3 Things We Can Learn about the Earned Income Tax Credit from a Map

Brookings Institute Blog - Mon, 04/07/2014 - 11:00

Our interactive map of the Earned Income Tax Credit (EITC) in your county looks at the average EITC amount, in dollars, and the share of taxpayers that claim the EITC at the county level nationwide.* Here are three main takeaways from the map:

1. The map of EITC benefits by county looks like a lot like a map of single motherhood

The map of the EITC benefits mirrors the map of single motherhood in the United States. The similarity can be explained by the design of the EITC, which makes it especially valuable for single parents. Childless households can only receive a small maximum benefit and married couples with children can face a significant marriage penalty.

2. Reliance on the EITC is widespread

In nine out of ten counties, at least 10 percent of taxpayers file the EITC. Even those counties with relatively high average incomes see a notable portion of their tax units benefitting from the EITC.

3. The benefits of the EITC are especially pronounced in the Southeast

A striking feature of the map of EITC benefits is the share of counties with high EITC take-up in Alabama, Mississippi, Georgia, and South Carolina. In these states, at least four out of ten counties have tax filer EITC take-up rates of at least 30 percent. EITC take-up rates outside the Southeast tend to be much lower.

See the full set of the tax maps here »

*Data are from 2007.

Categories: Blog

3 Things We Can Learn about Income Tax Burdens from a Map

Brookings Institute Blog - Mon, 04/07/2014 - 11:00

Our interactive map of income taxes in your county looks at average taxes paid, in dollars and as share of income, at the county level nationwide.* Here are three main takeaways from the map:

1. There is a lot of variation in the average county income tax bill

One out of every ten counties has an average income tax bill of roughly $2,400 or less, while another one out of every ten counties has an average income tax bill of roughly $7,000 or more. This variation is largely reflective of differences in income.

2. But when income taxes are expressed as a share of income, tax bills look more similar

Average taxes as a share of income tend to amount to around 10 percent in most counties. The middle 80 percent of counties—all but the lowest and highest 10 percent—have average tax bills of between 8 percent and 12 percent of income.

3. Income taxes paid, in dollars, tended to be higher around metropolitan areas

Tax bills tended to be higher around cities, where incomes are often higher. In particular, counties located near the corridor between Washington, DC and New York City, the California coast, Seattle, and southern Florida, and inland cities such as Dallas, Denver, and Chicago, all tended to have higher average tax bills than rural counties.

See the full set of the tax maps here »

*Data are from 2007.

Categories: Blog

3 Things We Can Learn about Itemized Deductions from a Map

Brookings Institute Blog - Mon, 04/07/2014 - 11:00

Our interactive map of itemized tax deductions in your county looks at average itemized deductions, in dollars and as share of taxpayers who itemize, at the county level nationwide.* Here are three main takeaways from the map:

1. The share of taxpayers who itemize varies by region

Counties located to the west of the Rocky Mountains and along the East Coast tend to have higher rates of itemization relative to those in the South or Midwest. Counties located near Atlanta, Chicago, and Minneapolis are notable exceptions.

2. The itemized deduction map looks similar to the map of housing prices

The map of itemized deductions largely follows the map of home prices in the United States. The connection between home prices and itemized deductions occurs through the mortgage interest deduction, which is among the top two largest itemized deductions. Since more expensive homes tend to call for larger mortgages, high-priced homes can lead to greater use of itemized deductions, all else equal.

3. There is a great deal of variation in the share of taxpayers claiming itemized deductions

Variation in income, home prices, and state and local taxes leads to variation in itemization rates. As a result, some counties have low rates of itemizing, while others have much higher rates. Approximately one out of every four counties saw less than 15 percent of taxpayers itemizing, while another one out of every four counties had rates of 30 percent or higher.

See the full set of the tax maps here »

*Data are from 2007.

Categories: Blog

3 Things We Can Learn about Property Taxes from a Map

Brookings Institute Blog - Mon, 04/07/2014 - 11:00

Our interactive map of property taxes in your county looks at average property tax, average home value, and property tax as a share of home value, at the county level nationwide.* Here are three main takeaways from the map:

1. Property taxes paid, in dollars terms, are highest in the coasts and around inland cities

In general, property taxes paid are highest on the coasts and around inland cities, especially Chicago and cities in Texas. Nationwide, counties near New York City tend to have the highest property taxes paid, led by Westchester County with an average property tax of $9,647.

2. Property taxes paid, as a share of housing value, are highest in the Midwest and Northeast

When property taxes are expressed as a share of home prices, the distribution looks very different than when the burden is expressed in dollar terms. When expressed as a share of home price, the low home prices in the Midwest raise the property tax burden while the high home prices on the West Coast lower the relative property tax burden.

3. States without income taxes tend to have higher property taxes

The states with no or limited income taxes—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—tended to have higher property taxes in dollar terms. However, the pattern is not always clear cut, with some states—such as California and Illinois—having both an income tax and relatively high property tax burdens.

See the full set of the tax maps here »

*Data are from 2007-2011.

Categories: Blog

Depth in Africa’s Transformation

Brookings Institute Blog - Mon, 04/07/2014 - 09:10

Editor's Note: This blog was originally published on the World Bank's Future Development blog.

Africa is growing fast but transforming slowly. This is the message of the 2014 African Transformation Report, launched last week by the African Center for Economic Transformation (ACET). The report addresses a worry on the minds of many: in spite of impressive growth, the structure of most sub-Saharan African economies has evolved little in the past 40 years, with a poorly diversified export base, limited industrialization and technological progress, and a large informal economy whose economic potential remains mostly overlooked. In many African economies, manufacturing—the sector that has led rapid development in East Asia—is declining as a share of GDP. The worry is that without a major transformation Africa’s recent growth may soon run out of steam. The report argues that for growth to continue, Africa needs to invest in “DEPTH”–diversification, export competitiveness, productivity, and technological upgrading, all for the purposes of human well-being.

The African Transformation Report contributes in a pragmatic and detailed way to a new narrative for Africa. Gone is the continent of poverty and desperation, and in its place is a continent of promise and opportunity—but only if economic transformation takes place. In building the new narrative, the report follows others: the African Union’s Agenda 2063, the African Development Bank’s long-term strategy, the UN Economic Commission for Africa’s 2013 report, multiple recent IMF papers, and UNCTAD’s 2012 report on structural transformation and sustainable development in Africa. What the ACET report does better than most is provide a concrete roadmap to maneuver through the individual components of such a transformation, based on a three-year research program covering 15 sub-Saharan countries. The report reinforces these case studies with a summary index of transformation, bringing the power of focused measurement and transparent data to what is otherwise an overwhelming landscape.

A few recommendations deserve special attention:

  1. Navigating structural transformation. The best path for structural change in Africa is tricky to identify. Recent rapid growth is quite unusual, compared to what happened elsewhere. As outlined in a blog post by Dani Rodrik and evidenced in multiple academic papers (see for instance Rodrik and McMillan 2011 and De Vries, Timmers and de Vries 2013), African workers moving out of agriculture have typically bypassed manufacturing and gone straight into services—sub-Saharan Africa is actually less industrialized today than it was in the 1980s. What makes it worse is that these services are often low-productivity and informal. The ACET report takes a balanced approach, calling for Africa’s entrance into labor-intensive manufacturing as well as for greater productivity growth in agriculture (or agro-processing), upgrading the agricultural supply chain and developing tourism. The report also provides suggestions on how to better optimize extractive resources, similar to the Africa Progress Panel’s 2013 report.
  2. Bringing out the potential of the informal economy. There is a welcome recognition that most people are working in informal firms or self-employed, and helping them develop better bridges with the formal sector as suppliers and distributors would boost their productivity and competitiveness.
  3. Managing the youth opportunity. By mid-century, sub-Saharan Africa’s workforce will be larger and younger than either India’s or China’s. The needed skills agenda is far broader than the traditional focus on access to and quality of basic education. It also includes vocational training in relevant industries, training of informal workers, and improving technological skills. These recommendations are closely aligned with the approach of the Global Competitiveness Report 2013–2014, which develops a model of stages of development based on levels of innovation rather than on the traditional agricultural / manufacturing / services classification.

