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1, February 2014
Restoring Liberty, Opportunity, and Enterprise in America
Up in a Down Year
by AEI President Arthur Brooks
We all see the problems our nation and world face right now. The conventional narrative appears to be that we should be depressed about last year. For us at AEI, this narrative is simply incorrect. During challenging times, the greatest gift is to be part of the solution. And that is where we find ourselves. By all objective measures, AEI had a terrific year in 2013. Our work has never had more weight in policy and in the media than it did in 2013. Our supporters have never been more generous. Our principles-based, progressoriented approach has never been more in demand. We are ramping up our research and communications efforts in 2014 for maximum impact. From economic policy research to philanthropic freedom to our increasing campus presence, our scholars are advancing AEI’s mission in new and innovative ways.
You will hear a lot in 2014 about AEI’s new Program on Human Flourishing, which aims to help all people build better lives through the blessings of free enterprise. Just two examples of the program’s work: AEI’s new poverty research focuses on helping the most vulnerable succeed; meanwhile, the Dalai Lama will visit AEI this month to discuss the link between free enterprise and happiness. It is crucial that we show both the right and the left that the free enterprise system is best for America because it gives all of us—especially the most vulnerable—the best opportunity to build the lives we want. The Program on Human
Flourishing will do just that and will communicate the results to millions.
“AEI’s scholarship is far-sighted and people-centered. Our shared vision of a better life for all people through free enterprise and American leadership is breaking through in new and unexpected ways.”
Our focus on the vulnerable couldn’t come at a more urgent time: workforce participation remains at levels not seen since the 1970s, food stamp recipiency is up 50 percent since 2009, and millions of Americans have lost their homes to foreclosure. We are doing particularly timely work on this last topic. My colleagues Ed Pinto and Stephen Oliner have determined that the Federal Housing Administration is threatening to gut low-income communities across the country by making a new cohort of paternalistic home loans to unqualified buyers. AEI’s just-launched International Center on Housing Risk faces the problem head on. Ed and Stephen have singled out the biggest information gaps facing housing market decision makers and have compiled the most robust data set in existence to address those gaps. Now they are working with lenders and policymakers to reform mortgage rules. The vulnerable are not just within our borders, however, so AEI’s research is not limited to America. While our leaders dither, volatile regions spin out of control and millions worldwide are victimized by ruthless dictators and warlords. In his forthcoming book, Dancing with the Devil: The Perils of Engaging Rogue Regimes, AEI resident scholar Michael Rubin explains why US diplomatic efforts are often ineffective in the face of humanitarian crises and national security threats. If America wants to bring Iran, North Korea, and Hezbollah to the table in a mood for serious negotiation, their leaders must know that America is serious about getting results. Michael’s road map for diplomatic success is a fascinating read. AEI’s scholarship is far-sighted and people-centered. Thanks to our community of scholars, supporters, and friends—just a handful of whom are featured in this newsletter—our shared vision of a better life for all people through free enterprise and American leadership is breaking through in new and unexpected ways. Thank you for your commitment to our cause, and I hope you will become even more involved with AEI in 2014.
Major New AEI Initiative: The Program on Human Flourishing
Answering the “Why” of the Free Enterprise System
AEI is leading the charge for free enterprise, arguing that it’s the most moral economic system because it lifts the most people out of poverty. Our new Program on Human Flourishing aims to settle the debate over free enterprise by showing conclusively that it gives the most people the greatest opportunity to create a better life. To win the battle for free enterprise, we must fight for people, rather than against things. AEI is reorienting its research, communications, events, and education around the “why” of our mission: public policy that puts all Americans, most especially the poor and vulnerable, further along in their pursuit of happiness. • Transformation: Based on the pillars of faith, family, community, and earned success that sustain individuals’ well being • Relief: Food, shelter, medical care, and other basic assistance The social science confirms that, while money and material goods are instrumental to the pursuit of happiness, they are not intrinsic to it. Study after study shows that faith, family, community, and work are the four overarching sources of people’s happiness. In order to realize their full potential—to truly flourish—people need: The free enterprise system delivers transformation, relief, and opportunity better than any other. When citizens and policymakers understand that fact, free enterprise becomes not just an economic alternative, but a moral imperative. The Program on Human Flourishing will disseminate the arguments of Arthur Brooks’s upcoming book and the research of dozens of contributing AEI scholars to a broad audience of policymakers, journalists, future leaders, and members of the public, establishing free enterprise as the foundation for any public policy that intends to improve our lives. • Opportunity: Education, credit, and an economy that is creating jobs
Central Program Insights
AEI’s moral case for free enterprise is built on three key insights: 1. The free enterprise movement must fight for people, not against things. 2. “Enterprise” is building your life—the free enterprise system allows you to choose the path you find most meaningful. 3. The pursuit of happiness is fueled by earned success, in whatever field we choose.
