April 2012 | Featured Idea Growing Small Business Through E-Government

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IDEAS

Economic for Development

10 Ideas for Economic Development

April 2012
National Director Taylor Jo Isenberg Field Director Winston Lofton Policy Director Reese Neader Program Director Alan Smith Chapter Services Coordinator Dante Barry Student Editors Lydia Austin, Michael Francus Alumni Editors Jason Gould, Riley Wyman Lucas Puente, Kelly Steffen Keyontay Humphries

The Roosevelt Institute Campus Network A division of the Roosevelt Institute 570 Lexington Avenue, 5th Floor, New York, NY 10022
Copyright (c) 2012 by the Roosevelt Institute. All rights reserved. The views and opinions expressed herein are those of the authors. They do not express the views or opinions of the Roosevelt Institute, its officers or its directors.

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IDEAS
FOR

Economic Development

Congratulations to Blake Falk, author of Growing Small Business Through E-Government Nominee for Policy of the Year

Inside the Issue

Self-Sustaining Prison Farms Will Reduce the U.S. Incarceration Budget Kyleen Breslin Economic Reserve Corps: Building for the Future Grayson Cooper Growing Small Business Through E-Government Blake Falk Empowering Small Business Through University Partnerships Mohammed A. Hoque QE3 Jubilee: Bailing Out Main Street Ben Mabie Challenging China on U.S. Jobs Nikita Shamdasani Integrating Informal Economies: UN Initiative to Adopt Financial Access at Birth (FAB) Ariana Rowberry Saving the American Dream: A Risk- and Profit-Sharing Mortgage Model Andrew Terrell Growing American Jobs Through Franchise-Based Entrepreneurship Gregory Santoro et al Incentivizing Debt Relief to Solve Michigans Brain Drain Crisis Emily Chackunkal et al

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p Letter from New York City

Where do groundbreaking ideas come from? How do they take shape? How do they
fundamentally shift the way we see our world? It almost always takes the confluence of a seemingly intractable problem, people of intentional purpose, and a certain boldness to overcome. Its a potent mix that can be seen in the advancements in workers rights spurred by Frances Perkinss forward thinking labor policies to the environmental movement inspired by Rachel Carsons revealing work on the damaging effects of pesticides. Ideas have real impact when there is the realization that we need to do better combined with the people who are bold enough to ultimately do something. The Roosevelt Institute | Campus Network provides a way for young people to tap into this process, a platform for them to unlock the potential to drive progressive change. We received a record number of submissions to our premiere publication series this year from hundreds of students who invested the time and energy to research, write, and design actionable policy solutions for their communities. The 84 authors ultimately selected for the 2012 10 Ideas represent a generation of young people who recognize that it is because of, not in spite of, their age that they are uniquely capable of tackling some of our most entrenched challenges. With a thirst for action, many of these students will use these ideas to build coalitions, gather resources, and recruit supporters to create real, sustainable impact. Among this group of thinkers, visionaries, and doers, I encourage you to look for the future Frances Perkins and Rachel Carson, leaders who are already combating the injustices of our prison system, reimagining how we use energy, and solving the obesity crisis. We are proud to present the 2012 10 Ideas series, an inspiring exemplar of our generations unique propensity to engage with and accept the responsibility of todays complex and interconnected challenges. Each one of these pieces represents a powerful reminder that this generation is not only willing to build a better future, but has already begun. Taylor Jo Isenberg National Director Roosevelt Institute | Campus Network

Policy Directors Note P

Welcome and thank you for reading the fourth edition of the Roosevelt Institute |
Campus Network 10 Ideas Series, our annual flagship publication. This series, encompassing six journals produced from our six student policy centers, represents the most innovative, game-changing ideas coming from our network.

Our country needs a new narrative for how to address the problems we face: skyrocketing inequality, rising health care costs, unsustainable deficit spending, climate change, the list goes on. Defeating these challenges will require broad support from our citizens. And yet across the political spectrum the majority of the voting public has expressed strong dissatisfaction with their relationship with government. They feel that they dont have a voice in how decisions are made. The work of the Campus Network, and our 10 Ideas Series demonstrates that there is an alternative way forward-grassroots policymaking-and that young people across the country are blazing a trail forward. Each idea in these journals represents the work of a student who independently took up the challenge of addressing our countrys problems. They worked at local nonprofits and visited community centers to identify the issues that mattered most to their constituents. They reached out to community leaders, professors, and government officials to identify resources that could address those issues. And along with writing the policy memos included in this journal theyve developed public campaigns to attract funding and popular support for their causes. With this new model of engagement our students are bringing government back to We the People. Were inviting you to join us. Reese Neader Policy Director Roosevelt Institute | Campus Network

Self-Sustaining Prison Farms Will Reduce the U.S. Incarceration Budget

Kyleen Breslin, Colorado College Requiring all prisons to have self-sustaining farms by 2040 would reduce the U.S. prison budget. In 2011, Congress allocated $6.8 billion to the Bureau of Prisons.1 A Key Facts budget of this size is justified by the The current Bureau of Prisons budget need for larger buildings, a trained could be reduced by $30,000,000 if the staff, and more secure facilities. Yet cost of feeding prisoners were eliminated.5 the costs associated with the every Prison farms would begin making a profit day lives of inmates are often overin as little as two years.8 looked. According to the Florida The Wateree River Correctional InstituDepartment of Corrections, the tion in South Carolina has already implemented a prison farm system, saving tax cost of housing an inmate in 2010 2 payers $400,000 per year.9 was $53.34 per day. Other states, such as South Carolina, estimate inmate costs to be roughly $70 a day.3 There are 2 million inmates in the United States, whose housing costs a minimum of $106,680,000 per day.4 Of this daily total, 29 percent is spent on food.5 Changing the way prisoners are fed could dramatically reduce these costs. Enacting a policy that requires state or federally run prisons to provide their own food through self-sufficient farms could decrease prison spending by $1.7 billion per year. Requiring prisons to subsist on locally grown natural foods would also provide them with the opportunity to improve the nutritional value of the food they serve. Despite the high cost of the prison nourishment service, the food served to inmates is unhealthy and often inedible.7 Implementing a farming program would increase the health of inmates and raise awareness about the importance of good nutrition. It would also decrease the money spent on prison medical services by increasing the overall health of inmates. The malnourishment of inmates has been federally recognized, but no plausible reforms have been proposed. In the 1978 case Hutto v. Finney, the U.S. Supreme Court ruled that it was cruel for Arkansas prisons to serve a food substitute known as grue, but replacing grue meant spending more money on food.6 Although the Arkansas judge ruled that eating grue could cause prisoners harm, no large-scale change was implemented. In 2008, Vermont inmates filed a class action lawsuit against prisons, saying that they were being served meals so awful, theyd rather go hungry than eat.7 Court cases like these acknowledge that prison food is harmful to the health of inmates.