Achieving growth with DEPTH is far from an easy task. Successful DEPTH would require wide-ranging policy reforms, and the tackling of cross-cutting issues such as regulation, business incentives and control of corruption. Such an effort would have to be a whole-of-government exercise that produced a strong national vision and strategy, a clear plan for coordination of different agencies and meaningful engagement with non-government stakeholders. It would also need a focus on implementation. As the High-Level Panel’s report on the post-2015 agenda noted, transformations need to be structured and measured. ACET’s 2014 report on a clear and well-informed set of transformational metrics starts this process and lays down a baseline for some African economies. Africa’s remaining economies should also be encouraged and assisted to produce the necessary statistical information. What has been started is a healthy debate on African economic transformation that goes beyond the broad generalizations of inclusive growth to a more focused set of priorities that can be used to shape African development strategies and their collective position in the post-2015 negotiations.

Authors Publication: Future Development
Categories: Blog

The Evolution of Monetary Policy: More Art and Less Science

IMF blog - Mon, 04/07/2014 - 07:07

By Giovanni Dell’Ariccia and Karl Habermeier

The global financial crisis shook monetary policy in advanced economies out of the almost complacent routine into which it had settled since Paul Volcker’s Fed beat inflation in the United States in the early 1980s.

Simply keep inflation low and stable, target a short-term interest rate, and regulate and supervise financial institutions, the mantra went, and all will be well.

Of course many scholars and policymakers, especially in emerging markets, were skeptical of this simple creed. But they did not make much headway against a doctrine seemingly well-buttressed by sophisticated theoretical models, voluminous empirical research, and over 20 years of “Great Moderation” —low inflation and output volatility. All of that has changed since the crisis, and ideas that were once marginal have now moved to center stage.

We don’t yet know where this debate will eventually lead. In some respects, the monetary policy of tomorrow may well look familiar, but in other respects, it is likely to be very different.

Our new paper, co-authored with other IMF staff, takes stock of where the debate stands, and provides a launching pad for further research and reflection. While not the first effort of its kind, this latest work shows just how much momentum the rethinking has gained, with a vast volume of new work by academics and central banks in just the last two or three years. We’ve invited policymakers, academics, and media from around the world to a high- level conference on April 13 during the Spring Meetings of the World Bank and IMF to give this broad group of stakeholders a further opportunity for discussion.

While our paper covers a broader set of issues, here we want to focus on three critical questions on the role of monetary policy and its relationship to financial stability and the economy: Should monetary policy target more than just price stability? Should current policy decision rules be reconsidered? And, finally, what are the challenges for central bank independence under a potentially expanded mandate?


Long-term price stability has been a primary objective of monetary policy for many years, and our review found no good reason why this should change. Low and stable inflation makes it easier for households and businesses to plan, and allows the economy to operate efficiently. But the crisis has shown that this is not enough: dangerous financial imbalances can brew under the apparently tranquil surface of low and stable inflation. And traditional prudential policy, which focused primarily on the stability of individual banks, proved inadequate to deal with the type of system-wide risks that led to the crisis.

So macroeconomic policy needs to pay greater attention to financial stability. However, the interest rate will often be a blunt and costly instrument to deal with financial imbalances. Would you put two million people out of work because banks are too leveraged or house prices are rising too fast? Instead, the first line of defense should be instruments that can target financial stability more directly and efficiently, including macroprudential tools, such as loan-to-value and debt-to-income limits, and capital flow management measures. Yet, when these tools prove insufficient, we may have to accept a new tradeoff for monetary policy, and the interest rate may have to lend a hand to maintain financial stability.

Policy decision rules

During the crisis, there were tectonic shifts in the structure and regulation of the financial sector. These have affected the impact of monetary policy on the broader economy. Moreover, the short-run relationship between inflation and unemployment seems to have changed.

The bottom line is that the details of how the central bank can best achieve its objectives are probably not the same as before the crisis. We still have a lot to learn about how things have changed and by how much, but it is already clear that for some time to come, monetary policy will involve more art and less science. This in itself will pose new challenges, including from a political economy standpoint. A less mechanical and predictable monetary policy may be more exposed to political interference, as we explain below.

Central bank independence

Central bank independence has been helpful to maintain price stability. Ulysses had himself tied to the mast to resist the sirens, and governments tie their monetary policy to an independent central bank to resist the short-term temptation to inflate away fiscal constraints. A simple and measurable mandate allows for effective accountability and makes independence politically feasible.

But is it possible to extend independence to also cover financial stability? And critically, can central banks retain independence for price stability if they allow greater government oversight over financial stability?

The answer to the first question is not clear. Financial stability is far more difficult to measure than inflation, and policy actions would often have clearer winners and losers than interest rate policy. This complicates accountability and could bring political challenges. As for the second question, countries have chosen a wide range of institutional arrangements to deal with the challenge. In some countries, the central bank leads financial stability policies (Singapore, United Kingdom); elsewhere, the ministry of finance is ultimately in charge (United States). So far, there are no final answers on what works best.

Parting thoughts 

What can we expect in the future? Only some of the questions raised here will be settled one way or the other in the short term. Many will require years of new experience and observation. In the meantime, policymakers will have to take decisions on new policies and institutional arrangements, often under great uncertainty. The art of central banking is alive and well.

Categories: Blog

Indonesia’s investment in flux

Can Indonesia’s economy move from a situation of investment in flux to an investment influx? This is one of the questions posed by the World Bank’s March 2014 edition of the Indonesia Economic Quarterly.

Why is Indonesia’s investment growth in flux? First, there has been a slowdown in fixed investment, due to lower terms of trade and tighter external financing conditions. This has helped narrow Indonesia’s external imbalances.

Second, while foreign direct investment—an important source of investment financing—has remained solid so far, the rapid growth of FDI inflows seen in recent years shows signs of plateauing.

Third, Indonesia remains reliant on external financing from portfolio investment inflows. These have surged in recent months, but they can be volatile.

Finally, recent policy developments have increased regulatory uncertainties. Add to that the usual difficulty of predicting policy ahead of elections, which may impact on investment of all kinds.

Given uncertain prospects for global investment flows to major emerging market economies like Indonesia, the good news is that Indonesia’s external balances are adjusting. The current account deficit shrank significantly in the fourth quarter of 2013, to $4.0 billion, or 2% of GDP. This is a welcome reduction from the record high of $10.0 billion in the second quarter of 2013—that’s 4.4% of GDP. The stock market rallied, gaining 9% in local currency terms, bond yields fell, and the Rupiah climbed back by 7% against the USD, year-to-date, recouping some of last year’s significant losses. Banking and portfolio inflows also rose in the final quarter of 2013*.

But some caution is warranted. The adjustment has been narrowly based on tighter monetary policy and currency depreciation over the second half of 2013, and slower investment growth. Indonesia remains vulnerable to a renewed deterioration of global market conditions.

Categories: Asia, Blog

Investasi yang tak menentu di Indonesia

Dapatkah ekonomi Indonesia keluar dari keadaan investasi yang tak menentu? Ini adalah salah satu pertanyaan yang diajukan dalam laporan Perkembangan Triwulanan Perekonomian Indonesia dari Bank Dunia edisi bulan Maret 2014.

Mengapa pertumbuhan investasi Indonesia tak menentu? Pertama, terdapat perlambatan dalam investasi tetap, karena turunnya kondisi perdagangan dan lebih ketatnya kondisi pembiayaan luar negeri.

