Table of Contents | iii

Table of ConTenTs
foreword by will Marshall and Mark ribbing I fIxIng our broken PolITICs: an InITIal sTeP 1 reforming Congressional elections, by ed kilgore II new foundaTIons for shared ProsPerITy 2 smart regulation for financial Markets, by eugene a ludwig 3 building america’s 21st Century Infrastructure, by Jessica Milano 4 Putting america’s Transportation system on Track, by Paul weinstein Jr 5 a Progressive fix for social security, by robert C Pozen 6 from Tax Cuts to Tax reform, by Paul weinstein Jr III resTorIng The ProMIse of soCIal MobIlITy 7 a work bonus for Men, by katie McMinn Campbell 8 Closing the graduation gap, by doug ross 9 ending Childhood hunger in america, by Joel berg and Tom freedman 10 Investing in early education for future growth, by loranne ausley and katie McMinn Campbell IV fuelIng Clean growTh 11 Putting energy in the white house, by dave edwards 12 energy efficiency as economic stimulus, by daniel l sosland, derek k Murrow, and sam krasnow 1 5 7 13 15 25 33 41 49 57 59 65 71 79 89 91 97

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13 Making america the world’s Clean-Car leader, by Jan Mazurek 14 establishing a global environmental organization (geo), by Jan Mazurek and edward gresser 15 america’s nuclear waste and what to do with It, by bill Magwood and Mark ribbing V new desIgns for naTIonal seCurITy 16 Creating a nuclear-fuel bank, by sen evan bayh 17 achieving Peace and Prosperity in the greater Middle east, by edward gresser 18 Taking naTo global, by will Marshall 19 national security Planning for the long Term, by Jim arkedis 20 a national security Court, by harvey rishikof 21 reforming defense acquisition, by Jordan Tama VI affordable healTh Care for all 22 health reform that Pays for Itself, by david b kendall 23 Improving health Care—by spreading the Mayo (the Mayo Clinic Model, That Is), by david b kendall 24 health Courts for Medical Justice, by david b kendall 25 a Memo to the new President and the nation’s governors: reinventing health Care—The role of the states, by david osborne abouT The auThors

103 109 115 121 123 129 139 147 157 165 173 175 181 189

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by will Marshall and Mark ribbing



r President, your election was a testament to our country’s amazing capacities for self-correction and reinvention Those national qualities have manifested themselves not a moment too soon with our country mired in war and a worsening economic crisis, americans across the political spectrum sense that hyperpartisan grandstanding is a luxury they can no longer afford They seek a new era of competence and comity, in which our people reach across old divides to find new solutions to the urgent challenges of our time The purpose of this book is to offer you and our fellow citizens some constructive ideas on how we can meet those challenges It is a collection of short policy pieces the Progressive Policy Institute (PPI) published as Memos to the Next President starting last september, before we could be sure who our next president would be our work continued through the transition, and this book—with the updated title of Memos to the New President—collects all 25 memos in a volume that we respectfully commend to your attention Taken together, these ideas constitute a new progressive agenda, one that we believe is entirely consistent with your vision for transcending outdated boundaries, forging new coalitions, and governing in a spirit of radical pragmatism This is a “big ideas” book in the tradition of PPI’s Mandate for Change (1992) and Building the Bridge (1996) Those earlier volumes spelled out the policy innovations that defined President Clinton’s modernizing agenda during the 1990s This new collection features the creative contributions of a wide array of analysts and policy experts It reflects PPI’s belief in the power of ideas to overcome the forces of inertia, stasis, and partisan orthodoxy that hold our country back we do not seek merely to advance ideas for the sake of novelty This book rests on the same core tenets that have always undergirded PPI’s work: equal opportunity for all—and special privilege for none; a social compact

2 | Memos to the new President

based on mutual responsibility and civic reciprocity; and the vigorous defense of individual liberty at home and abroad we see the progressive tradition in american politics as the continual struggle to apply and modify such classically liberal ideals in the light of changing economic and social conditions at a time when uncertainty haunts our financial markets, our Main streets, and the international landscape, the need for modernized approaches to policy and governance is as great as it has ever been you have called for transformative change, and this book is intended as a source of ideas for making it happen Memos to the New President is organized into six main parts, each of which pertains to a broad challenge facing your administration and our country we start where any serious project for fundamental change must start—a candid assessment of our broken political system americans’ confidence in washington has reached low ebb restoring trust in the basic integrity and problem-solving capacity of our federal government is the indispensible prerequisite for sweeping reform In his memo, ed kilgore offers creative proposals for reducing the power of special interests in washington and restoring genuine political competition in congressional elections Part II of the book grapples with what may be the most urgent substantive challenge you face: saving america’s free-enterprise system from the greed and myopia lately exhibited by far too many financiers and corporate leaders you will find here sage advice from gene ludwig, former Comptroller of the Currency, for building a new regulatory framework to stabilize u s financial markets other memos offer novel ideas for stimulating our ailing economy; rebuilding the nation’s aging transportation infrastructure; overhauling our regressive tax code; and rebalancing the intergenerational compact embedded in social security all of these prescriptions share an emphasis on reviving a dynamic, entrepreneurial economy that can once again deliver broad-based national prosperity while addressing the concerns of the middle class must be central to our economic policy, we must also redouble our efforts to help low-income americans enter the middle class in the first place Part III focuses on reviving our nation’s promise of upward social mobility for all This section of the book offers a set of highly specific prescriptions for closing persistent gaps in educational attainment It also explores ideas for bringing low-

foreword | 3

income men into the workforce, and for ending the scourge of childhood hunger in the wealthiest nation on earth Part IV presents strategies for building a clean-energy economy and restoring america’s leadership in green technology innovation by now, there is a broad consensus on the need for energy policies that can heal our natural environment, rebuild our job base, and wean us from dependence on foreign oil These memos offer specific plans for accelerating development of clean cars; unleashing the economic benefits of energy efficiency; contending with the problem of nuclear waste; and creating a new international body to foster cooperation on climate change and other threats to the global commons Part V addresses a longstanding challenge for progressives: spelling out clear, credible principles on national security and foreign policy sen evan bayh proposes a nuclear fuel bank to curb the spread of nuclear materials and technology other memos call for spurring economic growth and opportunity in the greater Middle east; modernizing the concept of collective security; reforming the military acquisitions process; striking a better balance between military and civilian power; and establishing a legitimate legal framework for trying terrorist suspects finally, in Part VI, we delve into one of our most vexing domestic challenges: a health-care system that absorbs about one-seventh of our national wealth; imposes onerous financial burdens on the public and private sectors; and leaves more than 45 million of us uninsured These memos elaborate a broad argument for reducing costs by raising quality They affirm PPI’s longstanding support for covering all americans, while suggesting ways that reform can pay for itself The book ends with an in-depth analysis by david osborne of how the nation’s governors can join forces with you and the federal government to break the back of medical inflation—an essential step toward creating a distinctly american approach to universal health care we would like to conclude by thanking our PPI colleagues, particularly debbie boylan, beth kennedy, Tyler stone, Maria bello, alice Mckeon and Moira Vahey we also thank the writers who contributed to this collection These memos are offered in the hope that they may reinforce the call for transformative change at a time when our country faces daunting challenges The last election was an expression of this nation’s keen desire to

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meet those challenges in a new spirit—a constructive spirit that transcends the tired ideological distinctions of the past, and seeks to renew the finest elements of our national character


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reforming Congressional elections | 7

TO: The new President FROM: ed kilgore RE: reforming Congressional elections

their presidential preference, a majority of voters share a profound sense of disgust with small-minded partisanship, special-interest obstructionism, and the power of lobbyists to subvert the common good This convergence of demands for change, across the usual partisan and ideological lines, provides you one clear opportunity to overcome the record of the last eight years— and the one distinct path to everything else you want to accomplish That is why I urge you to make “changing washington” your first priority as president obviously, you have many urgent challenges competing for your time and attention: bringing the war in Iraq to an


f the 2008 campaign produced any clear and unambiguous mandate from the american people, it is for fundamental change in washington regardless of

8 | Memos to the new President

acceptable conclusion, turning around our economy, and a hundred other things but rallying public support for a dramatic change in washington’s political culture will help you mobilize support for every other step you take, and it will improve the chances for progress on substantive reforms specifically, you should signal your continuing commitment to clean campaigns and to the goal of breaking the power of lobbyists over washington by calling for voluntary public financing of congressional campaigns you would slow or even stop the revolving door that now so easily whisks legislative and executive personnel from public decision-making to private decision-influencing such a direct assault on “politics as usual” will pre-empt the otherwise inevitable media story-line that you, like past presidents, are putting aside campaign rhetoric in order to adjust to the realities of power in washington—a point of view guaranteed to disappoint the public and undermine your postelection momentum any reform initiative must, of course, be tangible to be credible a twopronged attack on how lawmakers perpetuate their own power at the expense of the common good is the best and most audacious avenue to pursue

1. Public Financing of Congressional Campaigns
with Congress’s approval ratings at an all-time low, a reform offensive will also enable members of your party to make a fresh start, while providing members from the other party with an earlier test of their commitment to the reform ethic so many embraced during the 2008 campaign without question, special-interest campaign contributions are the mother’s milk of corruption, obstructionism, and gridlock in Congress as the cost of political campaigns has grown exponentially, the dependence of congressional candidates on special-interest dollars has grown as well This year, the most direct and formal method of special-interest fundraising—political action committees (PaCs)—contributed about $4 of every $10 raised by house candidates, and about one-third of all dollars raised by senate candidates (the numbers were significantly higher for congressional incumbents running for re-election) special-interest domination of party-committee and independent-advocacy donations (including the increasingly important infusions of cash from

reforming Congressional elections | 9

the so-called “527s”) was significantly larger Moreover, the widespread practice of “bundling” made it increasingly possible to link batches of individual contributions to particular interests or causes when you factor in the estimated $2 8 billion spent on congressional lobbying activities last year alone, it comes to approximately $5 million per member of Congress recent supreme Court decisions have weakened earlier congressional attempts to set contribution and expenditure limits only a system of public financing for congressional elections is capable of breaking the corrupting nexus of money and influence while a variety of models for voluntary public financing have been advanced over the years, the “clean money/clean elections” model, offering direct candidate subsidies in exchange for strict expenditure limits, is the best available today seven states have enacted variations on this proposal In the two states with the most comprehensive public-financing systems, arizona and Maine, participation in the system by candidates has risen steadily over time, with sizable majorities of state legislative candidates in both states choosing public financing in 2006 The best current legislation adapting the “clean money/clean elections” model to congressional elections is the bipartisan bill co-sponsored by sens richard durbin (d-Ill ) and arlen specter (r-Pa ) aside from the basic idea of offering full public financing to congressional candidates agreeing to expenditure limits, this bill also provides discounted broadcast television ad rates, along with “fair fight” funds to offset independent expenditure campaigns—thus closing (or at least shrinking) one of the largest loopholes undermining the public-financing system for presidential campaigns This last point is particularly important, given the arguments that broke out during the campaign over the presidential public-financing system It is time to acknowledge that the presidential system has been broken by outdated spending limits and the independent-expenditure loophole bipartisan legislation from sens russ feingold (d-wisc ) and susan Collins (r-Maine) would fix these problems, and merits your support some campaign-finance reformers this last year raised hopes that Internetbased small donations might represent an alternative form of public financing That may be true, but the “small-donor revolution” remains a distant

10 | Memos to the new President

rumor in congressional campaigns: This year, fewer than 10 percent of all congressional contributions were made in amounts under $200 In any event, voluntary public financing and small-donor fundraising are complementary, not mutually exclusive any congressional public-financing model could exempt very small contributions, and any candidate opting out of public financing in order to raise money exclusively from such donations could be deemed “clean ” here is another variation on the clean campaign theme, based on a creative proposal al gore made during the 2000 presidential campaign: Instead of making contributions directly to candidates, individuals would have the option of donating money to a new democracy endowment that would finance congressional campaigns They would receive a tax credit for every dollar they contribute to the endowment Candidates would qualify for money if they agreed not to accept any other sources of funding and to limit their overall campaign spending To offset the advantage of rich candidates who finance their own campaigns, the endowment’s managers could make sure that participating candidates have enough funding to be competitive This indirect system of public financing would be entirely voluntary and as such would not raise any constitutional issues whatever approach to reform you choose, the important thing is to demonstrate your resolve to sever the link between public legislation and private campaign donations