Analysis

In order to implement a prison farm system, prisons would need to purchase an initial supply of livestock, seeds, and farming equipment. This initial investment would not only provide long-term viability for a prison farm program but would also give funds to struggling farmers and agricultural suppliers. The program would soon pay for itself, since pris8

ons would no longer have to rely on government-subsidized funds for food. According to a video released by the farming organization The Hand That Feeds U.S., a large commercial grade farm would need to allocate $3 million dollars for start up costs, including land, equipment, and livestock.8 A prison with 300 inmates spends an average of $3 million every two years on food for Talking Points This bill would be beneficial for inprisoners, so a farm would quickly pay mates, taxpayers, and prison workers. for itself. Additionally, since most prisons are already located in remote areas, they would be able to purchase the property necessary for a farm large enough to sustain a prison population. Some private prisons in the United States have implemented such programs. For instance, the Wateree River Correctional Institution in South Carolina operates a 7,000 acre farm. These three correctional facility farms in South Carolina save taxpayers $400,000 a year.9

Next Steps

Introducing a self-sufficient prison farm initiative on a national level will take years of work and advocating, but introducing community-level measures can create an immediate and powerful impact. A partnership between prisons and local 4H clubs could provide a viable means of making a change. Members of agriculturally minded organizations like The Hand That Feeds U.S. can identify volunteers on the local level who are willing to contact prison supervisors and help them get started with the process of creating a farm. Also, writing grants to environmental organizations looking to increase localized food consumption can provide a financial basis for this movement.

Endnotes

1. USA Today. 2011 budget gives federal prisons $528M. Last modified February 4, 2010. Accessed December 4, 2011. http://www.usatoday.com/news/washington/2010-02-03-prison-budget_N.htm 2. Florida Department of Corrections. Budget, 2009-2010 Agency Annual Statistical Information. Accessed December 4, 2011. http://www.dc.state.fl.us/pub/annual/0910/budget.html 3. The Post and Courier, Charleston SC. Too much spent on prisons, study says. Last modified March 3, 2009. Accessed December 4, 2011. http://www.postandcourier.com/news/2009/mar/03/too_much_ spent_on_prisons_study_says73605/ 4. CNN Money. Inside Americas $37 billion prison economy Last modified December 1, 2006. Accessed December 4, 2011. http://money.cnn.com/magazines/business2/business2_archive/2006/12/01/8394995/index.htm. 5. Prison Policy Initiative. Daily cost to feed prisoners and the average American. Last modified 2003. Accessed December 4, 2011. http://www.prisonpolicy.org/graphs/foodcosts.html 6. FindLaw. U.S Supreme Court: Hutto v. Finney. Last modified June 23, 1978. Accessed February 13, 2012. http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=us&vol=437&invol=678 7. Huffington Post. Prison Calls if Food, Inmates Disagree. Last modified March 23, 2008. Accessed December 4, 2011. http://www.huffingtonpost.com/2008/03/23/prison-calls-it-food-inma_n_92953.html 8. The Hand That Feeds U.S. The Cost of Starting a Farm. Last modified February 2011. Accessed February 13, 2012. http://vimeo.com/11856105 9. CBS 7 News SC. SC Prison Farms Cut Down On Inmate Food Costs Last modified July 26, 2010. Accessed December 4, 2011. http://www2.wspa.com/news/2010/jul/26/4/sc-media-getting-sneak-peeknew-prison-dairy-ar-624489/

Economic Reserve Corps: Building for the Future

Grayson Cooper, University of North Carolina-Chapel Hill The development of an economic reserve corps, in combination with unemployment or inflation-triggered legislation, will enable shovel-ready projects to counteract economic downturns. According to Keynesian economics, government expenditure should increase during a recession in order to keep domestic output and aggregate demand constant, thereby stabilizing the economy.1 However, increasing government spending in a recession is more complex in reality than it is in theory, as evidenced by the 2008 recession and the strong political opposition to stimulus projects. After the passage of the American Recovery and Reinvestment Act (ARRA), Key Facts President Obama stated, theres no such Stabilization spending is slow to thing as shovel-ready projects.2 Infrareach implementation during a recession. structure projects are broadly defined as Keynesian economics states that public goods with long, useful lives, such governmental spending should as roads, utilities, and broadband Internet. increase during a recession (i.e. Such projects require approval for funding, countercyclical fiscal policy). site selection, and authorization, as well as worker selection and training, all of which take a significant amount of time and can often delay implementation. As currently implemented, infrastructure projects may not be agile enough to be a reliable tool for stimulating the economy. However, as other sectors of the United States government have demonstrated, these delays can be reduced. For instance, the reserve components of the United States armed forces enables the U.S. military to maintain a large, responsive, and trained military at a lower cost and without drawing workers away from the private sector when compared to a similarly sized standing military.

Analysis

A four-pronged solution is necessary to enact efficient and responsive stabilization funding: pre-approval, identification, evaluation, and utilization. First, infrastructure projects would be proposed during periods of economic growth. By designing and pre-approving infrastructure projects, we can ensure quick access to them during times when they are most needed to stabilize the economy. Second, an economic trigger based on unemployment or inflation rates will be determined so that the government will automatically begin the implementation of the predetermined infrastructure plans. Third, to ensure that infrastructure projects stay up-to-date with our societal needs, all approved projects will be regularly reviewed. Finally, the Economic Reserve Corps should be formed using funds from an optional unemployment insurance program that will be paid by employers who sponsor employees to participate in this program. The majority of unemployment insurance spending occurs during periods of recession.
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For example, disbursements of unemployment insurance totaled $128.4 billion, or 0.9 percent of GDP, in 2009.3 Thus, up to 50 percent of spending on the Economic Reserve Corps could be offset by tax credits toward unemployment insurance, as all employees in a participating workplace would be less likely to claim benefits since early flexible staffing policies could reduce the need for mass layoffs later. When the infrastructure triggers are reached, an infrastructure project will be set in motion, and members of the Economic Reserve Corps at participating companies that are seeking to reduce their workforce will be transferred to the infrastructure projects. In exchange for a greater guarantee of employment and the opportunity for paid skill training, the employee who is in the Economic Reserve Corps agrees to return to his/her sponsoring employer once the company has the capacity to rehire. The companys participation in the Economic Reserve Corps promotes profitability during a recession, reduced hiring, training, and firing costs, and serves as an additional incentive to recruit talented workers to a company, regardless of the employees participation in the reserve corps. Additional incentives, such as tax credits, could be offered to encourage companies to re-hire reserve corps workers as soon as possible.

Infrastructure projects are not currently structured for the agile response necessary for effective stimulus spending. An employer that joins the Economic Reserve Corps program provides greater job security for all of its employees, regardless of participation because they have a more flexible workforce and will have reduced hiring, firing, and training costs. An Economic Reserve Corps would eliminate the gap in employment for laid off workers before starting work on infrastructure projects. The costs of an Economic Reserve Corps can be offset by reduced unemployment insurance claims during a recession.

Talking Points

Next Steps

In order to prevent another Great Recession, the U.S. Congress should propose the Economic Reserve Corps program and establish a procedural standard for recession triggers on future infrastructure projects. Information should be distributed to employers, who can opt in, and select employees to sponsor in the Economic Reserve Corps.

