Researchers from the Brookings Metropolitan Policy Program have released new Earned Income Tax Credit (EITC) data from the IRS on federal individual income tax filers. The interactive data are available for all ZIP codes, cities, counties, metropolitan areas, states, state legislative districts, and congressional districts in the U.S. Users can also find new MetroTax model estimates of the EITC-eligible population in 2012 based on the latest American Community Survey data.

From the 2012 MetroTax model, here are 10 facts about EITC-eligible tax filers

• 71.1 million people live in tax units that are eligible
• 31.1 million children live in eligible households
• 72.8% of eligible filers speak English
• 50.9% are white
• 36.1% received food stamps at some point in the last year
• 25.8% are married filing jointly
• 13.2% have earned a bachelor’s degree or higher
• The median adjusted gross income is $13,638
• 12.7% of eligible filers work in the retail trade industry
• 13.6% work in office and administrative occupations

Read the blog post by Jane Williams and Elizabeth Kneebone to learn more and also visit the EITC interactive.

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

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

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

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

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

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

Downloads

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

Ryan’s EITC is pro-mobility… but funding it may not be

Paul Ryan seems to be thinking seriously about the issues of poverty and social mobility. He is a reformer as well as an authentic conservative.

While his willingness to embrace EITC expansion is welcome, his proposed funding methods raise serious questions. Paying for anti-poverty programs by cutting anti-poverty programs runs the risk of being self-defeating. No doubt some of them are not working as intended. But reform is the answer, rather than abolition. Many of these programs help those in the deepest poverty - who in many cases are those least likely to benefit from welfare-to-work policies such as the EITC, according to recent research from the Center for Budget and Policy Priorities and from the National Poverty Center. 

Ryan's package is worthy of serious attention, not least from the perspective of social mobility. It is important, however, not to consider the impact of the EITC expansion alone, but also how - and by whom- it will be paid for. 

In new Urban-Brookings Tax Policy Center analysis of Earned Income Tax Credit (EITC) take-up at the county level, Benjamin Harris, a fellow in Economic Studies, and Research Assistant Lucie Parker use zip-code level data on taxes and demographics to take a "fresh look" at the EITC. "Since its creation in 1975," they write, "the Earned Income Tax Credit has played a major role in the U.S. safety net." Earlier this year, Harris presented EITC take-up using IRS data from 2007. Compare that to the new list of ten counties with the highest share of EITC recipients below:

"The regional variation EITC claiming is stark," Harris and Parker conclude. "The counties with the highest share of taxpayers claiming the EITC are overwhelming located in the Southeast. ... [O]ver half the taxpayers in a large share of counties in Alabama, Georgia, and Mississippi claim the EITC. With few exceptions, almost all counties with high EITC claiming are located in the South. Relative to the South, the Northeast and the Midwest have much lower claiming rates. Moreover, average EITC benefit closely follows the pattern for share of taxpayers taking up the credit: in counties where more taxpayers claim the credit, the credit is larger on the whole."

Visit this U.S. map interactive to get county level data on share of taxpayers claiming EITC as well as average EITC amount, in dollars, per county.

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

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

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

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

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

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

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

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

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

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

Why the tax credit overlap matters

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

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

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

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

1. Florida

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

2. Texas

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

3. South Dakota

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

4. Georgia

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

5. Louisiana

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

6. Idaho

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

7. Montana

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

8. Wyoming

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

9. Utah

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

10. Oklahoma

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EITC dollars support local economies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

References

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Expand the credit for workers without qualifying children; and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Policy Brief #173

America needs to transform its energy system, and the Great Lakes region (including Minnesota, Wisconsin, Iowa, Missouri, Illinois, Indiana, Ohio, Michigan, Kentucky, West Virginia, western Pennsylvania and western New York) possesses many of the needed innovation assets. For that reason, the federal government should leverage this troubled region’s research and engineering strengths by launching a region-wide network of collaborative, high intensity energy research and innovation centers.

Currently, U.S. energy innovation efforts remain insufficient to ensure the development and deployment of clean energy technologies and processes. Such deployment is impeded by multiple market problems that lead private firms to under-invest and to focus on short-term, low-risk research and product development. Federal energy efforts—let alone state and local ones—remain too small and too poorly organized to deliver the needed breakthroughs. A new approach is essential.

America needs to transform its energy system in order to create a more competitive “next economy” that is at once export-oriented, lower-carbon and innovation-driven. Meanwhile, the Great Lakes region possesses what may be the nation’s richest complex of innovation strengths—research universities, national and corporate research labs, and top-flight science and engineering talent. Given those realities, a partnership should be forged between the nation’s needs and a struggling region’s assets.

To that end, we propose that the federal government launch a distributed network of federally funded, commercialization-oriented, sustainable energy research and innovation centers, to be located in the Great Lakes region. These regional centers would combine aspects of the “discovery innovation institutes” proposed by the National Academy of Engineering and the Metropolitan Policy Program (as articulated in “Energy Discovery-Innovation Institutes: A Step toward America’s Energy Sustainability”); the “energy innovation hubs” created by the Department of Energy (DOE); and the agricultural experiment station/cooperative extension model of the land-grant universities.

In the spirit of the earlier land-grant paradigm, this network would involve the region’s research universities and national labs and engage strong participation by industry, entrepreneurs and investors, as well as by state and local governments. In response to local needs and capacities, each center could have a different theme, though all would conduct the kinds of focused translational research necessary to move fundamental scientific discoveries toward commercialization and deployment.

The impact could be transformational. If built out, university-industry-government partnerships would emerge at an unprecedented scale. At a minimum, populating auto country with an array of breakthrough-seeking, high-intensity research centers would stage a useful experiment in linking national leadership and local capacities to lead the region—and the nation—toward a more prosperous future.

The Great Lakes Energy System: Predicaments and Possibilities

The Great Lakes region lies at the center of the nation’s industrial and energy system trials and possibilities. No region has suffered more from the struggles of America’s manufacturing sector and faltering auto and steel industries, as indicated in a new Metropolitan Policy Program report entitled “The Next Economy: Rebuilding Auto Communities and Older Industrial Metros in the Great Lakes Region.”

The region also lies at ground zero of the nation’s need to “green” U.S. industry to boost national economic competitiveness, tackle climate change and improve energy security. Heavily invested in manufacturing metals, chemicals, glass and automobiles, as well as in petroleum refining, the Great Lakes states account for nearly one-third of all U.S. industrial carbon emissions.

And yet, the Great Lakes region possesses significant assets and capacities that hold promise for regional renewal as the “next economy” comes into view. The Midwest’s manufacturing communities retain the strong educational and medical institutions, advanced manufacturing prowess, skills base and other assets essential to helping the nation move toward and successfully compete in the 21st century’s export-oriented, lower-carbon, innovation-fueled economy.

Most notably, the region has an impressive array of innovation-related strengths in the one field essential to our nation’s future—energy. These include:

• Recognized leadership in R&D. The Great Lakes region accounts for 33 percent of all academic and 30 percent of all industry R&D performed in the United States.
• Strength and specialization in energy, science and engineering. In FY 2006, the Department of Energy sent 26 percent of its federal R&D obligations to the Great Lakes states and is the second largest federal funder of industrial R&D in the region. Also in 2006, the National Science Foundation sent 30 percent of its R&D obligations there.
• Existing clean energy research investments and assets. The University of Illinois is a key research partner in the BP-funded, $500 million Energy Biosciences Institute, which aims to prototype new plants as alternative fuel sources. Toledo already boasts a growing solar industry cluster; Dow Corning’s Michigan facilities produce leading silicon and silicone-based technology innovations; and the Solar Energy Laboratory at the University of Wisconsin-Madison, the oldest of its kind in the world, has significant proficiency in developing practical uses for solar energy. Finally, the region is home to the largest U.S. nuclear utility (Exelon), the nation’s largest concentration of nuclear plants and some of the country’s leading university programs in nuclear engineering.
• Industry potential relevant to clean energy. Given their existing technological specializations, Midwestern industries have the potential to excel in the research and manufacture of sophisticated components required for clean energy, such as those used in advanced nuclear technologies, precision wind turbines and complex photovoltaics.
• Breadth in energy innovation endeavors and resources. In addition to universities and industry, the region’s research laboratories specialize in areas of great relevance to our national energy challenges, including the work on energy storage systems and fuel and engine efficiency taking place at Argonne National Laboratory, research in high-energy physics at the Fermi National Accelerator Laboratory, and the work on bioenergy feedstocks, processing technologies and fuels occurring at the DOE-funded Great Lakes BioEnergy Research Center (GLBRC).
• Regional culture of collaboration. Finally, the universities of the Great Lakes area have a strong history of collaboration both among themselves and with industry, given their origins in the federal land-grant compact of market and social engagement. GLBRC—one of the nation’s three competitively awarded DOE Bioenergy Centers—epitomizes the region’s ability to align academia, industry and government around a single mission. Another example is the NSF-supported Blue Waters Project. This partnership between IBM and the universities and research institutions in the Great Lakes Consortium for Petascale Computation is building the world’s fastest computer for scientific work—a critical tool for advancing smart energy grids and transportation systems.

In short, the Great Lakes states and metropolitan areas—economically troubled and carbon-reliant as they are—have capabilities that could contribute to their own transformation and that of the nation, if the right policies and investments were in place.

Remaking America’s Energy System within a Federal Policy Framework

America as a whole, meanwhile, needs to overcome the massive sustainability and security challenges that plague the nation’s energy production and delivery system. Transformational innovation and commercialization will be required to address these challenges and accelerate the process of reducing the economy’s carbon intensity.

Despite the urgency of these challenges, however, a welter of market problems currently impedes decarbonization and limits innovation. First, energy prices have generally remained too low to provide incentives for companies to commit to clean and efficient energy technologies and processes over the long haul. Second, many of the benefits of longrange innovative activity accrue to parties other than those who make investments. As a result, individual firms tend to under-invest and to focus on short-term, low-risk research and product development. Third, uncertainty and lack of information about relevant market and policy conditions and the potential benefits of new energy technologies and processes may be further delaying innovation. Fourth, the innovation benefits that derive from geographically clustering related industries (which for many years worked so well for the auto industry) have yet to be fully realized for next-generation energy enterprises. Instead, these innovations often are isolated in secure laboratories. Finally, state and local governments—burdened with budgetary pressures—are not likely to fill gaps in energy innovation investment any time soon.

As a result, the research intensity—and so the innovation intensity—of the energy sector remains woefully insufficient, as pointed out in the earlier Metropolitan Policy Program paper on discovery innovation institutes. Currently, the sector devotes no more than 0.3 percent of its revenues to R&D. Such a figure lags far behind the 2.0 percent of sales committed to federal and large industrial R&D found in the health care sector, the 2.4 percent in agriculture, and the 10 percent in the information technology and pharmaceutical industries.