AEI Scholars Participating in the Program
Scholars from across the Institute are planning work on poverty, education, family structure, and other aspects of economic mobility in the United States and around the world. AEI resident scholar Michael R. Strain studies the inner workings of the labor market and its effects on economic mobility. Americans’ ability to choose work that they find meaningful is crucial to the pursuit of happiness and human flourishing. Awilda Rodriguez joined AEI in the fall after finishing her PhD in education at the University of Pennsylvania and working as an analyst in the New York City Department of Education. She is researching the disproportionate effect that exploding college tuition has on high-achieving lowincome students. AEI visiting fellow Timothy P. Carney studies and writes about the pernicious effects of crony capitalism on Americans’ incentives to start businesses and earn their success.
AEI Launches International Center on Housing Risk
AEI recently launched the International Center on Housing Risk (ICHR) to make housing policy and housing finance more transparent, objective, and ultimately more stable. The center will build, disseminate, and maintain the most comprehensive set of residential mortgage risk metrics to date. The metrics and analysis are fully transparent and freely available to all, including mortgage financiers, policymakers, and individual borrowers. Additionally, an intuitive online interface will allow users to quickly grasp the risk trends and their implications for housing policy. The ICHR, directed by AEI scholars Edward Pinto and Stephen Oliner, places AEI experts at the center of the most pressing debates in housing policy and housing finance. AEI’s data and analysis will contribute to more effective legislation, improved private-sector lending practices, and greater long-term stability in the housing market. The ICHR will track mortgage risk through new indices that collectively address the most serious information • The collateral risk associated with home-price bubbles is not fully known. (Once a bubble pops and mortgages go “underwater”—the value of the home is less than the price of the mortgage—both the lender’s exposure and the borrower’s incentive to default increase.) • Loans securitized by government-sponsored enterprises (Fannie Mae, Freddie Mac) are especially poorly understood. The ICHR’s National Mortgage Risk Index, Composite Collateral Risk Index, and Capital Adequacy Index will address these information failures. The indices make use of the most comprehensive data set ever compiled, covering 85 to 90 percent of all new mortgages (and 100 percent of government mortgages) and propertylevel home value data in metro areas with a combined population of 40 million. For more information, visit www.housingrisk.org. • As a result, the quality of loans traded as mortgage-backed securities is not fully known. • The risk of default on loans issued by federal agencies (for example, the Federal Housing Administration) and the private sector is still not fully known. • Because the level of housing risk is unknown, the extent to which mortgage insurers are holding adequate capital against their risk is unknown. failures that led to the 2007–08 housing crash. Among the information gaps that the ICHR will close:
International Center on Housing Risk Codirectors
Edward J. Pinto is a resident fellow at AEI, where he studies the effect of government housing finance policy on poor and working-class families. As former chief credit officer of Fannie Mae, Pinto understands firsthand the federal government’s role in housing markets and how distorted incentives in the mortgage market can trap low-income families.
Stephen D. Oliner, resident scholar at AEI, spent more than 25 years at the Federal Reserve Board and was closely involved in the Fed’s analysis of the US economy and financial markets. Oliner studies monetary policy and real estate issues with an eye to the growth potential of the US economy.
Katie Biber, Enterprise Club Member
Many of them have never felt comfortable inside the tent of either major political party, so AEI’s message of policy over politics resonates.
“People in the Bay Area embrace AEI’s values of expanding liberty, increasing
Katie Biber, leader of AEI’s San Francisco Enterprise Club, senior counsel at Airbnb and former general counsel of Mitt Romney’s 2012 presidential campaign. sort the mail, you learn the names of the big players pretty quickly.
Why did you join AEI’s Enterprise Club and agree to take a leadership role in building the San Francisco chapter?
individual opportunity, and strengthening free enterprise.”