Kedua, sementara investasi asing langsung (FDI)—sumber pembiayaan investasi yang penting—masih tetap kuat sejauh ini, laju pertumbuhan aliran masuk FDI yang tercatat pada beberapa tahun terakhir menunjukkan tanda-tanda mendatar.

Ketiga, Indonesia tetap bergantung kepada pembiayaan luar negeri dari aliran masuk modal investasi portofolio. Aliran itu telah meningkat pada beberapa bulan terakhir, namun dapat bersifat volatil.

Akhirnya, perkembangan kebijakan terakhir telah meningkatkan ketidakpastian peraturan. Hal itu menambah kepada sulitnya memperkirakan kebijakan menjelang pemilu, yang dapat berdampak kepada seluruh jenis investasi.

Dengan ketidakpastian prospek aliran investasi global ke ekonomi-ekonomi pasar berkembang seperti Indonesia, kabar baiknya adalah bahwa neraca eksternal Indonesia sedang melakukan penyesuaian. Defisit neraca berjalan menyusut secara signifikan pada kuartal terakhir tahun 2013 menjadi 4,0 miliar dolar AS, atau 2 persen dari PDB. Penurunan ini merupakan hal yang menggembirakan karena defisit pernah mencapai catatan tertinggi sebesar 10,0 miliar dolar AS pada kuartal kedua tahun 2013—yang merupakan 4,4 persen dari PDB. Pasar saham kembali naik, dengan mencatat peningkatan sebesar 9 persen dalam mata uang lokal, imbal hasil (yield) obligasi turun, dan Rupiah menguat sebesar 7 persen terhadap dolar AS, selama tahun berjalan, yang menutup sebagian penurunan yang signifikan pada tahun lalu. Aliran masuk modal portofolio dan perbankan juga meningkat pada kuartal penutup tahun 2013*.

Namun sejumlah hal perlu diwaspadai. Sejauh ini penyesuaian itu terutama berdasarkan pada kebijakan moneter yang lebih ketat dan depresiasi valuta selama paruh kedua tahun 2013, dan—seperti telah disinggung—melambatnya pertumbuhan investasi. Indonesia tetap rawan terhadap kemungkinan penurunan kembali kondisi pasar dunia.

Categories: Asia, Blog

Are Emerging Markets Still On the Receiving End?

IMF blog - Thu, 04/03/2014 - 06:03

By Aseel Almansour, Aqib Aslam, John Bluedorn and Rupa Duttagupta

(Version in  FrançaisРусский中文 and 日本語)

The recent slowdown in emerging market growth is fueling a growing mania across markets and policy circles. Some worry that a large part of their stellar pace of growth over the 2000s (Figure 1) was due to a favorable external environment—cheap credit and high commodity prices. And, therefore, as advanced economies gather momentum now and begin to normalize their interest rates, and commodity price gains begin to reverse, emerging market growth could slip further.

Others instead contend that internal or domestic factors have played a role, with improved standards of governance and genuine structural reforms and robust policies, driving a fundamental transformation in the sources of emerging market growth towards a lower yet more sustainable trajectory.

The truth lies somewhere in between.  What is clear is that emerging markets contribute to a significant share of the global economy, and what matters for them matters increasingly for the global outlook.

And what matters for emerging markets over the coming years depends on the extent to which external and internal factors tend to foster or hinder their growth.

Chapter 4 of the April 2014 World Economic Outlook focuses on how external factors have driven growth in emerging market economies in  the past 15 years. The analysis suggests that emerging market growth, while still strong, has been slowing in the last two years driven as much by domestic conditions as by external circumstances.

How external factors influence emerging market growth

We find that a strong recovery in advanced economies is on balance good for emerging economies, despite being accompanied by a rise in advanced economy interest rates. Specifically, a 1 percentage point increase in the U.S. growth rate typically raises emerging market growth by 0.3 percentage points in the same quarter, and the cumulative effect stays positive beyond one-to-two years.

To understand why, let’s consider the various forces at play. First, higher growth in advanced economies should boost exports from emerging markets. Second, global capital would flow back from emerging markets to advanced economies to take advantage of the higher growth and interest rates. For emerging markets that trade more with advanced economies (e.g., Malaysia and Mexico), the first effect would dominate; and for emerging markets that are more open to capital flows (e.g., Chile and Thailand), the second effect could partly or fully offset the first. Our results suggest that for emerging markets as a whole, the impact of the first likely outweighs the second.

Not surprisingly, if emerging markets’ external financing conditions tighten by more than what can be explained by the recovery in advanced economies, emerging markets tend to suffer, as observed during bouts of market turbulence at the start of 2014. When capital flows out, emerging markets experience a depreciation of their exchange rates that likely helps the competitiveness of their exports. At the same time, they typically raise domestic interest rates to try to stem the capital outflow, an action that hurts growth. Our results suggest that the hit to emerging markets from higher domestic interest rates tends to offset the benefits from the exchange rate depreciation.

So we see that how these economies perform depend not only on their exposure to external factors, but also on whether and how they use domestic policies to respond to the changes.

So how have internal factors influenced emerging market growth?

External environment versus internal factors

As previewed in an earlier blog, the deviation of emerging market growth around its average over the last 15 years can be viewed as driven by either external or internal factors.

Which one dominates—external or internal factors? We find that external factors explain one-half or more of the growth deviation on average, although with important differences over time and across countries. For instance, the sharp downturn at the peak of the global financial crisis was almost fully accounted for by external factors for most countries.

Internal factors dominated in the strong growth uptake in emerging markets in 2006-07.  And the pullback in growth since 2012 is also largely attributable to internal factors.  These findings resonate well with recent studies that have underscored constraints from domestic structural factors and policy uncertainty as becoming more binding for growth in many larger emerging markets (see blogs by Anand and Tulin 2014 and Dabla-Norris and Kocchar 2013). For some large or relatively less open economies, such as China and India, internal factors—more than the external environment—mostly explain the fluctuations in growth from the average level over 1998-2013.

What about China’s role as an external factor for other emerging markets? We would expect the world’s second largest economy to also play an important role in determining growth in other emerging markets, and indeed it does. We find that many emerging markets were able to ride on the coat tails of China’s strong expansion during the crisis. But China’s recent slowdown has also acted to soften their growth (see Figure 3).

Shifting gears: adjusting to lower level of emerging market growth

Forecasts of emerging market growth starting in 2007, and conditional on the path of external conditions, reveal that some of the larger emerging markets have grown at lower rates than expected since 2012 (see Figure 4). This suggests that, other, mostly internal, factors are holding growth in many emerging markets, including constraints from domestic structural factors . And if the dampening effects from these internal factors persist as they have over the past year or so, emerging market growth will remain lower for some time, affecting growth in the rest of the world as well.

Keeping the house in order

There is no doubt that the external environment will continue to have a strong impact on emerging market growth. And so policymakers must remain vigilant and sensitive to external developments. Many concerns about the ramifications of external shocks are justified. A sharp tightening in external borrowing rates, without a proportionate improvement in advanced economy growth, would hurt emerging markets. China’s adjustment to a slower, even if more balanced, pace of growth, will inevitably alter prospects for other emerging markets. And, if advanced economies do not recover as currently expected, emerging markets will feel it too.

That said, internal factors are currently suppressing growth below levels expected given even current external conditions. Thus, the recent slowdown in emerging markets appears to be as dependent on internal developments as those from abroad. And the priority for policymakers now is to better understand the role of internal factors and assess whether there is scope for policies to improve these economies’ resilience regardless of the external backdrop.

The IMF will publish its global forecasts from the World Economic Outlook on April 9.

Categories: Blog

To Export LNG Without Restriction, or Not?