As to the national government’s efforts to respond to the nation’s energy research shortfalls, these remain equally inadequate. Three major problems loom:

The scale of federal energy research funding is insufficient. To begin with, the current federal appropriation of around $3 billion a year for nondefense energy-related R&D is simply too small. Such a figure remains well below the $8 billion (in real 2008 dollars) recorded in 1980, and represents less than a quarter of the 1980 level when measured as a share of GDP. If the federal government were to fund next-generation energy at the pace it supports advances in health care, national defense, or space exploration, the level of investment would be in the neighborhood of $20 billion to $30 billion a year.

Nor do the nation’s recent efforts to catalyze energy innovation appear sufficient. To be sure, the American Recovery and Reinvestment Act (ARRA) provided nearly $13 billion for DOE investments in advanced technology research and innovation. To date, Great Lakes states are slated to receive some 42 percent of all ARRA awards from the fossil energy R&D program and 39 percent from the Office of Science (a basic research agency widely regarded as critical for the nation’s energy future). However, ARRA was a one-time injection of monies that cannot sustain adequate federal energy R&D.

Relatedly, the Great Lakes region has done well in tapping two other relatively recent DOE programs: the Advanced Research Projects Agency–Energy (ARPA-E) and Energy Frontier Research Centers (EFRCs). Currently, Great Lakes states account for 44 and 50 percent of ARPA-E and EFRC funding. Yet, with ARPA-E focused solely on individual signature projects and EFRC on basic research, neither initiative has the scope to fully engage all of the region's innovation assets.

The character and format of federal energy R&D remain inadequate. Notwithstanding the question of scale, the character of U.S. energy innovation also remains inadequate. In this respect, the DOE national laboratories—which anchor the nation’s present energy research efforts—are poorly utilized resources. Many of these laboratories’ activities are fragmented and isolated from the private sector and its market, legal and social realities. This prevents them from successfully developing and deploying cost-competitive, multidisciplinary new energy technologies that can be easily adopted on a large scale.

For example, DOE activities continue to focus on discrete fuel sources (such as coal, oil, gas or nuclear), rather than on fully integrated end use approaches needed to realize affordable, reliable, sustainable energy. Siloed approaches simply do not work well when it comes to tackling the complexity of the nation’s real-world energy challenges. A perfect example of a complicated energy problem requiring an integrated end-use approach is transportation. Moving the nation’s transportation industry toward a clean energy infrastructure will require a multi-pronged, full systems approach. It will depend not only upon R&D in such technologies as alternative propulsion (biofuels, hydrogen, electrification) and vehicle design (power trains, robust materials, advanced computer controls) but also on far broader technology development, including that related to primary energy sources, electricity generation and transmission, and energy-efficient applications that ultimately will determine the economic viability of this important industry.

Federal programming fails to fully realize regional potential. Related to the structural problems of U.S. energy innovation efforts, finally, is a failure to fully tap or leverage critical preexisting assets within regions that could accelerate technology development and deployment. In the Great Lakes, for example, current federal policy does little to tie together the billions of dollars in science and engineering R&D conducted or available annually. This wealth is produced by the region’s academic institutions, all of the available private- and public-sector clean energy activities and financing, abundant natural resources in wind and biomass, and robust, pre-existing industrial platforms for research, next-generation manufacturing, and technology adoption and deployment. In this region and elsewhere, federal policy has yet to effectively connect researchers at different organizations, break down stovepipes between research and industry, bridge the commercialization “valley of death,” or establish mechanisms to bring federally-sponsored R&D to the marketplace quickly and smoothly.

A New Approach to Regional, Federally Supported Energy Research and Innovation

And so the federal government should systematically accelerate clean energy innovation by launching a series of regionally based Great Lakes research centers. Originally introduced in the Metropolitan Policy Program policy proposal for energy discovery-innovation institutes (or e-DIIs), a nationwide network of regional centers would link universities, research laboratories and industry to conduct translational R&D that at once addresses national energy sustainability priorities, while stimulating regional economies.

In the Great Lakes, specifically, a federal effort to “flood the zone” with a series of roughly six of these high-powered, market-focused energy centers would create a critical mass of innovation through their number, size, variety, linkages and orientation to pre-existing research institutions and industry clusters.

As envisioned here, the Great Lakes network of energy research centers would organize individual centers around themes largely determined by the private market. Based on local industry research priorities, university capabilities and the market and commercialization dynamics of various technologies, each Great Lakes research and innovation center would focus on a different problem, such as renewable energy technologies, biofuels, transportation energy, carbon-free electrical power generation, and distribution and energy efficiency. This network would accomplish several goals at once:

• Foster multidisciplinary and collaborative research partnerships. The regional centers or institutes would align the nonlinear flow of knowledge and activity across science and non-science disciplines and among companies, entrepreneurs, commercialization specialists and investors, as well as government agencies (federal, state and local) and research universities. For example, a southeastern Michigan collaboration involving the University of Michigan, Michigan State University, the University of Wisconsin and Ford, General Motors, and Dow Chemical could address the development of sustainable transportation technologies. A Chicago partnership involving Northwestern and Purdue Universities, the University of Chicago, the University of Illinois, Argonne National Lab, Exelon and Boeing could focus on sustainable electricity generation and distribution. A Columbus group including Ohio State University and Battelle Memorial Institute could address technologies for energy efficiency. Regional industry representatives would be involved from the earliest stages to define needed research, so that technology advances are relevant and any ensuing commercialization process is as successful as possible.
• Serve as a distributed “hub-spoke” network linking together campus-based, industry-based and federal laboratory-based scientists and engineers. The central “hubs” would interact with other R&D programs, centers and facilities (the “spokes”) through exchanges of participants, meetings and workshops, and advanced information and communications technology. The goals would be to limit unnecessary duplication of effort and cumbersome management bureaucracy and to enhance the coordinated pursuit of larger national goals.
• Develop and rapidly deploy highly innovative technologies to the market. Rather than aim for revenue maximization through technology transfer, the regional energy centers would be structured to maximize the volume, speed and positive societal impact of commercialization. As much as possible, the centers would work out in advance patenting and licensing rights and other intellectual property issues.Stimulate regional economic development. Like academic medical centers and agricultural experiment stations—both of which combine research, education and professional practice—these energy centers could facilitate cross-sector knowledge spillovers and innovation exchange and propel technology transfer to support clusters of start-up firms, private research organizations, suppliers, and other complementary groups and businesses—the true regional seedbeds of greater economic productivity, competitiveness and job creation.
• Build the knowledge base necessary to address the nation’s energy challenges. The regional centers would collaborate with K-12 schools, community colleges, regional universities, and workplace training initiatives to educate future scientists, engineers, innovators, and entrepreneurs and to motivate the region’s graduating students to contribute to the region’s emerging green economy.
• Complement efforts at universities and across the DOE innovation infrastructure, but be organizationally and managerially separate from either group. The regional energy centers would focus rather heavily on commercialization and deployment, adopting a collaborative translational research paradigm. Within DOE, the centers would occupy a special niche for bottom-up translational research in a suite of new, largely top-down innovation-oriented programs that aim to advance fundamental science (EFRCs), bring energy R&D to scale (Energy Innovation Hubs) and find ways to break the cost barriers of new technology (ARPA-E).

To establish and build out the institute network across the Great Lakes region, the new regional energy initiative would:

• Utilize a tiered organization and management structure. Each regional center would have a strong external advisory board representing the participating partners. In some cases, partners might play direct management roles with executive authority.
• Adopt a competitive award process with specific selection criteria. Centers would receive support through a competitive award process, with proposals evaluated by an interagency panel of peer reviewers.
• Receive as much federal funding as major DOE labs outside the Great Lakes region. Given the massive responsibilities of the proposed Great Lakes energy research centers, total federal funding for the whole network should be comparable to that of comprehensive DOE labs, such as Los Alamos, Oak Ridge and others, which have FY2010 budgets between $1 and $2 billion. Based on existing industry-university concentrations, one can envision as many as six compelling research centers in the Great Lakes region.

Conclusion

In sum, America’s national energy infrastructure—based primarily upon fossil fuels—must be updated and replaced with new technologies. At the same time, no region in the nation is better equipped to deliver the necessary innovations than is the Great Lakes area. And so this strong need and this existing capacity should be joined through an aggressive initiative to build a network of regional energy research and innovation centers. Through this intervention, the federal government could catalyze a dynamic new partnership of Midwestern businesses, research universities, federal laboratories, entrepreneurs and state and local governments to transform the nation’s carbon dependent economy, while renewing a flagging regional economy.

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• Research Strength in the Great Lakes
• Pursuing Large Scale Innovation

Executive Summary

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

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

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

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

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

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

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

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

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Lynn Neary: I'm Lynn Neary in Washington, sitting in for Neal Conan.

John Kerry may not have clinched the Democratic nomination for president in yesterday's primaries and caucuses, but his victories in five of the seven races certainly completed his rehabilitation from an also-ran to a front-runner. John Edwards and Wesley Clark also won last night, Edwards in South Carolina, Clark in a tight race in Oklahoma, where Edwards came in second. Joe Lieberman dropped out of the race altogether. Howard Dean vowed to fight on despite a dismal showing. So did Al Sharpton, who placed third in South Carolina. Dennis Kucinich barely registered with voters. All the candidates now have their eyes on the future with contests in delegate-heavy states now up for grabs.

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Lynn Neary:...With us to talk about money in politics is Anthony Corrado. He's a professor of government at Colby College in Waterville, Maine, and is spending this year as a visiting fellow at The Brookings Institution here in Washington.

Thanks for being with us.

Anthony Corrado: Well, thanks for inviting me, Lynn.

Lynn Neary: Do we know exactly how much money's been spent so far by the candidates?

Anthony Corrado: Well, so far the Democrats have raised about $170 million in private donations and public funding all together, and all of that money's now been spent. This very competitive contest has proved to be very expensive so that as we enter this crucial part of the nominating process, no candidate really has a large reservoir of cash that's available to be spent.

Lynn Neary: Yeah. Both Dean and Kerry used the same strategy, focusing on Iowa and New Hampshire, but came up with very different results, didn't they?

Anthony Corrado: Yes, they did, and it was particularly problematic for Howard Dean because what Dean decided to do was use the large store of cash that he had raised in 2003 to spend lots of money in the states that would be voting in February, as well as in Iowa and New Hampshire, and as a result spent over $3 1/3 million on television in states that were voting after New Hampshire. Whereas John Kerry basically took all of the money he had and put it into Iowa and New Hampshire and was able to get the victories he needed to spur additional fund-raising so that he right now is in the best position even though he ended up raising much less than Howard Dean prior to New Hampshire. He's now in the best position to raise and spend money in this next stage of the race.

Lynn Neary: Yeah. And what about Dean? Has he been able to--he was so well-known for his fund-raising. How has his fund-raising been since he has started losing?