Endnotes

1. Keynes, John Maynard. The General Theory of Employment, Interest, and Money. Atlantic Publishers & Dist, 2006. <http://www.saigontre.com/FDFiles/the-general-theory-of-employment-interest-andmoney.pdf>. 2. Condon, Stephanie. Obama: No Such Thing as Shovel-Ready Projects. CBSNews.com. 13 October 2010. <http://www.cbsnews.com/8301-503544_162-20019468-503544.html>. 3. Vroman, Wayne. The Role of Unemployment Insurance as an Automatic Stabilizer During a Recession. Impaq International, July 2010. <http://wdr.doleta.gov/research/FullText_Documents/ETAOP2010-10. pdf>.

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Growing Small Business Through E-Government

Blake Falk, University of North Carolina at Chapel Hill Municipalities should employ one-stop websites that combine the functions of multiple city agencies and lower the barriers to establishing a new business. The aftermath of the Great Recession left the U.S. economy with 8.75 million lost jobs,4 and job growth remains an integral part of the current economic recovery. While job growth continues at a tepid pace, small businesses have grown rapidly and have led job gains for seven consecutive months since June 2011.5 However, municipal, state, and federal bureaucratic barriers weigh more heavily on small businesses than on larger firms. Many of these costs derive from a lack of resources as compared to larger firms, and the most severe costs arise when small businesses are first established and most likely to grow. In light of these obstacles, New York City Mayor Michael Bloomberg championed NYC Business Express, an e-government project dedicated to creating a one-stop website for new and current business owners. Released in 2005, it created a centralized tool for filing for permits, licenses, and incentive programs for numerous city agencies.6 Since its inception, 22,000 accounts have been created, and the site has received 500,000 visits. Boston, San Francisco, and Newark have consequently contacted New York City to create similar websites.7 Key Facts

Cost of federal regulations per employee in 2004: $7,647 for firms with fewer than 50 employees, $5,282 for firms with more than 500 employees.1 NYC Business streamlines the functions of over 20 city agencies in a one stop website.2 Small businesses have consistently led job growth since June 2011.3

Analysis

Consider an entrepreneur in New York City. She will typically be required to interact with upward of twenty separate city agencies,8 such as the Business Integrity Commission and the Department of Environmental Protection,9 which often require the services of a lawyer. Consequently, the cost-per-employee is markedly higher. In 2004, federal regulation cost $7,647 for firms with fewer than 20 employees and $5,282 for firms with more than 500 employees.10 Part of this disparity in costs can be explained by the economies of scale that larger businesses enjoy. Herein lies the problem. New small businesses do not possess the vast resources that larger firms do, especially in terms of legal services. Consequently, the structural, financial, and time-related barriers faced by smaller entrepreneurs discourage new business establishment. One-stop websites such as NYC Business Express have accordingly experienced a warm reception from entrepreneurs.11 However, the cost of implementing such a program remains a point of contention. NYC Business Express required $27.4 million to develop.12 Additionally, different municipalities have different sets of regulations and agencies related to business creation, so a program like NYC Business Express cannot necessarily be replicated at little expense.
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The initial requirements of developing a one-stop site are nevertheless offset by the accounting and time benefits. It has allowed for cuts in administrative hours as more transactions are completed online instead of at brick-and-mortar agencies.13 The convenience of 24/7 access to permits, regulations, and incentive programs, as well as a more entrepreneur-friendly environment for small businesses, reduce the time-related costs to starting a new business.14

Next Steps

Because small businesses are exposed to the bureaucratic costs of Talking Points The administrative burden of new businessestablishing a new business, local es is more heavily felt by small businesses organizations such as chambers of than large businesses. commerce or small business as NYC Business Express is a successful modsociations must compel municipal el for an e-government tool that reduces governments to instigate this mutuaccounting and non-accounting costs of ally beneficial initiative. Given the starting and running a small businesses. current lukewarm employment situation, streamlining the process of small business formation through the creation of one-stop e-government websites will be a successful venture that municipal governments can employ to reduce the costs entrepreneurs face and allow small businesses to continue creating jobs.

Endnotes

1. Crain, W. M. (2005, September). The impact of regulatory costs on small firms. Small Business Research Summary, 294, 5. Retrieved 2011, 23 November, from http://books.google.com/books?hl=en&lr=&id=aD CIJWakHT8C&oi=fnd&pg=PR2&dq=the+impact+of+regulatory+costs+on+small+firms&ots=b61Yvijlzx&si g=yN-e_hG5cpTk_djruuFO5-MS98s#v=onepage&q=the%20impact%20of%20regulatory%20costs%20 on%20small%20firms&f=true 2. Wood, C. (2011, January 20). New York City website leads rise of business one-stops. Government Technology. Retrieved November 28, 2011, from http://www.govtech.com/e-government/New-YorkCity-Business-One-Stop.html 3. ADP. (2012, January 5). National Employment Report. Retrieved January 25, 2012 from http://www. adpemploymentreport.com/ 4. Sanchez, J. M. & Thornton, D. L. (2011). Why is economic growth so slow? The Federal Reserve Bank of St. Louis, 37, 1-2. 1. Retrieved from: http://research.stlouisfed.org/publications/es/11/ES1137.pdf 5. Ibid 3 6. Ibid 2 7. Ibid 2 8. Ibid 2 9. NYC Business Express. (2011). NYC.gov. Retrieved November 23, 2011, from http://www.nyc.gov/portal/ site/businessexpress/ 10. Ibid 1 11. Ibid 2 12. Department of Information Technology and Telecommunications. (2010, May 25). Hearing on the Mayors Fiscal Year 2011 Executive Budget. Retrieved 2012, 12 February, from http://council.nyc.gov/ html/budget/PDFs/doitt_exec_rpt_2011.pdf 13. Ibid 2 14. Douglas, M. (2011, January 21). The economics of e-government services are far from simple. Government Technology. Retrieved November 28, 2011, from http://www.govtech.com/budget-finance/TheEconomics-of-E-Government-Services-Are-Far-From-Simple.html

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Empowering Small Business Through University Partnerships

Mohammed A. Hoque, CUNY City College The corporate giants and big banks of Wall Street should establish partnerships with universities to create small businesses, which will help create more jobs and decrease the significantly high unemployment rate of the United States. Small businesses in America are on the ropes. Large banks such as Bank of America, JP Morgan Chase, etc., have significantly brought them down by declining to extend loans and credit. The New Rules Project notes that the countrys 20 biggest banks devote only 18 percent of their commercial loan portfolios to small businesses.1 The decline of small businesses will minimize competition in the U.S. marketplace and will fuel excessive unemployment. Key Facts

Despite the decline of small businesses, the capacities of big banks have largely expanded. According to 11 Facts You Need to Know About The Nations Biggest Banks, Due to the failure of small competitors and mergers facilitated during the 2008 crisis, the nations biggest banks including Bank of America, JP Morgan Chase, and Wells Fargo are now bigger than they were pre-recession. Pre-crisis, the four biggest banks held 32 percent of total deposits; now they hold nearly 40 percent.2 Yet the federal government bailed out these giant corporations instead of focusing on helping small businesses.3 The solution to the number of declining small businesses is to establish a partnership between big banks and universities. Since universities generate large profits from small businesses around their campuses, big banks and universities can work together to establish a program that can help sustain existing small businesses and create new ones. In return, corporate greed will be limited and more jobs will be created, which will strengthen the economy.