2. Redistricting Reform
Campaign contributions are not the only abuse of power that merits your immediate attention Thanks to political gerrymandering, the vast majority of u s house members remain completely insulated from accountability to the public in any meaningful sense The steady decline in the number of competitive congressional races in recent years has become an ongoing scandal even in the “wave” election of 2006, which saw an unusual number of incumbents facing viable challenges, 86 percent of house members did not face serious competition, and nearly 95 percent of all incumbents won The reason is simple enough: Incumbents are generally protected from competition

reforming Congressional elections | 11

by district maps that favor one party over the other by decisive margins, in sharp contrast to the partisan balance that has characterized national politics generally over the last decade To a remarkable extent, members of Congress are choosing their own voters, rather than the reverse aside from the inherently antidemocratic nature of a system in which politicians need not fear accountability to voters, numerous studies (including an analysis earlier this year by the democratic leadership Council1) have documented the unsurprising fact that noncompetitive congressional elections depress voter interest and participation There has been a lot of discussion in recent years about the de facto disenfranchisement of voters who live in non-battleground states in presidential elections but an even higher percentage of voters are effectively disenfranchised in house races cycle after cycle, thanks to districting schemes that prevent competition because of the common practice of drawing district lines through multiple media markets, gerrymandering also contributes to the high (and corruptionencouraging) cost of congressional campaigns, even in those few districts that are competitive furthermore, there is simply no way to measure the corrosive impact on civic engagement of crazy-quilt districts that defy any concept of contiguity or commonality of interest That is particularly true in large metropolitan areas where candidates for multiple seats are competing simultaneously on the airwaves with the next round of decennial reapportionment and redistricting due to begin during your first term as president, the time is ripe to push for redistricting reform but in the states and in washington, both parties will soon fall into the same old patterns of gaming the system for their own advantage as events during the last eight years have established, state-by-state redistricting reform efforts have little prospect for success fortunately, redistricting reform with respect to Congress (as opposed to state legislatures) is a federal issue, since Congress has plenary power to regulate its own redistricting rep John Tanner (d-Tenn ) has twice introduced legislation requiring that states utilize independent commissions and follow “traditional redistricting principles” (e g , compact and contiguous districts) in drawing congressional lines (sen Tim Johnson, d-s d , has introduced a senate counterpart) The bill would also ban the kind of mid-

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decade re-redistrictings that broke out during the 1990s, threatening to make redistricting an annual struggle Many reformers would argue for stronger legislation that would make competitiveness an explicit factor in congressional redistricting, along with the kind of process reforms contemplated by reps Tanner and Johnson but the key to making the whole subject politically viable is support from the bully pulpit of the white house nothing would more clearly signal your determination to put narrow partisan considerations aside and fight for a fundamental change in the culture of our capital than a high-profile stand for redistricting reform, particularly if it is combined with a call for public financing of congressional elections

This is not to suggest that you put aside every other priority to go for broke on initiatives to change Congress such initiatives, however, should be announced as early as possible even if you do not succeed in enacting public financing of congressional campaigns, or a reform of congressional redistricting that restores competitive elections, it is still worth the fight Making radical reforms of our broken political system a centerpiece of your administration’s initial agenda will help you maintain the momentum from your campaign, and keep faith with the voters who viewed you as an agent of change Endnotes
1 dunkelman, Marc, “gerrymandering the Vote: how a ‘dirty dozen’ states suppress a Many as 9 Million Voters,” democratic leadership Council, June 2008,

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smart regulation for financial Markets | 15

To: The new President From: eugene a ludwig Re: smart regulation for financial Markets


ur government’s approach to financial-services regulation over the last eight years has been a spectacular failure, bringing the united states

and the world to the brink of financial ruin The raw facts are stunning during 2008, america’s investment-banking industry has all but disappeared through failure, forced merger, or conversion to bank holding companies The country’s mortgage-banking industry has collapsed america’s largest insurance company was nationalized to avert its failure our two largest government-sponsored enterprises, fannie Mae and freddie Mac, for all practical purposes failed and have been placed to a great extent under federal control Three of the country’s 10 largest banking organizations were forced to merge, ending their independent existence

16 | Memos to the new President

The remaining nine largest financial companies were partially nationalized and the carnage is not over There are many failures that caused this conflagration: the excess liquidity and structural deficits that allowed the u s government and the american consumer to live way beyond their means; excessive leverage allowing consumers, businesses and investors to prop up unsustainable lifestyles and profits; complex mathematical modeling and financial structures that were too little understood or tested; and low-quality lending practices that drove up financial-institution profits at the expense of low- and moderate-income americans as you have pointed out, Mr President, the theme underlying many—if not all—of these failings has been an outmoded regulatory regime that has significantly abetted this outbreak of financial irresponsibility our country urgently needs a new regulatory paradigm to reestablish confidence in our financial system and to put in place a supervisory structure that helps to prevent a recurrence of the broad-scale institutional failures and market meltdowns of the kind we have just experienced This memo proposes such a paradigm shift and outlines the contours of a new system of smart financial regulation that is streamlined, comprehensive, conducive to economic efficiency and growth, and responsive to the needs of the american people

A Brief History of Financial Regulation
The bush administration’s approach to financial regulation appears to have been based on three underlying assumptions: first, financial-market regulation and supervision often does more harm than good It restrains market forces that provide innovative products and services that spur economic growth second, government intervention in markets to protect or assist individuals—particularly low- and moderate-income americans—may be goodhearted, but is, in fact, counterproductive Investors discipline the marketplace best any dishonest, anti-social behaviors by market participants need not be heavily policed, as the markets eventually will punish them Third, serious, broadly based imbalances do occur, but these can be re-

smart regulation for financial Markets | 17

solved by timely infusions of liquidity into the market These periodic interventions by the central bank should be enough to restore equilibrium This doctrine of regulatory minimalism has deep roots in american history It harks back to the colonial era, when the Crown and the big english banks worked to constrain independent economic activity in their american possessions such concentration and centralization of power was rejected by our new republic, which at first allowed financial institutions to flourish with little or no governmental supervision It was only after the chaos of the so-called wildcat banking era (and the political dislocations created by secession and the Civil war) that President lincoln brought some level of order and regulation to the marketplace he did this with the introduction of the national banking act and the national Currency act in 1863, and the creation of a national-bank supervisor in the office of the Comptroller of the Currency following several cycles of economic boom and bust, the great crash of 1929 and the resulting bank failures led to the new deal’s financial controls and social safety nets These regulatory innovations created a more stable balance of supervision and control on the one hand, and free-market dynamism on the other They restored market confidence, essential to a healthy financial system, and underpinned more than a half-century of stability and growth The new deal’s regulatory framework, however, was buffeted in the postwar decades by several forces on the world stage, technological change and globalization expanded the capital markets and made them more sophisticated These forces favored larger financial enterprises and set the stage for fiercer competition from abroad Closer to home, rampaging inflation (especially after the Vietnam war) led government to raise interest rates and eliminate rate ceilings This created new tensions and pressures in the domestic financial industry and dramatically recalibrated the competitive landscape Innovations occurring outside the strictly regulated banks—for example, certain types of securities activities—either drove banks into an unsound variance of these practices or simply led them to take bigger risks even as regulators grew in sophistication, they found themselves always lagging market developments

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These changes in a dynamic marketplace, combined with weaknesses that had grown up in the regulatory system—most notably a dysfunctional federal home loan bank board—laid the foundation for the savings-and-loan crisis of the late 1980s and early 1990s Congress and the white house responded effectively to these disruptions, establishing the resolution Trust Corporation and giving rise to a decade of stability and growth in the 1990s however, the Clinton administration’s attempts to create a new and more comprehensive regulatory structure were mostly stymied by lawmakers, with the exception of modest enhancements of the rules governing bank holding companies other Clinton-era efforts to respond to the dynamic marketplace and allow the financial sector to support a growing economy—such as reform of the glass-steagall act and removal of the prohibition on interstate banking— worked, even with a creaky regulatory structure, so long as the regulators in place were serious and collegial This was largely true during the Clinton years even with the dedicated regulators of this era, however, the system had a hard time keeping up not only was regulatory reform slow in coming, but the ideology espoused and modestly practiced by fed Chairman alan greenspan in the late 1980s and early 1990s—lighter supervision counterbalanced by ample liquidity in times of stress—weakened the regulatory fabric This market-knows-best mindset only became more entrenched—and more harmful—under the bush administration as regulations were weakened further In recent years, only a relatively small part of the financial-services sector has been comprehensively regulated, as much financial activity has been conducted through loosely managed (and even more loosely regulated) “vehicles” or “funds,” often within what should have been regulated financial firms for example, capital requirements and holding company rules encouraged capital arbitrage This allowed banking organizations to reduce their capital obligations by operating financial activities through bank holding company affiliates In some cases, these so-called “special investment vehicles” were created to hold instruments like leveraged loans and collateralized debt obligations The theory was that the regulated unit would not be affected by a vehicle’s failure, a view that proved to be incorrect as bank after bank has moved the assets and the resulting losses back onto the balance sheet

smart regulation for financial Markets | 19

The bush-era regulatory environment also allowed the larger banks, broker-dealers, and insurance companies to create highly structured, unregulated instruments such as credit-default and interest-rate swaps that they sold to the public or traded among themselves The construction of this house of cards was aided and abetted by rating agencies that were only nominally regulated by the securities and exchange Commission, and too often made rating errors ultimately, the ever-more-loosely regulated marketplace for financial services spiraled out of control as unregulated or underregulated mortgage brokers sold fraudulent products—so-called “liar loans” and “pay option arMs” (particularly troublesome forms of adjustable-rate mortgages)—to the public new entities advertising themselves as “mortgage banks” then fed the loans through a technology-fueled securitization Vegematic, slicing and dicing them into “tranches,” which were optimistically rated and sold to investors all over the world It is worth noting that while the worst offenders of this system were underregulated financial companies, their loose practices resulted in many of these behaviors being employed by some regulated enterprises To use another metaphor, excessive leverage and liquidity provided the kindling and the gasoline, as the use of derivatives—countenanced by all the regulatory agencies but particularly by the fed—caught fire and eventually exploded

The New Regulatory Paradigm
such are the origins of the mess you have inherited To restore public confidence in our financial system, you need a new paradigm that steers between the extremes of laissez-faire minimalism and nanny-state overkill Indeed, such a regulatory model may prove particularly important at this juncture in american history, since we will have to wean the public from the emerging nationalized system of finance and back to a free-market system This can only be done if public trust is re-established you have promised to put teeth into our systems of financial-market regulation and oversight as your economic team works to craft its approach, it should keep in mind two overarching themes

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first, effective regulation can only be achieved if it incorporates effective supervision such supervision is based on real-time, hands-on examination of how banks and other financial institutions manage market risks articulating ambitious rules will be a pointless exercise if they are not implemented with vigor second, safety and soundness are cornerstone concepts of financial regulation These words are not synonyms good regulation encompasses both the “safe” operation of financial-services firms (meaning prudent risk-taking) and the “sound” operation of such entities (meaning fair treatment of customers) Particularly in today’s highly interconnected world, where reputation matters, it is hard to imagine that an institution can operate safely unless it operates soundly and treats its customers fairly The past 150 years of american and international financial history have taught us that wisely designed regulatory systems can lessen the severity and frequency of panics and recessions here are seven principles for smart financial regulation that I hope you will find useful in your efforts to stabilize u s financial institutions and markets: 1. Comprehensive regulation for all, not just some. our “alphabet soup” of multiple financial regulatory agencies permitted even regulated intermediaries to choose among regulators and select the most accommodating environment in which to operate Though relatively few institutions avail themselves of this kind of regulatory arbitrage, its availability does cause some regulators to pull their punches all financial institutions and markets should be comprehensively regulated If some institutions are well regulated and others are not, then systems will tend to drift, if not rush, to the lowest common denominator furthermore, we need to ensure that the regulations we have on the books are reviewed periodically for effectiveness regulations often do not work as intended because they are static—or simply because they are well-intentioned but mistaken Therefore, regulators need to be required to test on a periodic basis the effectiveness of their rules and supervisory practices Indeed, it might be best to have those rules and practices audited from time to time by a third party—perhaps even by a non-governmental body

smart regulation for financial Markets | 21

2. Counter-cyclical, not pro-cyclical, regulation. effective regulation should tilt in the direction of counter-cyclicality This means that when times are good, loss reserves (the monies financial companies put away for a rainy day) and capital should rise Conversely, when times are bad, reserves may fall, though capital should already be at sufficient levels so that it does not need to be increased similarly, accounting policy should not be pro-cyclical, making any highs appear higher and the lows lower than true economic conditions would ordinarily dictate accounting should be about measuring, not driving, economic reality It is clear in the current cycle that mark-to-market accounting (in which assets are valued at their current market price) has not worked and needs to be modified 3. Regulatory burdens minimized, bright lines preferred. regulatory goals should be achieved through the least burdensome means possible heavy compliance burdens mean higher costs for consumers and— to the extent that they misdirect financial executives from their main mission—can even undermine the safety and soundness principles that regulation is supposed to enshrine In general, bright-line requirements—such as capital ratios that derive from set numerical standards, not speculative models—should be used as much as possible 4. Strict limits on the use of leverage. excessive leverage causes financial firms to be more volatile, and regulators must ensure adequate capital backstops for all financial-services activities setting the right capital standards (the amount of capital a financial firm is required to put in a reserve to cover possible losses) is difficult Capital requirements that are too high can cut off lending and depress economic activity Certainly, different activities with different risk characteristics create differing capital needs There are serious harmonization issues with respect to capital levels set by foreign governments furthermore, capital adequacy is one of the most important but by no means the only important prudential rule however, it is clear that the application of the basel II capital-adequacy rules by the seC—which allowed 40 to 1 leverage, and accordingly,