Anthony Corrado: Well, his fund-raising has actually held up very well. He's raising about a million dollars a week. He's raised about $3 million since that now-infamous night in Iowa. But one of the problems that he has is that he built such a large organization that it's very expensive to maintain. And as a result he has not had money for television advertising this week. He's not doing any television advertising in the states this weekend. And he probably won't do any television advertising in Tennessee and Virginia. So he's basically gone off of the airwaves in terms of paid television, with the exception of looking towards Wisconsin, which isn't until February 17th.

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The news Monday from the Centers for Disease Control and Prevention (CDC) on the incidence of resistant infections is disturbing but not surprising. CDC estimates that over two million Americans every year are affected by drug-resistant infections and of those, 23,000 die annually. The report notes that these figures are conservative and are likely an underestimate of the burden of resistant infections. While these numbers reflect domestic rates, antibiotic resistance is a global issue as well.

To further compound the issue, today’s antibiotic pipeline is nearly dry and has been for some time, with only a handful of large pharmaceutical companies and smaller biotech firms still engaged in antibiotic development. The threat of a so-called ‘post-antibiotic era’ – a time when there are no longer any effective antibiotic treatments – could become a reality without a concerted and comprehensive effort to combat this global threat. The evolution of drug resistance is an inherent risk of antibiotic use. The CDC report cited the development of new antibiotics and diagnostic tools, as well as programs and policies to support appropriate use of antibiotics, as being among the core strategies to combat resistance.

Clinical effectiveness and the relatively low cost of antibiotics have had the unintended consequence of contributing to overuse, accelerating the development of antibiotic resistance to all major classes of antibiotics. While there are some diagnostic tools available to support targeted treatment, it is often more time- and cost-effective for a physician to prescribe a relatively inexpensive, broad-spectrum antibiotic than to conduct a diagnostic test (if one exists at all). Antibiotic overuse can also be driven by patients who see antibiotics as safe and often low-cost cure-alls. Recognizing that these past patterns of overuse are dangerous, the clinical community is working diligently to curb inappropriate use and promote public health through stewardship and education programs. However, given the weakness of the current antibiotic development environment, it may be too little-too late; rates of resistance continue to rise globally while the number of effective therapies to treat many pathogens is dwindling. According to the CDC, resistance can be ”slowed but not stopped” – there will always be a need for novel antibiotics that can combat the evolution of these pathogens.

The current system for manufacturer return on investment for antibiotics, which are typically reimbursed at very low levels, is oriented towards volume sales. As a result, stewardship and educational programs geared toward limiting use of novel antibiotics create an ‘antibiotic development paradox.’ How can we incentivize investment in developing new effective antibiotics and also have successful programs that limit the use of these antibiotics in an effort to prevent or delay the development of resistance? Unless this fundamental conflict in the current business model is addressed, pharmaceutical firms are unlikely to expand development efforts.

How do we turn the tide?

There are several proposals that address aspects of the antibiotic development paradox with the goal of reinvigorating the antibiotic drug development ecosystem in a way that maximizes our ability to stay ahead of resistance. While none of these proposals alone will solve this problem, each could support the long-term goal of reinvigorating antibiotic discovery, development, and treatment.

Creating incentives for drug development

Antibiotic drug development has been a losing prospect for drug developers and has driven many of them to exit the antibiotic innovation space in the last few decades in favor of other therapeutic areas that have much larger markets and are easier areas to study. In order to make antibiotic development more attractive, various mechanisms have been proposed to stimulate or better reward successful clinical development. Incentives that can lower the financial risks associated with development include grants, tax credits, public-private partnerships, and intellectual property protections. Post-approval, prizes, advanced market commitments, and value-based pricing could all potentially provide additional incentives to invest in this research. Some potential incentives were discussed at the Incentives for Change: Addressing the Challenges in Antibacterial Drug Development workshop convened by Brookings in February 2013.

Balancing benefit and risk for severely-ill patients

Other incentives are related to the drug approval process. Novel mechanisms for expedited development and approval can speed time to market while still meeting traditional evidentiary requirements for safety and efficacy. In the last several years, a number of proposals – including from the Infectious Diseases Society of America and the President’s Council of Advisors on Science and Technology – have sought to reduce development time and cost and increase regulatory clarity through a more targeted clinical trial process directed at the highest-risk patients. A narrower study population would allow the U.S. Food and Drug Administration to make a more targeted assessment of the product’s safety, efficacy, and benefit-risk profile that could accelerate innovation for patients with serious drug-resistant infections. The need to steward these antibiotics, which was noted as a core action in the CDC report, would be especially important to both prevent the growth of resistance and to reduce the risk of adverse effects in less seriously-ill populations. Additional information on the proposed limited-use pathway and appropriate use is available on the Brookings website.

De-link reimbursement from return on investment

In order to attract investment for new antibiotic research, we must develop a business model that can support ongoing and expanding development without compromising the effectiveness of new therapies. Recognizing the need to “de-link” return on investment from the volume of antibiotics sold, efforts to move away from the volume-based reimbursement system could become an attractive path forward. Promising models, which were discussed at the Brookings workshop in February, included several guaranteed payment schemes supported by public funding. Taken to an extreme, such a system could even allow new antibiotics to be reserved indefinitely until needed, removing the developer’s incentive to sell any drugs in the years following approval. While such a program would likely be expensive (with sufficient returns estimated on the order of $1.75-2.5 billion over five years), government intervention is needed to fix this public health crisis and dangerous market failure. Its societal value in curtailing resistance and providing critical drugs would outweigh the cost to taxpayers.

The antibiotic development paradox will require a multi-pronged strategy that includes incentives to support front-end drug discovery and development, and new reimbursement policies that de-link unit volume sales from return on investment. However, this is by no means a quick fix. Even if this approach is successful, it will take decades for manufacturers to rebuild lost antibiotic development infrastructure and expertise, and to successfully develop and market new treatments. For the few drugs currently in development, even with expedited development and review pathways, they are still years from reaching the market.

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On February 29, the Africa Security Initiative at Brookings held a discussion on Nigeria, nine months after the inauguration of President Muhammadu Buhari, the country’s first president to take office in a peaceful transition of power from one party to another. President Buhari, who previously ruled Nigeria in the mid-1980s after a military coup, inherits a country facing burgeoning population, low oil prices for its top export, and the Boko Haram extremist insurgency in the northeast. Buhari also inherited other problems such as unrest in the country’s delta and southeast regions, and a culture of corruption and human rights abuse and impunity throughout much of the country’s armed forces and police.

Less than a year into his presidency, Buhari has made progress in reforming the military, sacking some military leaders and injecting a bit more energy into the counter-Boko Haram campaign. But has he chosen the right priorities for Nigeria and fundamentally headed in the right direction, and what has been the impact on civilians, particularly in the northeastern part of the country? What additional role, if any, could the United States and the broader international community play to support additional reform?

We convened a panel to discuss these subjects. The panel, made up of independent experts with deep knowledge ranging from human rights to economics and finance to broader political and security sector reform, included EJ Hogendoorn of the International Crisis Group, Madeline Rose from Mercy Corps, Mausi Segun of Human Rights Watch, and Amadou Sy from The Brookings Institution. Senior Fellow Michael O’Hanlon, who directs the Africa Security Initiative at Brookings, moderated the discussion.

Audio

• Examining the current state of Nigeria

Transcript

• Transcript (.pdf)

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• 20160229_nigeria_transcript

For more than a decade, government assistance to Afghanistan, Iraq, and Pakistan (the so-called AIP countries) has dominated United States aid efforts. And as the examples below illustrate, American institutions and mindsets found it extraordinarily difficult to adjust to aid in unsafe places. Cameron Munter draws on his experience as the head of the Provincial Reconstruction Team (PRT) in Mosul, Iraq in 2006 and as ambassador of the United States to Pakistan in Islamabad in 2011, with a description of U.S. reconstruction and state-building from which we may find lessons to consider in the future.

In 2006, when he went to Mosul as the first leader of the first PRT, the American civilian and military authorities in Baghdad painfully learned that the post-conflict situation would not correct itself. The undergrowth of our own bureaucratic structure prevented us from gaining a sophisticated understanding of our surroundings. Members of the PRT came and left after a few months, without passing on their hard-obtained knowledge. Local authorities quickly realized that the PRT had neither the money nor the firepower of the brigade commanders. And most of all, the guiding principles in place were still the creation of a kind of constitutional framework where political leaders, police, courts, businesspeople, and citizens would have institutions familiar to Americans, institutions that would work as we knew how to make them work.

Munter arrived in Pakistan at a time of great hope for U.S.-Pakistani relations. In 2011, in a series of meetings with the U.S. deputy secretary of state for resources and the head of USAID, Kerry-Lugar-Berman priorities took center stage: education, energy efficiency, job creation, special projects in the tribal areas, and public health. It is one thing to define a task and quite another to apply it to the specific context of a country in which security considerations prevent most USAID workers from even laying eyes on their projects. Overall, it seems the United States was much better at measuring its commitment to a prosperous, democratic Pakistan at peace with its neighbors by counting how much it spent and how fast rather than creating the proper relationship with those on the ground with whom it might have partnered.

Under these circumstances, what are lessons learned? When security is shaky, assistance is difficult. It may be that in situations like the AIP countries, we only have the capacity to engage in humanitarian aid and immediate reconstruction. If that is so, then the whole question of engagement in dangerous places is reopened: In a military setting, with military tasks, and thus a military system of organization, can civilian assistance succeed? Money spent is the way we measure commitment in such a setting, and that doesn’t bring the results we need.

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• Imagining assistance: Tales from the American aid experience in Iraq in 2006 and Pakistan in 2011

Extreme poverty around the world has decreased from around 2 billion people in 1990 living under $2 per day to 700 million today. Further, nine out of 10 children are now enrolled in primary schools, an increase over the last 15 years. Progress in both areas since 2000 has been part of the United Nations Millennium Development Goals, which set targets for reducing extreme poverty in eight areas, and which were the guiding principles for global development from 2000 to 2015. Today, the global community, through the UN, has adopted 17 Sustainable Development Goals to continue these poverty reduction efforts. 

In this new episode of Intersections podcast, host Adrianna Pita engages Brookings scholars Laurence Chandy and Rebecca Winthrop in a discussion of how digital technologies can be harnessed to bring poverty reduction and education to the most marginalized populations.

Listen:

Chandy, a fellow in the Global Economy and Development program at Brookings, says that the trends in getting people digitally connected "are progressing at such speed that they’re starting to reach some of the poorest people in the world. Digital technology is changing what it means to be poor because it’s bringing poor people out of the margins.”

Winthrop, a senior fellow and director of the Center for Universal Education at Brookings, says that "I think [education] access is crucial. And I do think that’s almost the first wave because without it we could work on all the ed tech—fabulous apps, great language translated content—but if you do not have the access it’s not going to reach the most marginalized."

Listen to this episode above; subscribe on iTunes; and find more episodes on our website.

Chandy was a guest on the Brookings Cafeteria Podcast in 2013; Winthrop has been a guest on the Cafeteria a few times to discuss global education topics, including: access plus education; investing in girls' education; and getting millions learning in the developing world.