The New Rules Project notes that the countrys 20 biggest banks devote only 18 percent of their commercial loan portfolios to small businesses.1 According to 11 Facts You Need to Know About The Nations Biggest Banks, Due to the failure of small competitors and mergers facilitated during the 2008 crisis, the nations biggest banks including Bank of America, JP Morgan Chase, and Wells Fargo- are now bigger than they were pre-recession.2

Analysis

Big banks and universities should work together in partnership to empower the small businesses around university campuses. There are a number of advantages of creating these programs for small businesses, including accessible loan funds and consultation from professional experts. The program will also result in an increase in consulting services for entrepreneurs. Colleges such as the City College of New York (CCNY) have made contracts with corporations such as the Metropolitan Food Company to establish a food restaurant business
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on campus. NY based Metropolitan Food Service, Inc. has been providing creative Talking Points Food Service Management solutions for There are a number of advantages colleges and universities in the greater New of creating these programs for small York City area.4 This ensures conveniently businesses, including accessible accessible food for students on campus. loan funds, lessons on how to run However, since the Metropolitan Food the business more efficiently by proCompany represents a monopoly, it is genfessional experts who have already erating large amounts of profits and it is also served in large corporations, and limiting competition. If CCNY partnered consultation for small businesses. The program will also result in an with a big bank such as JP Morgan Chase, increase in consulting firms for enthey could both use their wealth to estabtrepreneurs. lish more small businesses around CCNYs campus. JP Morgan Chase has partnered with Syracuse University to increase education in the area of financial services information technology.5 Big banks have the capability of going further by establishing small businesses along with the university. Such partnerships can generate more profit and increase jobs at the same time.

Next Steps

Universities and big banks can work together to establish programs that can help create small businesses and jobs. The federal government can facilitate this process by creating a forum for university and small business partnerships.

Endnotes

1. Garofalo, Pat. 11 Facts You Need to Know About The Nations Biggest Banks. <http://thinkprogress.org/ economy/2011/10/07/338887/1-facts-biggest-banks/ Oct. 7 2011>. 2. Ibid 1. 3. Reich, Robert. Aftershock: The Next Economy and Americas Future. Vintage; First Paperback Edition edition. page 103. 4. Metropolitan Food Service Inc. 2007. <http://www.metropolitanfoodservice.com/index.html>. 5. School of Information, Studies Syracuse University. 2011. Syracuse University-JPMorgan Chase Collaboration. <http://ischool.syr.edu/prospective/graduate/jpmc/index.aspx>. 6. Roosevelt, Franklin. Address Accepting the Presidential Nomination at the Democratic National Convention in Chicago. Franklin D. Roosevelt: Address Accepting the Presidential Nomination at the Democratic National Convention in Chicago. <http://www.presidency.ucsb.edu/ws/index. php?pid=75174#ixzz1fFCya8w>.

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QE3 Jubilee: Bailing Out Main Street

Ben Mabie, UC-Santa Cruz To combat the economic burden of household debt, the Federal Reserve should initiate QE3: a new round of quantitative easing targeted at American debtors. The idea of comprehensive debt forgiveness is not new. In times of ballooning wealth inequality Key Facts The U.S. government used and economic stagnation, demands for a Jubicomprehensive debt forgivelee, a cancellation of all debts, grow with striking ness to rescue the financial poignancy. Debt forgiveness is a policy that the industry. United States federal government engaged in Credit markets are stalled beduring the recession with the Federal Reserves cause American consumers are purchase of $2.1 trillion dollars worth of bank using their income to pay down debt as of June of 2010. By absorbing these othdebt. erwise toxic assets, the Federal Reserve gave Without addressing consumer the banks the ability to consolidate capital and debt, the U.S. economy will continue its pattern of anemic make economy saving investments. But banks growth. were hardly the only economic agents burdened by debt. The Federal Reserve Bank of New York observed that total household debt balance nearly tripled from $4.6 trillion in 1999 to 1$2.5 trillion in 2008. Though the figure has since fallen to $11.5 trillion as of the first quarter of 2011, the number is still an impressive figure. From 1997 to 2007, writes the Wall Street Journal,1 citing Federal Reserve data, household debt ballooned to 66 percent of economic output to 98 percent. Seventyfour percent of the debt is from homeowners mortgages, and debts on student loans have likewise ballooned to nearly three times that of the home mortgage debt during the Clinton administration.2 It is important to observe a few trends. First, despite a 114 percent increase in labor productivity over the last 40 years, workers wages in the same time period have decreased 6 percent when adjusted for inflation.3 Meanwhile, the gains of labors productivity have been concentrated amongst the wealthiest Americans: J.P. Morgan4 explains that 75 percent of U.S. corporate profit margins since 2001 have come from depressed worker wages. The juxtaposition of repressed wages and increased access to credit brought about greater borrowing and debt. This economic problem reached a climax in 2008. Americans, now paralyzed by a fear of debt, are spending and investing less than they did during 2005.5 As the Wall Street Journal highlighted, two-thirds of Americans polled online in July by U.K. research firm Absolute Strategy Research said they planned to either reduce their debt within a year or stop borrowing altogether. The phenomenon cannot be reduced to the depletion of access to capital: this hesitation reaches even to workers with excellent credit.6 Now lower demand for loans is driven by Americans who could get a loan, but are paying down debt.7 Workers are contracting demand as they shift from spending to saving.

Analysis

The optimal policy solution for this crisis is another round of quantitative easing that
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targets debtors mortgages based on a progressive scale of debt held relative to income. The Fed would buy up private debt -- but while banks and other loaning institutions hold the debt itself, QE3 would distribute money to those who owe. If trends hold, the additional cash will aid savers, incentivizing them to spend more, raising aggregate demand. The only alternative is that debtors defy current trends and spend anyway, which seems unlikely.

Debt cancellation saved the big banks, and can likewise aid private debtors. Personal debt is skyrocketing and limiting consumption. Quantitative easing directly targets household debt and instigates an inflationary currency that aids debtors.

Talking Points

Next Steps

The Federal Reserve should work directly with both U.S. consumers and financial institutions to institute a quantitative easing program that targets consumer debt based on a progressive scale of debt held relative to income. The Federal Reserve should supplement this action by continuing to lower interest rates and manage targeted inflation that reduces the debt burden on U.S. consumers.

Endnotes

1. Hilsenrath, Jon, and Ruth Simon. Spenders Become Savers, Hurting Recovery . October 22, 2011. http://online.wsj.com/article/SB10001424052970204294504576614942937855646.html (accessed ). 2. http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12011.pdf. 3. Harpers Index. Harpers Magazine. May 2011: 15. Print. 4. Harper. Harper. October 2011: 15. Print. 5. Hilsenrath, Jon, and Ruth Simon. Spenders Become Savers, Hurting Recovery . October 22, 2011. http://online.wsj.com/article/SB10001424052970204294504576614942937855646.html (accessed ). 6. Hilsenrath, Jon, and Ruth Simon. Spenders Become Savers, Hurting Recovery . October 22, 2011. http://online.wsj.com/article/SB10001424052970204294504576614942937855646.html (accessed ). 7. Hilsenrath, Jon, and Ruth Simon. Spenders Become Savers, Hurting Recovery . October 22, 2011. http://online.wsj.com/article/SB10001424052970204294504576614942937855646.html (accessed ).