Brookings Institute Blog - Wed, 04/02/2014 - 12:27

Legislative proposal H.R. 6 would provide for expedited approval for liquefied natural gas (LNG) exports to World Trade Organization countries. It is the most recent in a series of legislative proposals to move the gridlocked discussion about U.S. LNG exports forward. In this instance too, we are not certain that it actually will accelerate the debate and even if so, it may be the wrong direction for U.S. public policy. This is because the essential question of whether or not the U.S. should allow unrestricted LNG exports is not being debated.

That debate started several years ago, when it became clear that the U.S. would be producing more natural gas than it consumed. The existing regulatory framework only allowed for exports of LNG to countries with a Free Trade Agreement (FTA). These FTA countries are mostly large producers of natural gas themselves (Canada, Mexico) or did not consume any relevant amounts (many Central American states). Non-FTA countries had to go through a more complex process involving a positive determination that the exports would be in “the national interest.” What followed was an exchange of views and opinions between opponents and proponents of allowing unrestricted LNG exports, with those in favor claiming that the benefits would far outweigh the costs. Opponents have argued that unrestricted exports will drive up domestic prices – a position supported by energy intensive consumers such as the petrochemical industry – and increase domestic production of natural gas, which will accelerate greenhouse gas emissions.

Subsequently, the Department of Energy commissioned a number of studies to examine the macroeconomic consequences of allowing for unrestricted LNG exports, which were published in December 2012. The often quoted NERA study was clear in its assessment: allowing for unrestricted exports of LNG from the U.S. was only expected to have a modest upward effect on domestic prices for natural gas. Given the record low prices in the country, this would have positive implications for gas producers, and probably also for consumers in the long term. As Trevor Houser and Shashank Mohan have noted in their new book Fueling Up, at this point it remains to be seen how competitive U.S. LNG will be on global markets, with estimates varying widely. Our study in 2012 questioned whether U.S. LNG exports entering the market after 2020 would still be competitive.

Interestingly, what followed in 2013 was not an executive decision on whether or not the U.S. should allow unrestricted exports of LNG. Rather, what emerged were a number of legislative proposals, which aimed to increase LNG exports to a select group of countries, such as NATO allies, and in the most recent case, WTO members. The current crisis in Ukraine has once again fueled the debate on LNG and crude oil exports, even though it is highly debatable how increased U.S. exports would help solve the crisis, if only because there will be no exports of LNG before late 2015. As we and others have argued, the more viable and realistic approach to end the crisis in Ukraine lies in diplomatic efforts, not in energy sanctions and Cold War rhetoric.

That, however, does not resolve the question that was spurred by the dramatic increase in natural gas production, which is whether the benefits of unrestricted exports of LNG from the U.S. outweigh the costs. We believe that there is ample evidence to suggest they will, but they will have no effect on the current political crisis. It is time for a decision on unrestricted LNG exports, removed from the geopolitical rhetoric that has been spawned by the Ukrainian crisis. Bills such as H.R.6, while perhaps well intended, offer little more than political bluster.

Authors Image Source: © Issei Kato / Reuters
Categories: Blog

How U.S.-Russia Relations Complicate Obama’s Nuclear Arms Legacy

Brookings Institute Blog - Wed, 04/02/2014 - 07:56

Speaking on Prague’s Hradčany Square on April 5, 2009, President Barack Obama laid out his vision for managing nuclear arms. After major strides in 2009-2010, progress slowed, due to domestic political opposition and Moscow’s recalcitrance—and also to the administration’s timidity. With U.S.-Russia relations on a downward slide, securing a transformational legacy on nuclear weapons may be slipping out of the president’s reach.

U.S. and Russia make a New START

President Obama came to office seeking to do big things on nuclear arms. In an April 1, 2009 meeting, he agreed with then Russian President Medvedev to bilateral negotiations on strategic nuclear arms reductions. Four days later in Prague, he laid out an ambitious agenda, setting the goals of reducing the role and number of nuclear weapons in U.S. security policy and ultimately of a world without nuclear arms.

Negotiations on what became the New Strategic Arms Reduction Treaty (New START) made rapid progress. When Obama and Medvedev met that July in Moscow, they announced the parameters for the agreement.

April 2010 proved a watershed month for the president’s arms control and non-proliferation agenda. On April 8, he returned to Prague to sign New START, which required that the United States and Russia each reduce its strategic forces to no more than 1550 deployed strategic warheads on 700 deployed strategic missiles and bombers.

Just days before that, the administration issued its nuclear posture review. It put to paper the goals of reducing the role and number of nuclear arms and of creating the conditions in which the sole purpose of U.S. nuclear weapons would be to deter a nuclear attack on the United States and its allies.

On April 12-13, the president hosted the first Nuclear Security Summit. Some 40 leaders attended the meeting, which launched a process to secure weapons-usable highly-enriched uranium and plutonium stocks around the world.

One year after his Prague speech, Obama could point to a multi-pronged effort to transform American nuclear policy and reduce nuclear risks. He made clear his intent to do more. When signing New START, he called for negotiations on further reductions, including non-deployed strategic nuclear weapons and tactical nuclear arms—creating the possibility that, for the first time, the United States and Russia might negotiate limits on their entire nuclear arsenals.

Administration officials expected a quick ratification process for New START. They hoped to use momentum from that to pivot to ratification of the Comprehensive Test Ban Treaty (CTBT), sitting in limbo since a failed ratification vote in 1999.

Things began to get tougher that summer, as securing a two-thirds majority in favor of New START ratification turned out to be anything but easy. Republican senators raised myriad objections and posed hundreds of questions.

Some of the opposition appeared politically motivated. In the end, the Obama administration secured 71 votes for ratification. The debate, however, was far more bruising than expected. It left no momentum for the CTBT.

Russian Roadblocks

By mid-2011, Obama was finding it more difficult to work with the Kremlin as well. The Russians showed little interest in moving below New START’s limits and linked further cuts to a growing list of other issues—including missile defense, conventional forces in Europe, conventional global strike arms and third-country nuclear forces.

Missile defense proved especially contentious. Although Medvedev and NATO leaders agreed in 2010 to explore a cooperative missile defense, the United States and Russia took very different approaches. A May 2011 bid to find agreement on principles for resolving the differences came to naught when both sides backed away from their negotiators’ tentative understanding.

On the nuclear policy front, in summer 2011 the Pentagon launched a process to produce an implementation study for the 2010 nuclear posture review—a study that would define U.S. nuclear force and targeting requirements. Originally planned to take 90 days, the completion date was repeatedly moved back.

In 2012, it became apparent that the White House, in campaign mode for the November election, did not want a fight over nuclear weapons or arms control issues. The study and any new arms control initiatives went on pause.

With Obama’s reelection, administration officials hoped 2013 would bring new momentum on bilateral arms control questions. The Russians disappointed, however, continuing to show no interest in further nuclear cuts and brushing aside a U.S.-proposed agreement on missile defense transparency.

In June, the administration finally announced the implementation study’s results, and the president proposed a one-third cut in New START’s limit on deployed strategic warheads. The proposal fell flat in Moscow. And, though the implementation study included some intriguing ideas, many saw it as largely endorsing a status quo approach with regards to nuclear forces.

U.S.-Russian relations continued to stagnate, and the White House in August cancelled a planned September summit with President Putin. Among the reasons cited for the decision: the lack of progress on nuclear cuts and missile defense.

At home, the CTBT languished. While the State Department conducted an education campaign on Capitol Hill, the treaty clearly lacked the needed votes. Non-governmental organizations expressed interest in mounting a grassroots push but, absent a signal of presidential interest, felt they had nothing around which to rally.

Crisis in Ukraine and the Continuing Importance of Arms Control Talks

In 2014, a stagnant U.S.-Russia relationship took a turn for the worse. When the Russian military seized Crimea at the end of February, bilateral relations plunged toward a post-Cold War low.