On Thursday, July 7, the International Monetary Fund (IMF) revised its economic outlook for South Africa. Despite “considerable economic and social progress” since 1994, the IMF report cited high income inequality, among other factors, in its projection of slow growth and increased unemployment in the medium term. Earlier this year, in the Brookings Africa Growth Initiative’s Foresight Africa 2016, we explored this pressing problem—high income inequality—across the continent. The initial takeaway was that sub-Saharan Africa has greater in-country income inequality than other developing countries around the world. However, after separating seven outlier economies—Angola, the Central African Republic, Botswana, Zambia, Namibia, Comoros, and South Africa—we noted that income inequality, measured by the Gini coefficient, in the rest of the region actually mirrors the rest of the developing world, which currently stands at 0.39. All seven outlier economies have Gini coefficients above 0.55, a level reached by only four other countries worldwide: Suriname, Haiti, Colombia, and Honduras. 

It is important to explore precisely why this disparity exists. Notably, sub-Saharan Africa is not only an outlier in income inequality, but also in the relationship between economic growth and poverty reduction. Generally, in the developing world, every 1 percent of growth reduces poverty 4 percent. In sub-Saharan Africa, however, every 1 percent of growth only reduces poverty by 3 percent. In Foresight Africa 2016, Brookings Nonresident Senior Fellow Haroon Bhorat suggests that this disparity may be because of the commodity booms that have sustained growth periods in African economies, which bring extraordinary returns to capital but limited job growth. Alternatively, these commodity booms may have accompanied a fall in manufacturing output; growth is thus concentrated in the low-productivity services sector. In any case, this graph forces us to consider exactly what type of structural transformation is necessary for continued economic growth and acknowledge that inequality in sub-Saharan Africa might require different solutions in different countries.

For a more in-depth discussion on this issue, see Foresight Africa 2016 and Bhorat’s discussion of African inequality in relation to the Sustainable Development Goals.

Omid Abrishamchian contributed to this post.

Editors’ Note: One issue that has traditionally shared bipartisan support is how the United States should approach the Israeli-Palestinian conflict, write Sarah Yerkes and Ariella Platcha. However, this year both parties have shifted their positions farther from the center and from past Democratic and Republican platforms. How will that affect Obama’s strategy? This post originally appeared on the Israel Policy Forum’s blog, Matzav.

As the Republican and Democratic parties convene in Cleveland and Philadelphia, we expect to see numerous signs of the deepening polarization that has dominated this campaign season. One issue that has traditionally shared bipartisan support is how the United States should approach the Israeli-Palestinian conflict. However, this year both parties have shifted their positions farther from the center and from past Democratic and Republican platforms. This swing impacts whether the Obama administration, which has devoted significant time and resources to the negotiations, will issue a parting statement on the conflict.

In Cleveland last week the Republican party adopted a platform entirely dropping the two-state solution to the Israeli-Palestinian conflict, a move that puts the party further to the right than either AIPAC or Israeli Prime Minister Benjamin Netanyahu. The platform states, “We reject the false notion that Israel is an occupier and specifically recognize that the Boycott, Divestment, and Sanctions Movement (BDS) is anti-Semitic in nature and seeks to destroy Israel.” This language, combined with Republican nominee Donald Trump’s apparent disinterest in the conflict, makes it unlikely a Trump administration would prioritize Israeli-Palestinian issues or make any serious attempt at negotiations.

Conversely, this year’s Democratic Party platform reaffirmed the United States government’s long-standing commitment to seeking a two-state solution in the region. But the party took a notably progressive turn, highlighting both the importance of Israel’s Jewish and democratic future and Palestinian freedom “to govern themselves in their own viable state, in peace and dignity.” The contentious fight over the Democratic Party language, combined with Democratic nominee Hillary Clinton’s (and her potential First Gentleman’s) passion for this issue reveals an intent by a future Clinton administration to reinvigorate negotiations.

As President Obama and Secretary Kerry consider their final months in office, one item on the agenda is whether to push a last-ditch effort on the issue—either by releasing some sort of Obama or Kerry Parameters based on the outcome of the failed 2013-14 negotiations or by supporting one of the international initiatives such as the French Initiative, the Quartet Report, or the regional Arab Peace Initiative, now spearheaded by Egyptian President Abdel-Fattah el-Sissi.

Likely to drive the administration’s calculus are the Democratic and Republican nominees and their political motives on the U.S. led peace process. The time to watch for a potential move, therefore, is between November and January. Given the administration’s support for its own party’s nominee, it is in Obama’s interest to keep the peace process on life support—but without resuscitating it—through January. Publicly, but somewhat unenthusiastically, supporting the various international initiatives and allowing other states and international organizations to sit in the driver’s seat sets a future Democratic administration up with the best chance of success.

Lessons from getting Israeli and Palestinian leaders to the table over the years include the wisdom to refrain from yelling about past progress in negotiations. Publicly revealing how far Netanyahu and Abbas were willing to go in 2014 would only harm the next administration’s efforts at resuming negotiations. Keeping the “Kerry Framework” in the administration’s pocket allows a Clinton administration to take ownership of the peace process should she be elected.

Alternatively, if Trump is elected, the Obama administration would have nothing to lose in revealing the fruits of its efforts in 2013-14. The administration would have little concern for derailing a possible Trump attempt (which is not likely to take place in any event) and could determine that releasing some sort of Obama or Kerry Parameters would shed a positive light on the administration’s legacy. Furthermore, should the Republican Party win the White House, neither Obama nor Kerry is likely to care about the damage that releasing such a document might do to either Netanyahu or Abbas.

The party conventions have solidified the deep divides—both between and within the parties—regarding the U.S. approach to the Israeli-Palestinian conflict this campaign season. This divide, combined with a renewed international focus on the conflict, virtually guarantees that the administration will keep the conflict on the back burner before November. The election, therefore, will not only determine our next president but also the fate of the “Obama/Kerry Parameters”.

Note: Ariella Plachta, an intern with the Center for Middle East Policy, contributed to this post.

Quickly following on the heels of the midterm elections, Senate Majority Leader Mitch McConnell (R-KY) indicated that the medical device tax was a key target for repeal in the 114th Congress. Today, the Senate Finance Health Care Subcommittee will hold a hearing about the effects of the 2.3 percent tax that was included in the Affordable Care Act. Many believe that a repeal is, in fact, possible. Below is a basic primer about the tax and its contentious history.

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

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

Video

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

Event Materials

• Breakthrough Therapy Designation_final
• Breakthrough therapy slide deck

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The Risk Evaluation and Mitigation Strategies (REMS) program has become an important tool of the U.S. Food and Drug Administration (FDA) in ensuring that the benefits of a given medical product outweigh the associated risks, and has enabled FDA to approve a number of products that might not otherwise have been made available for patient use. Since the implementation of the REMS program, however, concerns have been raised regarding its impact on patient access to products and the associated burden on providers and health care systems. In an effort to address these concerns—and as part of its commitments under the Prescription Drug User Fee Act reauthorization of 2012—FDA has undertaken efforts to standardize and improve the effectiveness of REMS, and to better integrate REMS programs into the health system. As part of this broader initiative, the Agency is currently assessing the feasibility of integrating accredited continuing education (CE) programs and activities into REMS programs that have been developed for a single drug.

Under a cooperative agreement with the FDA, the Center for Health Policy held an expert workshop on May 18, titled “Incorporating Continuing Education into Single-Drug REMS: Exploring the Challenges and Opportunities”. This workshop provided an opportunity for pharmaceutical manufacturers, regulators, CE providers, accreditors, and other stakeholders to explore the ways that CE can be a valuable addition to the REMS toolkit, discuss potential barriers to the development and implementation of REMS-related CE for single products, and identify strategies for addressing those barriers.

Event Materials

• Bio sheet
• REMS CE Meeting Agenda
• REMS_CE_Meeting_Discussion_Guide_Final
• REMS CE Meeting Summary

The Risk Evaluation and Mitigation Strategies (REMS) program has become an important tool of the U.S. Food and Drug Administration (FDA) in ensuring that the benefits of a given medical product outweigh the associated risks, and has enabled FDA to approve a number of products that might not otherwise have been made available for patient use. Since the implementation of the REMS program, however, concerns have been raised regarding its impact on patient access to products and the associated burden on providers and health care systems. In an effort to address these concerns—and as part of its commitments under the Prescription Drug User Fee Act reauthorization of 2012—FDA has undertaken efforts to standardize and improve the effectiveness of REMS, and to better integrate REMS programs into the health system. As part of this broader initiative, the Agency is currently assessing the feasibility of integrating accredited continuing education (CE) programs and activities into REMS programs that have been developed for a single drug.

Under a cooperative agreement with the FDA, the Center for Health Policy held an expert workshop on May 18 titled, “Incorporating Continuing Education into Single-Drug REMS: Exploring the Challenges and Opportunities”. This workshop provided an opportunity for pharmaceutical manufacturers, regulators, CE providers, accreditors, and other stakeholders to explore the ways that CE can be a valuable addition to the REMS toolkit, discuss potential barriers to the development and implementation of REMS-related CE for single products, and identify strategies for addressing those barriers.

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• Download discussion guide

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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What if there were a new economic engine for the United States that would put our people back to work without putting the government deeper in debt? What if that economic engine also improved our international competitiveness, reduced greenhouse gases, and made the American people healthier?

At a minimum, it would sound a lot better than any of the current offers on the table: stimulus from the liberals, austerity from the conservatives, and the president’s less-than-convincing plan for a little stimulus, a little austerity, and a little bit of a clean-energy economy.

The potential for just such an economic renaissance is a lot more plausible than many would imagine. At the heart of this opportunity are the underappreciated implications of a massive demographic convergence. In short, the two largest demographic groups in the country, the baby boomers and their children—together comprising half the population—want homes and commercial space in neighborhoods that do not exist in anywhere near sufficient quantity. Fixing this market failure, unleashing this latent demand, and using it to put America back to work could be accomplished without resorting to debt-building stimulus or layoff-inducing austerity. At least for the moment, Washington has an opportunity to speed up private investment for public good and launch what could be a period of long-lasting prosperity. It is a market-driven way to make the economic recovery sustainable while addressing many of the most serious problems of our time: the health care crisis, climate change, over-reliance on oil from countries with terrorist ties, and an overextended military.

Real estate has caused two of the last three recessions, including the Great Recession we’ve just gone through. That is because real estate (housing, commercial, and industrial) and the infrastructure that supports real estate (transportation, sewer, electricity, and so on) represent 35 percent of the economy’s asset base. When real estate crashes, the economy goes into a tailspin. To speed up the economic recovery now slowly underway, the real estate sector must get back into the game, just as it played a central role in the economic recoveries of past recessions. (Real estate also kept the high-tech recession in the early 2000s from being as serious as it might have been.) The United States will be condemned to high unemployment and sluggish growth if 35 percent of our asset base is not engaged. And hundreds of billions of dollars in potential investment capital is on the sidelines, waiting for the right market signals to be deployed.

