholders interested in a more peaceful and stable Pakistan. Debate within the country about education reform should not be left only to education policymakers and experts, but ought to figure front and center in national dialogues about how to foster security. The price of ignoring Pakistan’s education challenges is simply too great in a country where half the population is under the age of 17.

There has been much debate concerning the roots of militancy in Pakistan, and multiple factors clearly come into play. One risk factor that has attracted much attention both inside Pakistan and abroad is the dismal state of the national education sector. Despite recent progress, current school attainment and literacy levels remain strikingly low, as does education spending. The Pakistani education sector, like much of the country’s public infrastructure, has been in decline over recent decades. The question of how limited access to quality education may contribute to militancy in Pakistan is more salient now than ever, given the rising national and international security implications of continued violence.

The second half of 2009 witnessed not only the Pakistani government stepping up action against insurgents but also the release of a new Pakistan National Education Policy that aspires to far-reaching and important reforms, including a commitment to increase investment in education—from 2 to 7 percent of gross domestic product. Hundreds of millions of dollars in international education aid have been newly pledged by donor countries. This renewed emphasis on education represents a substantial opportunity to seek to improve security in Pakistan and potentially also globally over the medium to long term. Policymakers both inside and outside Pakistan should give careful consideration to whether and how education investments can promote peace and stability, taking into account what we now know about the state of the education sector and the roots of militancy.

This report takes a fresh look at the connection between schools, including but not limited to Pakistan’s religious seminaries, known as “madrasas,” and the rising militancy across the country. Poor school performance across Pakistan would seem an obvious area of inquiry as a risk factor for conflict. Yet to date, the focus has been almost exclusively on madrasas and their role in the mounting violence. Outside Pakistan, relatively little attention has been given to whether and how the education sector as a whole may be fueling violence, over and above the role of the minority of militant madrasas.

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Employment is down among everyone between the ages of 16 and 64—particularly among teens, but with a great deal of variation by geography, race, and education. The disparity between blacks and whites is especially stark. For example, unemployment among white young adults peaked at 14% in 2010—still considerably lower than unemployment rates for black young adults at any point in the 2008 to 2014 time period. Unemployment for black 20- to 24-year-olds rose to 29.5% in 2010 and fell to 22.3% in 2014, compared to 10.3% among whites in 2014.

While there is no silver bullet, higher levels of education and work experience clearly improve job prospects down the line for young people. There are multiple strategies local and regional leaders can use to build more structured pathways into employment.

Teens and young adults (referring to 16- to 19-year-olds and 20- to 24-year-olds, respectively) are not monolithic populations. Age is an obvious differentiator, but so are a number of other factors, such as educational attainment, skill level, interests, parental support, and other life circumstances.  Schools, families, and neighborhoods all play a role in a young person’s trajectory—both positive and negative. But at the most basic level, a program for a 17-year-old high school student is likely not appropriate for a 23-year-old, regardless of educational attainment. Successful programs integrate education, training, work-readiness, and youth development principles, but the particular blend of these elements and settings vary: more school-based and educationally focused programs for younger youth, and more community-based and career-focused programs with strong ties to education for older youth.

An admittedly non-comprehensive review includes the following types of promising and proven programs:  

For high school students:

• Paid internship programs, such as Urban Alliance and Genesys Works
• High school programs that bridge school and work with occupationally-focused courses and career exposure, such as Career Academies, Linked Learning, High Tech High, Advanced Career, Alamo Academies, and P-Tech, some of which also incorporate post-secondary courses and credentials into their programs
• Youth apprenticeships, such as state programs in Georgia and Wisconsin 

For out-of-school youth and young adults:

• Highly structured programs offering work readiness and technical skills development, often in partnership with community colleges, and coupled with paid internships, such as Year Up, i.c.stars, npower, and Per Scholas
• Programs that offer stipends and combine academics, job training, mentoring, and supportive services while carrying out community improvement projects, such as YouthBuild and Youth Corps

The sobering fact is that promoting employment and economic security among young people is not a straightforward proposition. To succeed in today’s economy and earn middle-class wages, a young person needs to complete several steps: graduate from high school or earn an alternate credential; enroll in and complete some post-secondary education or job training; preferably gain meaningful work experience; and enter the labor market with in-demand skills. (A decent economy and some luck help, too.) There are many points along that path from which a young person can get off-track, particularly young people of color and those from high-poverty neighborhoods. And while high youth unemployment is increasingly in the news these days, the difficulties youth without college degrees face in finding good jobs has been a problem for decades.

Programs such as the ones listed above are part of the solution. But they are not enough, given the magnitude of the problem. In order to produce better employment outcomes at scale, leaders from all sectors and levels of government need to make broader shifts in how education and workforce programs are designed, and how they interact with each other and employers. That is a heavy lift, but it is worth it to address the high costs imposed by the status quo: high unemployment, poverty, and untapped potential.  

      

During his presentation at the University of Michigan/Urban Land Institute Real Estate Forum, Christopher B. Leinberger discusses the impact walkable urbane places has and will have on metropolitan development patterns, the market reasons for this change and how to strategically manage it.

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From 2006 to 2011, Qatar was highly active as a conflict mediator within the greater Middle East, seeking political consensus in Lebanon as well as securing a key peace agreement regarding the Darfur conflict. What were the drivers of Qatari mediation during this time, and how successful were Qatari negotiators in their efforts? How has Qatar’s foreign policy during the Arab Spring affected its ability to act as a mediator? How might Qatar expand its mediation capacity in the future?

In an Analysis Paper, Sultan Barakat weighs the prospects for renewed Qatari mediation efforts in a changing regional landscape. He holds that Qatar’s turn towards a more interventionist foreign policy during the Arab Spring shifted the country’s focus away from mediation, while backlash against the country’s positions has limited its ability to engage with the region’s conflicts.

Drawing on interviews with government officials, Barakat concludes that Qatar’s efforts were much aided by financial resources and wide-ranging political ties which helped drive initial mediation efforts, yet were hampered by a lack of institutional capacity to support and monitor such mediation.

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Longevity annuities—a financial innovation that provides protection against outliving your money late in life—have the potential to reshape the retirement security landscape. Typically bought at retirement, a longevity annuity offers a guaranteed stream of income beginning in ten or 20 years at a markedly lower cost than a conventional annuity that begins paying out immediately. Sales have grown rapidly and it will be even easier to purchase the annuities in the future given new Treasury regulations. While economists have touted the attractiveness of longevity annuities as a way to ensure the ability to maintain one’s living standards late in life, significant barriers to a robust market remain—including lack of consumer awareness, questions about product value, and employer concerns with taking on fiduciary responsibility by offering these products to their employees.

Can longevity annuities overcome these barriers to find widespread popularity among Americans retirees? On November 6, the Retirement Security Project hosted a panel of experts to discuss the potential for these products to contribute to the economic security of older Americans, in addition to policy reforms that could lead to greater take-up by retirement plan sponsors and consumers alike. Following a presentation by Katharine Abraham that laid out the issues, two panels of prominent experts added their insights on the promise and challenges of this burgeoning market.