22 | Memos to the new President

extremely low capital requirements for investment banks—was seriously wrong Capital requirements of 6 percent of total assets of high-quality capital (the so-called leverage ratio) as well as 10 percent of total assets risk based (somewhat lower quality capital) are closer to the mark 5. More and better regulators. smart regulation and oversight requires more regulators, and it requires that they be well trained and well paid It is time to professionalize regulation and supervision; today, you can get a college degree in almost everything except regulation and supervision since such efforts will take years to bear fruit, it is important that your administration encourage universities to create strong academic programs at the undergraduate and graduate levels in regulation, supervision, and risk monitoring 6. Better coordination with other governments and agencies. In no economic sector has globalization made more of an impact than banking and finance what happens in our housing market reverberates around the world yet, we continue to operate a balkanized regulatory system, both internationally and within the united states each european country has its own bank regulatory system, and the eu plays its own modest role; in the united states we have four federal bank regulators and 50 state regulators regulatory meetings in the united states and internationally make progress, but have too much of a Towerof-babel quality to them due to this multiplicity of voices even getting u s regulators to come out with subprime guidance took years, and then this achievement was watered down by the disagreements among the bureaucracies To ensure efficient business operations and consumer well-being, and to protect the taxpayer from future bailouts, we must harmonize international standards and enforcement 7. Regulation that serves consumers and communities. smart regulators want the businesses they regulate to succeed, but their first concern should be for the consumers and communities that these businesses serve Companies inspire confidence when they are financially safe and sound; decline

smart regulation for financial Markets | 23

to take undue advantage of their customers; and find ways to better their communities In regulating the financial sector, we need to ensure that differently sized institutions are regulated appropriately so they are able to meet the needs of the communities they serve for example, it is important that regulation not become a means of eliminating smaller firms, such as community-based banks and financial institutions for example, the capital rules of basel II proved too complex for many community banks, and overly advantaged large, sophisticated banks even in their modified form, these rules create a playing field that is far from level

The old model of regulatory minimalism has failed our country in two principal ways first, it is not sufficiently comprehensive; it allows a large portion of the financial services world to be either unregulated or underregulated second, the current “alphabet soup” of financial services, regulators, and enforcers is almost unintelligible to the public; encourages regulatory arbitrage; has led to less rigorous consumer standards than is desirable; and has trouble attracting a sufficient number of talented people to supervise larger and more complex financial companies, instruments, and markets The global financial meltdown has unmasked these weaknesses and created momentum for serious change Mr President, I hope you will create a new paradigm of smart regulation designed to restore confidence in our financial system; check its tendencies toward excessive risk in pursuit of outsized gains; and restore its ability to generate wealth and value for the people of this nation

building america’s 21st Century Infrastructure | 25

To: The new President From: Jessica Milano Re: building america’s 21st Century Infrastructure

comprehensive railway network; the most sophisticated communication and electricity grids; and an extensive interstate-highway system for generations of americans, these highways, trains, and airports were symbols of our ingenuity, prosperity, and cando spirit but they also reflected something even deeper: a national commitment to individual freedom and unlimited horizons Today, this advantage is disappearing one can see it not only in the spectacular failures of our aging bridges and levees, but also in the day-to-day grind of bottlenecked


n the not-too-distant past, the united states was the world’s undisputed leader in public infrastructure ours was the nation with the best airports; the most

26 | Memos to the new President

traffic, pothole-riddled roads, dysfunctional airports, and the vast stretches of our nation still unserved by advanced telecommunications networks all of these shortfalls represent areas in which we have fallen behind other advanced nations any american who has traveled in recent years to western europe or east asia has noticed the improvements other leading nations have made: the fast inter-city trains of france; the state-of-the-art airports of China and Japan; the widely accessible high-bandwidth Internet connections of south korea Then the american traveler comes home to the slow trains of amtrak, the chronic delays of kennedy airport, and the dearth of high-speed Internet access in rural areas The overall effect is a limiting of american mobility, both physical and social It is a contradiction of our basic interests and values This erosion of our public resources is a civic shame, a drag on our economic growth, and, in some cases, even a threat to safety If we are to get america moving again, your administration and the new Congress will need to make key investments to reverse this decline The most straightforward explanation for this failure is a lack of adequate funding u s spending on infrastructure, as a percentage of gross domestic Product (gdP), has declined by 50 percent since 1960 spending today is now well below where it needs to be—and the cracks have, quite literally, begun to show while the american society of Civil engineers (asCe) estimates the united states will need to raise $1 6 trillion just to repair and maintain our existing infrastructure stock,1 we are being outspent by our competitors The united states is currently investing less on infrastructure as a percentage of gdP than europe, China, and many emerging economies In total, emerging economies alone are likely to spend $1 2 trillion on infrastructure in 2008 2 america spends only about 2 percent of gdP per year on infrastructure investment (this includes federal, state, local, and private-sector spending) by contrast, that number is about 5 percent in europe and between 9 percent and 12 percent in China 3 In developed economies, the average is about 3 percent of gdP, and for developing economies it is around 6 percent while the united states is trying to make a dent in its massive repair bill, other

building america’s 21st Century Infrastructure | 27

countries are lapping us in new investment—further shrinking the competitiveness gap between america and the rest of the world

U.S. Competitiveness Gap
with the economy slumping, fuel costs rising over time, and private capital looking for new investment opportunities, infrastructure projects can boost our global competitiveness and create jobs at the same time Many studies have pointed to a positive correlation between such investment and economic growth 4 economic analyses over the last 20 years have attempted to quantify those benefits, and have come up with a wide range of estimates depending on how the funds were spent almost all analysts agree, however, that public spending generally produces “positive economic returns ”5 a recent world bank study even estimates that under the right conditions, “a 1% increase in a country’s infrastructure stock is associated with a 1% increase in the level of gdP ”6 Infrastructure is defined as transportation (highways, roads, air, water, and rail), utilities (water, gas, electricity, and telecommunications), and some other public facilities such as schools, prisons, and the postal system In short, it is the nerve, sinew, and muscle of our economy and our society when these networks and systems get fatigued and run down, it is impossible for america to operate at full health In order to understand the problem, we need to understand how the united states currently pays for what we have In 2004, $400 billion was spent on infrastructure, of which the federal government provided $60 billion, or 15 percent of the total state and local governments funded 42 percent, and the private sector covered the remainder 7 what is important to know here is that these three different funding sources tend to spend their money on very different things for example, federal spending is dominated by transportation—nearly 50 percent of uncle sam’s infrastructure spending goes toward highways state and local government spending is dominated by highways, schools, and water, which together account for nearly 80 percent of the state-and-local sector’s $175 billion publicworks bill Private-sector infrastructure spending is dominated by energy and

28 | Memos to the new President

telecommunications; these two spending categories alone account for nearly 80 percent of private infrastructure spending 8 despite this de facto specialization, there is no clear mandate on how to set goals and allocate spending on infrastructure federal funding is subject to annual budgeting and therefore highly susceptible to congressional pork annual budgeting also means it can be difficult to design and fund projects that require a longer time horizon or serve a greater national interest state and local projects that depend on local taxes for support—like schools—can be severely affected by adverse local economic conditions that make it difficult to raise funds even the private sector, despite the benefit of market efficiency, can be slow to explore new opportunities, such as renewable energy resources, when the current ones are still making considerable profits

Untapped Opportunity
Public investment is needed, but it is clear that government cannot, and should not, shoulder the burden alone as it happens, private capital investors are hungry for high-quality investment opportunities after the collapse of mortgage-backed securities and the turbulence in the equity markets In response to this market demand, banks and private equity firms have raised funds to invest in major infrastructure projects according to Mckinsey & Company, the world’s 20 largest private infrastructure funds have nearly $130 billion under management, with 77 percent of it raised over the last two years alone 9 This represents an enormous opportunity for funding our infrastructure needs one way to seize that opportunity is to create an american version of the european Investment bank (eIb), which has a half-century track record of success in financing productivity-enhancing projects The eIb was founded under the terms of the 1957 Treaty of rome as the long-term lending institution of the european union (eu) The eIb is owned by the member states of the eu, who make an initial contribution to the bank’s capital-reserve fund according to their relative gdP otherwise, the bank is fully self-financing, borrowing on the financial markets to issue loans, and does not take any funds from the eu budget The eIb operates

building america’s 21st Century Infrastructure | 29

autonomously, is a non-profit, and makes lending decisions based on the following charter criteria: • Investments must help achieve eu objectives; • These investments must be economically, financially, technically, and environmentally sound; and • They should help attract other sources of funding (the eIb cannot lend more than 50 percent of the total cost of an individual project) because the eIb’s shareholders are the eu member states, its debt carries the highest possible credit rating (aaa) on the money markets, allowing it to generate capital on very competitive terms borrowers range from small businesses to national governments while repayment terms may vary, all loans must be paid back to the bank In 2007, the eIb raised €55 billion on the capital markets and made new loans totaling €47 8 billion10—85 percent of which went toward further improvements to eu airports, highways, bridges, railroads, and other vital infrastructure The remainder supported development projects around the globe

An American Investment Bank
your administration should establish an american Investment bank (aIb), following the model of the eIb The aIb could be staked with an initial capital-reserve fund from the federal government and one-time membership fees from the states 11 The aIb could then raise funds for infrastructure loans by issuing debt instruments backed by the government’s credit rating The skyrocketing growth in private investment funds shows that there is a large—and still untapped—market for infrastructure-backed assets This market is a ready source of funds for public-private partnership in infrastructure investment The aIb, like the eIb, should have a charter that sets out clear investment goals These should include the following:

30 | Memos to the new President

• Projects should be evaluated based on sound economic criteria and their environmental impact; • such projects should promote community economic development and broad-based economic opportunity; and • They should promote the maintenance and public safety of existing critical infrastructure

a self-financing institution like a new aIb could raise funds for infrastructure investment without raising taxes In addition, such an entity—if given sufficient autonomy—could evaluate infrastructure projects based on sound economic criteria and not pork-driven local interests unlike the current system of annual federal budgeting for projects, which encourages congressmen to find funds for local projects regardless of larger economic value, the aIb would raise its own funds and issue loans This would give the bank an incentive to make loans to economically viable projects, since a failure to do so would expose the bank to the risk of default The fact that the aIb would not rely on annual or continued federal financing means it would be free to evaluate loan proposals on their economic merits rather than on purely political terms These qualities of self-financing and autonomy would enable the aIb to allocate long-term capital more easily than annual budgeting can, and will have the added benefit of cutting down on wasteful public spending The charter goals of the aIb would prohibit it from financing “bridges to nowhere,” because projects would have to promote economic development and be evaluated on sound economic principles like the war-bond program during world war II, aIb infrastructure bonds would allow ordinary americans to “invest in america” to help meet the infrastructure challenge and promote responsible citizenship In addition to the civic and patriotic benefits of such a program, americans will benefit from the opportunity to purchase a new high-quality savings instrument

building america’s 21st Century Infrastructure | 31

finally, the aIb would be ideally suited to make loans to joint public-private partnerships This would make it easier for local communities to attract private partners, and would allow states and localities to tap into the more than $100 billion in private funds currently available for investment opportunities over time, the aIb could also provide technical advice to localities looking to reproduce previous aIb infrastructure projects

america’s infrastructure is in need of significant repairs, but increased demand cannot be met by tax-based government funds alone an american Investment bank would be able to raise funds for infrastructure development, promote public-private partnerships, and allocate funds efficiently without being subject to some of the pitfalls of annual budgeting In addition, offering infrastructure-backed bonds is a great way to encourage ordinary americans to participate while raising funds without raising taxes In short, this is a policy that you would do well to consider There is much to gain—and no time to lose Endnotes
1 2 3 4 5 6 7 8 9 10 11 american society of Civil engineers, report Card for america’s Infrastructure, “The Cracks are showing,” The Economist, June 26, 2008; “building brICs of growth,” The Economist, June 5, 2008 Ibid Congressional budget office, Issues and Options in Infrastructure Investment, May 2008 Ibid “building brICs of growth,” The Economist, June 5, 2008 Congressional budget office, op. cit Ibid spellman, James, “building on strong foundations,” Financial Times, March 13, 2008 european Investment bank, annual report 2007, Volume II financial report The obama campaign proposed a $60 billion federal investment in a national Infrastructure reinvestment bank over 10 years, but this proposal applied mainly to transportation projects It did not seem to call for the creation of an autonomous, selffinanced institution along the lines of what is being recommended here

Putting america’s Transportation system on Track | 33

To: The new President From: Paul weinstein Jr Re: Putting america’s Transportation system on Track


f america’s air-travel system is any indication, the sky really is falling flights have been cancelled by the hundreds due to safety concerns five commercial airlines

have gone out of business since the beginning of the year (three in one week in april), in large part because of unstable fuel costs and declining passenger demand six broad

fare increases have gone into effect this year alone, along with new charges on everything from pillows to luggage at Philadelphia International airport, average passenger delays have grown to more than 20 minutes, while bottlenecks at airports in the new york metropolitan area have become so chronic that the federal government has imposed flight caps and installed a new “airport czar” to make sense of the mess

34 | Memos to the new President

while the laws of supply and demand will undoubtedly correct some of the problems the airline industry faces, the future for air travelers is not so bright Most economists agree that airline mergers, fewer flights, and more fuel-efficient planes will eventually help put the industry on stronger financial ground unfortunately, these very measures will also mean higher prices, less choice, and fewer amenities for passengers In the short term, passengers have two choices: fly less or pay more for an inferior service but your administration could offer a creative, long-term solution to both our air-travel woes and the congestion on our roadways: high-speed rail (hsr) for years, efforts to pass legislation that would make a significant investment in high-speed rail have been halted by a number of factors: the bush administration’s ideological opposition to government investments in infrastructure; the return of deficits; the lack of a direct source of funding; the hostility of the airline industry; and a wasteful and distracting debate over the future of amtrak with the airline industry cutting routes and raising fares, the cost of a gallon of gas expected to continue to rise in the long term, and the unemployment rate going up, the time for a major investment in high-speed rail may finally be at hand