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Challenging China on U.S. Jobs

Nikita Shamdasani, University of North Carolina at Chapel Hill The U.S. government should give tax breaks to U.S. businesses operating in China to facilitate the migration of their workers back to the U.S., provided they move back a minimum percentage of their workers. Luxury brands will be given larger tax breaks since their products are more coveted among the Chinese. The gap between the value of what the U.S. Key Facts imports to China versus the value that it ex The U.S.-China trade imbalance ports increased to about $295,465.5 million in grew to about $295.5 billion last 2011, the largest trade imbalance that the U.S. year, making it the U.S.s largest 1 has ever had with another country. This gap trade imbalance ever.1 has been growing since the late 1980s, when While the U.S. exports $22.7 bilthe U.S. first faced a bilateral trade deficit with lion in electrical and machinery China. The U.S. cannot continue to sustain this equipment and power generadeficit. The consequences on foreign policy of tion equipment to China, it imhaving an overly dependent economy will deports $173.5 billion worth of the same goods from China.6 tract from U.S. power. China uses its trade sur Among other sources, China pluses to purchase U.S. treasury securities; as a uses its trade surpluses with the result the U.S. is growing increasingly reliant on U.S. to buy U.S. treasury securiChina to finance its debt. As of September 2011, ties and now owns about 25 perChina owns $1.15 trillion in treasury securities, cent of them.3 more than 25 percent of the total amount of securities in circulation today.2 If the U.S. wants to maintain an impactful foreign policy, it needs an economy that is not overly reliant on any of its trading partners. Certain economists believe that the trade imbalance may not be as large a problem as it is made out to be, but considering the trajectory of Chinas growth, it still has the potential to be a significant threat. With the current increase in Chinese wages, which rose 69 percent between 2005 and 2010,3 the U.S. finally has an opportunity to attract U.S. businesses back home and reduce imports from China.

Analysis

This plan calls for the U.S. government to provide tax breaks to U.S. businesses currently operating in China. With the ongoing increase in Chinese wages and shipping costs, certain U.S. businesses whose major component of sales are to American customers are already relocating back to the U.S.4 The U.S. government should incentivize businesses to continue to move back with these tax breaks. Companies should be required to move back a minimum of 10 percent of their Chinese workforce to the U.S. as jobs for Americans in order to be eligible for this tax break. Once this stipulation is met, they will receive $5,000 per worker in tax credits. With the relocation of manufacturing to the U.S., overall GDP will rise. While the U.S. government will have to increase its deficit spending to draw these companies back in, the income lost will be regained after the implementation of this plan, primarily because of multiplier effects. There is empirical evidence that tax rate reductions increase real GDP5 and the tax multiplier of a job tax credit is estimated to be 1.3.6 The increased number of employed workers in the U.S. would also lead to the collection of more taxes from workers.7 The current unemployment rate has
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meant that the U.S. government pays transfer benefits in the form of unemployment benefits to a large number of people,8 so the benefits of reducing those transfer payments through these tax credits also justifies the initial cost. Luxury brands, which will be defined by their status as goods that have a much higher consumption rate with a significant increase in income, will be given larger tax credits of $6,000 due to the benefit of exporting these Talking Points goods. This benefit comes from the progres Incentives for companies in China will help move the workforce sive spending growth of the Chinese middle back to the U.S. class based on the coupled trends of the Luxury brands will be given larger Chinese government anticipating minimum incentives. wage increases of 13 to 15 percent over the Policy accommodates for rising next five years and the younger Chinese genwages and shipping costs in Chieration spending much more of its money on na, which have started a trickle of discretionary items than previous generajobs back to U.S. tions, which have led to increased purchases Considering the trajectory for of luxury items.9 Moving these goods back to Chinas growth, the trade imbalance is becoming a big problem the U.S. will not only increase GDP, but also and must be dealt with to protect net exports due to the stronger market for U.S. foreign influence and ecothese goods. Although the U.S. may not have nomic security. the necessary supplier base or infrastructure for all industries to move back immediately, a gradual movement would create a foundation so that eventually the U.S. will have the ability to produce materials cheaply.4

Next Steps

Congress must pass legislation for the tax breaks that it will issue to U.S. businesses in China. It must include strict measures to ensure that a minimum percentage of the workforce must migrate to the U.S. before a business becomes eligible for the tax break. The government should advertise companies that have already began moving workers back, such as Caterpillar, Sauder, and NCR.4 When other companies in similar industries see the profits that these companies continue to sustain and the reasoning for their move back to the U.S., they will have a concrete model for migration.

Endnotes

ary 17, 2012.) 2. Department of the Treasury/Federal Reserve Board, Major Foreign Holders of Treasury Securities. http://www.treasury.gov/resourcecenter/data-chart-center/tic/Documents/mfh.txt (accessed December 1, 2011) 3. Multinational Manufacturers: Moving Back to America. The Economist, May 12, 2011. http://www.economist.com/node/18682182 (accessed January 5, 2012). 4. Foroohar, Rana. The Senates China Misstep. TIME, October 24, 2011, 17. 5. Barro, Robert, and Charles Redlick. Stimulus Spending Doesnt Work. The Wall Street Journal, October 1, 2009. http://online.wsj.com/ article/SB10001424052748704471504574440723298786310.html (accessed January 10, 2012). 6. Zandi, Mark. Using Unemployment Insurance to Help Americans Get Back to Work: Creating Opportunities and Overcoming Challenges. West Chester: Moodys Analytics, 2010. 7. Talking to Arthur Laffer about Taxes, Taxes, Taxes and Barack Obama. TIME, December 7, 2007. http://business.time.com/2007/12/07/ talking_to_arthur_laffer_about/ (accessed January 10, 2012). 8. Autor, David H., David Dorn, and Gordon H. Hanson. The China Syndrome: Local Labor Market Effects of Import Competition in the United States. Rep. August 2011. 9. Saporito, Bill. A Great Leap Forward: Can Chinas Famously Thrifty Workers Become the Worlds Biggest Spenders? TIME, October 31, 2011, 34-39. 10. U.S. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey. http://www.bls.gov/cps/prev_yrs.htm. (accessed February 17, 2012).