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• Better Financial Security in Old-Age? The Promise of Longevity Annuities
• Understanding Longevity Annuities
• Eliminating Barriers to Market Development
• Longevity Annuities Are Not Necessarily Niche Products
• The Adverse Selection Issue

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• Better Financial Security in Old-Age? The Promise of Longevity Annuities

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• Uncorrected Transcript (.pdf)

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• 20141106_longevity_annuities_transcript

      

       

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

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

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

Transfers rates from community college vary dramatically by state

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

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

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

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

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

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

Tuning an American engine of social mobility

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

       

2014 was a relatively friendless year for the Democratic Republic of Korea (DPRK or North Korea). It publicly lost its best friend and patron, China, to its erstwhile nemesis, the Republic of Korea (ROK or South Korea), when Presidents Park Geun-hye and Xi Jinping celebrated their growing friendship at the July summit in Seoul. Recently, retired PLA General Wang Hongguang wrote in the Chinese language site of Global Times, which is closely linked to the Chinese Communist Party, that China tired of cleaning up North Korea’s “mess” and would not step in to “save” North Korea if it collapses or starts a war.[1] And there is a vigorous debate in Beijing on whether the DPRK should be treated on a “normal” basis with China’s interests as the sole guide and purpose or be treated as a special case needing China’s indulgence and protection.[2] Since the Sony hack of November, North Korea has been under tighter scrutiny, both real and virtual, by Seoul, Beijing and Washington, accompanied by tighter sanctions in the new year. Bludgeoned by global condemnation of its atrocious human rights record, Pyongyang’s pariah status has intensified. Only Russia has been warming up to North Korea out of its own economic and political self-interest.

Is there any sizable country with good intentions for the region that is not giving up or beating up on North Korea? Is there any country Pyongyang likes and possibly even trusts? Mongolia stands out as the sole candidate, and it is friendly with both the East and the West.

Since the 2000s, Mongolia has played an increasingly constructive and steady role in in its bilateral ties with the DPRK and in its promotion of peace and cooperation in Northeast Asia. President Tsakhiagiin Elbegdorj, who visited Pyongyang in 2013, was the first head of state to reach out to the DPRK since Kim Jung Un assumed power and helped author the “Ulaanbaatar Dialogue on Northeast Asia Security,” which held its first meeting in June, 2014. It is a unique forum that combines official (track one) and unofficial academic/think tank/NGO (track two) participants, on a variety of important regional issues. The goals are to decrease distrust among nations and increase cooperation and peace. Both the DPRK and the ROK (Republic of Korea or South Korea) were represented at the inaugural meeting, as were the United States, China, Russia, Japan, and some European nations.

The UB Dialogue, as a consultative mechanism, has the potential to bring together policymakers, international organizations such as the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), and civil society entities and facilitate a range of initiatives related to economic cooperation; military transparency; environmental issues; non-traditional security threats; regional stability, cultural and educational exchange among the participants, including the two Koreas. These are official agenda items and goals of the UB Dialogue. With the Six-Party Talks nearly defunct and inter-Korean relations unable to address regional issues that affect the peninsula, Mongolia may be able to serve as a “Geneva or Helsinki of the East” as some observers have suggested.

Mongolia’s expanding global presence

Mongolia is uniquely positioned as the only country in Northeast Asia that enjoys good relations not only with North Korea but also South Korea, the United States, China, Russia, and Japan.

Mongolia’ relations with the United States, Canada, and Western Europe have steadily improved and deepened since the late 1980s. In recent decades, both Democratic and Republication administrations in Washington have enjoyed mutually warm and collaborative relations with Mongolia. President George W. Bush was the first sitting U.S. president to visit the country in 2005; he thanked the Mongolians for sending troops to join U.S.-led forces in Iraq and Afghanistan and for supporting anti-terrorism initiatives. Former Secretary of Defense Donald Rumsfeld also visited in the same year. In 2007, President Nambaryn Enkhbayar visited Washington to co-sign the Millennium Challenge Corporation Compact with President Bush. The next (and current) leader, President Elbegdorj, met U.S. President Barack Obama at the White House in 2011, as did the first civilian Minister of Defense, L. Bold. Vice President Joe Biden included Mongolia on a three-country Asia visit in August, 2011; China and Japan were the other two. A year later, Secretary of State Hilary Clinton took her turn in Ulaanbaatar. The most recent visit by top-level U.S. officials to Mongolia was by Secretary of Defense Chuck Hagel in April 2014.

Mongolia’s pursuit of the “third neighbor” policy allows the country to develop cooperative relations with the United States, Western Europe, ASEAN nations and others partly as “an air pocket” from its economic and security reliance on Beijing and Moscow. The softer side of this diplomatic push has been demonstrated by Ulaanbaatar’s membership in the Organization for Security and Cooperation in Europe and its previous chairmanship of the Community on Democracies.”[3]

Western experts on Mongolia applaud the way the country has developed a unique “peacekeeping niche” that facilitates participation in UN peacekeeping activities, international anti-terrorism measures, and humanitarian actions. For its small population of about three million, Mongolia takes on a heavy load of peacekeeping activities, ranking 26^th on the UN’s list of contributing nations.[4]

Since 2003, Mongolia annually hosts the “Khaan Quest” peacekeeping exercises for the purpose of tactical advancement and capacity building for its Mongolian Armed Forces (MAF) and for the improvement of regional confidence building. Although the United States and NATO play prominent roles, the Quest has attracted more diverse participants over the years so that by 2012, the number of interested parties expanded to include representatives from China and India as well as an array of developing nations such as Vietnam and Cambodia. These exercises are acknowledged as gatherings devoted to strengthening international cooperation and interoperability on peacekeeping initiatives around the world.[5]

On the economic side, Mongolia has been diversifying its external relations, with the maintenance of sovereignty and the related desire to reduce its overwhelming dependence on China as important goals. Expansion of economic relations is driven in part by a desire to participate in and benefit from global standards investment funds, and market access is a national priority. In that context, Mongolia’s relations with the West have been constructive and collaborative. For example, in 2013, the United States Trade Representative Michael Froman and Mongolia's Minister for Foreign Affairs, Luvsanvandan Bold, signed the Agreement on Transparency in Matters Related to International Trade and Investment between the United States of America and Mongolia. The Agreement commits the parties to provide opportunities for public comment on proposed laws and regulations and to publish final laws and regulations in Mongolian and English in order to facilitate access, openness, fairness, and procedural coherence in international trade and investment between Mongolia and other countries. “Additional commitments address the application of disciplines on bribery and corruption.” This type of administrative and legal modernization and the incorporation of measures to prevent and correct corruption are exemplary measures that could be helpful to the DPRK and other countries that are unfamiliar with or lagging in appropriate frameworks for doing business with diverse international actors.

Maintaining sovereignty between giants

China and Russia have vied for influence over Mongolia for many decades, from the time when Mongolia was in the Soviet sphere in influence to the present. Although 89 percent of foreign trade in 2013 was with China and Russia provides about 75 percent of Mongolia’s gasoline and diesel fuel and much of its electricity, Ulaanbaatar is assertively broadening and deepening its economic interests with the two big neighbors, especially greater transportation access and cheaper costs (vital to the landlocked nation), participation in the development of the New Silk Road corridor, and the construction of a Russian oil and gas pipeline through Mongolia that reaches China. All three countries have mutual interests and investments in developing Mongolia’s well-endowed mining industry.

But being sandwiched between two giants means Mongolia has to be prudent in preserving its sovereignty and independence, and Ulaanbaatar has done so in practical ways, balancing the two large powers’ interests with its own. The 2010 National Security Concept’s “One-Third Clause” sets a clear limit on the proportion of foreign direct investment from any one country: one-third. Legislation limits (foreign) state-owned companies from gaining control of strategic assets. And as numerous bilateral security and military cooperation agreements link Mongolia with China and Russia, UB has strategically and legally created elbow room for its autonomy. The government’s National Security and Foreign Policy Concepts outline a specific policy of not allowing foreign troops the use of its territory. Such preservationist measures to maintain sovereignty and independence in economic and security terms would be welcome examples to a North Korea which zealously prioritizes national sovereignty.