We’re unlikely, however, to see a real estate recovery based on a continuation of the type of development that has driven the industry for the past few generations: low-density, car-dependent suburbs growing out of cornfields at the edge of metropolitan areas. That’s because there is now a massive oversupply of such suburban fringe development, brought on by decades of policy favoring it—including heavy government subsidies for extending roads, sewers, and utilities into undeveloped land. Houses on the exurban fringe of several large metro areas have typically lost more than twice as much value as metro areas as a whole since the mid-decade peak. Many of those homes are now priced below the cost of the materials that went into building them, which means that their owners have no financial incentive to invest in their upkeep. Under such conditions, whole neighborhoods swiftly decline and turn into slums. This happened in many inner-city neighborhoods in the 1960s, and we’re seeing evidence of it in many exurban neighborhoods today. The Los Angeles Times reports that in one gated community in Hemet, east of L.A., McMansions with granite countertops and vaulted ceilings are being rented to poor families on Section 8 vouchers; according to the Washington Examiner, similar homes in Germantown, Maryland, outside Washington, D.C., are being converted to boarding houses.

Many hope that when the economy recovers, demand will pick up, inventories of empty homes will be whittled down, and the traditional suburban development machine will lumber back to life. But don’t bet on it. Demand for standard-issue suburban housing is going down, not up, a trend that was apparent even before the crash. In 2006, Arthur C. Nelson, now at the University of Utah, estimated in the Journal of the American Planning Association that there will be 22 million unwanted large-lot suburban homes by 2025.

Meanwhile, the Great Recession has highlighted a fundamental change in what consumers do want: homes in central cities and closer-in suburbs where one can walk to stores and mass transit. Such “walkable urban” real estate has experienced less than half the average decline in price from the housing peak. Ten years ago, the highest property values per square foot in the Washington, D.C., metro area were in car-dependent suburbs like Great Falls, Virginia. Today, walkable city neighborhoods like Dupont Circle command the highest per-square-foot prices, followed by dense suburban neighborhoods near subway stops in places like Bethesda, Maryland, and Arlington, Virginia. Similarly, in Denver, property values in the high-end car-dependent suburb of Highland Ranch are now lower than those in the redeveloped LoDo neighborhood near downtown. These trend lines have been evident in many cities for a number of years; at some point during the last decade, the lines crossed. The last time the lines crossed was in the 1960s—and they were heading the opposite direction.

There are some obvious reasons for the growing demand for walkable neighborhoods: ever-worsening traffic congestion, memories of the 2008 spike in gasoline prices, and the fact that many cities have become more attractive places to live thanks to falling crime rates and the replacement of heavy industries with cleaner, higher-end service and professional economies.

But the biggest factor, one that will quickly pick up speed in the next few years, is demographic. The baby boomers and their children, the millennial generation, are looking for places to live and work that reflect their current desires and life needs. Boomers are downsizing as their children leave home while the millennials, or generation Y, are setting out on their careers with far different housing needs and preferences. Both of these huge demographic groups want something that the U.S. housing market is not currently providing: small one- to three-bedroom homes in walkable, transit-oriented, economically dynamic, and job-rich neighborhoods.

The baby boom generation, defined as those born between 1946 and 1964, remains the largest demographic bloc in the United States. At approximately 77 million Americans, they are fully one-quarter of the population. With the leading edge of the boomers now approaching sixty-five years old, the group is finding that their suburban houses are too big. Their child-rearing days are ending, and all those empty rooms have to be heated, cooled, and cleaned, and the unused backyard maintained. Suburban houses can be socially isolating, especially as aging eyes and slower reflexes make driving everywhere less comfortable. Freedom for many in this generation means living in walkable, accessible communities with convenient transit linkages and good public services like libraries, cultural activities, and health care. Some boomers are drawn to cities. Others prefer to stay in the suburbs but want to trade in their large-lot single-family detached homes on cul-de-sacs for smaller-lot single-family homes, townhouses, and condos in or near burgeoning suburban town centers.

Generation Y has a different story. The second-largest generation in the country, born between 1977 and 1994 and numbering 76 million, millennials are leaving the nest. They may sometimes fall back into the nest, but eventually they find a place of their own for the first time. Following the lead of their older cousins, the much smaller generation X (those born between 1965 and 1976), a high proportion of millennials have a taste for vibrant, compact, and walkable communities full of economic, social, and recreational opportunities. Their aspirations have been informed by Friends and Sex in the City, shows set in walkable urban places, as opposed to their parents’ mid-century imagery of Leave It to Beaver and Brady Bunch, set in the drivable suburbs. Not surprisingly, fully 77 percent of millennials plan to live in America’s urban cores. The largest group of millennials began graduating from college in 2009, and if this group rents for the typical three years, from 2013 to 2018 there will be more aspiring first-time homebuyers in the American marketplace than ever before—and only half say they will be looking for drivable suburban homes. Reinforcing that trend, housing industry experts, like Todd Zimmerman of Zimmerman/Volk Associates, believe that this generation is more likely to plant roots in walkable urban areas and force local government to fix urban school districts rather than flee to the burbs for their schools.

The convergence of these two trends is the biggest demographic event since the baby boom itself. The first wave of boomers will be sixty-five in 2011. The largest number of millennials reaches age twenty-two in 2012. With the last of the boomers hitting sixty-five in 2029, this convergence is set to last decades. In addition to the generational convergence, the Census Bureau estimates that America is going to grow from 310 million people today to 440 million by 2050.

An epic amount of money will pour into the real estate market as a result of population growth and demographic confluence. To be sure, unemployment and stagnant wages have eroded people’s buying power. Boomers have suffered steep declines in the value of their current homes and 401(k)s, and young people are leaving college with ever-larger student loan debts.

But Americans of all ages have saved and paid off debts since the recession began, and average household balance sheets should be significantly healthier five years from now. In addition, 85 percent of the new households formed between now and 2025 will be single individuals or couples with no children at home; unburdened by child-rearing expenses, they will have more income available for housing (and less desire to spend it tending big backyards).

Most importantly, the very act of moving to more walkable neighborhoods will free families from the expense of buying, fueling, and maintaining the two or more cars they typically need to get around in auto-dependent suburbs. Households in drivable suburban neighborhoods devote on average 24 percent of their income to transportation; those in walkable neighborhoods spend about 12 percent. The difference is equal to half of what a typical household spends on health care—nationally, that amounts to $700 billion a year in total, according to Scott Bernstein of the Center for Neighborhood Technology. Put another way, dropping one car out of the typical household budget can allow that family to afford a $100,000 larger mortgage.

The burgeoning demand for homes in walkable communities has the potential to reshape the American landscape and rejuvenate its economy as profoundly as the wave of suburbanization after World War II did. If anything, today’s opportunity is larger. The returning veterans and their spouses represented approximately 20 percent of the American population at that time; the current demographic convergence—77 million boomers plus 76 million millennials—comprises nearly 50 percent.

In the postwar years, America pushed its built environment outward, beyond the central cities, creating millions of new construction jobs and new markets for cars and appliances—a virtuous cycle of commerce that helped power American prosperity for decades (until, of course, it went too far, leading to the oversupply of exurban development that is acting as deadweight on the current recovery). The coming demographic convergence will push construction inward, accelerating the rehabilitation of cities and forcing existing car-dependent suburbs to develop more compact, walkable, and transit-friendly neighborhoods if they want to keep property values up and attract tomorrow’s homebuyers. All this rebuilding could spur millions of new construction jobs. But more importantly, if done right, with “smart growth” zoning codes that reward energy efficiency, it would create new markets for power-conserving materials and appliances, providing American designers and manufacturers with experience producing the kinds of green products world markets will increasingly want.

In addition to fueling long-term economic growth, the new demand for walkable neighborhoods could provide other benefits. One of the biggest drivers of rising health care costs is the expansion of chronic diseases like obesity, diabetes, and heart disease—conditions exacerbated by the sedentary lifestyles of our car-dependent age. All would be substantially reduced if Americans move into higher-density, transit-friendly neighborhoods in which more walking is built into their daily routine.

The potential environmental benefits are equally profound. A study conducted by the National Resources Defense Council concluded that simply conforming new construction to smart growth standards would reduce carbon emissions 10 percent within ten years, more than half the target set by the president and the stalled climate legislation. Similarly, the U.S. Green Building Council estimates that new sustainable developments could reduce water consumption by 40 percent, energy use by up to 50 percent, and solid waste by 70 percent.

We can reap these economic, health, and environmental benefits if the real estate market is allowed to follow the demand preferences of consumers. But that’s easier said than done. Markets don’t exist in a vacuum. They operate within rules and incentives set by governments. The rules and incentives that guide today’s real estate market were designed, for the most part, more than a half century ago to fit the demands of the postwar-era Americans who were looking for new homes with yards outside overcrowded cities in which to raise their families. For many years the government-insured mortgages provided to millions of GIs were regulated in such a way that they could only be used to buy newly constructed homes, not to purchase or rehab existing homes—an incentive that strongly biased growth away from cities and toward the suburbs. Cheap rural land outside cities became accessible and valuable to developers thanks to the building of the interstate highway system, 90 percent funded by the federal government. Using federal matching grants, suburban municipalities extended water, sewer, and electric lines to new subdivisions, charging developers and homeowners a fraction of the real costs of those extensions. Municipalities also crafted zoning codes, often in response to federal regulations that essentially mandated low-density development.

Today, even though consumer preferences have changed, most of the old rules and subsidies remain in place. For instance, federal transportation funding formulas, combined with the old-school thinking of many state departments of transportation, continue to favor the building of new roads and widening of highways—infrastructure that supports low-density, car-dependent development—over public transit systems that are the foundation for most compact, walkable neighborhoods. When developers do propose to build denser projects, with narrower streets and apartments above retail space, they often run up against zoning codes that make such building illegal. Consequently, few compact, walkable neighborhoods have been built relative to demand, and real estate prices in them have often been bid up to astronomical heights. This gives the impression that such neighborhoods are only popular with the affluent, when in fact millions of middle-class Americans would likely jump at the opportunity to live in them.

To meet this broad new demand, however, requires that entire metropolitan regions work together to chart a common vision for their communities. When that happens, all kinds of Americans, and not just coastal elites, choose walkable, transit-based growth.

Consider the recent experience of Utah, a state that voted 63 percent for John McCain and Sarah Palin. In 1997, in anticipation of the 2002 Winter Olympics in Salt Lake City, a coalition of local CEOs, elected leaders, developers, farmers’ associations, conservation advocates, and urban planners put together a process of public meetings to get citizens involved in developing a strategy to accommodate greater Salt Lake City’s fast-paced growth in a fiscally and environmentally sustainable way. That process, dubbed “Envision Utah,” led to a blueprint for development in the four-county region. The plan largely rejects further suburban sprawl in favor of a “quality growth strategy” of dense walkable neighborhoods built around transit stops.