Rail and Reality: Why America Needs High-Speed Trains
first of all, with our economy officially in a recession and unemployment rates projected to rise to levels not seen since the beginning of the 1990s, one of the strongest arguments for a major investment in high-speed rail is that it will help produce new jobs and promote economic growth over the long term Most of the major high-speed rail proposals include forecasts of significant job growth These projections usually include both direct job creation (temporary construction-related jobs during the building of the network) and indirect job creation (permanent jobs created as a result of the growth generated by the rail network) based on estimates done in the past for high-speed rail projects, we believe that for every $10 billion invested in high-speed rail, 40,000 construction-

Putting america’s Transportation system on Track | 35

related positions and 112,500 permanent jobs will be created 1 This ratio of investment to job creation (amounting to a cost of $65,573 per job) compares quite favorably to the recently enacted federal stimulus package according to Treasury secretary henry Paulson, the $150 billion stimulus will only create 500,000 jobs (a cost of $300,000 per job) 2 second, a major investment in hsr would decrease congestion at our airports and on our highways a single railroad track, just six feet across, has the capacity of a superhighway 10 times wider according to the san francisco bay area Metropolitan Transportation Commission, an hsr system between southern California and the bay area would attract enough passengers away from planes to replace approximately 200 shuttle flights each day This would allow for more long-distance flights out of California’s major airports, including increasingly profitable flights to asia Third, hsr can also reduce pollution and our dependence on foreign sources of energy high-speed trains draw power from the electrical grid, which is fueled primarily by domestically produced energy sources such as coal Plus, trains require about one-third as much energy per passenger mile as automobiles and airplanes although nothing powered through the grid is entirely carbon-neutral, high-speed trains produce no direct emissions as for greenhouse gases, the carbon footprint of hsr is considerably lighter than that of planes and autos, with hsr producing half as much carbon-dioxide emission as airplanes and one-sixth as much as cars according to the California high speed rail authority, the proposed hsr system from san francisco to san diego would eliminate nearly 18 billion pounds of greenhouse-gas emissions and reduce the state’s dependence on foreign oil by up to 22 million barrels per year 3 fourth, since the mid-1990s, there has been a strong increase in rail demand and service, primarily along short- to medium-distance inter-city routes and commuter lines In eight of the last nine years, amtrak has experienced increases in ridership, with the 2005 level of 25 4 million representing a 29 percent boost from 1996 These increases have been primarily driven by a few key routes where there is a strong inter-city passenger-rail presence, such as the northeast Corridor, the Chicago-anchored Midwest network, and the Pacific Coast 4 but amtrak is only part of the story from 1995 to 2005, usage of commuter rail (service between central business districts and commuter towns

36 | Memos to the new President

that, compared to rapid transit, is less frequent and covers longer distances) grew by more than 20 percent, from 352 million to 423 million passenger trips This growth rate is comparable to that for automotive travel during this period furthermore, roughly one-half of the 21 commuter railroads in north america did not exist 15 years ago Traditionally, such systems were concentrated in large, densely populated northeastern cities such as new york, Philadelphia, and boston Today, commuter railroads are located in metropolitan areas across the nation, including Miami, los angeles, nashville, Charlotte, and albuquerque, while new systems are in the advanced stages of planning and development in detroit, orlando, and austin 5

Three Ways to Pay For High-Speed Rail
Clearly, it’s time for a national investment in rail where it makes sense— namely, in densely populated corridors It will not be easy to generate the necessary levels of funding in the current financial climate, but it can be done here’s how, in three straightforward steps: 1. Build five high-speed rail corridors. your administration should identify five priority corridors to be built out in the next 10 years These corridors would be chosen based on a number of factors: distance; geography (the flatter the terrain, the faster the train); the availability of state, local, and private funding; and a high probability of use (densely populated corridors with significant levels of highway and airborne traffic) Those states that are already committing to building hsr obviously would have some advantage in this process for example, California is arguably the furthest along in its efforts to build a bullet train that connects most of its major cities with the passage in november of almost $10 billion in bond authority for hsr, a north-south route through the state should be one of the five corridors 6 a second obvious choice for high-speed rail funding would be the northeast Corridor (boston-new york-Philadelphia-washington) a third candidate would be the area currently covered by the Midwest regional rail Initiative (Minneapolis-Chicago-st louis-detroit) other possible options for the final two bullet-train corridors include florida (Tam-

Putting america’s Transportation system on Track | 37

pa-orlando-Miami), Texas (san antonio-houston-dallas), Pennsylvania (Pittsburgh-Philadelphia), and the southwest (los angeles- Phoenix), where federal funds could be used to restart state efforts to build hsr These high-speed routes on dedicated passenger-rail tracks could be operated by a number of entities: amtrak; regional government-sponsored corporations; state and local cooperatives; and, if feasible, private companies The selection of operators would depend on affordability, the presence of committed investors, and other factors obviously, if state governments are contributing a significant portion of the funds for the project, they would have a major influence in determining who would operate it 2. Establish a Rail Trust Fund and identify deficit-neutral sources of financing. what is needed most is a dedicated source of direct rail funding that is deficit-neutral without this, true hsr in the united states will continue to be nothing more than a dream roads and airports have direct sources of financing, in the form of taxes, tolls, and other user fees If passenger rail is going to succeed once again in the united states, it too needs its own direct source of funds That is why Congress should establish a rail Trust fund (rTf) that would finance the construction and maintenance of our national passenger-rail system, including hsr The rTf would receive its funding from a variety of sources: • a ticket tax on all passenger-rail systems, including commuter-rail networks (but not rapid transit) a $5 per-ticket charge on amtrak’s passenger network could raise $175 million a year a smaller charge on commuter systems (around $1 per ticket) could raise more than $400 million each year • In return for letting freight companies use the new and improved rail lines during off hours, those companies could, where feasible, be charged fees worth an additional $200 million per year • states would be required to match the federal contribution for any major rail investment at the same level as they do for highway and air-

38 | Memos to the new President

port projects states that offered greater matches could receive priority funding • federal dollars to help support hsr (and traditional passenger rail) should also come from a mandatory national system to cap and trade emissions of carbon dioxide and other greenhouse gases a portion of the proceeds generated from auctioning carbon-emission rights should be reserved for rail development If those rights were to reach $25 a ton (akin to the expected prices on the 2008-2012 european trading market), the value of trading allowances would be approximately $100 billion annually, or just under 1 percent of u s gdP 7

3. Target investment at demand by focusing on proven rail corridors. More than one-third of all u s passenger-rail traffic is where rail is currently available and most reliable: in the northeast and along the inter-city corridors of California and the Midwest The primary focus of our new rail system should be on developing these regional networks where rail transportation has a real chance of succeeding any other approach risks throwing away taxpayer dollars and contributing further to the mistaken belief that america “isn’t ready” for large-scale passenger rail amtrak may also continue supplementing these efforts with carefully identified long-haul passenger routes serving less-populated rural areas, which might be more affordably served by rail than by the current system of highly subsidized rural air routes These rural rail extensions may be politically necessary to advance hsr in some states The infrastructure for passenger rail and hsr should receive the same level of federal support as highways and airports, which currently receive subsidies amounting to 80 percent of their overall cost furthermore, the next administration needs to develop a transportation policy that integrates our air and rail networks In the past, airlines have seen rail as a potential competitor, and they have opposed federal subsidies for high-speed systems This has resulted in an air-traffic system that is overwhelmed by short-haul flights with unstable fuel prices and an aviation grid that has reached its limits, the time is right to create a rail network that serves as a passenger feeder to our

Putting america’s Transportation system on Track | 39

airports for example, someone traveling from Peoria, Ill , to Paris would no longer fly a commercial prop plane to Chicago, but instead take a fast train that would stop at o’hare for the international flight to france To ensure the process is seamless, the rail network and the airlines could have codesharing agreements and even combined fares; a single ticket would get you from central Illinois to the City of light To create these new intermodal transportation hubs, some funds would be redirected from airport expansion to the construction of rail lines that link directly to air terminals This last point is crucial direct rail connections to airports are far more useful—and more popular—than rail systems that force passengers to navigate a combination of trains and buses before ever reaching an airplane

Conclusion: The Time is Right
Mr President, if we choose to live in the past, america’s transportation system will just keep creaking along but if we take a regional approach, highspeed trains and traditional rail can serve an important transportation role in the 21st century such a breakthrough will not come cheap, and choosing five corridors to start the process will take political courage however, the economic, environmental, and transportation benefits of high-speed rail are clearly worth the expense and the effort Endnotes
1 for estimates on job creation for specific high speed rail projects, see California high speed rail authority and Midwest high speed rail association 2 remarks by secretary henry M Paulson, Jr before the national association of business economists, March 3, 2008 3 California high speed rail authority, 4 u s department of Transportation, bureau of Transportation statistics, & “with rail leading, america’s Transit ridership soars - but after years of underfunding, agencies Plunge Into Crisis,” lightrailnow org, august 2008 5 “usa: despite Critics and federal opposition, light rail Transit Chalks up Major successes in 2007,” lightrailnow org, december 2007 6 goble, keith, “Voters in California ok high-speed rail, transit tax questions,” Land Line Magazine, november 19, 2008 7 Thanks to Jan Mazurek for this information

a Progressive fix for social security | 41

To: The new President From: robert C Pozen Re: a Progressive fix for social security

of the baby boomers’ long march into retirement so begins a demographic phenomenon that will reshape our society and—unless we act wisely now—overwhelm our public finances The implications for our elected leaders are clear: when it comes to reforming social security and Medicare, the future is now as our new president, you must begin laying the groundwork for a comprehensive update of america’s venerable but underfunded social-insurance programs— starting with social security but why start with social security? doesn’t Medicare present a much bigger financial challenge?


hile the past year was dominated by a highstakes election and the financial meltdown on wall street, 2008 also marked year one

42 | Memos to the new President

It does, and that is exactly the point since social security is, comparatively speaking, the “easy” fix, it ought to be repaired first we know how to fix social security, whereas there is less agreement on viable options for reining in health care costs If we can build a sturdy coalition to reform social security, that might make it easier to form a similar bipartisan alliance when we tackle Medicare down the line forging a new spirit of bipartisan trust and cooperation is a prerequisite for entitlement reform back in 2001, President bush tapped me to be one of several democrats on his Presidential Commission to strengthen social security That effort foundered on the white house’s ideological fixation with private savings accounts funded by payroll tax contributions by conflating reform with these “carve out” accounts, republicans repelled democrats and sowed a legacy of mistrust that has paralyzed candid discussion of social security ever since The truth is, social security faces a substantial funding gap that cannot be closed by stronger economic growth or tax hikes alone The new demographic realities—fewer workers supporting more retirees—demand that we also restrain future benefit growth otherwise, the program’s rising costs will continue to crowd out space in the federal budget for public investments in other progressive priorities The fairest way to constrain those costs is to adopt what I have called “progressive indexing” of social security benefits before explaining this idea in detail, let’s look at some background

Social Security: The Basics
social security is a mandatory insurance program for all american workers, in which payroll taxes are used to finance workers’ retirement benefits It is financed by a 12 4 percent payroll tax on earnings up to an annual maximum, which in 2008 was $102,000 retirement benefits under social security are based on a complex formula taking into account a worker’s average lifetime earnings, wage inflation, and other factors The financing challenges of social security derive primarily from the changing demographics of the u s In 1960, payroll taxes from approximately six workers supported benefits to every retiree; by 2030, there will

a Progressive fix for social security | 43

be only two workers supporting every retiree Moreover, american retirees will continue to live longer, and therefore receive social security benefits for more years as a result, the social security trustees predict a funding shortfall with a present value of $4 7 trillion over the next 75 years They estimate that the social security Trust fund will run out of money around 2041 1 If no reforms are made to social security on or before 2041 (that is 32 years from now— when today’s thirty-somethings will be in their 60s and early 70s), Congress would either have to slash social security benefits by roughly 25 percent or raise payroll taxes to a rate of 18 percent (or some combination of both) skeptics of reform have argued that such draconian steps can be avoided if economic growth and wage levels increase faster than assumed by the 2007 Trustees report yet, even if this optimistic scenario were to occur, the impact on social security’s solvency would not be that large, because higher wages would also mean higher retirement benefits for many workers More importantly, the longevity assumptions used by social security have generally understated increases in life expectancy If the biotech industry makes a breakthrough in a major disease like cancer, there could be a dramatic rise in the life expectancy of american workers while the Trust fund’s solvency will be at issue in 2041, social security’s problems really begin in 2017 In that year, social security will go from an annual surplus to an annual deficit as benefits start to exceed payroll taxes The impact of this would go well beyond social security here’s why: historically, both republican and democratic administrations have used social security’s surplus to reduce the federal budget deficit In 2007, for example, the deficit would have been more than $100 billion higher without the social security surplus after 2017, however, social security will run ever-growing deficits of its own, which will make the federal deficit even bigger

Reforming Social Security: Four Principles to Follow
what can be done to avoid a federal budget crunch starting after 2017—or an outright bankruptcy of social security around 2041? four principles (two do’s and two don’ts) should be followed in all reform plans:

44 | Memos to the new President

1. Do protect Social Security’s character as a social-insurance program whereby every contributing worker receives retirement benefits related to his or her contributions. The strong political support for social security has been grounded in its broad-based application to private-sector workers This political support would be undermined if Congress adopted “means testing,” which would involve taking away all social security benefits from workers with annual earnings or retirement income over specified amounts 2. Do make Social Security more progressive for low-wage workers. The tax benefits from all private retirement plans—including defined benefit plans, 401(k) plans and individual retirement accounts—exceed $100 billion per year, and go overwhelmingly to middle-income and high-wage workers Thus, social security should preserve decent benefits to low-wage workers, who generally have no other sources of retirement income 3. Don’t divert any payroll taxes from Social Security to private “carve out” accounts invested in the securities markets. This has no support from democrats, and will be opposed even by some republicans in light of wall street’s recent woes but social security reform should be accompanied by expanding “add-on” accounts, like individual retirement accounts, which are not funded by payroll taxes 4. Don’t reduce benefits for anyone now in retirement or close to retirement. These workers have long relied on the existing rules for social security, and it would be a breach of trust to change those rules on them now that they are at the end of their most productive years My proposal for progressive indexing of benefits is consistent with these four principles It would index, or link, the initial benefits of higher earners to prices rather than to wages, as is currently the case The effect of such a change would be to limit social security benefits for the well-off to the growth in prices—a step that would be mitigated by providing affluent americans with new opportunities to save money in tax-favored accounts This would start

a Progressive fix for social security | 45

in 2012 and not apply to anyone in retirement as of that year The end result would be the protection of social security for all americans, with no diminution of benefits for lower-wage workers

The Importance of Indexing
Most people believe that social security benefits already are based on price indexing because, after they retire, their benefits are indexed for inflation (using the consumer price index, or CPI) but that is not actually the case The initial calculation of social security benefits at retirement is based on wage indexing—not price indexing upon a worker’s retirement, the government calculates his or her average annual earnings over a 35-year career, and then increases that average by the rise in wages over his or her career (not the rise in prices) This little-known fact helps explain how price indexing could save social security In the united states, wages have historically risen over 1 percent faster per year than prices Therefore, the purchasing power of social security benefits in 2045 is projected to be roughly 50 percent higher than in 2005 for a comparable worker (in constant dollars) That is a substantial increase in purchasing power It would be great if we could afford to offer that boost to all american workers unfortunately, we cannot we can only afford to offer it to some workers, and social equity demands that we reserve it for the lowest 30 percent of wage earners—workers who generally do not have other sources of retirement income under progressive indexing, their benefits would not change by contrast, most median-wage and high-wage earners receive retirement benefits from private plans—including 401(k) programs—as well as social security under progressive indexing, the social security benefits of high earners (over $90,000 per year in average career earnings) would grow with inflation, while those of middle earners would grow at a rate somewhere between inflation and the rise of wages setting the growth of benefits this way for high- and middle-wage earners would make a real difference, saving literally trillions of dollars It would reduce the present value of the 75-year deficit of social security by somewhere between $2 6 trillion to $3 2 trillion, depending on the precise design of the

46 | Memos to the new President

progressive-indexing program what are the alternatives to progressive indexing? Many reformers call for extending the normal retirement age beyond 67 (it will stay at 66 for a few years after 2011 and then rise slowly to 67 in 2027) such an extension would be logical if linked to rising life expectancy, since that implies receiving retirement benefits for more years Moreover, the political opposition to this alternative would likely be reduced if the normal retirement age is gradually extended beyond 67 only after a far-off date like 2040 There are several substantive and political arguments against the proposal to raise the normal retirement age above 67: • raising the retirement age is not progressive because it applies equally to workers at different wage levels; • In practice, such an increase in the retirement age would be more challenging to low-wage workers, since they are more likely to engage in physical labor; • The difference in life expectancy between low- and high-wage earners is already substantial and appears to be expanding; and • Many democrats are dead-set against it

Why Other Approaches Fall Short
of course, price indexing is hardly the only idea for saving social security yet when one looks at the alternatives, it becomes clear that they all have grave flaws, which tend to be serious enough to disqualify them for example, many progressives call for changing the way we calculate the cost-of-living adjustments for current retirees Most economists agree that the current methodology overstates the actual rise in consumer prices The federal government, however, has already worked many of these kinks out of the system, so further improvements in our cost-ofliving calculations would not do much to narrow social security’s 75-year

a Progressive fix for social security | 47

funding gap why not simply raise taxes to cover the social security shortfall? If the united states were to boost its payroll tax rate from 12 4 percent to levels found in western europe (e g , 19 percent in germany), the social security deficit would disappear Problem solved, right? however, economists generally agree that such a rate increase would hurt economic growth It also would be quite regressive since the rate increase would be incurred by low earners as well as high earners for these reasons, many progressives have focused on raising the amount of wages subject to the payroll tax during the late 1980s, this maximum wage base covered close to 90 percent of all wages in the economy but that percentage has slipped to the mid-80s in recent years To bring social security’s wage base back to roughly 90 percent of total wages, you could tweak that formula upward This, however, would have the perverse result of gradually imposing a 12 4 percent payroll tax on earnings between $102,000 and $200,000 per year, while exempting wages above $200,000 from the payroll tax altogether To get around that problem, some democrats have proposed a “doughnut” approach that would impose a surtax of between 2 percent and 4 percent on all earnings above $200,000 This has the obvious political advantage of taxing a small group of the highest earners, while avoiding further payroll taxes on those earning between $102,000 and $200,000 per year assuming that such a surtax would not involve any increases in social security benefits, this could lower the 75-year deficit by $500 billion to $1 trillion depending on its design The “doughnut” approach has several drawbacks first of all, when combined with efforts to roll back the bush tax cuts for high earners, the surcharge could mean a 25 percent hike in taxes for earnings over $200,000 per year (This calculation is based on a 4 percent surcharge plus a 4 6 percent incometax increase for high earners, from a 35 percent tax rate to 39 6 percent ) second, if the surtax is not linked to any increase in benefits, this would violate the insurance principles underlying social security as explained above, these insurance principles have been critical in maintaining political support for social security since the politics of social security reform point toward some combina-

48 | Memos to the new President

tion of benefit cuts and tax increases, you might want to consider combining progressive indexing with a 2 percent surtax for incomes above $200,000, starting in 2018 To soften the blow, you could ask Congress to lift the existing $150,000 income cap on the roth Ira This way, higher earners would be able to save more on their own, which would help compensate for the slower growth in their social security benefits at the same time, your administration could push for matching tax credits for low earners who sock more of their own money into Iras as our next president, you should make progressive indexing a key part of your reform agenda for this reason: It can put social security back on a sound financial footing in a way that preserves franklin roosevelt’s vision of providing all americans a basic floor of economic security in old age and that’s more than reason enough Endnotes
1 The 2007 annual report of the board of Trustees of the federal old-age and survivors Insurance and federal disability Insurance Trust funds, May 1, 2007

from Tax Cuts to Tax reform | 49

To: The new President From: Paul weinstein Jr Re: from Tax Cuts to Tax reform

and re-establish confidence in the global financial system obviously, these challenges—along with obligations to expand access to health care and college—will cost money They will also threaten your efforts to restore fiscal discipline, at least in the short term one way to address our economic troubles, reduce our deficits, and invest in our future is to get serious about tax policy and this does not just mean cutting taxes sure, when you were on the campaign trail, you and your opponent got into all kinds of arguments over who would cut taxes more deeply and for more people That is an american political tradition that goes all the way back to the boston Tea Party


s the new president, your first priority must be to get our economy going again This means using federal resources to stimulate growth, promote job creation,

50 | Memos to the new President

but we need something more fundamental now, something rather revolutionary in its own right now that the campaign is over and you are getting down to the hard business of governing at a time of grave economic uncertainty, you need to think not merely of cutting taxes, but of reforming our entire tax system This memo outlines three concrete ways for you to do just that It is important to make clear at the outset that these suggestions would be, at worst, revenue-neutral (and, if you are able to constrain spending increases, they would actually help restore fiscal sanity) That is a major consideration as you inherit the bush deficit The three tax-reform policies are as follows: • slash through the thicket of current tax breaks and winnow them down to four core incentives that focus on the true economic priorities of the middle class, such as owning a home and paying for college; • enact a meaningful middle-class tax cut that remedies the current imbalance between labor income and investment income; and • simplify business taxation so that our nation’s entrepreneurs do not have to waste their time, money, and creative energy on figuring out our convoluted system of shelters and loopholes before we dig into those three points in greater detail, let’s start with some basic truths about our tax system The federal tax code, as presently constituted, is a mess It does not raise enough revenue to meet our nation’s financial needs Its complexity is a drag on economic growth and innovation It fails to adequately promote savings and work It is so confusing that it takes the average taxpayer 31 hours to navigate and each year it gets worse, as lawyers, accountants, and financial planners identify new loopholes that cost the treasury hundreds of billions of dollars Things have gotten so bad that one poll—conducted for the associated Press by Ipsos-Public affairs—actually found that a slim majority of americans would rather go to the dentist than prepare their tax returns The good news is that the need for tax reform is so great that your ad-

from Tax Cuts to Tax reform | 51

ministration will have a historic opportunity to not only simplify the code, but also use it to spur economic growth and help the middle class get back on its feet unfortunately, the most widely-discussed reforms—replacing the current income tax with a consumption tax or a flat tax—are as bankrupt as wall street while proponents of these ideas bill them as bold and innovative reform, the truth is that either one would be a raw deal both are horribly regressive and would leave most americans worse off than they are now Consider this: under a national sales tax, a family making $50,000 per year would pay the same amount in taxes for such basic items as food and clothing as a family earning $500,000 for the lower-income family, sales taxes would add up to a big chunk of the family budget for the wealthier family, taxes would barely be a consideration That is not fair and while some have argued that a national sales tax would eliminate the need for the Irs, they overlook the fact that we would need a new agency to collect tax revenues from businesses worst of all, a national sales tax would have to be much higher than its proponents admit In fact, the brookings Institution’s william gale estimates that it would take a sales-tax rate of approximately 60 percent to fund the federal government at its current levels, since taxable retail sales account for less than one-third of all u s economic activity 1 advocates for a so-called flat tax call for collapsing the existing five marginal income-tax rates into one That idea sounds simple, but it would not be cheap former undersecretary of Commerce robert J shapiro has estimated that maintaining current federal revenues would require a 21 percent flat tax, with an initial exemption so as to not tax low-wage families into poverty 2 That is cold comfort when you consider that less than one-quarter of all taxpayers are in the tax brackets above the 15 percent rate If we were to keep the popular deductions such as those for mortgages and charitable contributions, the rate would likely have to rise to 29 percent a flat tax would thus become a substantial tax hike for a large majority of taxpayers america deserves a better approach to tax reform, one that simplifies the code and actually lowers taxes for middle-class families The plan we propose is designed to shore up the very pillars of middleclass aspiration It would make the tax code work for ordinary american

52 | Memos to the new President

families by providing a tax cut to help pay for college, buy a home, raise children, and save for retirement Those incentives will help families get into the middle class and stay there Just as importantly, this plan is fiscally responsible Coupled with sensible spending cuts and the restoration of budget accountability, it will help reduce our burgeoning federal debt here is a more detailed description of the three basic policies outlined earlier:

1. Four Core Tax Incentives
over the years, lawmakers have added tax breaks for retirement savings, home purchases, and myriad other hallmarks of middle-class attainment while well-intentioned, this accrual of new incentives has created a system that is confusing and often at odds with itself furthermore, many of the existing tax breaks are not refundable, so they do not go to those who need them most To fix this mess, in 2004 PPI proposed eliminating or consolidating some 68 tax breaks that are redundant and sometimes at cross-purposes (including no fewer than 16 tax-favored retirement accounts) our approach is to replace them with four core tax incentives that would be readily understandable, available to the vast majority of taxpayers, and consistent with the values of work and family because the four new incentives would replace existing tax breaks, this plan is budget-neutral It need not add a single dime to the federal deficit The first new incentive would be a refundable College Tax Credit (CTC) similar to the $4,000 american opportunity Tax Credit you proposed during your campaign 3 The CTC will provide a fully refundable tax credit to ensure that college is affordable for all american families This credit will cover 100 percent of the first $4,000 of qualified tuition expenses, making community college essentially free and covering about two-thirds of the cost of tuition at a public four-year college at a time when access to college loans from banks may shrink, such a credit is more vital than ever 4 The second major incentive would be to extend the home-mortgage deduction to non-itemizing homeowners by creating a 10 percent Mortgage Interest Credit (MIC) This refundable credit (also included among your

from Tax Cuts to Tax reform | 53

campaign proposals) would offset mortgage-interest payments and make homeownership more affordable for lower- and middle-income families This universal credit would provide an average tax cut of $500 to 10 million homeowners who do not currently itemize 5 Third, a new family Tax Credit (fTC) would replace and augment three existing tax incentives—the earned Income Tax Credit, the Child Credit, and the Child and dependent Care Credit Qualifying families would receive $1 in a refundable credit for every $2 earned, with a maximum credit of $3,500 for a family with one child, $5,200 for two children, and $7,000 for three children fourth, a universal Pension (uP) would replace those 16 existing Iratype accounts with a single portable retirement account for all workers This proposal would help ensure every american has the option of saving in an easy, automatic pension account To encourage americans to open a uP, each worker would receive a $500 stake upon taking his or her first job unlike traditional defined-benefit plans and 401(k)s, a universal Pension would move with workers from job to job—a necessity in today’s fluid labor market when workers change jobs, their 401(k) accounts would seamlessly transfer to their universal Pensions, without any cumbersome paperwork or the need to open an Ira finally, the uP would expand the existing savers Credit to match 50 percent of the first $1,000 of savings for families that earn under $75,000 per year, and make the credit fully refundable