Mongolia and the Korean peninsula

Mongolia’s potential role as a non-nuclear peace broker in the region was further evidenced by its successful hosting of DPRK-Japan negotiations since 2012, which have yielded bilateral progress on longstanding abduction issues. In March 2014, Ulaanbaatar hosted the first-ever reunion between the parents of one of the abductees, Megumi Yokota (whom North Korea claims is dead), and her daughter, son-in-law, and their child who live in North Korea. Mongolia also served as a neutral venue for high-level talks on normalizing Japan-DPRK relations back in September 2007 as part of the Six-Party Talks framework. Asia Times reported that “arranging this recent meeting reflected Ulaanbaatar's ‘contribution to satisfy regional stability in Northeast Asia’ and how it could play a role in deepening understanding and normalizing DPRK-Japan relations.” President Elbegdorj's administration took particular care in staging the negotiations, including the use of the official state compound in Ikh Tenger as the meeting place. According to Alicia Campi, an American expert on Mongolia and the author of the AT article, Ikh Tenger was requested by the North Koreans.[6]

Mongolian President Elbegdorj is often described as an activist head of state, both for his focused efforts on developing Mongolia internally and advancing the country’s role and contributions internationally. One of his main foreign policy priorities is to promote regional economic integration and cooperation and peace and security. Dialogue and trust-building, two key components of his approach, coincide with ROK President Park Geun-hye’s emphasis on trustpolitik and the proposed Northeast Asia Peace and Cooperation Initiative (NAPCI). Both NAPCI and the UB Dialogue seek to chip away at distrust among Northeast Asian countries and increase collaboration and cooperation through multi-layered activities, including mutually reinforcing Track 1, 1.5 and 2 gatherings. Both emphasize multilateral cooperation on non-traditional security issues and people-to-people exchanges as ways to help build trust and resolve regional problems step by step. NAPCI held a track 1.5 forum in October 2014 in Seoul. In sharp contrast to its reaction to the first UB Dialogue of June that year, the DPRK flatly rejected the invitation to participate in the Seoul dialogue and criticized NAPCI as a cover for pressuring Pyongyang to relinquish its nuclear program and for reunification by absorption.[7]

There is no reason why the Ulaanbaatar Dialogue and NAPCI cannot be complementary and mutually reinforcing. Given that trust in inter-Korean relations is non-existent while Mongolia has gained deeper trust with both Koreas over the past two decades, NAPCI activities could benefit from Mongolia’s unique position in its relations with the DPRK. Ulaanbaatar potentially can serve as a neutral meeting ground, literally and metaphorically, for Pyongyang and Seoul. Moreover, given that the NAPCI seeks to maintain a cooperative relationship with other multilateral bodies and places emphasis on complementarity and inclusiveness, working with and supporting successful rounds of the UB Dialogues would be a principled move on the part of South Koreans. Moreover, engagement with North Korea through the UB Dialogue most likely represents an easier path to increasing inter-Korean trust than bilateral efforts and even easier than the NAPCI. South Korea’s domestic divisions and bitter left-right infighting tend to weaken the government’s position in approaches to the North. Seoul’s military standoff and competition with the North, its alliance with the United States, and participation in international sanctions regimes all cause suspicion in Pyongyang. In short, Seoul’s complex list of concerns and goals, some of which are contradictory to the spirit and practice of trust-building and cooperation with North Korea, create difficult conditions for progress through NAPCI alone.

In addition to lacking this baggage, Mongolia has unique standing with both North and South. It is a former Soviet satellite state that asserted full independence in 1990, and it is notable for successfully transitioning from a communist state to a vibrant democracy without civil war or bloodshed. President Elbegdorj’s 2013 speech in Pyongyang contained strong enunciation of the tenets of liberty. At the elite Kim Il Sung University in Pyongyang, he addressed students with these bold words: "No tyranny lasts forever. It is the desire of the people to live free that is the eternal power." And the Mongolian government has been keeping its border open to North Koreans who risk the arduous journey out of the DPRK and has permitted its airlines to transport them to South Korea.

Additionally, Mongolia has become a model of economic modernization and prosperous participation in the global economy. Although it faces some economic imbalances, its GDP rate was sky-high at 11.7 percent in 2013. There are good lessons to share with North Korea, and President Elberdorgj has made it clear that Mongolia would be very willing to work with the DPRK on economic development, IT, infrastructure, the management of mining precious earth resources and refineries. The two countries also engage in a worker exchange program, affording DPRK citizens the opportunity to breathe the air of freedom and to be exposed to South Korean television programming while they reside in Mongolia.

In recent years, Mongolia has pursued multiple types of people-to-people activities involving North Koreans, including academic exchanges, northeast Asian mayoral forums, and women’s parliamentary exchanges including female leaders from both Koreas. In June 2015, the second Track 2 conference of the UB Dialogue will convene in Ulaanbaatar with scholars from across the region and the United States with the theme of “Energy, Infrastructure, and Regional Connectivity.”

Sports and cultural initiatives in the past years have included international boxing matches in Ulaanbaatar with boxers from the DPRK, ROK, Mongolia, Russia and China. In 2013, Mongolia established an International Cooperation Fund which has supported children’s summer camps, basketball training and other exchanges with the DPRK in order to promote positive peace and people-to-people development in the region.

In the humanitarian arena, food aid to the DPRK has been channeled through international organizations, and the two countries have cooperated on physician exchanges. Prior research by Caprara and Ballen, conducted in cooperation with United Nations Special Envoy for Financing the Health Millennium Development Goals and for Malaria, has noted the additional soft power benefits of cooperative service development projects.

A recent global development forum hosted at the United Nations Asia-Pacific headquarters in Bangkok launched an Asia Pacific Peace Service Alliance which could build on these bilateral and regional exchanges in the critical area of humanitarian action and development in North Korea. An International Youth Leaders Assembly has been proposed in Ulaanbaatar for June, 2015, which would further the role of youth in fostering track two initiatives of service and dialogue.

Dr. Tsedendamba Batbayar, Mongolia’s Director of Policy Planning in the Ministry of Foreign Affairs and Trade, visited Washington in November, 2014 and noted the broad range of Mongolia-DPRK exchanges. Together with Mongolia Ambassador Bulgaa Altangerel, he emphasized his country’s desire to serve as a fair broker and mediator for the Northeast Asia region and to pursue prudent and practical measures to help build bridges of understanding between the people of North Korea and other parties.

But despite its uniquely constructive approach to dealing with the DPRK and other regional neighbors, Mongolia faces unique challenges in the mediator role it seeks to achieve. First, Ulaanbaatar has been able to gain Pyongyang’s trust because of the quiet diplomacy it has pursued, staying behind the scenes and out of the limelight. This has enabled a steady channel to the Pyongyang elite, and a focus on bilateral interests has been maintained. In short, drama has been avoided. But if Mongolia plays a more high-profile role with North Korea and multilateral actors, it will most likely be difficult to avoid some drama—posturing, rhetoric, and standoffs—emanating from various parties. Second, any increased or intensified involvement of China, Russia, and the United States in UB-led dialogue could come with the headache of big power arrogance and competition over leadership. The value of Mongolia’s role and activities for regional cooperation and peace stems from the fact that Ulaanbaatar does not assume airs or seek to dominate others. Whether China, Russia, and the United States would be able to refrain from seeking leadership and disproportionate influence in UB-led initiatives is highly questionable. Third, with respect to peninsular issues, for the UB Dialogues to gain more acceptance and credibility regionally and internationally requires that the DPRK become a consistent and collaborative presence at gatherings. Whether any nation or actor has the capacity to deliver consistent and collaborative participation by Pyongyang is an open question.