The first step was the building of a seventeen-mile, twenty-three-station light rail line in Salt Lake City called TRAX. The line was highly controversial; many predicted it would be an underutilized boondoggle. But when the first phase opened in 1999, TRAX proved an immediate hit with the public—eventually some trains became so crowded with riders that their doors couldn’t close. In 2000 and 2006, voters approved tax increases to expand the system, including increased reach to several outlying suburbs, twenty-six miles of new light rail track, forty additional station stops, and eighty-eight miles of heavier commuter rail, reaching as far as Provo. Meanwhile, mixed residential-commercial developments have been constructed around existing stations in places like the formerly industrial suburb of Murray City.

Locally financed transit expansions are also underway in such wide-ranging places as St. Louis, Denver, Los Angeles, Montgomery, Alabama, and Broward County, Florida. From 2004 to 2009, 67 percent of light rail ballot measures passed. In 2008, the election year defined by the financial crisis, 87 percent of transit measures passed. In Seattle, a 2008 measure saw sponsors actually eliminate road funding so that the thirty-four-mile extension of the light rail system would pass.

The public, then, has made its desire for transit-oriented growth quite clear, and governments at the local and metropolitan levels have begun to respond. At the federal level, however, the policy machinery remains on autopilot, supporting a sprawl-based growth model that is beyond broken. What we need to do should be obvious: replace old federal rules and incentives that hamper the market’s ability to meet changing needs and preferences for housing with new ones that don’t, thus helping to rejuvenate the American economy. But these new policies will have to be produced in a political environment that, unlike in the postwar years, is hostile to government actions that add considerably to the federal deficit. And they need to be written quickly: the peak of the convergence is only three years away, and the economy needs a sustainable base from which to grow more quickly now.

Throughout human history, transportation has determined the pattern of real estate development, and so the place to begin is federal transportation policy. Fortunately, next year Congress will probably reauthorize the giant transportation law that determines most federal infrastructure spending—which, tellingly enough, is still commonly referred to in Washington as “the highway bill.” This will provide a golden opportunity to change federal policy in several fundamental ways. First, the biases in federal matching grants that favor roads and highways over every other type of infrastructure (sidewalks, bike paths, mass transit, and so on) must end. Second, the grants should be “scored” based on their economic, environmental, and social equity impacts—in particular, on the degree to which proposed transportation projects minimize travel times and distances for residents and enable compact, walkable, energy-efficient, and affordable development. Third, metro areas should be required, and given funding, to do what greater Salt Lake City did: create a blueprint for future growth. Those blueprints should then help guide which specific infrastructure projects get federal funding. In effect, this will shift the power to shape growth patterns away from congressional appropriators and state departments of transportation and to local citizens and local elected officials. And it will help ensure that actual consumer demand drives the process, rather than the current combination of antiquated federal funding formulas, congressional earmarks, and offstage machinations of conventional developers.

Many liberals might want Washington to cover most of the costs of this new infrastructure. That’s unlikely to happen in the current political and fiscal environment. Nor, frankly, is it necessary, or even healthy. Instead, scarce federal dollars should be used to attract private dollars, of which there are plenty. The Investment Company Institute reports that institutional investors are keeping a relatively stable $1.8 trillion in money market funds because money managers see no good long-term investment vehicles. A similar amount is sitting in the coffers of non-financial corporations.

The Obama administration has proposed one way to tap some of these private dollars: create an “infrastructure bank” that would leverage several private dollars for every federal dollar invested to build a project. In return, the bank and private investors would receive, say, a dedicated locally raised future tax revenue source. 

Another approach would be to revive a practice from the past. A hundred years ago, virtually every city of 5,000 or more had an extensive network of streetcars. These systems were typically not publicly owned. Instead, real estate developers, often in partnership with electric utilities, built and ran them, even paying municipal governments to rent the right-of-way. The developers made their money not from fares, which barely covered operations, but from the increased land values that the trolley extensions made possible. There’s no reason why similar deals can’t be negotiated today to fund various kinds of mass transit. In fact, the process has already begun in a few places. Developers are helping to pay for the extension of the Washington, D.C., metro rail to Dulles airport, while Microsoft cofounder Paul Allen’s real estate company and other property owners participated in the funding of the streetcar to his substantial property holdings just north of downtown Seattle. The federal government can help make such arrangements much more common by offering partial guarantees of the debt floated to build transit infrastructure.

Another way Washington can encourage walkable neighborhoods is through reforms of Fannie Mae and Freddie Mac. These two government-sponsored mortgage guarantors and underwriters went bankrupt and were taken over by the U.S. government—in large part because they overinvested in homes on the suburban fringe. But in recent years Fannie Mae has been experimenting with an interesting new product: “location efficient mortgages.” Instead of relying solely on credit score and income to determine whether a borrower qualifies for a mortgage, these loans use electronic map systems to take into account how much homeowners will have to pay for transportation. Research by Scott Bernstein of the Center for Neighborhood Technology suggests that location efficient mortgages may have lower default rates than conventional Fannie Mae loans. If that finding proves true, then it makes sense to expand the program, and to apply the same concept to household energy savings: Fannie, Freddie, and HUD’s Federal Housing Administration should factor in the savings from more energy-efficient homes and retrofits. And all these products should be available for more types of construction than just the single-family detached house.

In the past, big shifts in real estate patterns, from suburbanization to gentrification, have often made the lives of the poor considerably worse. To make sure that doesn’t happen as we move toward more walkable communities, federal action will also be needed. The Obama administration took a first step earlier this year by announcing that location efficiency will be a criterion for $3.25 billion in competitive HUD housing grants. That means that at least some walkable developments will be built to include housing for lower-income families, and more can be done along these lines using existing federal housing programs such as the Low-Income Housing Tax Credit.

But the truth is that federal housing policy can make only a modest dent in the affordability problem. As we’ve seen, what really drives development is transportation policy, and so the real lever of change is, again, the upcoming transportation bill. The bill should offer state and local governments a clear choice: if they want federal dollars for light rail and other transit systems, they must ensure that citizens at all income levels reap the benefits. That means changing local zoning codes to mandate that a portion of the housing in transit-oriented developments—say, 15 percent—be reserved for lower-income families. It also means that local jurisdictions need to remove ordinances that act as barriers to affordable housing—an idea long championed by many conservatives, including the late Jack Kemp. For instance, empty nesters ought to have the right to rent out unused bedrooms or turn part of their homes into separate rental units. Doing so is illegal in most municipalities today.

Ultimately, the biggest barrier to affordability is insufficient supply: homes in walkable, transit-oriented neighborhoods cost too much because there are not enough of them to satisfy the growing market demand. What’s needed, then, is a supply-side solution: build more such neighborhoods.

Can a set of policies like these ever get through Congress? After all, Republicans have long been ideologically hostile to mass transit. With their base now predominantly in exurban and rural America, most GOP lawmakers will look with skepticism, even disdain, at proposals to use government in ways that benefit cities and closer-in suburbs that tend to elect Democrats. And many Americans who live in rural or exurban areas feel the scorn that too many educated urbanites express for their lifestyle, and reflect that scorn right back.

Yet, as Utah shows, conservative Americans can rally behind mass transit when all the advantages are pointed out and the hidden costs of sprawl made clear. The threats to family life posed by long commutes and auto dependency are a building issue among evangelical Christians. Conservatives are often among the most acute critics of federal highway subsidies and the way they insulate consumers from the real cost of driving. The late Paul Weyrich, cofounder of the Heritage Foundation, served on Amtrak’s board and was an outspoken champion of passenger rail. As William Lind recently argued in the American Conservative magazine, it was hardly a triumph of free enterprise that America’s convenient and affordable streetcar and passenger rail systems, most of them privately owned, were put out of business by government-subsidized and -owned highways.

In the wake of the Great Recession there is also another huge pocketbook force at work: however they might lean ideologically, the best hope suburbanites have for reversing their depressed home values is for mass transit lines to be extended in their communities. Though not every suburb can be saved in this way, for many it represents the most practical long-term solution to their dilemma.

Ultimately, the strongest argument for these policies—one conservatives and liberals ought to be able to agree on—is that they would allow the moribund real estate market to function again, and in so doing would give the economy a dose of healthy growth. Indeed, assuming that a decisive package like the one above is passed, the private sector, awash in capital, may anticipate the demand about to be unleashed in our markets and start investing in real estate again. That is what happened in downtown Portland, Oregon, when a proposed $50 million streetcar led to $3.5 billion of private-sector development, much of it before the streetcar was built. America will be back in business. And good business is good politics.

But leading the transition to sustainability is also a strategic imperative for the United States. China and India need to figure out how to accommodate 700 million of their countrymen who will leave the villages and enter the cities over the next forty years. That’s more than twice the total American population. China is already building at a pace that will allow it to have 221 cities with more than 1 million residents—the U.S. has nine. The competition for energy and raw materials like copper, lumber, and steel under a business-as-usual scenario is extraordinary and will result only in increased levels of strategic conflict in the decades ahead, as recent congressional hearings on “strategic minerals” attests. By making a decisive shift and embracing sustainable communities, innovative American firms will have the domestic markets they need to develop and deliver the super-efficient products and services that will keep America secure and, through increased exports, help build our economy while reducing our trade imbalance.

Admittedly, the road to sustainability only begins with how we build and rebuild our communities. In addition to the ideas discussed here, there is much more we need to do to address the energy and material intensity of our economy in ways that will lead to better jobs, higher wages, reduced deficits, and greater national security. But at a time when the American people need a plan for long-term prosperity, and because real estate absorbs so much of our wealth, it is essential that we focus on pushing on the door unlocked by our demographic inheritance: the two largest population groups, half of our population, want communities that the market is not delivering due to out-of-date subsidies and policies.

Hong Kong has seemed quiet for the last four months. The foreign media moved on to other stories once last fall’s protest movement came to an end. But locally the debate over a new system to elect the territory’s chief executive has continued non-stop, and the situation is about to heat up again. On Wednesday Hong Kong time, the government will announce its proposal for electoral reform. Once it does, the pro-democracy opposition will face some difficult choices.

Here, in not too much detail, is a quick review of the background.

In 2007, the government of the People’s Republic of China, which has sovereignty over Hong Kong, announced it would accept an election of Hong Kong’s chief executive (CE) through universal suffrage for the 2017 election. It also said that candidates would be picked by a Nominating Committee. Pro-democracy politicians and the public at large, a majority of which supports a more democratic system, welcomed the universal suffrage part of this pledge but suspected that Beijing would use the Nominating Committee to restrict who got to run. What good is a one-man-one-vote election, they asked, if voters had to choose between candidates who are from the territory’s conservative establishment camp and will likely accommodate Beijing? (Good question.)