1. U.S. Census Bureau, Foreign Trade- U.S. Trade with China. http://www.census.gov/foreign-trade/balance/c5700.html. (accessed Febru-

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Integrating Informal Economies:

UN Initiative to Adopt Financial Access at Birth (FAB)
Erika K. Solanki, University of California, Los Angeles Financial Access at Birth, an innovative social and economic model, seeks to achieve complete financial inclusion through a $100 savings account endowment to every registered birth. As a UN-sponsored initiative, funding should be collected in conjunction with developed nations, host countries, and private donors. Approximately 2.7 billion people, half of the global population, lack access The developing world contains 80 perto a wide range of quality and reliable cent of the world population, and these financial services. When people do individuals are industrially engaged and not have access to formal financial serpossess a wealth of assets. vices, basic tasks like saving are impos Collectively, the wealth of the poor drasible. Moreover, informal economies matically outweighs the total wealth of have negative consequences for parthe rich. For example, the aggregate value ticipants. For example, when the poor of the undercapitalized dwellings in Egypt give money to informal bank entities, is an estimated $240 billion30 times the the poor lose almost 30% percent of value of all shares on the Cairo stock exchange. potential returns through fees. A posi If developed nations commit to donate tive rate of return is critical to saving; 1/50 of 1 percent of annual GDP to fund thus, the poor need formal savings acthe FAB initiative, the U.S. alone would counts. The Financial Access at Birth contribute at least a quarter of the annual project is an innovative socio-economdeposit costs, as 1/50 of 1 percent of anic model that seeks to achieve worldnual U.S. GDP is approximately $2 to $3 wide complete financial inclusion. Fibillion annually. nancial inclusion can be defined as the state in which all people who can use financial services indeed have access to a full range of financial services provided conveniently, at affordable rates, and with dignity for all clients. One of the main reasons the poor are still poor is because they are unable to translate their informal economic activities into formal economic activities. In Hernando de Sotos Mystery of Capital, he discusses the tremendous informal wealth that the poor have accumulated: $9.3 trillion in dead capitaltwice as much purchasing power as the total circulating U.S. money supply.

Key Facts

Analysis

The FAB initiative would ensure that a savings account with $100 is created for each birth certificate that is filed. The idea is that the incentive of $100 would provide enough of an edge to encourage parents to create an official identity for their children, which is a first critical step to development. The purpose of the FAB initiative is to encourage individuals without access to financial services to open savings accounts at birth that are linked to each individual via a unique ID number. These accounts would have initial deposits made via cash transfer. Once the account is created and the identity of the recipient is confirmed, third party service providers can utilize the funds for service dissemination, including tuition, healthcare, food costs, and shelter costs. There
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are two elements to the cost of this program: the initial deposit cost and transaction costs. The initial deposit cost will roughly average $10 billion a year. Most developed countries can jointly decide on an annual percentage of GDP that each country can afford to dedicate to the FAB initiative. Secondly, the transaction costs average 3 percent to 5 percent of the initial deposit amount, and these costs should be assumed by the banks because of the short-term sense of social responsibility and as a long-term mechanism for recruiting new customers.

Next Steps

The United Nations Department of Economic and Social Affairs should develop a framework through which the Financial Access at Birth initiative can be agreed upon and enforced. After multiple rounds of multi-country collaboration, the UN should draft a binding international agreement that is adopted by member countries to ensure that each country is committed to the FAB initiative. FAB calls for each country to contribute to the program based on annual gross domestic product, thus rich countries would give more than poor countries. Ultimately, this basis for contribution will become the primary mechanism of foreign assistance, as it results in a form of aid transfer from rich to poor countries.

Leaders of developed nations need to gradually discontinue funding aid programs that do not address the fundamental causes of underdevelopment, as aid programs tend to simply mitigate proximate causes. The FAB initiative is capable of transforming undercapitalized assets into usable, liquid capital. Enabling the poor to integrate into the formal economy from birth will help spur economic growth not only among new generations, but also among parents that have children within this system, as financial inclusion will be an accessible privilege.

Talking Points

Endnotes

1. About FAB, Financial Access at Birth, accessed September 27, 2011, http://www.financialaccessatbirth.org/index.php. 2. Center for Financial Inclusion: Resources, ACCION International, accessed October 10, 2011, http://resources.centerforfinancialinclusion.org/. 3. DeSoto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books, 2000. 4. Hough, Jack, Why This Man Wants Babies To Get $100, Smart Money, April 9, 2010, accessed October 10, 2011, http://www.smartmoney.com/invest/markets/why-this-man- wants-babies-to-get100/?page=all. 5. Resources, Center for Financial Inclusion, accessed October 10, 2011, http://resources.centerforfinancialinclusion.org/.

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Saving the American Dream: A Risk- and Profit-Sharing Mortgage Model

Andrew Terrell, Warwick University (UK) New mortgage models based on risk and profit sharing can rein in the economic incentives that led to the sub-prime crisis that hurt millions of American homeowners. Home ownership has been seen as a vital part of the American social contract since the presidency of Franklin D. Roosevelt. Since then, it has become the passport to middle class status. The federal government has encouraged this trend through favorable tax laws and financing via the Federal National Mortgage Association (Fannie Mae).1 Consequently, the number of Americans who own their own home has steadily increased. Key Facts However, now millions of Americans have had Negative equity means a homeowner owes more than his house their homes foreclosed on and nearly half of is worth. all mortgage buyers are facing imposed pov 48 percent of American homeerty with obligations that leave them buried owners with mortgages are in debt.2 In the past, lenders were local banks trapped with negative equity.4 that knew their borrowers personally. Today, Every three months, 250,000 lending has become a complex risk-shifting exnew families enter into forecloercise, where the lender bears an insignificant sure.5 stake in the mortgage.3 The legal framework has not caught up to financial innovation.

Analysis

A new framework is critical in order to prevent another sub-prime mortgage crisis. Lessons from alternative financial systems can enable us to build a new model that re-embeds risk, realigns the mortgage market with the social contract, and creates a deeper system of accountability. Born out of Islamic finance, innovative instruments exist to provide citizens with access to credit, including mortgages.6 Through a model based on a combination of profit- and risk-sharing, we can better protect our citizens and their homes from devastating financial shocks. To overcome several market failures inherent within the current lending system, we must shift away from the paradigm of caveat emptor or buyer beware.7 This has not only shielded lenders from legal liability, but has also made assessing accountability and refinancing extremely difficult. Caveat emptor and the distributor model provided perverse incentives that drove the sub-prime market to loan on farcical standards.8 We can correct some crucial market failures by moving toward a mortgage business based on balanced liabilities.9 To accomplish this transition, we should adopt a profit- and risk-sharing model. The difference between a traditional mortgage10 and one based on profit- and risk-sharing is the degree to which the lending entity, bank, or other financial institution has a stake in the continual performance of the asset over the life of the contract.