In addition, some observers believe that the impasse between North Korea and other nations is not simply the result of a trust deficit, but reflects mutually exclusive goals. While Mongolian mediation may not be able to solve the nuclear issue, it can be an effective channel – among others – for increasing communication, finding common ground, and beginning to ease tension.

Mongolia is the one Northeast Asian country that has kept its emotional cool and balanced policy interests with North Korea and other regional actors. It has not tripped over its own feet by politicizing historical grievances with its neighbors. Rather, it has exercised a calm can-do approach while its neighbors have engulfed themselves in hyper-nationalistic and ideological mire. And it has smartly used diplomacy and entrepreneurship to make friends and develop its own economy and people. These are significant assets that can be of benefit not only to UB but also to the region.

Recommendations

1. The Obama administration should actively support the Ulaanbaatar Dialogue process and encourage Seoul to find common cause in advancing greater regional dialogue and collaboration with the Mongolians through Track 2 and 1.5 processes. A precedent for this can be found in the case of Oman, which the current administration effectively tapped for back channel dialogue with Iran, kick-starting the present nuclear talks. Also, support by Washington would build on a prior exchange with Mongolia hosted by the Korea Institute for National Unification (KINU), where scholars noted potential benefits from three-way economic cooperation and the possibility of providing the North Koreans with a proven model of transformation from a closed statist system to a prosperous and more open system.

2. ROK President Park’s proposed regional cooperation mechanism should receive serious attention together with the Ulaanbaatar initiative. The two parallel efforts could benefit from being part of inter-connected strategies to defuse regional tension and forge greater trustpolitik.

3. The UN ESCAP headquarters can serve as an important multilateral bridge for humanitarian aid together with the multi-stakeholder Asia Pacific Peace Service Alliance (APPSA), which was launched at the UN headquarters in Bangkok last October. The U.S. Agency for International Development (USAID) could partner with UN ESCAP and the World Food Program to establish a verifiable humanitarian aid regime, building on prior food aid oversight protocols developed during the Bush administration. Mongolia also would be an excellent candidate for the training of an international volunteer corps for potential disaster and humanitarian relief and economic development projects concerning the DPRK and the broader Northeast Asia region. Mongolia has excellent working relations with the U.S. Peace Corps, which also helped facilitate the recent launch of the APPSA.

4. In the context of peninsula unification planning, regional economic cooperation on private and multi-stakeholder investment projects and the enabling of market-friendly policies could be further explored with Mongolia and other Northeast Asian partners in areas such as infrastructure, energy, and technology.5. Cultural and educational exchanges between Mongolia and the DPRK could be expanded on a multilateral basis over time to include the ROK, China, Russia, Japan and ASEAN nations together with UNESCO to further cultural bases and norms of peace.

       

In the developing world, more than 200 million children under the age of five years are at risk of not reaching their full development potential because they suffer from the negative consequences of poverty, nutritional deficiencies and inadequate learning opportunities. Overall, 165 million children (one in four) are stunted, and 90 percent of these children live in Africa and Asia. And though some progress has been made globally, child malnutrition remains a serious public health problem with enormous human and economic costs. Worldwide, only about 50 percent of children are enrolled in preprimary education, and in low-income countries a mere 17 percent. And though more and more children are going to school, millions have little to show for it. By some accounts, 250 million children of primary school age cannot read even part of a sentence. Some of these children have never been to school (58 million); but more often, they perform poorly despite having spent several years in school, which reflects not only the poor quality of many schools but also the multiple disadvantages that characterize their early life.

Ensuring that all children—regardless of their place of birth and parental income or education level—have access to opportunities that will allow them to reach their full potential requires investing early in their development. To develop their cognitive, linguistic, socioemotional and physical skills and abilities, children need good nutrition and health, opportunities for play, nurture and learning with caregivers, early stimulation and protection from violence and neglect.

The Case for Early Interventions 

The arguments for investing in children early are simple and convincing. Early investment makes sense scientifically. The brain is almost fully developed by age three, providing a prime opportunity to achieve high gains. We know that the rapid rate of development of the brain’s neural pathways is responsible for an individual’s cognitive, social and emotional development, and there is solid evidence that nutrition and stimulation during the first 1,000 days of life are linked to brain development. 

Early investment makes sense in terms of equity. The playing field has the highest chances of being leveled early on, and we know that programs have a higher impact for young children from poorer families. In the United States, for example, increasing preschool enrollment to 100 percent for low-income children would reduce disparities in school readiness by 24 percent between black and white children and by 35 percent between Hispanic and white children. We also know that equalizing initial endowments through early childhood development (ECD) programs is far more cost-effective than compensating for differences in outcomes later in life. 

Early investment makes sense economically. Investing early prevents higher costs down the road, and interventions yield a high return on investment. There is evidence of the benefits for the individual and for society more broadly. For instance, at the level of the individual, in Jamaica children participating in an early childhood stimulation program were found to have 25 percent higher earnings 20 years later compared with children who did not participate. At the economy-wide level, eliminating malnutrition is estimated to increase gross domestic product by 1 to 2 percentage points annually, while countries with school systems that have a 10-percentage-point advantage in the proportion of students

Downloads

• Download the paper (PDF)

       

       

Employers continued to boost payrolls in 2015, capping six straight years of job gains. It was the third year in a row in which employment gains topped 210,000 a month. In the 12 months ending in November, public and private payrolls increased 220,000 a month, or about 1.9 percent over the year. Virtually all the growth in payrolls was in the private sector, which added 212,000 jobs a month. The public sector added modestly to its payrolls last year, but the number of government employees remains more than one million (4.4 percent) below the peak level attained in 2010. 

Nearly all major industries except mining contributed to job gains in the past 12 months, though gains in manufacturing were weaker than in any year since the expansion began in 2010.  Payrolls in the mining industry tumbled more than 10 percent, hurt by a steep fall in oil and gas prices and the decline in exploration for new energy reserves. The construction industry continued to add to payrolls last year at about the same pace as in the previous two years, although the level of employment is still about 1.2 million (15 percent) below the peak level achieved in 2006.

Based on the age composition of the U.S. population, between 65,000-80,000 new jobs are needed every month to keep the unemployment rate from rising. Since late 2010, monthly payroll gains have comfortably exceeded this threshold. As a result, the jobless rate has declined steadily. In the 12 months through November 2015, the unemployment rate dropped another 0.8 percentage point, falling to 5.0 percent. The jobless rate is now within a half percentage point of its level immediately before the Great Recession. Since reaching a peak in the autumn of 2009, the unemployment rate has been cut in half.

We’ve also seen improvement in other indicators of job market distress in the past year. The number of Americans who want full-time jobs but have been forced to take part-time positions fell more than 11 percent in the 12 months through November 2015. About 9 million workers who wanted a full-time job were employed part-time in the middle of 2010. That number has fallen to about 6 million in recent months.  Similarly, the number of Americans in long spells of unemployment continues to shrink. Workers reporting they were unemployed 6 months or longer fell to 2.05 million in November, representing a considerable improvement since 2010. In that year, more than 6 million jobless workers reported they had been looking for work for at least a half a year.

The most welcome news for Americans who hold jobs is that inflation-adjusted wage levels improved last year.  Real average hourly earnings increased 1.8 percent between November 2014 and November 2015, and real weekly earnings climbed 1.6 percent.  These gains represent a considerable improvement compared with earlier years in the recovery, when real wage gains were negligible.  Nonetheless, nominal wage gains in 2015 were only slightly faster than they were in earlier years of the recovery. The reason for the startling turnaround in real wage growth is that consumer prices increased very little over the past year.  In the 12 months ending in November, the CPI edged up just 0.5 percent, almost a full percentage point more slowly than the average rate of consumer inflation in the previous three years.  The slowdown was driven by lower prices for energy and other key commodities.  (The “core” consumer inflation rate, which strips out the effects of price changes in energy and food, was 2.0 percent last year, a bit higher than the rate in the previous year.) 