You work in the tech industry. Are there any low-hanging-fruit changes to policy that you think would create an environment more amenable to entrepreneurs?
How did you first get interested in politics and policy?
My earliest political memory is election night 1988, when I watched the evening news and colored in a map to show the states won by George H. W. Bush and Michael Dukakis. Even then I had the sensibilities of a conservative or libertarian, but I lacked the vocabulary to apply labels. As I grew older, I became keenly interested in issues of policy in addition to pure politics, and I would frequently test my knowledge by debating the budding liberals in my class. When I moved to Washington, DC, for college, I took an internship with the Dole presidential campaign. I did nothing more than answer phones (I wasn’t even issued a computer), but I was in love. I’ve been involved in every presidential cycle since.
When did you first hear of AEI?
After my family moved to San Francisco last year, I was looking for meaningful involvement in a free enterprise cause. I have several friends involved with the DC chapter of the Enterprise Club, and one urged me to spend time working with AEI in San Francisco. I’m very glad I took her advice.
AEI’s first San Francisco Enterprise Club gathering, held in the fall with Charles Murray, had a great turnout. The Bay Area isn’t known as a conservative hotbed— why do you think AEI has an opening there?
The biggest hurdle for entrepreneurs in almost every industry is the regulatory red tape that makes it hard to disrupt incumbent players who have money and lobbyists to help shape the rules in their own favor. Beyond that, patent reform and a more thoughtful approach to taxes would help, among other things. So would a sensible health care law that entrepreneurs can understand and afford (without the assistance of a lawyer).
I worked on Capitol Hill as a college student. When your job is to open and
Actually, I’ve found that most people in the Bay Area embrace AEI’s values of expanding liberty, increasing individual opportunity, and strengthening free enterprise. AEI has an opening because people here (and everywhere) are truly frustrated about the direction our country is heading. They are looking to make a difference on issues they care about and meet others who share their commitment to liberty.
For more information on AEI’s Enterprise Clubs, contact development manager Emily Cox (202.862.5919; email@example.com).
Dancing with the Devil
Prudence and Folly in American Foreign Policy
AEI resident scholar Michael Rubin offers an unvarnished view of modern US relations with rogue states in his new book Dancing with the Devil: The Perils of Engaging Rogue Regimes, which is set for release this month. Rubin argues that there are real diplomatic and military costs associated with negotiating with hostile regimes, but that these costs are usually overlooked by diplomats hoping to avoid military intervention. The result is a faulty calculus—diplomatic engagement is viewed as a cost-free first step with any adversary—and ultimately it can cost America more than it should have to settle a conflict. far greater chance of succeeding. He cites the common tactic employed by rogue regimes of coming to the negotiating table with trumped-up grievances. This puts Western diplomats on the defensive, and talks begin with the balance of power in favor of the dictator or warlord.
AEI Resident Scholar Michael Rubin
“Michael Rubin’s pathbreaking history could not be more timely. Rubin shows how fifty years of dancing with devils by Democratic and Republican administrations has more often than not led to war instead of peace.”
—–SEN. JOSEPH I. LIEBERMAN.
Amb. John Bolton, Sec. William J. Bennett, and others have also delivered advance praise of the book.
The flexing of American military power can correct this imbalance and ensure that rogue states are more compliant in the aftermath of the talks. A state that knows the United States is loath to use its army is likely to misbehave. Rubin’s careful history of American diplomacy with Iran, North Korea, Iraq, and Libya, and with groups such as the Taliban, Hamas, and Hezbollah, reveals that career diplomats aren’t learning from the past. But our enemies are—and the same old toothless diplomacy emboldens them. While the United States sits back and waits for rogues and terrorists to fully comply with an agreement, their centrifuges keep spinning, raising the hard-power cost that we ultimately pay to contain them.
Rubin describes a mistaken belief that rogue regimes desire the same global peace that America does, rather than their own aggrandizement. US diplomats negotiate with terrorist groups, ruthless dictators, and aspiring nuclear powers but are disappointed time and again when US inducements are not met with the agreed-upon reforms by the rogue power. By the time America “sends in the cavalry” to supplement its diplomatic efforts, the situation has usually devolved. A precarious civil order has begun to crumble, terrorist factions have gained a larger foothold, or would-be nuclear powers are closer to building a bomb. Rubin argues that a judicious mix of hard and soft power from the beginning would give negotiations a
Watch Rubin’s AEI Bradley Lecture on his new book at www.aei.org/Rubintalk.