While Obama has well over two years in office remaining, the circumstances for progress on arms control look anything but auspicious. He still has opportunities. The combination of crippling international sanctions and the election of Hassan Rouhani as Iran’s president opened the possibility in 2013 to settle the feud between the international community and Tehran over Iran’s nuclear program. Negotiators reached an interim agreement in November. Getting to a permanent settlement will require a hard slog, but a deal that effectively constrains Iran’s nuclear capability is possible. It would stand as a major non-proliferation achievement.

Washington will host the fourth Nuclear Security Summit in 2016. While progress on securing nuclear materials has been slower than hoped in 2010, the process has produced success stories. However, 2016 will likely not be the endpoint.

As for U.S.-Russian negotiations, the deterioration in the broader relationship makes arms control more difficult—but it also makes it more important. The limits and predictability of New START offer a reassuring bound on bilateral competition as relations enter a more trying period.

Washington should continue to keep lines open. During the Cold War years, Washington and Moscow often found arms control was the principal—and sometimes only—working channel. They reached agreement even during challenging times. The 1984 lull in U.S.-Soviet relations, during which all arms control talks were suspended, turned around in 1985. Two years later, President Reagan and General Secretary Gorbachev signed a landmark treaty banning all U.S. and Soviet intermediate-range missiles.

Such a turnaround should not be excluded, though prospects appear low. The administration could consider unilateral adjustments in U.S. nuclear forces—the Joint Chiefs validated the one-third cut in New START levels as sufficient for deterrence and war plans. But it is hard to see the White House taking such steps in the current tense atmosphere with Russia.

So, five years after Prague, Obama can take pride in his early nuclear arms control achievements. Absent a reversal in U.S.-Russia relations and a change of thinking in Moscow, however, he will not leave the transformational legacy that he outlined on Hradčany Square.

Authors Image Source: © Jim Young / Reuters
Categories: Blog

An EPA-Sanctioned State-Based Carbon Tax Could Reduce Emissions and Improve State Finances

Brookings Institute Blog - Tue, 04/01/2014 - 14:10

The U.S. Environmental Protection Agency (EPA) is developing a proposed rule due out in June that could allow states to use carbon excise taxes or fees to limit the one-third of U.S. greenhouse gas emissions that come from power plants. The tax approach, one of several options EPA could offer states, could provide an important test for price-based limits on climate-changing activities.

A national price on carbon currently has little traction in Washington, but EPA’s power plant rule could open the door for a straightforward state-based tax. EPA just needs to set a minimum tax trajectory that any state could adopt. Here are some potential benefits to such a system:  

  1. It’s market-based, flexible, compatible with existing fuel mixes, accommodates the “remaining useful life” of equipment, and doesn’t undermine electricity reliability.
  2. A tax option is feasible and consistent with the law. If EPA can allow cap-and-trade under the rule, as the agency has indicated it will, it can allow an excise tax or fee.
  3. A carbon fee discourages each fuel’s use in exact proportion to its damage to the climate. This changes the relative prices of different fuels and encourages all pollution reductions that cost less than the tax. EPA can set a tax that reflects the Administration’s estimates of the damages of the pollution.
  4. A tax incentivizes changes at power plants (for example, more efficient boilers and lower-carbon fuels) and greater energy efficiency by consumers.
  5. A tax encourages abatement in ways EPA and states can’t predict, for example by helping drive a market for new technologies. Standards based on existing technologies may not do that.
  6. A tax would be an easy way for states to implement EPA curbs on power plant emissions. Some states already have excise taxes on natural gas. In contrast to cap-and-trade, states wouldn’t have to allocate allowances, create a registry, monitor trades, or enforce a price floor. They wouldn’t have to measure electricity generation, transmission, or consumption. They’d just monitor fossil fuel use and collect the money.
  7. Under a tax, regulated firms wouldn’t have to manage volatile allowance prices or other uncertainties. A predictable compliance price fosters the long term investments that are critical to reducing the use of carbon-based fuels in a cost effective way.
  8. A traditional emissions standard would impose different incremental abatement costs in different states, potentially distorting investment across state lines. In contrast, an EPA-specified tax option available to all states would allow them to harmonize their pollution policies without having to link them directly, for example through a regional allowance market.
  9. States could use the revenue however they wish. For instance, they could lower inefficient taxes, potentially providing pro-growth state tax reform along with environmental benefits.
  10. In its power plant rule, EPA can signal that the same tax will also work for future carbon rules for industrial facilities. This would allow states to adopt only one tax law and help industries invest wisely in pollution reduction before EPA imposes new regulations.
  11. A price-based standard is diplomatically far superior to an emissions rate standard (i.e. “X tons of CO2 per kilowatt hour generated”) because it clarifies the economic ambition of US climate policy and starts a useful international carbon pricing dialogue.
  12. A carbon price in the rule would signal to Congress what the Administration would accept as a federal carbon tax alternative to Clean Air Act rules.

Finally, members of Congress who denounce EPA regulations might support agency rules that give states the flexibility to adopt a modest carbon fee schedule instead of mandated emissions standards. States could choose which option suits them best, leaving the decision and the potential revenue in their control.

Categories: Blog

Cuba's New Investment Law: Open for Business?

Brookings Institute Blog - Tue, 04/01/2014 - 10:30

Dateline Havana: The Cuban legislature has approved a new foreign direct investment law (FDI), and the detailed follow-on regulations will be issued within the next 90 days. From my informal conversations in Havana, Cubans on the street seem to accept with enthusiasm the government’s dual message: that the new guidelines will not compromise Cuban sovereignty – a key gain of the 1959 revolution – but will encourage badly needed inflows of foreign capital and technology.

In a shift from past practices, government messaging has emphasized the importance of foreign investment worldwide, with the Communist Party daily, Granma (March 31, 2014), quoting a government commission declaring that “no country today has successfully developed without foreign investment as a component of its political economy.” President Raúl Castro asserted that “we must take into account the absolute necessity to stimulate and attract foreign investment, to add dynamism to our economic and social development.”

Experienced commentators have noted, however, that many of the more positive paragraphs in the new law could also be found in the previous 1995 FDI regulations, which were outweighed by more restrictive clauses and by a recalcitrant bureaucracy that in recent years has approved very few major new foreign ventures.

Several of the more promising sections of the new law echo recommendations in the 2012 Brookings monograph, The New Cuban Economy: What Roles for Foreign Investment?:

  • A strong official recognition that FDI must be integral to Cuba’s development strategy, if the country is to depart from its sluggish economic path.
  • Majority foreign ownership is an option (although this was also the case, if ignored in practice, under the 1995 regime).
  • The project approval process should be streamlined and made more transparent.
  • Firms should have more flexibility with regard to wage scales, such that remuneration can be a stimulus to productivity. In addition, the much anticipated currency unification will likely reduce the extraordinarily heavy tax on wages paid by foreign investors.

Other noteworthy aspects of the new law include reductions in certain taxes, and the promise of just compensation in the event of expropriation. But some existing obstacles to investment appear not to have been adequately addressed. For example, the new law continues to press investors on local content requirements, even as it also notes the importance of firm integration into global value chains.

The proof will be in the pudding, and investors will be watching closing for the fine print in the new regulations and, most importantly, for the implementation of the approval process. The new law recognizes that Cuba badly needs foreign investment in many sectors of its economy, including but not limited to agriculture and sugar, energy, bio-technology, construction, and tourism. Will the government establish an investment climate that attracts foreign investments, and a truly transparent bureaucratic process that vets proposals in a prompt timeframe competitive with international standards?

U.S.-based businesses, of course, will not be able to take advantage of any new investment opportunities, as a result of long-standing and comprehensive commercial sanctions. Other foreign businesses, however, are likely to get a head start soon.

Authors Image Source: © Stringer . / Reuters
Categories: Blog

Are Emerging Markets Adjusting to a New Normal?