Back when politicians and voters cared more about inflation than they currently do, Brookings economist Arthur Okun proposed an economic indicator called the “misery index” to summarize the dual hardships of inflation and unemployment. To measure economic misery Okun suggested adding the current unemployment rate and a measure of consumer price inflation.  In Chart 1 below I have added the civilian unemployment rate and the trailing 12-month percentage change in the CPI.  In the 11 months of 2012 through November, the misery index averaged just 5.4, its lowest level since the 1950s and well below its average levels in the 1990s (8.8) and in the period from 2000 to 2007 (7.8). When inflation is benign and has remained subdued for a long time, Americans may forget the pain they feel when price increases are frequent and large. Okun’s misery index fell to an exceptionally low level in 2015, even if a small majority of Americans continues to believe the economy is getting worse.

The good news in 2015 is that unemployment continued to fall and real wages began to rise.  The less welcome news is that key measures of labor force participation failed to improve.  For example, the labor force participation rate of Americans between 25 and 54 was the same in November 2015 as it was in November 2014. More worryingly, it was 2.1 percentage points below its level in November 2007, just before the Great Recession.  So far we have seen no rebound in participation among people in prime working ages, despite abundant signs that it’s easier to land a job. 

Low participation is the main explanation for depressed employment rates among prime-age Americans.  Participation rates are not only low in comparison to levels seen before the Great Recession, they are also now below those in other rich countries.  Charts 2 and 3 compare employment-to-population rates among 25-54 year-olds in seven OECD member countries (Canada, France, Germany, Japan, Sweden, the United Kingdom, and the United States).  The charts show employment rates separately for men and women in two different years, 2000 and 2014.  The countries are ranked, from left to right, by their employment rates in 2014. In 2000 the U.S. had the second highest male employment rate (Chart 2) and the second highest female employment rate (Chart 3) of the seven countries listed.  By 2014, the U.S. had the lowest male and female employment rates among the countries compared.  Although several nations saw declines in their prime-age male employment rate, only the U.S. also experienced a decline in its prime-age female employment rate.  The other six countries all saw increases in female employment.

The main reason for the drop in prime-age U.S. employment was the decline in prime-age participation. An enduring puzzle of the current recovery is the failure of participation rates to rebound, even in the face of steady improvement in the job market.

      

Researchers have long known that the rich live longer than the poor. Evidence now suggests that the life expectancy gap is increasing, at least here the United States, which raises troubling questions about the fairness of current efforts to protect Social Security.

There's nothing particularly mysterious about the life expectancy gap. People in ill health, who are at risk of dying relatively young, face limits on the kind and amount of work they can do. By contrast, the rich can afford to live in better and safer neighborhoods, can eat more nutritious diets and can obtain access to first-rate healthcare. People who have higher incomes, moreover, tend to have more schooling, which means they may also have better information about the benefits of exercise and good diet.

Although none of the above should come as a surprise, it's still disturbing that, just as income inequality is growing, so is life-span inequality. Over the last three decades, Americans with a high perch in the income distribution have enjoyed outsized gains.

Using two large-scale surveys, my Brookings colleagues and I calculated the average mid-career earnings of each interviewed family; then we estimated the statistical relationship between respondents' age at death and their incomes when they were in their 40s. We found a startling spreading out of mortality differences between older people at the top and bottom of the income distribution.

For example, we estimated that a woman who turned 50 in 1970 and whose mid-career income placed her in the bottom one-tenth of earners had a life expectancy of about 80.4. A woman born in the same year but with income in the top tenth of earners had a life expectancy of 84.1. The gap in life expectancy was about 3½ years. For women who reached age 50 two decades later, in 1990, we found no improvement at all in the life expectancy of low earners. Among women in the top tenth of earners, however, life expectancy rose 6.4 years, from 84.1 to 90.5. In those two decades, the gap in life expectancy between women in the bottom tenth and the top tenth of earners increased from a little over 3½ years to more than 10 years.

Our findings for men were similar. The gap in life expectancy between men in the bottom tenth and top tenth of the income distribution increased from 5 years to 12 years over the same two decades.

Rising longevity inequality has important implications for reforming Social Security. Currently, the program takes in too little money to pay for all benefits promised after 2030. A common proposal to eliminate the funding shortfall is to increase the full retirement age, currently 66. Increasing the age for full benefits by one year has the effect of lowering workers' monthly checks by 6% to 7.5%, depending on the age when a worker first claims a pension.

For affluent workers, any benefit cut will be partially offset by gains in life expectancy. Additional years of life after age 65 increase the number years these workers collect pensions. Workers at the bottom of the wage distribution, however, are not living much longer, so the percentage cut in their lifetime pensions will be about the same as the percentage reduction in their monthly benefit check.

Our results and other researchers' findings suggest that low-income workers have not shared in the improvements in life expectancy that have contributed to Social Security's funding problem.

It therefore seems unfair to preserve Social Security by cutting future benefits across the board. Any reform in the program to keep it affordable should make special provision to protect the benefits of low-wage workers.

Editor's note: This piece originally appeared in The Los Angeles Times. 

       

The past few months have seen a flurry of reports on discouraging trends in life expectancy among some of the nation’s struggling populations. Different researchers have emphasized different groups and have tracked longevity trends over different time spans, but all have documented conspicuous differences between trends among more advantaged Americans compared with those in worse circumstances.

In a study published in April, Stanford economist Raj Chetty and his coauthors documented a striking rise in mortality rate differences between rich and poor. From 2001 to 2014, Americans who had incomes in the top 5 percent of the income distribution saw their life expectancy climb about 3 years. During the same 14-year span, people in the bottom 5 percent of the income distribution saw virtually no improvement at all.

Using different sources of information about family income and mortality, my colleagues and I found similar trends in mortality when Americans were ranked by their Social-Security-covered earnings in the middle of their careers. Over the three decades covered by our data, we found sizeable differences between the life expectancy gains enjoyed by high- and low-income Americans. For 50-year old women in the top one-tenth of the income distribution, we found that women born in 1940 could expect to live almost 6.5 years longer than women in the same position in the income distribution who were born in 1920. For 50-year old women in the bottom one-tenth of the income distribution, we found no improvement at all in life expectancy. Longevity trends among low-income men were more encouraging: Men at the bottom saw a small improvement in their life expectancy. Still, the life-expectancy gap between low-income and high-income men increased just as fast as it did between low- and high-income women.

One reason these studies should interest voters and policymakers is that they shed light on the fairness of programs that protect Americans’ living standards in old age. The new studies as well as some earlier ones show that mortality trends have tilted the returns that rich and poor contributors to Social Security can expect to obtain from their payroll tax contributions.

If life expectancy were the same for rich and poor contributors, the lifetime benefits workers could expect to receive from their contributions would depend solely on the formula that determines a worker’s monthly pensions. Social Security’s monthly benefit formula has always been heavily tilted in favor of low-wage contributors. They receive monthly checks that are a high percentage of the monthly wages they earn during their careers. In contrast, workers who earn well above-average wages collect monthly pensions that are a much lower percentage of their average career earnings.