22

Next Steps

Talking Points Congress should facilitate the endorse Traditional mortgages are financial inment of profit- and risk-sharing mortstruments founded on debt. Our altergages by banks and brokers. This should native model calls for a mortgage partbegin with a gradual alteration on the nership based on equity capital and a guidelines for approved mortgage sellfloating rate rental. This discourages ers as defined by the Federal Housing disintermediation in financial products, Finance Agency, as well as legislation facilitating greater transparency and aimed at the secondary mortgage marinformation for borrowers, lenders, and ket. Also key is the alteration of the tax investors. This is based on an approach known as Musharaka al-Mutanaqisa.11 code to allow existing deductions for a There is consensus that until the probnew model founded on shared equity lem of negative equity is solved, U.S. instead of debt. Congress may also want economic development and growth will to take a stance on a taxpayer-favorable be significantly depressed.12 variation of the Danielson rule used by tax courts.13 The eventual objective would be converging the principles of the new model with the necessary requirements for mortgage loans and tax code purposes until a majority of newly issued mortgages conform to the requirements. The mortgage model should then be examined after a minimum of five years.
Endnotes
1. Fabozzi, Frank J., and Franco Modigliani. 1992. Mortgage and mortgage-backed securities markets. Boston, Mass: Harvard Business School Press. pp. 1920 2. Olick, Diana. US Real Estate: Half of US Mortgages Are Effectively Underwater - CNBC. CNBC. http://www.cnbc.com/id/45209336/Half_of_US_Mortgages_Are_Effectively_Underwater (accessed November 23, 2011). 3. Alex, Blumberg, & Adam, Davidson, The Giant Pool of Money, This American Life, May 9th, Web, http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money. 4. Olick, Diana. US Real Estate: Half of US Mortgages Are Effectively Underwater. CNBC. http://www. cnbc.com/id/45209336/Half_of_US_Mortgages_Are_Effectively_Underwater (accessed November 23, 2011). 5. Federal Deposit Insurance Corporation. Foreclosure Statistics. FDIC. www.fdic.gov/about/comein/ files/foreclosure_statistics.pdf (accessed November 24, 2011). 6. Maurer, Bill. 2006. Pious property: Islamic mortgages in the United States. New York: Russell Sage Foundation. pp. 15-16 7. Latin, lit. meaning buyer beware. 8. Alex, Blumberg, & Adam, Davidson, The Giant Pool of Money, This American Life, May 9th, Web, http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money. 9. Latin, lit meaning in good faith. 10. French, lit. meaning dead pledge. 11. Varian, Keith , and Jennifer Rockwell. Islamic Financing and Forclosure.Real Estate Issues 34, no. 1 (2009): 2. http://www.murthalaw.com/files/NewsEvent319.pdf (accessed November 22, 2011). 12. Olick, Diana. Why Care About Negative Equity. CNBC, December 13, 2010. http://www.cnbc.com/ id/40644565/?Why_Care_About_Negative_Equity (accessed November 23, 2011). 13. Jensen, Nickolas. Avoiding Another Subprime Mortgage Bust Through Greater Risk and Profit Sharing and Social Equity in Home Financing. Arizona Journal of International & Comparative Law Vol 25, No. 3. p. 850.

23

Growing American Jobs Through Franchise-Based Entrepreneurship

Gregory Santoro, Melia Ungson, Andrew Macklis, and Helena Malchione Yale University The structure offered by the franchise business model in conjunction with the support of local mentoring resources can significantly lower the barriers to youth entrepreneurship and catalyze local economic growth. Given the important role of small businesses and the sobering survival rates of new firms in the current recessionary environment, it is essential to create programs that address the unique set of challenges that small business entrepreneurs face and to promote youth entrepreneurship. Linking the young entrepreneur to mentoring resources and franchise opportunities will improve the success rates of new businesses, leading to increased economic growth in local communities.

At 14.4 percent, the youth unemployment rate is significantly higher than the national rate of 8.5 percent. With this in mind, we tailored our research to target young entrepreneurs in our local community of New Haven, CT. The racial make up and low education level of residents make New Haven an especially challenging environment for entrepreneurship. As of the 2010 census, New Havens population was 27.4 percent Hispanic and 35.4 percent blacktwo minority groups that statistically face tougher odds opening new businesses than their nonminority counterparts. The odds of a minority opening a business may be as much as 55 percent lower than those for a nonminority. Additionally, there is a critical link between education and entrepreneurial success: one marginal year of schooling may increase entrepreneurial income by as much as 5.5 percent. Among New Haven residents, however, about 31 percent possess a bachelors degree and roughly 80 percent have graduated from high school. A partnership among community organizations and community development banks can make entrepreneurship more feasible, especially for young adults.

Unemployment in the U.S. was 9 percent in October, 2011.ix Small businesses represent 99.7 percent of U.S. employers.x In 2009, 552,600 new businesses opened, while 660,900 businesses closed. xi

Key Facts

Analysis

Compared to starting an independent business, franchise entrepreneurship offers new business owners substantial advantages: an established business structure, pricing scheme, and recognized brand name. Raising start-up capital is the largest and perhaps most obvious initial challenge that entrepreneurs face. The average cost of starting a new business from scratch is estimated at a little more than $30,000, which is comparable to start-up costs for many franchises. For example, the initial franchise fee for one food truck franchise is $25,000. Although there are additional cash investments totaling $75,000 and monthly franchising fees of $500-$1500, the franchise eases the financial burden on its entrepreneurs by helping them apply for SBA guaranteed loans. In general, franchises can also be used to subsidize building costs, train staff, and establish
24

products and pricing, all of which reduces the capital required over the first several months of launching a business. Potential lenders view franchised businesses as lower risk because of their guided structure and the fact that the business model has been tested elsewhere. This enables franchisors to receive larger loans on more favorable terms. Moreover, there are special forms of financial support available for franchises at the local and national levels.

Many entrepreneurs are disconnected from local support and mentorship programs. Franchises provide a structure and organization to new businesses. Connecting entrepreneurs to helpful resources will help raise the number of new businesses. Successful, new business spur local economic growth and employment.

Talking Points

After securing startup capital, entrepreneurs struggle to thrive under competitive market conditions. New entrepreneurs frequently fear they lack the experience and knowledge necessary to successfully bring the right product to the right market. It is essential, therefore, that formal mentor relationships and support networks be coupled with this franchise model to help entrepreneurs work through the many challenges that arise when starting a business. Local experts from organizations such as SCORE, the Chamber of Commerce, and the Small Business Association can serve as exceptional pools from which mentor programs can be created. Local mentors can advise on neighborhood demographics, local real estate, potential competitors, and useful contacts. New Havens START Community Development Bank recently began implementing such a program to assist entrepreneurs in opening new franchises in some of the citys least developed neighborhoods. As the city has high unemployment and a lack of commercial diversity, this program to assist entrepreneurs can have a large impact on the New Haven community.

Next Steps

In many cities similar to New Haven, organizations that, like START, not only provide loans, but also focus on development, can help increase the success of new businesses by implementing this information sharing model. To do this, it is important to analyze the local market, compile the best support sources in the community, and provide this information in free guidebooks to entrepreneurs looking for loans at local banks. Such seemingly simple efforts to improve entrepreneurs access to local resources can truly have an impact in helping communities overcome stagnant employment rates and in driving economic development.