IMF blog - Tue, 04/01/2014 - 08:00

By Aseel Almansour, Aqib Aslam, John Bluedorn and Rupa Duttagupta 

Emerging markets have grown at a remarkable pace through most of the 2000s. They even rebounded strongly from the Great Recession, notwithstanding the sluggishness in advanced economies. Easy global financial conditions, rising commodity prices and beneficial terms of trade potentially compensated for weak external demand from the advanced economies.

But now, emerging market growth, while still strong, has begun to slow. This oddly coincides with an outlook for advanced economies that is improving, even if gradually. So what’s behind this dichotomy?

Emerging markets are adjusting to changes in the external environment. On the one hand, the incipient recovery in advanced economies is helping emerging markets, including through higher exports. On the other hand, the favourable external financing conditions are now beginning to reverse, implying a tougher financial environment for emerging markets. Then you have domestic factors, which appear to have pulled down growth in some emerging markets (see also IMF blog post on January 22, 2014, and December 18, 2013).

So how much have external conditions—such as growth in advanced economies and external financial costs, among others, affected emerging markets?  And to what extent have domestic conditions influenced emerging market growth?

This is a key focus of our forthcoming Chapter 4 in the April 2014 World Economic Outlook. We show that, on average, external conditions tend to explain at least half of the growth variation in emerging markets. That said, there are considerable differences in the contribution of external factors across time (see figure) and across countries. The chapter also delves into the implications of China’s transition to a slower, even if more sustainable, pace of growth, and its impact on other emerging markets.

Overall, emerging markets will benefit from some external developments, but suffer from others. But if on top of this, the dampening effects from internal factors persist, growth in emerging markets could indeed adjust to a lower level than before, at least temporarily.

Check back on April 3rd for further insights on the interplay of external and internal factors on emerging market growth.

Watch the live webcast of the analytical chapters of the World Economic Outlook on Thursday April 3 at 9 am (EST) on

Categories: Blog

Where Are Real Interest Rates Headed?

IMF blog - Tue, 04/01/2014 - 07:00

By Andrea Pescatori and Davide Furceri

In the past few years, many borrowers with good credit ratings have enjoyed a cost of debt close to zero or even negative when it is adjusted for inflation. In other words, real interest rates, and, thus, the real cost of borrowing, have been about zero. The rate decline has been global—average global 10 year real rate declined from 6 percent in 1983 to almost zero in 2012 (see figure).

Because the recent interest rate declines reflect, to a large extent, weak economic conditions in advanced economies after the global financial crisis, some reversals are likely as these economy return to a more normal state.

But how much of a reversal?

And what should we expect looking forward to the next five or ten years?

High and rising debt levels in advanced economies; population aging; monetary policy tapering; financial deepening in emerging market economies, which would reduce borrowing constraints and thereby net saving—these are all factors that would suggest a substantial increase in interest rates in the medium term.

Other factors, however, would work in the opposite direction: long-lasting negative effects of the global crisis on economic activity; persistence of the “saving glut” in key emerging market economies; and renewed declines in the relative price of investment goods.

The forthcoming analytical chapter of the World Economic Outlook constructs a new dataset of real interest rates for a wide set of countries and provides a perspective on where real interest rates and, more generally, the cost of capital are heading.

Watch the live webcast of the analytical chapters of the World Economic Outlook on Thursday April 3 at 9 am (EST) on, where we will discuss the IMF’s latest thinking on these issues.

Categories: Blog

Yet Another Short Term 'Doc Fix,' but with Glimmers of Hope

Brookings Institute Blog - Mon, 03/31/2014 - 08:00

Late last week, House leaders approved a 12-month short-term patch to prevent looming physician payment cuts that would threaten access to health care for millions of Americans.

Another short-term ‘doc-fix’—or legislative repair made to the broken Medicare Sustainable Growth Rate (SGR) system—did not come as a surprise, but carried substantial frustration and disappointment. Over the past year, Congress has made great strides toward a permanent fix to the dysfunctional SGR system. In 2013, bipartisan and bicameral legislation was released to repeal the SGR formula and replace it with a period of stable updates to provider payments. It also included provisions to incentivize the movement of providers away from fee-for-service reimbursement and into value-based payment arrangements, such as Accountable Care Organizations. In the end, none of the bills came to full chamber vote.

There was a broad sense of optimism around a permanent SGR fix last year. A favorable score from the Congressional Budget Office (CBO) and unprecedented cross-chamber and cross-party collaboration made passing a full repeal a no-brainer. However, without consensus on a solution to cover the law’s $180 billion price tag before December 2013 recess, a 3-month patch landed us to where we are today: yet another patch.

The patch bill, which passed the House of Representatives on Thursday, March 27 and will likely pass through the Senate next week, is expected to be signed by President Obama. The bill is nearly identical to the majority of other SGR patches passed by Congress in recent years (all 16 of them). Though it has not yet been scored by the CBO, the House legislation will cost approximately $20 billion, and offsets include the following:

-  Value-based purchasing for skilled nursing facilities -  Linking fee schedule rates for clinical laboratory services to reported commercial rates
-  Cuts to CT services by physicians and outpatient departments using outdated CT scanning equipment
-  Applying $2.3 billion accrued from the "Transitional Fund for SGR Reform" after an extension of the Medicare sequester
-  Delaying the inclusion of oral-only drugs in bundled payment system to 2014
-  Cuts to misvalued codes in physician fee schedule
-  Reallocation of the Medicare sequester for 2024

Though certainly better than providing insufficient or no offsets to cover the cost of the bill, the final point—the reallocation of the Medicare sequester for 2024—was described by the Committee for a Responsible Federal Budget as a “gimmick.” It covers a portion of the bill’s cost by simply moving the savings set to accrue from the Medicare sequester in 2025 to 2024. Therefore, it has no impact on the overall national debt.

While imperfect and not the permanent fix that we hoped for, the authors of the bill included a number of provisions not typically included in SGR legislation, but that offer glimmers of hope for further progress in healthcare reform. A number of these policies were recommended in March 2013 by the National Commission for Physician Payment Reform and hit on important areas within healthcare. Furthermore, their inclusion illustrates that the SGR patch is one of the few legislative vehicles that has bicameral and bipartisan viability and therefore has a high likelihood of passing out of both chambers and being signed by the president.

Rife with controversy, under the two midnights rule, Medicare will not reimburse hospitals under Part A for admitted patients that spend less than two nights in the hospital; services would be considered outpatient and billed at lower rates under Part B. This type of financial pressure could undermine safe practices and medical decision-making, and providers and health systems have not yet had enough time to develop procedures to address the new policy.

Next, quality improvement is a necessary feature of any value-based payment and delivery system, yet there is a paucity of robust measures for pediatric populations. Moving the needle forward on generating consensus for quality measurement in children will allow for better care at lower costs.

In the insurance and payment space, the bill delays the nationwide conversion to ICD-10 diagnostic and procedural codes. It is likely that payers and providers alike needed additional time to develop and implement the IT infrastructure to make the smooth transition to the new system. The bill also eliminates the cap on deductibles for employer-sponsored health plans.

In the wake of numerous mass shootings in recent years, the system’s failure to provide and reimburse for drastically needed mental health services should remain at the forefront of the health policy agenda. Progress seen here, with promoting community-based mental health services and creating funding for outpatient treatment programs is a welcome and essential first step.

Finally, the maintenance of pediatric residency slots has been a topic of great interest in recent years. Increasing the number of slots and funding for graduate medical education (GME) in pediatrics is sorely needed, since investing in the health of children can yield great returns for better health and lower costs long-term. Further, in order to receive funding for children’s hospitals GME, sites must submit funding proposals annually, which generates anxiety around the number of slots available in any given year. This bill commissions a GAO report to explore children’s hospital GME payment.