The latest research findings suggest that growing mortality differences between rich and poor are partly or fully offsetting the redistributive tilt in Social Security’s benefit formula. Even though poorer workers still receive monthly pension checks that are a high percentage of their average career earnings, they can expect to receive benefits for a shorter period after they claim pensions compared with workers who earn higher wages. Because the gap between the life spans of rich and poor workers is increasing, affluent workers now enjoy a bigger advantage in the number of months they collect Social Security retirement benefits. This fact alone is enough to justify headlines about the growing life expectancy gap between rich and poor

There is another reason to pay attention to the longevity trends. The past 35 years have provided ample evidence the income gap between America’s rich and poor has widened. To be sure, some of the most widely cited income series overstate the extent of widening and understate the improvement in income received by middle- and low-income families. Nonetheless, the most reliable statistics show that families at the top have enjoyed faster income gains than the gains enjoyed by families in the middle and at the bottom. Income disparities have gone up fastest among working-age people who depend on wages to pay their families’ bills. Retirees have been better protected against the income and wealth losses that have hurt the living standards of less educated workers. The recent finding that life expectancy among low-income Americans has failed to improve is a compelling reason to believe the trend toward wider inequality is having profound impacts on the distribution of well-being in addition to its direct effect on family income.

Over the past century, we have become accustomed to seeing successive generations live longer than the generations that preceded them. This is not true every year, of course, nor is it always clear why the improvements in life expectancy have occurred. Still, it is reasonable to think that long-run improvements in average life spans have been linked to improvements in our income. With more money, we can afford more costly medical care, healthier diets, and better public health. Even Americans at the bottom of the income ladder have participated in these gains, as public health measures and broader access to health insurance permit them to benefit from improvements in knowledge. For the past three decades, however, improvements in average life spans at the bottom of the income distribution have been negligible. This finding suggests it is not just income that has grown starkly more unequal.

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

       

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

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

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

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

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

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

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

To read more, download the full paper here.

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

Downloads

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

       

Neel Kashkari, the newly appointed President of the Federal Reserve Bank of Minneapolis, is super-smart with extensive experience in the financial industry at Goldman Sachs and then running the government’s TARP program, but his call to break up the big banks misses the mark.

Sure, big banks, medium-sized banks and small banks all contributed to the devastating financial crisis, but so did the rating agencies and the state-regulated institutions (mostly small) that originated many of the bad mortgages.  It was vital that regulation be strengthened to avoid a repetition of what happened – and it has been.  There should never again be a situation where policymakers are faced with either bailing out failing institutions or letting them fail and seeing financial panic spread.

That’s why the Dodd-Frank Act gave the authorities a new tool to avoid that dilemma titled “Orderly Liquidation Authority,” which gives them the ability to fail a firm but sustain the key parts whose failure might cause financial instability.  Kashkari thinks that the authorities will not want to exercise this option in a crisis because they will be fearful of the consequences of imposing heavy losses on the original owners of the largest banks.  It’s a legitimate concern, but he underestimates the progress that has been made in making the orderly liquidation authority workable in practice.  He also underestimates the determination of regulators not to bail out financial institutions from now on.

To make orderly liquidation operational, the Federal Deposit Insurance Corporation (FDIC) devised something called the “single point of entry” approach, or SPOE, which provides a way of dealing with large failing banks.  The bank holding company is separated from the operating subsidiaries and takes with it all of the losses, which are then imposed on the shareholders and unsecured bond holders of the original holding company, and not on the creditors of the critical operating subs and not on  taxpayers.  The operating subsidiaries of the failing institution are placed into a new bank entity, and they are kept open and operating so that customers can still go into their bank branch or ATM and get their money, and the bank can still make loans to support household and business spending or the investment bank can continue to help businesses and households raise funds in securities markets.  The largest banks also have foreign subsidiaries and these too would stay open to serve customers in Brazil or Mexico.

This innovative approach to failing banks is not magic, although it is hard for most people to understand.  However, the reason that Kashkari and other knowledgeable officials have not embraced SPOE is that they believe the authorities will be hesitant to use it and will try to find ways around it.  When a new crisis hits, the argument goes, government regulators will always bail out the big banks.

First, let’s get the facts straight about the recent crisis.  The government did step in to protect the customers of banks of all sizes as well as money market funds.  In the process, they also protected most bondholders, and people who had lent money to the troubled institutions, including the creditors of Bear Stearns, a broker dealer, and AIG, an insurance company.  This was done for a good reason because a collapse in the banking and financial system more broadly would have been even worse if markets stopped lending to them.  Shareholders of banks and other systemically important institutions lost a lot of money in the crisis, as they should have.  The CEOs lost their jobs, as they should have (although not their bonuses).  Most bondholders were protected because it was an unfortunate necessity.

As a result of Dodd-Frank rules the situation is different now from what it was in 2007.  Banks are required to hold much more capital, meaning that there is more shareholder equity in the banks.  In addition, banks must hold long-term unsecured debt, bonds that essentially become a form of equity in the event of a bank failure.  It is being made clear to markets that this form of lending to banks will be subject to losses in the event the bank fails—unlike in 2008.  Under the new rules, both the owners of the shares of big banks and the holders of their unsecured bonds have a lot to lose if the bank fails, providing market discipline and a buffer that makes it very unlikely indeed that taxpayers would be on the hook for losses.

The tricky part is to understand the situation facing the operating subsidiaries of the bank holding company — the parts that are placed into a new bank entity and remain open for business.  The subsidiaries may in fact be the part of the bank that caused it to fail in the first place, perhaps by making bad loans or speculating on bad risks.  Some of these subsidiaries may need to be broken off and allowed to fail along with the holding company—provided that can be done without risking spillover to the economy.  Other parts may be sold separately or wound down in an orderly way.  In fact the systemically important banks are required to submit “living wills” to the FDIC and the Federal Reserve that will enable the critical pieces of a failing bank to be separated from the rest.

It is possible that markets will be reluctant to lend money to the new entity but the key point is that this new entity will be solvent because the losses, wherever they originated, have been taken away and the new entities recapitalized by the creditors of the holding company that have been “bailed in.”   Even if it proves necessary for the government to lend money to the newly formed bank entity, this can be done with reasonable assurance that the loans will be repaid with interest.  Importantly, it can be done through the orderly liquidation authority and would not require Congress to pass another TARP, the very unpopular fund that was used to inject capital into failing institutions.

There are proposals to enhance the SPOE approach by creating a new chapter of the bankruptcy code, so that a judge would control the failure process for a big bank and this could ensure there is no government bailout.  I support these efforts to use bankruptcy proceedings where possible, although I am doubtful if the courts could handle a severe crisis with multiple failures of global financial institutions.  But regardless of whether failing financial institutions are resolved through judicial proceedings or through the intervention of the FDIC (as specified under Title II of Dodd-Frank) the new regulations guaranty that shareholders and unsecured bondholders bear the losses so that the parts of the firm that are essential for keeping financial services going in the economy are kept alive.  That should assure the authorities that bankruptcy or resolution can be undertaken while keeping the economy relatively safe.

The Federal Reserve regulates the largest banks and it is making sure that the bigger the bank, the greater is the loss-absorbing buffer it must hold—and it will be making sure that systemically important nonbanks also have extra capital and can be resolved in an orderly manner.  Once that process is complete, it can be left to the market to decide whether or not it pays to be a big bank.  Regulators do not have to break up the banks or figure out how that would be done without disrupting the financial system.

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Editor's note: This piece originally appeared in Bloomberg Government. 

       

       

       

       

After a recent talk about my ISIS book, one of the audience members asked, “What can I read to help me not hate Islam?” I don’t think it’s a scholar’s job to persuade others to love or hate any culture. But the question was sincere, so I suggested some books that have helped me better understand Islam. I also put the question to Twitter. Below is some of what I and others came up with.

Two cautions before we dive in: First, the list is obviously not exhaustive and I’ve left out overly apologetic books—in my experience, they only increase the skeptical reader’s suspicion that she’s being suckered. Second, people on Twitter gave me great suggestions but I’ve only included those I’ve read and can vouch for:

Muhammad and the Quran: Two of the best books you’ll ever read about Muhammad and the Quran are also the shortest: The Koran: A Very Short Introduction and Muhammad, both by Michael Cook. He writes with great wit and deep scholarship.