Endnotes
Bureau of Labor Statistics. Latest Numbers. www.bls.gov. (accessed 21 January 2012). U.S. Census Bureau: State and County QuickFacts. New Haven, CT. Data derived from 2000 Census of Population and Housing. http:// quickfacts.census.gov/qfd/states/09/0952000.html (accessed 16 February 2012). Miaritza Salazar, The Effect of Wealth and Race on Start-up Rates, Small Business Administration Office of Advocacy, Small Business Research Summary 307 (July 2007), 23. Pat Dickson, Mark Weaver, and George Solomon, Entrepreneurship and Education: What is Known and Not Known about the Links Between Education and Entrepreneurial Activity, in The Small Business Economy: A Report to the President (pp.11356) (Washington, D.C.: United States Government Printing Office, 2006), 113. U.S. Census Bureau: State and County QuickFacts. New Haven, CT. Data derived from 2010 Census of Population and Housing. Caron Beesley, How to Estimate Starting a Business from Scratch, Small Business Cents (blog), Small Business Administration, 21 November 2011, http://community.sba.gov/community/blogs/community-blogs/small-business-cents/how-estimate-cost-starting-business-scratch, (accessed 25 January 2012). Mambis. Gourmet Streets. Food Truck Franchise Group. http://ftfus.com/img/franchiseprofilesheets/GS_Franchise%20Profile%20 Sheet_%20Mambis.pdf. 24 January 2012. Leasing a Food Truck: Financing. Food Truck Franchise Group. http://ftfus.com/franchising-financing.htm. (accessed 26 January 2012). ix Bureau of Labor Statistics. Latest Numbers. www.bls.gov. (accessed 27 November 2011). x Major Clark and Radwan Saade, Federal Procurement from Small Firms, in The Small Business Economy: A Report to the President (pp.4765) (Washington, D.C.: United States Government Printing Office, 2008), 47. xi U.S. Small Business Administration Office of Advocacy, Frequently Asked Questions, accessed January 2011, http://www.sba.gov/sites/ 25 default/files/sbfaq.pdf (accessed 12 February 2012). xii Amy E. Knaup, Survival and Longevity in the Business Employment Dynamics Database, Monthly Labor Review (May 2005), 52.

Incentivizing Debt Relief to Solve Michigans Brain Drain Crisis

Emily Chackunkal, Sonja Karnovsky, Tom OMealia, Nick Otto, Adam Watkins, and Seth Wescott, University of Michigan In light of record levels of student debt and a high proportion of college graduates leaving Michigan as a result of the weak economy, the state government should implement a program that forgives student debt in return for living in Michigan after graduation.

Student debt is a growing burden on American youth. A recent report found that 8.8 percent of students defaulted on their federal loan repayments in 2011,1 which is just below the 9.14 percent default rate for credit cards.2 The report also revealed that accumulated debt on student loans totals to about $875 billion, a number that surpasses the total amount of credit card debt in America.3 The state of Michigan is not exempt from this trend. The average amount of debt for Michigan graduates as they enter repayment is $25,675.4 The median debt level for the nearly 8,500 colleges and universities listed in the United States was $11,141.5 The high level of student debt for Michigan students, coupled with one of the worst economic situations in the country, has caused many highly educated people to leave the state. Almost half of Michigans students leave the state after graduation, contributing to Michigans migration rate the eighth worst in the country.6 This loss in college graduates will hinder Michigans economic prospects in the future as businesses search for talented human capital elsewhere. If the state wants to return to a high level of economic prosperity, Michigan must attack both the rising level of student debt and also work to keep students in the state after graduation.

Michigan has over 300,000 students in public universities, but only 50 percent of those students remain in the state after graduation.7 Michigan has the eighth worst migration rate in the country among people with a college degree.8 Sixty percent of students in Michigan graduate with debt, and the average amount of debt is $25,675. 9

Key Facts

Analysis

Michigan should implement a law stipulating that any student graduating with a degree in business, math, or science from a Michigan university who remains in the state after graduation will have his or her monthly student loan payments absorbed by the state. This policy is similar to the Opportunity Maine program, which allows graduates to qualify for a tax credit for student debt if they remain in Maine after graduation.10 Maines program is expected to turn a profit of $30 million per year for the state after 10 years with the increased tax revenues from higher population and business growth.11 If a similar program is implemented in Michigan, the state would see a similar or greater return on investment. For example, the average starting salary of an engineer is about $60,000.12 If you calculate a 4.35 percent income tax in the state of Michigan over 10 years, the revenue from income taxes alone would pay back the cost of the forgiven debt.13

26

Next Steps

Talking Points Michigan has been plagued The state of Michigan suffers from both a high with severe student debt and rate of student debt and a brain drain crisis. brain drain problems. The state A debt forgiveness program based on the stipugovernment must play a signifilation that students remain in the state after cant role in solving these probgraduation is a cost-effective solution to these lems. A debt forgiveness policy problems. for students who stay in the This program will ease the financial burden of state after graduation solves college on graduates, attract jobs as a result of both issues and will make the high concentration of people with advanced skills, and add revenues to the state governments money for the government budget. in the long run. The benefits to Michigan are irrefutable; therefore the Michigan State Legislature should implement this policy to give Michigans students and the economy a brighter future.
Endnotes
1. Default Rates Rise for Student Federal Loans. U.S. Department of Education. September 12, 2011. Accessed January 23, 2012. http://www.ed.gov/news/press-releases/default-rates-rise-federal-studentloans. 2. Norris, Floyd. Default Rates Easing, Except on Credit Cards New York Times. May 21, 2010. Accessed January 23, 2012. http://www.nytimes.com/2010/05/22/business/economy/22charts.html. 3. Dennis Cauchon. Student Loans Oustanding will Exceed $1 Trillion this Year. USA Today. October 25, 2011. Accessed January 23, 2012. http://www.usatoday.com/money/perfi/college/story/2011-10-19/ student-loan-debt/50818676/1. 4. Reed, Matthew, Lauren Asher, Pauline Abernathy, Diane Cheng, and Debbie F. Cochrane. Student Debt and the Class of 2010. Institute for College Access and Success. November 2011. Accessed November 8, 2011. http://projectonstudentdebt.org/files/pub/classof2010.pdf. 5. Jesse, David. How much does the average University of Michigan, Eastern Michigan University graduate owe in loans? AnnArbor.com. September 16, 2010. Accessed November 8, 2011. http://www. annarbor.com/news/university-of-michigan-graduates-owe-an-average-of-more-than-20000-in-loansgovernment-says. 6. Silverman, Lauren. The Brain Drain. Generation Y Michigan. November 5, 2009. Accessed November 13, 2011. http://generationymichigan.org/2009/11/05/the-brain-drain/. 7. Ibid. 4. 8. Ibid. 6. 9. Ibid. 3. 10. Opportunity Maine Program. Opportunity Maine. Accessed November 19, 2011. http://www.opportunitymaine.org/opportunity-maine-program/. 11. Graham, Emily. Opportunity Maine aims to keep college grads in-state. The Bowdoin Orient. Accessed November 19, 2011. http://orient.bowdoin.edu/orient/article.php?date=2007-11-02ion=1&id=8. 12. Engineer Salary: Stats and Data. Accessed November 22, 2011. http://www.engineersalary.org/. 13. Income Tax Rate Change Information. Michigan Department of Treasury. Accessed November 22, 2011. http://www.michigan.gov/taxes/0,1607,7-238-43513_44135-177505--,00.html.

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