Without a doubt, this year’s progress made on the SGR generated momentum for a future system that does not involve staggering from patch to patch each year. Despite another short-term fix, this bill does take strides to move forward on healthcare reform, and with continued physician leadership, we may yet see a permanent SGR fix.

Categories: Blog

Paying it Forward: The Role of Health Plans in Preventing and Reducing Childhood Obesity

Brookings Institute Blog - Mon, 03/31/2014 - 06:41

According to a report released by the Centers for Disease Control and Prevention, 78 million adults (35.7%) and 12.5 million children (16.9 %) in the US are obese. Recently the CDC reported a 43% decrease in childhood obesity rates over the last decade in children ages 2-5. However, a closer look at the data suggests this decline is questionable. Though there is widespread agreement that pediatric obesity results in higher costs—by some estimates, total expenditures are tripled for obese children (see figure)—most insurers paradoxically do not cover for obesity counselling or treatment by pediatricians or dieticians. As a result, even when pediatricians are worried that a child is overweight, they can do little to help.

Getting insurers to do the right thing

There are no easy answers or highly effective treatments for pediatric obesity, since true change requires intensive efforts to change behavior, such as food choices by families. However, regular dietary counselling by a pediatrician or dietician might offer much needed help and information. For example, many families may not realize how calorically dense a bagel with cream cheese may be, compared with whole grain cereal for breakfast.

Recently, the Clinton Foundation and American Heart Association pursued a novel strategy: The convened insurers across the country, and asked them to voluntarily cover 4 annual visits with a pediatrician and 4 visits with a dietician, if children were deemed to be overweight, defined as a body mass index over the 85 percentile for age. This voluntary pledge, called the Healthier Generation Benefit, was adopted by sixteen insurers covering 2.5 million children nationwide. As a result, for the first time, many families could finally get weight and lifestyle counselling for children.                                            

Did it work?

Last year, a study in the Journal of Obesity revealed mixed results from the program. Though hundreds of thousands of children were eligible for the new services, many insurers reported that less than 50 families actually used the benefit. (Three of the insurers reported between 100-1000 families enrolled.) The adoption rates were highest where dieticians were permitted to directly bill insurers for their services. As the researchers point out, “Translating access into utilization,” the researchers point out dryly, “has been more challenging.” No specific outcome data was collected on whether the counselling actually worked.

Still, the program demonstrates how creative approaches and consensus-building with payers can support important public health needs.

How the next round of payment reform could improve pediatric obesity

To continue to burn, the spark of innovation requires a source of continuing fuel. In the case of health care, that means that innovative care must be supported by thoughtful payment reform. The Healthier Generation Benefit was well intentioned, but still relied on traditional, fee-for-service, office-based care—for which the long term evidence is limited. In addition, the actual uptake among the neediest families was poor.

How can the next round be more effective? The key is to consider breaking out of traditional fee-for-service boundaries. Several insurers have done just that—for example, Anthem Blue Cross partnered with Los Angeles public schools to re-engineer school lunches, UPMC Health Plan in Pennsylvania supported widespread adoption of a science-based National Institutes of Health school program, and United Healthcare has enlisted school nurses as front line providers to identify and coordinate services for overweight schoolchildren. Such innovations reach much larger numbers of children, and don’t rely on office-based care.

Additionally, payment reforms must be accompanied by pre-specified outcomes measures. Stated simply: We must see if the ideas really works to help overweight children—which will be the real test.

Categories: Blog

Japan: New Thinking on National Security

Brookings Institute Blog - Fri, 03/28/2014 - 10:52

I just returned from a trip to Japan, where the major topics of discussion were Japanese national security strategy and the strategic choices facing Tokyo in the 21st century.

There has, of course, been a lot of development in these topics of late, with the Japanese government issuing a National Security Strategy for the first time in December 2013.  That same day, the government issued the National Defense Program Guidelines for 2014 and after. The Abe administration has also announced the establishment of a National Security Council (mirroring that of the U.S., and now China) to coordinate these efforts across government.

In sum, these efforts seek to make Japan a “proactive contributor to peace” – active and cooperative in increasing international security in Asia and globally. The documents also point to an increase in Japan’s defense spending, both to achieve this vision and to meet a perceived increase in the demand for deterrence in the East China Sea and vis-à-vis North Korea.

Significant thinking remains to be done on issues ranging from how the new NSC is likely to interface with various parts of the Japanese bureaucracy to how the U.S.-Japan alliance should approach deterrence and crisis management in “grey zone” incidents. These shifts in Japanese policy, however, are likely to be welcomed by the United States, which has long wanted Japan to be able to play a more active role. Many of them will likely be welcomed in Southeast Asia as well, where perceptions of Japan are generally positive, and where Tokyo has placed significant diplomatic, economic, and assistance emphasis in the past few years – cooperation with the Philippines and Myanmar and ASEAN being just a few notable examples.

One of the most significant sources of opposition to changing Japan’s role in Asian security has been regional friction over Japan’s approach to history. Although “history questions” are not discussed in the new defense and security policy documents, it is clear that they are an immediate and fundamental strategic challenge for Japan – in part because a series of statements and gestures by politicians associated with the Abe administration have inflamed animosity in Asia, particularly in China and South Korea, with concrete costs to Japan’s security. Most notably, the re-emergence of the issue contributed to the cancellation of a valuable intelligence-sharing agreement between Tokyo and Seoul, and has stalled relations between those two countries since Prime Minister Abe and South Korean President Park Geun-hye took office.

As others have noted, Japan is going to find it difficult to emerge as a 21st century power if it is still re-litigating events of the 20th century. Official statements that Japan sees as adding historical nuance or precision to the debate are perceived in China and South Korea as missing the emotional heart of the matter: the human suffering experienced in those countries during the period of Japanese expansionism. Chinese researchers and media explicitly use the metaphor of West German Chancellor Willy Brandt kneeling before a memorial to the Warsaw Ghetto Uprising in 1970 as a contrast with Abe’s current behavior. (The analogy is likely popular in China for two additional and important reasons: first because Brandt’s move was unpopular among German conservatives at the time, and second because it went hand-in-hand with West Germany’s recognition of the post-war German-Polish border – a useful analogy if China wishes to suggest that concessions on disputed territory would provide a true signal of Japan’s sincerity.)

It is good to see, therefore, that some of Japan’s new thinking also encompasses these issues, and that there are small signs of progress. At the official level, President Park and Prime Minister Abe met for the first time this week in a trilateral forum with President Obama. Abe said last week that his government will not overturn the 1993 “Kono Statement” on comfort women, and in South Korea recent polling data suggest that domestic anger over history is less of a constraint than the government might think, providing some opening for movement. At the unofficial level, proposals like that of Professor Kiichi Fujiwara, which focuses on how to address the upcoming 70th anniversary of the Second World War in Asia, seek to move the history issue out of its current zero-sum framework and shift its focus from official disputes toward the collective commemoration of shared human suffering.

As Caitlin Talmadge and I noted in an analysis of the U.S.-Japan alliance last summer, the United States cannot and should not force its allies to resolve their grievances, including historical ones. It can, however, play a constructive role by fostering opportunities for its allies to improve relations, as it did in a joint security statement issued by the U.S., Japan, and South Korea in June 2013, or by arranging this week’s trilateral meeting. The same might be true for history, where Asia’s 20th century history is America’s too, and where the U.S. role and interest in shaping a positive environment are clear. Doing so might also add diplomatic heft to a “rebalance” policy whose underpinnings have been called into question by sequestration’s impact on the American defense budget and the uncertain future of the rebalance’s economic centerpiece, the Trans-Pacific Partnership – questions that are being actively raised by America’s allies and partners across Asia.