The following ensued:

• After several years of public debate, the Hong Kong government began a formal process consulting the public in December 2013. The key point of disagreement was over whether election candidates could emerge only through a Nominating Committee vote or through other mechanisms as well. Those who wanted other mechanisms believed that the Committee’s membership would be friendly to Beijing and pick candidates accordingly. Some of these skeptics were prepared to engage in civil disobedience to try to get their way.
• In late June 2014, the Hong Kong government announced the results of the consultation and the incumbent CE, C. Y. Leung, made a formal report to Beijing. This was the first step in a five-step process for constitutional revision, a process set by China. There is general agreement that Leung’s report understated the opposition to a nomination system that relied exclusively on the Nominating Committee.
• On August 31st, the Standing Committee of China’s National People’s Congress (NPC-SC) announced a decision on basic parameters for the new system (step two). Sure enough, it ruled out any supplementary nominating mechanisms. It also strongly suggested that the Nominating Committee would be constituted the same way as the 1,200-person Election Committee that had heretofore selected the CE and whose members were mostly friendly towards Beijing. The NPC-SC also limited the number of final CE candidates to two or three and dictated that each had to receive majority support from the Nominating Committee to become a candidate.
• The public response to the decision was sharply negative. The logical conclusion seemed to be that the new system was rigged in a way that Hong Kong voters have to pick among establishment candidates only, and that a pro-democracy aspirant had no way of getting nominated.
• In late September, students began a civil disobedience campaign that was marked by episodes of violence, and resulted in the occupation of three sets of major roadways in the territory. These lasted until early December, but the campaign did not persuade the government to back down on its basic approach.
• At the same time, the Hong Kong government, staying within the parameters Beijing announced on August 31st, began a second consultation process on its more specific reform proposals.

Why, you may ask, doesn’t Beijing just impose the system it wants? The reason is that it already committed that in step three of the five-step constitutional revision process, the government would introduce a bill in the Hong Kong Legislative Council reflecting its final proposal and that the legislature would have to approve it by a two-thirds margin. Even though the legislature is constituted in a way that gives disproportionate power to interests aligned with Beijing, the establishment camp currently does not have enough votes for a two-thirds majority. Consequently, the government must win over four or five moderate legislators from the democratic camp. In response, the more radical democrats have worked hard to keep the moderates committed to rejecting any government that is based on Beijing’s parameters, because it means that China gets to screen who gets to run. 

In light of this problem, the Hong Kong government did a clever thing. In the consultation document, it included the option of “democratizing” the Nominating Committee while remaining within Beijing’s basic parameters. It proposed to do this first by making the body more representative of Hong Kong society and reducing the proportion of seats held by business interests and groups otherwise linked to China. Second, it suggested a two-stage process of selection. In the first stage, the Nominating Committee would consider more “potential candidates” than the two or three that would ultimately be nominated to run in the election. To be picked as a potential candidate, an individual would need the support of only a minority of Committee members (how low was unspecified). This could increase the possibility of one or more democratic politicians emerging as potential candidates and then, in the second stage, at least one of them being selected as a final candidate. The result would be a competitive election.

Last week, Raymond Tam, the Hong Kong government’s secretary for constitutional and mainland affairs, indicated that something along these lines would be proposed by the government this Wednesday. He talked of using “the necessary legal room to maximize the democratic elements” and making the “entrance requirement" for potential candidates no higher than one-eighth of the membership. Additionally, there would be greater openness, transparency and accountability in the process of reviewing potential candidates within the Nominating Committee.

The devil, of course, will be in the details of the proposal (more on that later in the week). Moreover, Tam said nothing about making the Nominating Committee more representative of Hong Kong society. Did that element get set aside, and if so, what are the implications? If the membership of the committee is still biased in favor of the political status quo, would it matter if the process within the Nominating Committee is more competitive and transparent?

Whatever the proposal, the ball will then be in the pan-democrats’ court. Do they vote as a block to reject any process that allows the Nominating Committee to screen candidates? Do they then want to expose themselves to near-certain criticism that their recalcitrance denied the Hong Kong public the opportunity to vote for the CE? Or, do they take a chance on the more flexible approach that Tam is proposing, in the hope and belief that a pan-democrat will be screened in, which in turn would seem to set up a competitive election?

Read Richard Bush's response to the Hong Kong government's proposal for electoral reform »

Hong Kong’s next vote for Chief Executive (CE)—scheduled for 2017—offers a narrow pathway for improving democratic governance. The question is will a few of Hong Kong’s democratic legislators recognize the opportunity and make the necessary compromises.

As I saw in a trip to the city last week, discussions about reforming the election process are already well underway. Up until now, the CE has always been chosen by a 1200-person selection committee, mostly comprised of members willing to follow China’s lead on major political issues. Now under consideration is a plan to elect the next CE through a one-person, one-vote election (universal suffrage). The number of eligible voters would jump from 1,200 to around 5 million.

The caveat from Beijing has been that the candidates for that election would be selected by a nominating committee to be modelled on—you guessed it—the old selection committee. Pro-democracy politicians have sought a more flexible and open-ended process. It was public opposition to Beijing’s nominating committee that set off the Umbrella Movement protests last September and the 79-day occupation of several downtown thoroughfares. The democrats’ opposition to the current plan is important because the tabled proposal must receive support from two-thirds of the Legislative Council to pass, and the government doesn’t have the votes. It needs four democrats to cross the aisle and vote for the package.

Outsized importance

Hong Kong is a small place (7.25 million people), but what happens to the universal suffrage proposal has rather large implications. I have often thought that how China calibrates its choices concerning Hong Kong’s political system says something about what kind of great power it will be. This is not the defining issue of China’s revival as a great power, to be sure. How Beijing uses its growing power economically, diplomatically, and coercively is more important.

Yet most of the objects of China’s exercise of power, particularly in East Asia, are countries with informed, patriotic populations who care about the security and independence of their countries. (The only real exceptions are the islands of the East and South China Sea whose only inhabitants are seagulls.) So China will have to balance any temptation to promote its interests in more assertive ways with a sensitivity to popular feeling. Indeed, its recent “big country” mentality has caused a backlash in the “small countries” it has tried to bend to its will.

Shifting politics

So Hong Kong should be a good test of China’s sensitivity level. It is constitutionally a part of China. Its population is predominantly ethnic Chinese. The overwhelming majority of people accept their lot as Chinese citizens and would do nothing to upset the status quo. They are inherently pragmatic and understand, most of them, the benefits Hong Kong enjoys by being a part of China, including the rule of law and some political freedoms.

But a significant majority also want genuine electoral democracy. If China had granted that ten years ago, the gratitude would have been profound. But the delay has had deleterious effects. Hong Kong’s politics have become more polarized and radicalized. Political mistrust is deep and moderates have been marginalized, especially in the democratic camp. Meanwhile, the new Chinese leadership is placing greater emphasis on national security, and Beijing’s propaganda organs warn of “foreign forces” (e.g. the United States) working behind the scenes to destabilize Hong Kong.

So far, therefore, the interaction between the Chinese central government and the majority of the Hong Kong public has not gone well as it could have. Things will come to a head in a couple of weeks when the Legislative Council votes on the electoral reform proposal. The democratic camp maintains an apparently strong united front and says it will vote as a bloc against the package, which will mean that Hong Kong reverts to the past “small circle” election of the CE.

During my visit I found a couple of brave souls who believe the game is not over; the dominant mood, however, was one of pessimism. If the package goes down, there will likely be no protests, since radical forces have at least blocked what they hate, even as they didn’t secure what they wanted. If the package passes, however, there will likely be protests akin to those last fall, but not as prolonged. Whatever happens, there will be a big demonstration on or around July 1, the eighteenth anniversary of Hong Kong’s return to China. The size of that rally will be a barometer of the intensity of public feeling.

A “narrow pathway” to success?

There is a curious aspect about the package that Legislative Council will vote on. As I outlined in a Brookings blog post in late April, the proposal actually creates a narrow pathway for the democrats to first nominate and then elect one of their own as CE.

It would require, above all, a willingness on the part of at least four democrats to set aside their dissatisfaction with the undemocratic defects of the current proposal (and they do exist) and focus on the democratic opportunity that it presents. Later on, it would require the democrat camp to unite in supporting a moderate candidate who would not invite Beijing’s automatic rejection and who would have broad public support (and such individuals do exist). It should also have confidence that the majority of voters are on their side and would vote for that candidate. This is not a sure thing. The pro-Beijing members of the nominating committee will have the power not to name that person as a candidate—but rejecting a moderate, popular democrat would put them in a very awkward position.

The independent people that I spoke to in Hong Kong last week agreed with me that the current proposal creates this “narrow pathway.” But they also deplored the reality that the mutual mistrust between the democratic and pro-Beijing camps has become a serious obstacle to a sensible compromise. Radicals dominate the democratic camp. Their influence often constrains moderate democrats who might otherwise vote, as an act of conscience, for the package.

Beijing could have conducted its engagement with the Hong Kong public and the democratic camp in a much more skillful way. The priority it places on control of Hong Kong has outweighed its pledges to institute democracy. That has not changed, and it has contributed to the radicalization of Hong Kong politics. Yet the radicals, who would rather fight than win, are now providing Beijing with a pretext to take no chances.

Five years pass so quickly. It seems like only yesterday that EU leaders were emerging from an unseemly and apparently ad hoc appointment process to announce that Catherine Ashton, a member of the British House of Lords and a recently appointed European trade commissioner, would be the first-ever high representative for foreign affairs and security policy -- a sort of EU foreign minister. One existential currency crisis and two Russian invasions of Ukraine later, the EU is picking her successor.

With the passage of time and the rush of events, the stakes have become much higher. Yet the EU continues to select its leaders as if its postmodern continental paradise were not under siege from the south, because of the disintegration of the Arab world, and to the east, thanks to Russian aggression. Just like last time, the selection of the new high representative, Federica Mogherini, was undignified, full of haggling, and more focused on her gender, party affiliation, and nationality than on her actual qualifications for the job. And those are few: Mogherini emerged from obscurity just a few months ago to become Italy’s foreign minister.

Critics look at Mogherini’s lack of experience and assume that the EU’s underperformance in foreign policy will continue. This is a real possibility, and with crises brewing to Europe’s east and south, this is a particularly bad moment for the EU to descend into a bout of internal squabbling. But Mogherini can transcend the process that selected her and be the foreign policy representative the EU needs if she learns a few lessons from the recent past.

Back in 2009, pundits were filled with hope about the new EU foreign policy chief. The post was new and newly empowered to set up a diplomatic corps, the European External Action Service (EEAS). Against this backdrop, the choice of Ashton, an unknown British politician with no foreign policy experience, came as a cold shower. Her appointment reinforced the perception that the EU leaders’ stated resolve to raise the union’s foreign policy profile was rhetorical rather than real.

Although understandable, both the high expectations and the subsequent disappointment were misplaced. Even a high representative with an impeccable résumé would not have turned the EU into a foreign policy juggernaut. After all, the EU high representative is not a U.S. secretary of state with plenty of space to set U.S. foreign policy, but a bureaucrat operating within the much narrower limits of intergovernmental decision-making. In the EU, it is the member states -- not Brussels -- that make decisions on the most consequential issues of foreign policy.