2. A Middle-Class Tax Cut That Rewards Work
during the campaign, you championed a middle-class tax cut to help overburdened families make ends meet now, with our country facing a recession, getting middle-class tax relief enacted in the first few months of your administration is even more necessary you are right that the top rates of the bush tax cut should be allowed to expire yet with the government bailouts of the financial and housing sectors (along with a possible second stimulus package), that extra revenue alone will not be enough to pay for both a middle-class tax cut and reductions in a fiscal year 2009 deficit—a deficit that some believe may reach an

54 | Memos to the new President

astronomical $1 trillion That is why we are proposing an additional offset to pay for a middle-class tax cut: a securities-transaction tax Currently, the united kingdom imposes a modest stock-transfer tax of 0 25 percent on every purchase or sale of a share of stock despite the existence of this tax, london has gained on new york City as a center of the financial world a share-transfer tax also appears in some of asia’s most dynamic economies, and does not exactly seem to have hindered their upward trajectory Malaysia and singapore each have financial-turnover taxes of at least 0 10 percent India introduced a securities-transactions tax in 2004, and Japan, korea, Taiwan, and hong kong did so earlier In each of these cases there were no significant reductions in either price volatility or market turnover other countries that have had financial turnover taxes of at least 0 10 percent include australia, austria, finland, and germany In the united states, we had a securities fee from 1914 to 1966—a halfcentury that, with the obvious exception of the great depression, featured an extraordinary rise in wealth and living standards across a broad range of income levels 6 Indeed, this sort of tax would have almost no impact on typical middle-class shareholders a tax of this size, with comparable taxes on various other financial instruments, like options and futures, would help reduce the excessive speculation that has contributed to our current financial crisis a transaction tax of 0 25 percent on the trading of securities, derivatives, and credit swaps could raise anywhere from $100 billion to $150 billion annually, enough to cover the cost of your middle-class tax plan and then some alternately, you could use some of the revenues from the transaction tax to cut the highly regressive payroll tax (thus restoring some balance between how we tax income from work and capital) and apply the rest to extend the life of the social security Trust fund for example, you could provide every taxpayer with a $500 refund at a cost of $69 billion annually That would leave $31 billion to $81 billion for deficit reduction or to help pay for the retirement of the baby boomers, many of whom lost substantial sums in the recent market collapse 7 with the financial markets still in a delicate state, you should wait to institute the tax until 2010, at which time the bailout and stimulus packages should have taken full effect In addition, a time limit could be placed on the

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transaction tax after the full cost of the bailout has been repaid to american taxpayers (this is expected to occur within 15 years to 20 years)

3. Simplified Business Taxation
Perhaps no section of the code is more convoluted and inefficient than the corporate-income tax with a federal rate of 35 percent (39 percent if you add in state and local taxes), the united states has one of highest nominal rates in the world yet, according to the general accounting office, 60 percent of u s firms did not pay income taxes from 1996 to 2000 further, as a percentage of gdP, revenues from the corporate-income tax have dropped from 5 percent to between 1 5 percent to 2 percent in recent years with one of the highest rates in the world, why are u s corporate-tax revenues declining? The reason is twofold first, the 35 percent rate only applies to income above $10 million; lower levels of corporate income are taxed at lower rates second, corporations receive a large number of deductions, credits, and other tax benefits that dramatically reduce the income on which they owe as a result, the Congressional research service estimates that the effective corporate tax rate—the share of profits actually paid to the Irs—averages approximately 26 3 percent 8 furthermore, in recent years the use of tax shelters—efforts to actually hide income from taxation—has exploded while every american business owner has the right to seek ways to save money on taxes, it is hard to see how the profusion of tax refuges available primarily to the very wealthy are good for our republic at a time of acute budget shortfalls, crumbling physical infrastructure, two wars abroad, a failing health-care system, and numerous other urgent public needs one way to create an environment favorable to all businesses is to reduce the disparities created by the tax code That is why we recommend you seek legislation to create a loophole-closing commission (comparable to the commissions that have handled the similarly thorny political task of closing military bases), with a mandate to cut the corporate tax structure down to a single low rate such a proposal would help eliminate inefficiencies, promote fairness, and reduce the tax burden on the major-

56 | Memos to the new President

ity of firms over the long term, it would also save businesses billions in compliance costs In return for reducing the corporate rate, you could consider asking american businesses to contribute to expanding health-care coverage or require every firm to offer its workers a 401(k) To ensure that Congress does not go back and undo tax reform, you could promise to veto any legislation that includes new tax loopholes In conclusion, Mr President, you should make tax reform the leading item on your reform and economic agenda for this reason: simplifying the code and making it more pro-work and pro-family is key to getting the u s economy growing again—for all americans Endnotes
1 2 3 4 5 6 gale, william, “The national retail sales Tax: what would the rate have To be?” The brookings Institution/Tax notes, May 16, 2005 shapiro, robert J , “The flat Tax, flat-lined: republicans usually love tax reform now that they control washington, why are they scared of it?” Slate, november, 26, 2002 The average tuition cost of tuition at a public university was $6,185 during the 20072008 academic year, according to the College board hu, shing-yang, “The effects of the stock transaction tax on the stock market - experiences from asian markets,” department of finance, national Taiwan university, december 1998 The Internal revenue service calculates that in 2007 there were 138 million taxpayers Maguire, steve, “average effective Corporate Tax rates: 1959-2002,” Congressional research service The Crs estimates apply only to domestic non-financial corporations

7 8

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a work bonus for Men | 59

To: The new President From: katie McMinn Campbell Re: a work bonus for Men

have slid into the “underclass” and stayed there—a phenomenon reflected in broken homes, overflowing prisons, and entire neighborhoods bereft of responsible male role models by addressing this problem, you will be able to improve upon the not-so-benign neglect of the past eight years running for president in 2000, george w bush promised nothing less than a revolutionary new approach to fighting poverty—a strategy he dubbed “compassionate conservatism ” as he explained, “It is compassionate to actively help our fellow citizens in need It is conservative to insist on responsibility and results ”


ne of the most serious social problems our nation faces is the persistence of poverty and joblessness among men far too many adult males

60 | Memos to the new President

In two terms, however, the president failed to make good on his pledge to “rally the armies of compassion ” rather than a paradigmatic shift, his administration has delivered a grab bag of small-scale, underfunded efforts that did little more than tinker at the margins of existing social policy what a striking contrast with President bill Clinton, who launched bold social innovations aimed at rewarding work and ending the old welfare entitlement abetted by a strong economy, the Clinton reforms produced big gains: u s welfare rolls were cut by more than half; teen pregnancy rates fell; and poverty declined every year between 1993 and 2000 for black children, the poverty rate fell to its lowest point ever on President bush’s watch, the number of americans living in poverty increased between 2001 and 2004 before leveling off, and there also has been a worrisome uptick in teen pregnancy Meanwhile, meager income gains and the rising cost of living—especially for housing, food, gas, and heating oil— have been a double whammy for low-income working families That means it is up to you, Mr President, to pick up where bill Clinton left off and revive our society’s faltering efforts to enable poor citizens to work their way out of poverty you could start by announcing an ambitious organizing principle for a new round of progressive social initiatives: never again will any american family with a full-time worker live in poverty Poverty reduction and social mobility must be a top priority you should seek to build upon the ideas and programs of the 1990s that offered opportunity for all but also demanded responsibility from all—and commit to overseeing the next steps in welfare reform The bargain of mutual responsibility—in which public assistance is temporary and conditioned on work—produced dramatic results where the reformers of the 1990s focused on moving welfare recipients (mostly single mothers with children) to work, we must now add a new emphasis on the plight of poor men low-income men, especially minority men, have witnessed a twodecade trend of increased unemployment and decreased school enrollment 1 some studies show that only 42 percent of working-age, poor men worked at all in 2005 Just 16 percent of this group reported working full-time year-round, and only 6 percent of poor african-american men worked full-time 2

a work bonus for Men | 61

The absence of low-income men in the labor market is not only harmful to these individuals, but also to society at large a lack of responsible, breadwinning fathers in low-income neighborhoods weaves a well-documented tangle of social pathologies It undermines marriage and heightens the vulnerability of low-income women who must fend for themselves as single moms It leaves more children unsupervised and deprives adolescents of positive male role models given these realities, the next big step in anti-poverty policy is to draw men back into the labor market as President Clinton often said, the best way to fight poverty is to make sure people can find jobs at the same time, however, we cannot deny the fact that many low-wage positions fail to provide a minimally decent standard of living To remedy this defect of labor markets, the next administration should expand the proven policy tool that makes work pay: the earned Income Tax Credit (eITC), a refundable tax credit that supplements the wages of workers in minimum-wage and low-paying jobs The eITC is, quite simply, a work bonus Its power to reduce poverty and reward work without enlarging public bureaucracy has made it the policy of choice for today’s anti-poverty warriors on both the left and right Conservative hero ronald reagan called the tax credit “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress ” echoing that sentiment, President Clinton dramatically expanded the eITC in 1993 to make american social policy “put work first ” Those who doubt the effectiveness of the eITC need only look to the past decade to see its proven successes since its expansion, the credit has lifted 4 million people out of poverty every year, decreased family poverty by onetenth, and cut childhood poverty by one-quarter 3 furthermore, the eITC expansion increased labor-market participation rates among single mothers receiving welfare from 9 percent to 28 percent 4 because our anti-poverty policies have been linked to parents with children, the effects of programs such as the eITC have had very little effect on low-income men, who generally do not have custody of children Currently, the maximum federal eITC benefit is $4,536 for families with two or more children, and $2,747 for families with one child low-income workers who do not have children earn only $412—a much smaller benefit

62 | Memos to the new President

In short, the eITC’s incentives are much less powerful for low-income fathers than for mothers by making low-income men eligible for a more generous work credit, we can move america closer to the progressive goal of making work pay for everyone In fact, evidence from work-support experiments suggests that an increase in the eITC for single, childless workers, including non-custodial fathers, would not only lift more families out of poverty, but would increase the presence of low-income men in the labor market by at least 4 percent and as much as 20 percent 5 PPI has proposed a plan that would expand the eITC for single, childless workers, including non-custodial fathers, while also simplifying the tax code building on PPI’s family friendly Tax reform agenda, your administration should consider folding the eITC, the Child Credit, and the Child and dependent Care Credit into a unified family Tax Credit (fTC) Qualifying families would receive $1 in a refundable credit for every $2 earned, with a maximum credit of $3,500 for a family with one child, $5,200 for families with two children, and $7,000 for families with three or more children The expanded fTC would triple the benefits that non-custodial fathers and childless workers typically receive from the current eITC, giving them a maximum benefit of $1,236 per year In order to buttress parental responsibility, the credit would only be available for those fathers who faithfully pay their child support 6 If we are going to require all able-bodied individuals to work in order to receive government benefits, it is our moral obligation to ensure that those recipients have adequate incentives to get a job and keep it your administration has the chance to draw upon the lessons of welfare reform, and once again make work pay—this time for men Endnotes
1 edelman, Peter, harry holzer, and Paul offner, Reconnecting Disadvantaged Young Men, The urban Institute Press, 2006 2 Mead, lawrence, “Toward a Mandatory work Policy for Men,” The future of Children, Vol 17, no 2, fall 2007 3 berlin, gordon l , “rewarding the work of Individuals: a Counterintuitive approach to reducing Poverty and strengthening families,” february 2007,

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4 Zedlewski, sheila rafferty, “family economic resources in the Post-reform era,” The future of Children, Vol 12, no 1 winter/spring 2002 5 berlin, op. cit 6 Campbell, katie McMinn, and will Marshall, “Making work Pay: for Men Too,” Progressive Policy Institute, november 2007,

Closing the graduation gap | 65

To: The new President From: doug ross Re: Closing the graduation gap

ublic education is mainly a state and local responsibility, but over the past quarter-century it has become a national problem The main reason is a stubbornly persistent achievement gap between middle-class and low-income students, a gap that belies america’s promise of equal opportunity even as it weakens our country’s ability to win in global markets Closing that gap, as your white house predecessors realized, will require determined presidential leadership what’s exciting today is that we finally have some solutions while our most advantaged children must be expected and supported to do better academically in light of the rising achievement levels of Chinese, Indian, and russian schoolchildren, the central education challenge confronting us involves the children of the poor


66 | Memos to the new President

fareed Zakaria, in his thoughtful book The Post-American World, points out that the top-achieving two-thirds of american students are quite competitive on international academic tests The problem that threatens american prosperity, Zakaria argues, is our failure to adequately educate the bottom third of our students That this bottom-achieving third consists largely of urban, low-income african-american and latino kids raises this challenge beyond the economic while we may not like to admit it, a mother’s race and income remain powerful predictors of a child’s academic performance To put it simply, educating poor kids is the civil-rights issue of our time despite the economic and moral imperative to act, our past efforts to dramatically improve the education of poor children seem to offer little encouragement In the summer of 2007, the new york City schools celebrated an increase in the high-school graduation rate from 49 percent to 51 percent according to a recent study by Michigan state university, my hometown of detroit has a graduation rate of 32 percent—and only 25 percent for boys! Virtually every large urban public-school system in america posts such abysmal results no major city seems able to educate its poor children at levels comparable with middle-class suburban systems beneath these discouraging urban high-school graduation rates, there exists some remarkably hopeful news a growing number of public, general-admission high schools in big cities across america have developed new school designs that produce high-school graduation and college-enrollment rates equal to those found in affluent suburban settings university Prep, the charter public school I helped start in detroit eight years ago, graduated 93 percent of its entirely african-american, overwhelmingly poor senior class in June 2007, and enrolled 91 percent of those graduates in college or technical school furthermore, those students have re-enrolled for their second year of college at rates nearly double those expected for african-american students, and above the Michigan statewide average for all freshmen even more exciting is the fact that these graduation and college enrollment rates are not just a single-school phenomenon I could take you on a tour tomorrow of 50 other public general-admission high schools nationwide that are achieving results as impressive as anything we have seen at university Prep—with demographically similar student populations