It is difficult not to conclude after this trip that the strategic challenges currently facing Japan and the U.S.-Japan alliance are serious, and that a lot of work remains to be done to meet these challenges. The good news from the trip, however, is that the strategic thinking underway seems equally serious.

Authors Image Source: © Kevin Lamarque / Reuters
Categories: Blog

Why Aging and Working Makes us Happy in 4 Charts

Brookings Institute Blog - Fri, 03/28/2014 - 06:19

Editor's note: How are age, employment, and happiness related? Four charts in Carol Graham and Milena Nikolova’s latest paper illustrate that flexible employment arrangements are linked to higher happiness levels. For more, listen to a new podcast.

In the past few years, economists and other social scientists have made great strides in developing measures to assess subjective well-being (or, more colloquially, happiness), which has deepened our understanding of well-being beyond the traditional income dimensions. There are remarkably consistent patterns in the determinants of subjective well-being across people within and across countries and cultures around the world. One of the most striking of these is the relationship between age and happiness (which is good news for those of us who are already on the “back-nine”). There is a U-shaped curve, with the low point in happiness being at roughly age 40 around  the world, with some modest differences across countries. It seems that our veneration of (or for some of us, nostalgia, for)  youth as the happiest times of our lives is overblown, the middle age years are, well, as expected, and then things get better as we age, as long as we are reasonably healthy (age-adjusted) and in a stable partnership.

There are other consistent patterns. Income matters to individual happiness in every context we have studied this relationship. Yet after basic needs are met, other things like how your income compares to that of your peers also start to matter. Moreover, married people (and those in a civil union) are typically happier than their non-married counterparts (there is a direction-of-causality-issue here, though, as happier people are more likely to marry each other); healthier people are happier; and women are, in most places, happier than men (as long as gender rights are not severely compromised).

Another variable that is absolutely critical for subjective well-being is employment status. The unemployed are less happy than the employed worldwide. And both psychologists and economists find that long-term unemployment has psychological scarring effects. Long-term unemployment and under-employment, and the youth’s delayed entrance into employment, coupled with the over-burdened pension systems, are major problems in the U.S. and Europe. At a time when these issues have risen to the fore, it is perhaps worth considering more flexible labor market arrangements. While several solutions have been proposed, we are left wondering whether there would be public receptivity to changing labor market arrangements. While this is hard to predict, what we can measure – and did in our new paper – is the well-being costs and benefits of different work arrangements. As we argue in the study, different employment and retirement arrangements may be appropriate for people at different stages of their lives, depending on their career goals or innate well-being levels. Understanding how employment, retirement, and late-life work relate to well-being can contribute to ongoing public policy discussions.

In an analysis of Europe and the U.S., based on Gallup World Poll data, we discovered that voluntary part-time workers were happier, experienced less stress and anger, and had higher job satisfaction than other employees. We also found a “happiness premium” among older workers working full-time or voluntarily employed part-time. And late-life workers (i.e., those working past retirement age) working full-time or voluntarily employed part-time were typically happier and more satisfied with their health than their retired counterparts. The positive effects were greatest, meanwhile, in those countries where more flexible labor market arrangements were more common (and thus publicly acceptable).

Of course, not everyone has the luxury of choosing to work part-time, and many of those workers who choose to work beyond the retirement age do so precisely because they like their work. Still, our findings provide some food for thought. Perhaps we can imagine a future where over-burdened middle- aged workers with children have more flexibility to work part-time, with late-life workers taking up some of the slack. . The latter would help ease the burdens posed by fiscally unsustainable pension systems. And more flexible labor market arrangements might also provide more opportunities (full or part-time) for youth to enter the labor market on a training basis as a first step. Our results cannot resolve issues of political feasibility and firm-level receptivity, among others. Yet as a first step, they tell us that there is a “happiness premium” for workers in more flexible arrangements.

For more on Carol’s work, read her book, The Pursuit of Happiness.

Categories: Blog

New Tax Legislation Would Increase the Return to Work for Low- and Middle-Income Working Families

Brookings Institute Blog - Thu, 03/27/2014 - 09:00

This week, Senate Budget Committee Chairwoman Patty Murray introduced legislation that would provide tax relief for working families. Her bill would establish a deduction for two-earner families and expand the Earned Income Tax Credit (EITC) for childless individuals. The proposed “secondary earner deduction” would allow married-couple families to deduct a portion of the secondary worker’s earnings from their family’s taxable income, increasing both the return to work and these families’ available resources. If enacted, this bill will immediately allow hard-working American couples to keep more of their earnings and improve the economic security of over 7 million families, according to estimates from the Joint Committee on Taxation.

The proposed legislation closely follows the secondary earner deduction outlined in our December 2013 Hamilton Project paper, which we justified on grounds of both fairness and efficiency. In our paper, we illustrate how the secondary earner penalty arises from the family-based nature of the U.S. federal income tax system. For families headed by a married couple, spousal income is pooled, and the first dollar of earnings by a spouse—or “secondary” earner —is taxed at the marginal tax rate of the last dollar earned by the primary worker. Under the current federal tax and transfer system, and assuming standard child care costs, we estimate that a family headed by a primary earner making $25,000 per year will “take home” less than 30 percent of a secondary worker’s pay. In other words, the effective average tax rate on the secondary worker’s earnings is 70 percent.

The figure below—taken from our Hamilton Project paper—shows the take-home share of earnings for a secondary earner for four different wage levels:

This makes it especially difficult for low-wage couples to work their way up the economic ladder. Consider a family of four, in which the primary earner makes $25,000 per year (a little over 150 percent of the current federal minimum wage of $7.25). As this family adds a second worker with similar earnings, their payroll taxes double, they lose their entire EITC (approximately $5,000), and they see an increase in federal income taxes (approximately $2,500). This family also loses eligibility for food assistance through the SNAP program (worth over $2,500) and may also incur child care costs. As this example illustrates, working poor families see little economic gain from a spouse’s labor supply.

Senator Murray’s “21st Century Worker Tax Cut Act” would allow low- and middle-income families with young children to deduct a portion of the secondary worker’s earnings from their family’s taxable income. Specifically, married-couple families with at least one child under the age of 12 and adjusted gross income below $130,000 (with phase-out starting at $110,000) could deduct 20 percent of up to $60,000 of the secondary earner's income. Low-income families would benefit through an increase in their EITC. Middle-income families would benefit from a lower federal income tax bill.

The proposed legislation couples this deduction with an expansion of the EITC for childless workers. The EITC is viewed as the most important source of cash assistance to low-income families in the United States. Furthermore, since receipt of the credit requires positive earnings, the tax credit encourages individuals to work, addressing the enduring criticism that traditional transfer programs discourage work. However, the EITC is less successful at rewarding the work efforts of dual-earner families. As a consequence of our family-based system of income taxation, many dual-earner couples—even those in which both spouses earn the federal minimum wage—bring in a combined income that puts them beyond the income eligibility for the full EITC. The proposed legislation would take an important step toward addressing this shortcoming.

A secondary earner tax deduction becomes even more important once the EITC is expanded for childless individuals. Consider a single mother with two children making $25,000 a year. Under current law, she qualifies for an EITC benefit of approximately $5,000. As we have already pointed out, if she marries someone making $25,000, as a couple they would no longer qualify for an EITC payment. Now consider an expanded EITC program such that the childless individual could also qualify for a sizable EITC payment on his own. Now if the two marry, the increase in taxes they experience upon marriage is even larger because they would lose both EITC payments. For this reason, it is especially important than an expansion of the EITC for childless individuals be paired with a secondary earner tax deduction.

The legislation put forward by Senator Murray recognizes this, and wisely pairs a secondary earner tax deduction for low- and middle-income families with an expanded EITC schedule for single childless individuals. As public finance economists, we consider the coupling of a secondary earner tax deduction with an expansion of the EITC for childless individuals an important and forward-looking proposal.

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