AEI Trustees, National Council, and Philanthropic Leaders Gather for Chairman’s Dinner and Policy Discussions
Congressman Aaron Schock (R-IL) and Congresswoman Tulsi Gabbard (D-HI) talked about their efforts to foster a spirit of bipartisanship among young (under-40) members of Congress.
AEI’s board of trustees, National Council members, and scholars, together with philanthropic leaders and top policymakers, met at AEI’s headquarters in early December for two days of off-the-record policy briefings and discussion of some of the most important issues of our time. The events included AEI’s annual Chairman’s Dinner, featuring a keynote by Senate Minority Leader Mitch McConnell, who reflected on the challenges the 113th Congress faced over the past year and the plan for the critical months ahead. In addition to these policy discus-
“Giving generously to the causes we value really does
AEI health policy scholar Scott Gottlieb discussed the future of American health care with visiting fellow Ramesh Ponnuru.
sions, AEI held its first Philanthropic Freedom Project working group. Philanthropic leaders heard from Arthur Brooks and AEI scholars Michael Strain, Tim Carney, and Jim Pethokoukis about how to combine charitable efforts with free enterprise in our efforts to lift up the poor and vulnerable. This working group is part of AEI’s broader effort to preserve and protect philanthropic freedom and includes original research on how charitable giving has changed in the United States in the wake of the Great Recession and how these changes have serious ramifications for future tax policy.
boost our well-being and our esteem in the eyes of others. On behalf of my colleagues in America’s millions of nonprofits, I want you to know we’re here for you. We want to help you become healthier, happier and better looking.”
—Arthur Brooks, Wall Street Journal (November 25, 2013), on the personal benefits of giving
Senate Minority Leader Mitch McConnell, Rep. Kevin McCarthy, and other policy leaders engaged the AEI community on a range of policy topics.
Members of AEI’s Legacy Society— those who have included AEI as a beneficiary of their estates or long-term planning—have made unrestricted bequests, designated AEI as the beneficiary of a retirement account that AEI depends year-in and year-out on the generous annual support of people and organizations that share our principles and purpose. Just as important is the generosity of those who provide for AEI’s future through their estate and tax planning strategies. will establish an endowed chair, and set up charitable estate trusts that benefit AEI and provide income to themselves or family members at considerable tax savings. For more information on how you can make a bequest or planned
gift to AEI, contact Nicole Ruman Skinner, Managing Director, Development (202.862.7189; firstname.lastname@example.org).
AEI to Honor Nobel Prize Recipient Eugene Fama at 2014 Annual Dinner
Eugene Fama, winner of the 2013 Nobel Prize in Economics, has agreed to accept AEI’s Irving Kristol Award at the 2014 AEI Annual Dinner in Washington on May 6, 2014. Fama, who serves as a member of AEI’s Council of Academic Advisers, was recognized by the Norwegian Nobel Committee for his work on the pricing of assets. His “efficient markets hypothesis” holds that stock and bond markets assimilate new information so quickly that it is impossible to consistently “beat the market.” As a result of Fama’s work, millions of investors around the world now hold cheap-to-manage index funds designed to match stock markets’ performance. The Irving Kristol Award, named in honor of the longtime AEI senior fellow, is the Institute’s highest honor. Previous recipients of the award (formerly called the Francis Boyer Award) include Gerald Ford, Alan Greenspan, Henry Kissinger, Ronald Reagan, Paul Ryan, Antonin Scalia, and Clarence Thomas. Fama is the first Nobel Prize winner to be honored since Mario Vargas Llosa in 2005. If you are interested in purchasing a ticket or sponsoring a table at the Annual Dinner, please contact AEI senior development associate Windle Jarvis (202.862.5906; email@example.com).
Attracting New Audiences to AEI: A Symposium with the Dalai Lama
On February 19–20, His Holiness the Dalai Lama will visit AEI for groundbreaking discussions about how free enterprise can provide the most people the best chance to live happy and fulfilling lives.
AEI President Arthur Brooks and His Holiness the Dalai Lama
for two days of policy analysis and deep philosophical inquiry. The Dalai Lama’s visit signifies both his and AEI’s commitment to reorienting policy discussions around the question of happiness and human flourishing.
The summit will bring together eminent scholars and business leaders
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