Closing the graduation gap | 67

These successful urban schools take many different forms, but do have several characteristics in common: 1 unlike the high schools most of us went to, which saw their primary role as providing subject matter classes for students whose families motivated them to work hard and study, these successful schools take full responsibility for motivating urban students to learn They refuse to take themselves off the hook just because their students may live in poverty, come from disorganized families, or arrive with poor academic preparation such schools motivate their students by doing what it takes to create powerful relationships between students and teachers, and individualize learning to make sure students who have persistently failed in school have positive learning experiences that build the selfconfidence necessary to continue their studies students get regular exposure to work settings and successful people in the community to build both aspiration and a network of adults who can help The most important single trait these successful urban schools share is the absolute commitment to providing the motivation that a student needs to persist and do the hard work required to graduate. 2 high-performance urban public schools realize that school culture trumps everything—that creating a school environment where achievement, aspiration, and hard work are socially valued and rewarded is the necessary condition for having a successful urban school all of these schools obsessively emphasize that all of their students will learn and that, of course, all will graduate and go on to college or technical school 3 These schools make it their business to know how each student is doing academically and socially at all times—and to act on that knowledge If you don’t know that one of your ninth-graders is stuck at a fifth-grade reading level and is fast losing confidence, or that another just lost her mother to a drive-by shooting, you won’t keep those kids in school, much less send them to college successful schools know each of their students as individuals

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4 successful urban schools have rigorous college-preparatory curricula They do not track students, because they realize that every child needs the skills required of college freshmen whether they attend universities, pursue occupational certificates in community colleges or technical schools, or enroll in apprenticeship programs a story from detroit illustrates this principle dejuan was a bright and charming young man at our high school who, at 16, suddenly stopped coming to school his father reported he had no idea where dejuan was, and seemed indifferent to his fate dejuan’s mother had abandoned him years before, save for a brief period when she returned to claim custody—only to have him incarcerated in a juvenile facility for incorrigibility The school offered a $50 reward for anyone who could provide information about dejuan’s whereabouts a student came forward and indicated he was living in an abandoned house with several friends on the east side of the city dejuan’s teacher-advisor, who had worked closely with him since the ninth grade, drove to the house once there, she told him he needed to return to school and that she would help him find a place to live dejuan resumed his studies and moved in with one of our male teachers and his wife as a result of these extraordinary interventions by university Prep teachers, dejuan graduated from high school with his class and received a full-tuition scholarship from a local university every school graduating large percentages of their urban students can relate dozens of similar stories so, there they are—the four broad strategies that successful urban schools tend to have in common what’s keeping us from implementing these strategies in every disadvantaged school in the nation? what’s keeping us from moving quickly and boldly to begin graduating at least 90 percent of all poor children in america from high school and sending at least 90 percent on to college and technical school? In a word, politics—which ought to be encouraging for the man who is president of the united states In my view, there are two main prerequisites for replacing obsolete factorystyle middle and high schools in our big cities with high-performance schools The first prerequisite is autonomy Virtually all of these successful schools are

Closing the graduation gap | 69

managed by their principals and teachers They hold themselves directly responsible for their students’ success, and have the power to alter curriculum and learning strategies as they see fit In other words, these schools are site-managed reform, then, means shifting power wholesale to the individual schools from the large central bureaucracies that currently direct every big-city school system These central bureaucracies refuse to give up control, because they understand that doing so would result in their own demise who can blame them? few of us start the call for revolution with our own letters of resignation Power has to be taken from them politically The second prerequisite is the abolition of tenure as we know it In nearly all successful urban schools, the principal formally or informally controls who works at the school—in short, principals at these schools have genuine power to hire and fire on a formal, districtwide basis, this means teacher unions giving up the old seniority-centered advancement system Most union leaders haven’t figured out how to abandon this long-cherished system and get re-elected They need political help without presidential leadership, it appears unlikely that entrenched opposition to such vitally important reforms will be overcome a president elected with a mandate for educational change could lead the effort to eliminate the high-school dropout crisis from american life, and create a path to success for millions of young people here are three thoughts on how you might proceed: • let the american people and the Congress know that this is an urgent problem that actually has a solution, and demonstrate that solution by visiting successful urban schools in every region of the country since the federal government can’t redesign local schools directly—and should not even be tempted to engage in what is inherently a highly decentralized process—the bully pulpit is the most powerful presidential resource for bringing about necessary school reform • The penalties in the no Child left behind law (nClb) should be supplemented with some positive incentives for reform over the past halfdecade, the penalties for failing urban schools have become little more than manageable irritants for big-city districts nClb could be amended to give

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failing urban systems a financial incentive to replace a failing school with a school design that is proven to benefit students with similar demographics Michigan just appropriated money for a 21st Century school fund that offers a set of financial incentives to do exactly this • strategies for overcoming bureaucratic opposition to site-managed schools could be devised by regional and state partnerships convened by the president in collaboration with governors, business executives, and civic leaders who understand the urgent need to do something about high dropout rates while we know how to graduate poor children and send them to college— how to get them “in the game”—most of us don’t yet know how to help them play that game competitively with a few exceptions, even relatively successful urban schools still don’t send their students to college as well-prepared as their suburban counterparts until we can close that gap, we still aren’t providing the real equal educational opportunity our students deserve This is our next big challenge The good news is that a small but growing number of urban schools are beginning to demonstrate some impressive progress in closing this gap having said that, what we do know constitutes an enormous source of opportunity for america’s urban children now we need to make sure that all urban schools are able to implement this knowledge, even as we work to overcome the final barriers to equal educational outcomes for minority kids so many of our pressing national problems lack clear solutions fortunately, that is no longer the case with urban education we know how to engage lowincome children in education, graduate them from high school, and send them to college and technical studies The replacement of failing urban schools with these powerful new school designs promises to change america in ways as profound as the homestead act, the gI bill, and the Voting rights act all of these historic acts of legislation gave americans new power to shape their own destinies enabling millions of low-income children to graduate from college follows in that proud tradition

ending Childhood hunger in america | 71

To: The new President From: Joel berg and Tom freedman Re: ending Childhood hunger in america

reports that nearly 700,000 poor children in the united states directly experience hunger, and more than 12 million children live in low-income families that suffer from food insecurity, which means they struggle to meet their daily nutritional needs now the good news: by implementing your courageous campaign pledge to end child hunger in the united states by 2015, you have a win-win opportunity to strike a blow against a major social problem while also stimulating our ailing economy Through practical reforms of existing nutrition programs, along with new targeted spending, your administration could end childhood hunger in america 1


irst, the bad news: hunger and food insecurity are soaring in america, and our faltering economy will only make things worse The federal government

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America’s Hunger Crisis
food inflation is at its worst level in 17 years according to the u s department of agriculture (usda), food prices rose 4 percent in 2007, compared with an average 2 5 percent annual rise for the last 15 years given the financial meltdown and economic recession, the numbers for 2008 will likely be worse The troubled economy and rise in food prices are hitting low-income children especially hard In 2007, one in six children lived below the poverty line fully 12 4 million children lived in households that could not always afford enough food of those, 691,000 children were particularly bad off, suffering directly from reduced food intake In May 2008, feeding america, the nation’s largest food-bank network, reported that all of its member agencies served more clients in the previous year, with the overall increase estimated to be between 15 percent and 20 percent fully 84 percent of food banks were unable to meet the growing demand due to a combination of three factors: an increasing number of clients; decreasing government aid; and soaring food prices The new farm bill, passed into law earlier this year over the veto of President bush, will not help much while money was added for federal nutrition assistance, it amounted only to an extra 54 cents per week for every american facing hunger recent research shows that food insecurity in america hurts our economy and compromises our international competitiveness It increases our nation’s spending on health care and reduces our productivity and educational performance a 2007 sodexho foundation study puts “the cost burden of hunger” in america at a minimum of $90 billion annually: “This means that on average each person living in the U.S. pays $300 annually for the hunger bill. On a household basis this cost is $800 a year. And calculated on a lifetime basis, each of us pays a $22,000 tax for the existence of hunger. And because the $90 billion cost figure is based on a cautious methodology, we anticipate that the actual cost of hunger and food insecurity to the nation is higher.” 2

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Ironically, food insecurity also contributes to the nation’s growing obesity epidemic, as hunger and obesity are flip sides of the same malnutrition coin when families can not afford a full supply of nutritious foods (which are usually more expensive than less nutritious foods), they often rely upon junk food, which is far cheaper and more immediately filling Public polling shows americans care deeply about these problems about one in five americans say they know poor people who have gone hungry In a national exit poll conducted on election night, an amazing 73 percent of respondents said they would favor “spending additional tax dollars on federal hunger programs to end child hunger in the united states by 2015 ” In short, there is a large political constituency that believes we can solve the problem and that is willing to spend more resources to get it done hunger makes it harder for children to learn, for parents to parent, for workers to work, and for sick people to get well It causes frustration and hopelessness Put simply, hunger makes it more difficult for a person to lead anything like a full life adlai stevenson said, “a hungry man is not a free man,” and this remains true That is why ending hunger must be a key component of your agenda for slashing poverty

Food Spending as an Economic Stimulus
democratic leaders in Congress have twice sought over the past year to include more money for nutrition in economic-stimulus packages, and twice were stymied by republican opposition democratic leaders are now making another attempt, and they should keep fighting on this front until they prevail reagan adviser Martin feldstein, Clinton administration Treasury secretary robert rubin, and federal reserve Chairman ben bernanke all agree that increased federal spending on food stamp benefits is actually one of the best ways to stimulate the economy 3 President bush’s 2008 stimulus package gave tax refunds to many people who did not need them and who did not immediately spend the money In contrast, Peter r orszag, director of the Congressional budget office, testified that increases in food stamps and unemployment benefits would have more immediate economic effects than rebates “food stamp and unemployment

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benefits can affect spending in two months,” Mr orszag said “rebates would affect spending at the end of 2008 ”4 when low-income americans receive federal nutrition benefits, they tend to spend the money immediately, helping all those involved in growing, processing, shipping, warehousing, and retailing food spending more on federal nutrition programs turns out to be a direct and quick way to create new american jobs

Five Steps for the Next Administration
we urge you to announce a clear plan to achieve your campaign goal to end childhood hunger in the united states during your administration This is no quixotic venture It can be accomplished by reforming existing programs and with some new spending, most of which would go into the expansion of school meals and food stamp benefits targeted at children your plan should include five key steps: 1. Provide All Children with a Free School Breakfast Many low-income children already are eligible for free school breakfasts, but because of logistical hurdles and the stigma involved, only about 20 percent actually receive them To reverse this trend, you should ask Congress to fund universal school breakfast free of charge, to be provided directly in first-period classrooms both universal and in-classroom breakfasts have already proved successful in select school districts nationwide for instance, in newark, n J —where both approaches are utilized—the district has a 94 percent breakfast-participation rate In 2008, new york City launched a pilot project to test in-classroom breakfasts in a number of schools at one pilot site, Public school 68 in the bronx, all students eat breakfast together during their first-period class according to the school’s principal, before the pilot an average of 50 kids came to school late every day—so many that she had to assign extra staff to write out late slips when the school started serving breakfast in its classrooms, kids came in early just for the meals, and now only about five kids a day are late—a 900 percent decrease in tardiness absenteeism and

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visits to school nurses also dropped, and in the afternoons, kids fell asleep in the classrooms less frequently In other words, making sure children get enough to eat is not only good nutrition policy; it is also good education policy The pilot in-classroom project in new york worked so well that Mayor Michael bloomberg recently announced its expansion from 50 schools to 300 schools The federal government should provide technical assistance and funding to aid such in-classroom breakfast programs nationwide when a district adopts a universal breakfast or lunch policy, it reduces paperwork and bureaucracy and saves time and money Most school districts currently have a complex system in place to collect forms and data on the income of each student’s parents to determine the eligibility of each child for either free, reduced-price, or full-cost meals This administrative chore takes precious time and energy away from a school’s core mission: educating children a universal-breakfast system relieves schools of this burden, and just as principals and teachers are liberated to turn their attentions to more vital tasks, students themselves get to concentrate on what matters when they eat breakfast in a classroom instead of a lunchroom that is a hallway or two away, they have more time to focus on their studies Crucially, they are also protected from the stigma of having to leave their friends to go to a special breakfast room “for the poor kids ” Textbooks are widely understood to be critical educational tools, and public school districts typically lend them out free of charge to all students The time is ripe for the nation to view school meals in much the same way free breakfast and lunch should be universal in classrooms around the country 2. Improve Program Efficiency and Accountability The federal government’s welter of food programs must be simplified and better organized In particular, the food stamp program (recently renamed the supplemental nutrition assistance Program) should be combined with other government-sponsored nutrition programs This will create administrative efficiencies, widen eligibility, and boost participation for a variety of reasons, many families who are eligible for hunger programs do not apply one way to increase participation would be to combine applications for many programs, including the special supplemen-