Other scriptures: Most non-Muslims are unaware that Islamic scripture is more than the Quran. It includes a vast collection of words and deeds attributed to Muhammad by later authors. These scriptures are sort of like the Gospels, and Muslim scholars fight over their authenticity like Christian scholars debate about the accuracy of Matthew, Mark, Luke, and John. These extra Islamic scriptures contain most of the teachings that make modern people (Muslims included) uncomfortable about Islam. One of the world’s experts on these scriptures, Jonathan Brown, has written a terrific book about them, Misquoting Muhammad.

Rumi: The medieval mystic’s poems about life and death are beautiful and moving, no matter your belief system. I loved his poems so much as an undergrad that I went on to study Middle Eastern languages just so I could read his work in the original. I’m glad I first viewed Islam through the eyes of Rumi and not a group like ISIS. Neither is solely representative of Islam but both draw heavily on its scriptures and reach such different conclusions.

The Bible: Many people recommended reading the Bible to decrease hate of Islam. The nerd in me leapt to the least obvious conclusion, “Ah, good idea! Reading some of the rough stuff in the Hebrew Bible is a good way to put a kindred ancient religion like Islam in perspective.” But they meant something a little less complicated:

@will_mccants @jenanmoussa Read the bible and learn to love and not to hate. :-)

— Dirk Lont (@Denkkracht1) December 12, 2015

It’s a worthy perspective today no matter your faith.

      

Two recently posted papers by Brookings colleagues purport to show that “even a large increase in the top marginal rate would barely reduce inequality.”[1]  This conclusion, based on one commonly used measure of inequality, is an incomplete and misleading answer to the question posed: would a stand-alone increase in the top income tax bracket materially reduce inequality?  More importantly, it is the wrong question to pose, as a stand-alone increase in the top bracket rate would be bad tax policy that would exacerbate tax avoidance incentives.  Sensible tax policy would package that change with at least one other tax modification, and such a package would have an even more striking effect on income inequality.  In brief:

• A stand-alone increase in the top tax bracket would be bad tax policy, but it would meaningfully increase the degree to which the tax system reduces economic inequality.  It would have this effect even though it would fall on just ½ of 1 percent of all taxpayers and barely half of their income.
• Tax policy significantly reduces inequality.  But transfer payments and other spending reduce it far more.  In combination, taxes and public spending materially offset the inequality generated by market income.
• The revenue from a well-crafted increase in taxes on upper-income Americans, dedicated to a prudent expansions of public spending, would go far to counter the powerful forces that have made income inequality more extreme in the United States than in any other major developed economy.

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[1] The quotation is from Peter R. Orszag, “Education and Taxes Can’t Reduce Inequality,” Bloomberg View, September 28, 2015 (at http://bv.ms/1KPJXtx). The two papers are William G. Gale, Melissa S. Kearney, and Peter R. Orszag, “Would a significant increase in the top income tax rate substantially alter income inequality?” September 28, 2015 (at http://brook.gs/1KK40IX) and “Raising the top tax rate would not do much to reduce overall income inequality–additional observations,” October 12, 2015 (at http://brook.gs/1WfXR2G). 

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At the previous Summit of the Americas in Cartagena, Colombia in April 2012, President Barack Obama was badly roughed up by his Latin American counterparts (and embarrassed by his Secret Service for entertaining sex workers). Happily, the president and his entourage did much better at last week’s Summit in Panama, but the United States still has a way to go before the Summits once again become the productive vehicle for U.S. foreign policy that they once were, at their founding in Miami in 1994.

In Cartagena, leader after leader criticized the United States for allegedly heavy-handed counter-narcotics policies; oppressive treatment of immigrants; a weak response to crime and poverty in Central America; and monetary policies that supposedly harmed their economies. Most pointedly, speakers denounced the decades-old economic sanctions against Cuba. But given the upcoming Congressional elections, Obama and his Secretary of State Hillary Clinton did not want to do anything to endanger their Democratic Party’s chances. Obama was reduced to affirming, uncharacteristically, “I am here to listen, but our policies will not change.”

Once the November 2012 mid-term elections were over, policies did, in fact, change as the United States took a more relaxed approach to counternarcotics; the administration announced immigration policy reforms, including negotiating agreements with Central American nations to reduce the outflow of children and promote economic growth and jobs at home; and Vice President Joseph Biden met repeatedly with Central American leaders, and offered $1 billion in economic and security assistance.

In Cartagena, the Latin Americans threatened to boycott the Panama Summit if Cuba was not invited. But last December 17, President Obama and Cuban President Raúl Castro announced their agreement to negotiate the normalization of diplomatic relations, and in one blow, the United States transformed a thorn in relations with Latin America into a triumph of inter-American diplomacy that significantly enhanced U.S. prestige in the region.

So in Panama, most of the Latin American and Caribbean leaders, rather than berate the U.S. president, praised him for his courage and generally treated him with courtesy and respect. The three leaders of Central America’s Northern Tier (Guatemala, Honduras, and El Salvador—whose president is a former guerrilla commander) were effusive in their praise. The president of Brazil, Dilma Rousseff, who in Cartagena had sharply criticized U.S. monetary policies and had cancelled a visit to the White House to protest NSA spying, was pleased to announce that her visit had been rescheduled for this June. 

Obama’s own performance was more spirited than it had been in Cartagena. In response to a harsh polemic by Ecuadorean President Rafael Correa, Obama shot back: “The U.S. may be a handy excuse for diverting attention from domestic political problems, but it won’t solve those problems.” After listening politely through Raúl Castro’s extended remarks—during which Castro praised him as a man of honesty and authenticity—Obama departed to avoid having to sit through the predictable harangues of Argentine President Cristina Kirchner and Bolivian leader Evo Morales. Few could blame him.

At the parallel CEO Summit of business executives, Obama delivered thoughtful responses to questions posed by several entrepreneurs including Facebook founder Mark Zuckerberg, distinguishing himself from the facile rhetorical answers of the other presidents on the panel. At a Civil Society Forum where delegates affiliated with Cuban government organizations engaged in disruptive tactics, Obama lectured firmly on the virtues of civility and tolerance. Together with two other presidents (Tabaré Vasquez of Uruguay and Guillermo Solis of Costa Rica), Obama met privately with a dozen leaders of nongovernmental organizations, took notes, and incorporated at least one of their suggestions into his later public remarks.

But Obama’s Panama experience was marred by an inexplicable misstep by his White House aides a month earlier—the very public sanctioning of seven Venezuelan officials for alleged human rights violation and corruption, and the declaration that Venezuela was a “threat to U.S. national security.” To Latin American ears, that language recalled Cold War-era justifications for CIA plots and military coups. The State Department claims it warned the White House against Latin American blowback, but perhaps not forcefully enough. Once Latin American anger become apparent, the White House tried to walk the “national security” language back, saying it was just a formality required by U.S. legislation, but the damage was done. Speaker after speaker condemned the “unilateral sanctions” and called for their repeal.

The ill-timed sanctions announcement provided Venezuelan President Nicolás Maduro and his populist allies with a ready stick to beat the United States. For whileObama’s diplomacy had managed to peel off most of the Central Americans and win over or at least diminish the antagonism of other leaders, it had not found a way to tranquilize the rejectionist states (Ecuador, Bolivia, Nicaragua, Argentina) tied to Venezuela in an “anti-imperialist” alliance. Although a relatively small minority, these spoilers seriously disrupt plenary meetings with long and vituperative monologues, and small minorities of “veto” players can block the signing of otherwise consensus documents such that in Panama, as in Cartagena, no consensus declaration was issued; rather the host leader signed brief “mandates for action” that lacked full legitimacy.