Ashton has operated well within this limited sphere and carefully picked her issues. She has understood that the role of the high representative must change depending on the degree of agreement among the states. When there is a strong consensus, the high representative’s role most closely resembles that of a normal foreign minister -- he or she has great leeway to devise and implement policies. The 2013 normalization of relations between Serbia and Kosovo is a good case in point: there was sufficient consensus among member states that Ashton was able to spearhead an agreement between the two countries, for which she deservedly earned credit.

If there is a lack of consensus but also an imbalance of interest among member states, ad hoc groups of interested member states tend to take the initiative -- as did the United Kingdom, France, and Germany in 2003 on Iran’s nuclear program and Poland and Lithuania during Ukraine’s 2004 Orange Revolution. The high representative’s task here is not to lead but to help devise a policy course acceptable to all member states and, once the policy has been created, lend it the political weight of the whole EU. Ashton has carefully interpreted this role in the nuclear talks with Iran, which she has conducted on behalf of the P5+1 (the five permanent members of the UN Security Council plus Germany).

Finally, when member states have conflicting interests and all care about a particular issue, as they often do with regard to Russia, the high representative is limited to proposing lowest-common-denominator options that, however unsatisfying, represent what the EU can reasonably do. Ukraine, for better or for worse, is an example in which it would serve the EU little for the high representative to try to lead the member states to a destination that they have not (at least yet) agreed they want to go.

The high representative’s job description thus includes policy shaping, consensus building, and conflict management skills. The measure of his or her success is less a function of foreign policy chops than of the interpersonal skills the representative brings to the job. Measured against these requirements, Ashton’s record is decent. By the same token, there might be less reason to worry about Mogherini than some expect.

Mogherini is the high representative that EU leaders want. She is a woman, she is from the center-left, and she compensates the Italians for their recent losses in the international ranking of influential countries. Perhaps most significant, thanks to her lack of experience and high profile, she is unlikely to be able to challenge the member states’ principal role in EU foreign policy. Attesting to this is the fact that a number of EU member states agreed to her appointment despite having expressed concerns about Italy’s tendency to seek accommodation with Russia at a moment when Russia is invading its neighbor. However unhappy these countries may be with Mogherini’s selection, they are confident that her personal opinion on Russia will not affect the EU’s consensus-based foreign-policy-making process.

Mogherini’s weaknesses are real, but if she concentrates on what the EU high representative can realistically do, she can turn them into strengths. Her lack of defined policy positions on most issues will allow her to reflect consensus when it exists and to rely on the EEAS, which Ashton so assiduously built, to implement policies. This might make her an effective bridge builder between member states that disagree and also allows her to be more supportive than someone with a more established profile when vanguard groups of interested states want to move forward on specific issues on their own. Her lack of gravitas is more an issue of relative inexperience than a lack of personality. If she interprets correctly the multitasking role of the high representative, her standing will grow accordingly, as has happened with Ashton. Even on Russia policy, Mogherini has a unique opportunity. Although EU members are divided on what to do, Russia’s escalating aggression in Ukraine is slowly bringing them together. As an Italian associated with a relatively pro-Russian stance, her eventual calls to confront the Kremlin could be all the more effective.

The EU and the United States need a more unified and effective European foreign policy. But the EU is what it is. A U.S.-style secretary of state with a strong vision and lust for the spotlight would not transform the union because he or she would lack the legal authority and political legitimacy to do so. But a good high representative can still move the EU in the right direction, as long as he or she understands the subtleties of the role. And with the support of skilled advisers from the EEAS, Mogherini can be the high representative the EU needs.

This piece was originally published in Foreign Affairs.

And thus, it happened, Brexit is a reality. For the first time in history, a European Union member state has decided to leave the EU. And what a member state it is. The U.K. is the EU’s second-largest economy, its main military power (along with France), a country with a global foreign policy outlook, and a pro-active approach to international crises and challenges.

The composite coalition that championed Brexit, including the openly xenophobic U.K. Independence Party (UKIP) as well as staunch free marketeers from the Conservative Party, understandably celebrates a result probably unachievable just a few years ago. So do the other parties in Europe that have made opposition to immigration, European integration, and globalization the centerpiece of their political agenda, such as the National Front in France, the PVV in the Netherlands, and the Northern League in Italy. Rightly emphasizing the similarities with his views on these issues, the Republican contender for the U.S. presidency, Donald Trump, has hailed Brexit as a “good thing.”

The rest of the world—and of the U.K.—is stunned, as The New York Times headline read on the day after the U.K. referendum. Politicians, experts, and ordinary citizens wonder about the effects of Brexit for the U.K., Europe, and the world. These are legitimate concerns. To put it bluntly, Brexit is a severe blow to the U.K., to the EU, and to the international liberal order. Worse still, it might trigger a chain reaction that could turn it into a full-blown catastrophe.

A more divided country

In just one night, the U.K. has plunged into a grave constitutional crisis. The dramatic fall of the pound vis-à-vis the dollar—it reached its lowest point in 30 years—has caused the British gross domestic product to slip below France’s in two hours. It may be that the grim predictions of the U.K. Treasury—which has warned about a U.K. going into a recession already this year – are exaggerated. Yet there is little doubt that the next prime minister—David Cameron has already announced he will resign in the next few months—will have to cope with volatile markets and a more fragile and vulnerable economy. And this is going to be just one of the excruciatingly difficult tasks he or she will be confronted with.

The Conservative Party still holds an absolute majority in Parliament, so it is from its ranks that the next prime minister will come out. Pundits are betting on a leading figure of the pro-Brexit fraction, but that is not a given. The party is divided and bitter between its pro- and anti-Brexit camps, a wound that a centrist might perhaps have a better chance to heal.

Mending intra-party fences will just be the start, however. The EU referendum has torn apart the country. It has highlighted painful splits between the older generation (overwhelmingly in favor of Brexit) and the younger one (massively against); between the province and urban centers (London, Manchester, and Liverpool all voted to stay in the EU); and between English and Welsh (who voted for Brexit) and Northern Irish and Scots (who voted against).

This latter split is likely to have political consequences. The Scottish National Party, which unsuccessfully ran a pro-independence campaign in 2014, has announced that the possibility of holding a second referendum is on the table. And Sinn Fein, the Irish nationalist party, has called for a vote on Northern Ireland’s reunification with Ireland. Post-Brexit, the U.K. faces the prospects not only of a diminished international role and economy, but territory too.

A weaker EU

The EU will also suffer from Brexit. The leaders of the other 27 member states have to now decide how they want to handle the divorce with London. As the British economy is deeply integrated with the EU’s, imposing hard terms on the U.K.—for instance, excluding it altogether from the European single market—is counterproductive. At the same time, EU leaders want to prevent that too generous terms might invite emulations from other countries. Indeed, the risk of contagion has never been so high.

Next fall, Italy may find itself in a political crisis if voters reject a constitutional reform on whose success the pro-EU Prime Minister Matteo Renzi has pinned his political career. Mistrust of Italy’s ability to run the economy will spread across markets, raising the specter of yet another eurozone crisis. This will only give Euroskeptic movements more credibility. In spring 2017, the Netherlands and France will hold national elections, while German voters will go to the polls in early fall. Marine Le Pen and Geert Wilders, leaders of the National Front and the PVV respectively, are polling ahead of pro-EU forces. Both have both promised an EU referendum if elected. German Chancellor Angela Merkel is weary and might be unable to secure a fourth mandate. If she goes, the next chancellor is very likely to be less pro-EU and tougher on immigration. Europe’s re-nationalization would then be a real prospect.

A less cohesive West

A fractured and divided EU would be a much less relevant international actor. The Europeans’ influence on global governance, international institutions, and multilateral negotiations would shrink. The United States would see Europe as a problem rather than a partner, and the cohesion of the West, as much as its leadership capacity, would dwindle. The notion that rules, institutions, and norms should govern international relations would lose in credibility, while the one that emphasizes power would gain. The functionality of the Western-promoted liberal order would be at risk.

Well-respected experts have good reasons to argue that we should not despair about Brexit. They are right, the catastrophic scenario sketched above is not a given. Yet it’s not implausible either. Policymakers in the U.K., Europe, and elsewhere should consider their next steps being fully aware that Brexit’s effects might be felt farther away than the British Isles.

On August 26, the Brookings Institution hosted a panel discussion of the findings of the 2015 Financial and Digital Inclusion Project Report and Scorecard. Chief among the report’s findings was the rapid growth of financial products and services targeted at the world’s unbanked population.  Much of the growth stems from innovations in digital payments systems and non-bank financial services.  For example, systems like M-Pesa in Kenya allow customers to store money on their mobile phones and easily transfer it to other M-Pesa users.  Advancing financial inclusion will greatly benefit the two billion people worldwide that still lack access to any financial services.

The report itself ranks a set of 21 countries on four continents chosen for their efforts to promote financial inclusion.  The criteria used to score each country include country commitment, mobile capacity, regulatory environment, and adoption.  The results show that several pathways to financial inclusion exist, from mobile payments systems to so-called “branchless” banking services.  Places that lack traditional banks have seen financial inclusion driven by mobile operators, while others have experimented with third-party agent banking in areas that lack bank branches.   

The panel drew financial inclusion and mobile payments experts from the government, industry, and non-profit groups.  Each panelist touted the benefits of financial inclusion from their own perspective.  Women especially have much to gain from financial inclusion since they have historically faced the most obstacles to opening financial accounts.  In developing countries, a mobile payments system grants women greater privacy, control, and safety compared to cash payments.  Traceable digital payments also make it easier to combat corruption and money laundering.  Salaries paid to government employees and transfer payments to low-income households can be sent straight to a mobile payment account, eliminating opportunities for bribe seeking and theft. 

According to the panelists, financial inclusion can also drive economic growth in developing countries.  As financial services expand, they will also increase in sophistication, allowing customers to do more with their money.  For example, a payments record can be used to establish a credit history for loan applications, and digital savings accounts with interest can help customers protect their wealth against inflation.  These same systems can also be used to provide insurance coverage, reducing financial uncertainty for low-income populations.

The proliferation of financial services has many benefits, but it will also create policy challenges if regulations do not keep up with financial innovation.  Requiring several forms of identification to purchase a mobile phone or open a bank account presents an obstacle to low income and rural customers that live far away from government offices that issue identification. Broad coordination between telecom regulators, ID issuers, banking authorities, and other government agencies is often necessary for lowering barriers to accessing financial services.

It is telling that many countries included in the report are looking to other developing countries for policies to promote financial inclusion.  The scarcity of traditional banks combined with new methods of accessing financial services opens avenues to financial inclusion not seen in most developed countries. Established banking industries and the accompanying regulations leave fewer opportunities for financial innovation, but countries with large unbanked populations can start with a clean slate. Over the next two years, FDIP will continue to monitor and report on developments in financial inclusion around the world.

Send comments on the 2015 FDIP Report and Scorecard and suggestions for future reporting to FDIPComments@brookings.edu.