The problem of the rejectionist minority will be partially alleviated when Kirchner is shortly replaced, likely by a more moderate government in Argentina, and political turnover will eventually come in Venezuela, but the hemisphere needs new rules that protect majority rights to get things done. Some simple procedural innovations, such as a more forceful chair, or even the simple system of red-yellow-green lights that alert speakers to their time limits, would help.

Notwithstanding the misstep on Venezuela sanctions and the disruptive tactics of the rejectionist minority, the overall mood in Panama was upbeat, even celebratory. Leaders made reference to the xenophobic violence and religious intolerance plaguing other continents, and remarked with some pride that, in comparison, Latin America was a zone of peace that was also making progress, however inadequate, on human rights, poverty alleviation, and clean energy. With some procedural fixes, favorable political winds, and continued progress on concrete issues of mutual interest, inter-American relations could well continue their upward trajectory.

Read more about the Summit with Richard Feinberg's post on Cuba's multi-level strategy at the Seventh Summit of the Americas.

      

Israel apologized to Turkey today for the May 2010 incident on board the Mavi Marmara naval vessel, part of a flotilla to Gaza, in which nine Turks were killed from Israel Defense Forces fire. The apology came during a 30-minute telephone conversation between Israeli Prime Minister Benjamin Netanyahu and Turkish Prime Minister Recep Tayyip Erdogan, orchestrated by President Barack Obama, who was ending his 3 day visit to Israel and the Palestinian Authority. Erdogan accepted the Israeli apology, and the leaders agreed to begin a normalization process between Israel and Turkey, following the past three years, when relations were practically at a standstill. (Last December, I wrote about the beginnings of a Turkey-Israeli rapprochement, and discussed more of the policy implications here.)

This development allows the two countries to begin a new phase in their relationship, which has known crisis and tension, but also cooperation and a strong strategic partnership.

The U.S. administration played a key role behind the scenes in creating the conditions that paved the way for an Israeli apology and Turkish acceptance. Undoubtedly, a close relationship between Turkey and Israel-- two of America’s greatest allies in the region-- serves United States’ strategic interests globally and regionally. At a time when the Middle East political landscape is changing rapidly, it was imperative to end the long impasse between Ankara and Jerusalem.

Over the past year, Turkey and Israel have also come to realize that repairing their relationship and re-establishing a dialogue is at their best interest, as they face great challenges in their immediate vicinity (first and foremost, the Syrian civil war).

United States officials emphasized that this is the first step in a long process. Nevertheless, the parties will have to make a great effort to overcome years of distrust and suspicion if they want the relationship to work. No one is under the allusion that relations will go back to what they were in the “honeymoon” period of the 1990s but modest improvement can be made. It will not be an easy task, and for that to happen it is essential that the parties not only talk to each other, but also listen to one another and begin to respect each other’s sensitivities. In order for this rapprochement to be successful, United States will have to continue to oversee discussions between Turkey and Israel, and remain heavily engaged in this process.

       

The narratives on U.S. development aid to Pakistan—as well as Pakistan’s own development policy discussion—frequently invoke the conventional wisdom that more education and better economic opportunities result in lower extremism. In the debate surrounding the Kerry-Lugar-Berman bill in 2009, for instance, the late Ambassador Richard Holbrooke urged Congress to “target the economic and social roots of extremism in western Pakistan with more economic aid.”

But evidence across various contexts, including in Pakistan, has not supported this notion (see Alan Kreuger’s What Makes a Terrorist for a good overview of this evidence). We know that many terrorists are educated. And lack of education and economic opportunities do not appear to drive support for terrorism and terrorist groups. I have argued that we need to focus on the quality and content of the educational curricula—in Pakistan’s case, they are rife with biases and intolerance, and designed to foster an exclusionary identity—to understand the relationship between education and attitudes toward extremism.

My latest analysis with data from the March 2013 Pew Global Attitudes poll conducted in Pakistan sheds new light on the relationship between years of education and Pakistanis’ views of the Taliban, and lends supports to the conventional wisdom. The survey sampled 1,201 respondents throughout Pakistan, except the most insecure areas of Khyber Pakhtunkhwa and Baluchistan. This was a time of mounting terror attacks by the Pakistani Taliban (a few months after their attack on Malala), and came at the tail end of the Pakistan People's Party’s term in power, before the May 2013 general elections.

On attitudes toward the Pakistani Taliban, or Tehrik-e-Taliban Pakistan (TTP), 3 percent of respondents to the Pew poll said they had a very favorable view, 13 percent reported somewhat favorable views, while nearly 17 percent and 39 percent answered that they had somewhat unfavorable and very unfavorable views, respectively. A large percentage of respondents (28 percent) chose not to answer the question or said they did not know their views. This is typical with a sensitive survey question such as this one, in a context as insecure as Pakistan.

So overall levels of support for the TTP are low, and the majority of respondents report having unfavorable views. The non-responses could reflect those who have unfavorable views but choose not to respond because of fear, or those who may simply not have an opinion on the Pakistani Taliban.

The first part of my analysis cross-tabulates attitudes toward the TTP with education and income respectively. I look at the distribution of attitudes for each education and income category (with very and somewhat favorable views lumped together as favorable; similarly for unfavorable attitudes).

Figure 1. Pakistani views on the Pakistani Taliban, by education level, 2013

Figure 1 shows that an increasing percentage of respondents report unfavorable views of the Taliban as education levels rise; and there is a decreasing percentage of non-responses at higher education levels (suggesting that more educated people have more confidence in their views, stronger views, or less fear). However, the percentage of respondents with favorable views of the Taliban, hovering between 10-20 percent, is not that different across education levels, and does not vary monotonically with education. 

Figure 2. Pakistani views on the Pakistani Taliban, by income level, 2013

Figure 2 shows views on the Pakistani Taliban by income level. While the percentage of non-responses is highest for the lowest income category, the percentages responding favorably and unfavorably do not change monotonically with income. We see broadly similar distributions of attitudes across the four income levels.

But these cross-tabulations do not account for other factors that may affect attitudes: age, gender, and geographical location. Regressions (not shown here) accounting for these factors in addition to income and education show interesting results: relative to no education, higher education levels are associated with less favorable opinions of the Pakistani Taliban; these results are strongest for those with some university education, which is heartening. This confirms findings from focus groups I conducted with university students in Pakistan in May 2015. Students at public universities engaged in wide ranging political and social debates with each other on Pakistan and its identity, quoted Rousseau and Chomsky, and had more nuanced views on terrorism and the rest of the world relative to high school students I interviewed. This must at least partly be a result of the superior curriculum and variety of materials to which they are exposed at the college level.

My regressions also show that older people have more unfavorable opinions toward the Taliban, relative to younger people; this is concerning and is consistent with the trend toward rising extremist views in Pakistan’s younger population. The problems in Pakistan’s curriculum that began in the 1980s are likely to be at least partly responsible for this trend. Urban respondents seem to have more favorable opinions toward the Taliban than rural respondents; respondents from Punjab and Baluchistan have more favorable opinions toward the Taliban relative to those from Khyber Pakhtunkhwa, which as a province has had a closer and more direct experience with terror. The regression shows no relationship of income with attitudes, as was suggested by Figure 2.

Overall, the Pew 2013 data show evidence of a positive relationship between more education and lack of support for the Taliban, suggesting that the persisting but increasingly discredited conventional wisdom on these issues may hold some truth after all. These results should be complemented with additional years of data. That is what I will work on next.