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tal nutrition Program for women, Infants, and Children (wIC); food stamps; school meals; and the earned Income Tax Credit If we are going to provide food assistance to the poor, we owe it to them and to ourselves to do it far more efficiently Currently, food stamps pay barely $3 a day per person for food, and even that does not reach all those who need it we can do better—by streamlining forms, employing technology, and putting the savings toward enhanced benefits for those who would otherwise go hungry In addition, you should formally charge the secretary of agriculture with responsibility for achieving quantifiable results in reducing hunger by instituting such accountability at the cabinet level, you will send a signal that ending hunger is a genuine priority of your administration 3. Support Working Families one of the best ways government can help working families is to make sure that work pays a decent wage This is especially true for parents struggling on low incomes to feed their children as food prices climb even though Congress has raised the minimum wage so that it will reach $7 25 an hour by July 2009, this is not enough you could propose a one-two punch to make work pay: first, index the minimum wage to the rising cost of living second, expand the earned Income Tax Credit and make sure that it offers men as well as women strong rewards for work 5 4. Reward Best Practices in the States state governments are often the testing ground for the nation’s most important policy experiments your administration could reward states for successful innovations in feeding the hungry and improving nutrition for example, every three years, the usda could finance bonuses to the five states that show the greatest reduction in the agency’s measures of food insecurity and hunger These states could then use their winnings to expand and improve their antihunger programs This would act as an incentive for other states to create truly effective hunger policies 5. Provide Real Ammo to the Armies of Compassion another way to improve the quality of food programs is to encourage and fund new partnerships between the federal government and nonprofit groups,

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be they secular or religious dedicated volunteers and staff from the nonprofit sector not only can help with food distribution, but also with training programs; earned Income Tax Credit and food stamps outreach; and with other self-sufficiency programs not a penny of public money should be used to proselytize or discriminate, but if we want more congregations and civic groups to help in the antihunger movement, then government must provide them with a substantial increase in resources—including direct funding; technical assistance; staff support; and surplus property and real estate The debate should not be over whether religious groups should be involved in the fight against hunger They already are, up to their necks The real debate should be over whether they can obtain the resources they need to do this vital work more effectively

It is worth noting that the united states achieved its greatest progress against malnutrition during the era of greatest bipartisan cooperation on the issue of hunger—during the late 1960s to mid-1970s, when a broad coalition led by democratic sen george Mcgovern (s d ) and his republican colleague, sen bob dole (kan ), created the modern nutrition safety net america once again needs leaders who can transcend partisanship and bring our people together to solve big problems as you put together a stimulus package to help revive our economy, we hope you will focus spending on anti-hunger programs This would improve the lives of millions of american children who already live on the economic margins and are vulnerable to the devastating effects of a prolonged economic slump great achievements require great commitments President kennedy put the united states on a trajectory to reach the moon we hope you will accomplish your goal—one that would be equally great, but a bit more down-to-earth: ending childhood hunger in america Endnotes
1 This paper grew out of a previous report, “ending u s Child hunger by 2012: how america Can break the Political logjam”in 2006

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2 brown, J larry, donald shepard, Timmothy Martin, and John orwat, “The economic Cost of domestic hunger: estimated annual burden to the united states,” The sodexho foundation, June 2007 3 “food stamps = real stimulus,” food research and action Center, real_stimulus_archive_aug20_2008.htm 4 herszenhorn, david M , “bush and house in accord for $150 billion stimulus,” The New York Times, January 25, 2008 5 Campbell, katie McMinn and will Marshall, “Making work Pay,” The Progressive Policy Institute, november 2007,

Investing in early education for future growth | 79

To: The new President From: loranne ausley and katie McMinn Campbell Re: Investing in early education for future growth


e know that education reform—more specifically, narrowing the achievement gap in our public schools and meeting the workforce

needs of a new millennium—looms large in your thinking here is some advice: begin at the beginning That is, focus

your education policies on students who are at the very start of their schooling—three-year-olds and four-year-olds by investing money in the education of students who are still at the most important developmental stage of their lives, our nation can reap extraordinary, lasting benefits The united states needs to invest in early education not despite the current economic crisis, but because of it when money is scarce, we must spend it with extra care —and no

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other public investment promises a bigger return than the expansion of earlychildhood schooling according to university of Chicago researcher James heckman, every dollar spent on getting very young children ready to learn saves taxpayers $7 in foregone social costs That is a better investment than the going rate for many high-interest money-market accounts a world-class education for all americans—especially disadvantaged students who languish in poor to mediocre schools—is part of the answer to every seemingly intractable national problem we face That’s why now is precisely the time to make comprehensive, high-quality preschool a national priority There is no better way to narrow the achievement gap and prepare the next generation to compete in the world economy

Closing the Achievement Gap
despite a new national focus on raising education standards and measuring student performance, we still have a long way to go towards eliminating the achievement gap in america Minority and economically disadvantaged students have made gains in recent years, but they continue to fall behind their white and middle-class counterparts The most recent national assessment of education Progress (naeP) shows black students scored on average 26 points lower than white students in fourthgrade math assessments hispanic fourth-graders scored 21 points lower than white students among eighth-graders, the gap was larger still: white students scored 32 points higher than their black peers and 26 points higher than hispanic students In the reading assessment, white students in the fourth grade scored 27 points higher than black students, and 26 points higher than hispanic students The reading-score gap among eighth-graders was almost identical The achievement gap is not just a matter of racial disparities; economic class is also a factor kids from low-income households—those eligible for the national school-lunch program—scored at least 20 points lower on eighth-grade math and reading assessments than those who did not qualify These gaps, moreover, appear much earlier than fourth grade The preparation gap between disadvantaged and middle-class children is evident before kindergarten one-quarter of kindergarten students lack basic social, emotion-

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al, academic, and motor skills and while two-thirds of entering kindergartners know the alphabet, only 39 percent of the most disadvantaged children can recognize letters 1 The disparities in preparation exist because poor children often do not receive proper stimuli and learning opportunities at home during the first three years of life—the most rapid and critical phase of human development according to the nonprofit group Zero to Three, environment plays a major factor in brain development: “[T]he particular language each child masters, the size of his vocabulary, and the exact dialect and accent with which he speaks are determined by the social environment in which he is raised—that is, the thousands of hours he has spent (beginning even before birth) listening and speaking to others.” 2 other factors such as malnutrition, which disproportionately affects lowincome children, put some children well behind on the first day of kindergarten when children do not receive proper nutrition, their brains develop more slowly, resulting in weaker language skills, lower IQs, and diminished academic performance In short, if disadvantaged children are neglected during their infancy and toddler years, and their parents cannot afford high-quality preschool, they are set on paths of lifetime struggles we have chosen to focus on the second part of the equation—access to high quality prekindergarten—because while the research on the importance of early-childhood learning is substantial, there are few programmatic interventions that produce measurable results unequal performance in school begets inequality in income and wealth every day that we postpone a national commitment to high-quality pre-k means one more day of missed opportunity to make america a stronger, fairer society ensuring that every four-year-old has access to a good preschool education is a moral and economic imperative

A Smart Investment
Investing in high quality pre-k is like saving at a young age and watching your assets grow as compound interest works its magic as noted earlier,

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James heckman has shown that investments in young children have a much larger payoff than later remedial programs he writes: “Skills beget skills and capabilities foster future capabilities. … Early learning confers value on acquired skills which leads to (a) self-reinforcing motivation to learn and (b) early mastery of a range of cognitive social and emotional competencies, making learning at later ages more efficient and therefore easier and more likely to continue.” 3 heckman notes that while investments in job training, prisoner rehabilitation, and adult literacy produce some benefits, the economic returns are low even among the most successful remedial programs for youth and adults, “the performance of disadvantaged children is still behind the performance of children who experienced earlier interventions in the preschool years ”4 decades of solid research demonstrate the promise of high-quality preschool studies have shown that strong pre-k programs increase cognitive abilities, academic achievement, and employment rates, while reducing criminal activity and welfare-dependency rates 5 In Chicago, students enrolled in pre-k programs were 29 percent more likely to graduate from high school when compared to their peers who did not attend prekindergarten an evaluation of Maryland’s early-learning programs showed that fifth-graders who attended pre-k were 44 percent less likely to repeat a grade than those fifth-graders who did not Children who participated in the university of north Carolina’s abecedarian Project study on the effects of early-childhood education on low-income on youth were 26 percent less likely to become teenage parents than peers who had no such schooling a study of 40-year-old adults in Michigan found that those who had attended pre-k had average incomes 33 percent higher than those who had not 6

A Federal Partnership with the States
There is no question, then, that high-quality preschool works There is, however, a question as to the federal government’s proper role in buttressing earlylearning efforts with the significant exception of head start, education is mostly a state responsibility

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we suggest that you make the federal government a vigorous partner with the states in expanding the current patchwork of programs, so that highquality pre-k becomes available for every poor and disadvantaged child in america The federal government should not supplant state efforts, but instead should powerfully reinforce them specifically, you could create a new, performance-based grant that gives states the flexibility to expand access to pre-k This will be expensive: we estimate that providing high-quality pre-k for all low-income four-year-olds and subsidizing it for working middle-class families will cost the federal government $9 2 billion per year however, if you require all states to meet the average effort of the states that are currently investing in preschool, you could shave about a billion dollars off that price tag 7 unlike traditional block grants, a performance-based grant should come with very specific expectations about outcomes states could, for example, expand access to proven and promising programs; increase support for earlyeducation teachers; and integrate parents into school learning, services, and activities

Expanding Access
Political candidates regularly reach for the mother of all clichés about education: “our children are our future ” somehow, however, access to quality preschool opportunities for poor kids is still a rarity even though the number of students enrolled in a state-run pre-k program increased in 2007, uneven access remains the rule The chance that a child will benefit from a state pre-k program is still determined largely by where he or she lives 8 while some states have increased enrollment, others have made no progress at all for example, oklahoma, long a leader in early-childhood education, provides pre-k for more than two-thirds of its four-year-olds Its universal pre-k program is available to every child in the state at the opposite end of the spectrum, 12 states provide no state-funded pre-k programs at all 9 only 17 states meet eight or more of the 10 criteria for high-quality pre-k programs furthermore, only 22 percent of four-year-olds attend state-funded preschool 10

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while most states have made investments in early education, what currently exists is a patchwork of programs with varying levels of quality There is a dearth of the high-quality programs that consistently generate positive returns what do such programs look like? for starters, they recognize the unique needs and learning styles of young children, and provide curriculum that integrates learning across cognitive, physical, social, and emotional development These programs often include language, reasoning, science, and math education They make a imaginative use of block play, dramatic play, art, and music 11 These schools tend to have low student-to-teacher ratios, and their teachers possess both a bachelor’s degree and specific training in early-childhood education The more successful programs also include nutritious meals, regular snacks, and nap times—we are talking about very young children, remember some of the best schools also offer vision, hearing, and overall health screenings to detect any physical or mental barriers to learning

Supporting Early Childhood Teachers
a long-term investment in our children means a long-term investment in those who teach and nurture our children our society currently is not doing this Teachers and child-care workers are among the lowest-paid members of the american workforce, making on average $12 40 per hour or $25,000 a year The only way we are going to attract talented people into the early-childhood arena is by treating teachers like professionals rather than glorified baby sitters That means devising ways to gradually increase earning opportunities for those who teach and care for our youngest children one idea worth exploring is to extend federal loan-forgiveness programs to early-learning teachers for example, the Public service loan forgiveness program allows people who have been employed in a full-time public-service job for 10 years—including early-education teachers—to have the entirety of their debt discharged There are other loan-forgiveness programs for teachers, but these do not include early-education professionals you, Mr President, could change that

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at the state level, public supports for teachers include scholarship programs (T e a C h early Childhood scholarship) and salary stipends (Child Care wage$) that encourage early-childhood teachers to stay in the workforce states should be able to use their performance-based grants to adopt these programs, which are aimed at enticing more teachers into early-childhood education

Getting Parents Involved
The children who most need preschool typically come from the most disadvantaged homes—those headed by single parents with low education levels and low wages These parents need extra support too, so they can do a better job of parenting and preparing their kids for school some states, for example, offer parents education and job-training opportunities, teacher conferences, home visits, and health and nutrition assistance one of the more successful empirically tested parent-intervention programs includes the Incredible years Program, which offers a set of curricula designed to integrate parents and teachers to promote social competence and prevent conduct-related problems in babies, toddlers, and young children researchers at harvard’s graduate school of education found that children who were considered high-risk for behavior problems at the beginning of the school year and whose parents and teachers participated in the Incredible years parent-training sessions were less likely to have behavior problems at the end of the year when compared to those children whose parents did not participate 12 all of this confirms what we have long intuitively understood: when parents are involved with their children’s schools, their children’s literacy skills increase, their behavior improves, and their overall social skills increase 13

If we do not take steps now to improve our entire system of early learning, our children and our country will suffer the consequences other advanced countries have long surpassed our early-education efforts Public preschool education is almost universal in denmark, germany, the united kingdom,

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the netherlands, belgium, greece, and spain 14 The united states is unlikely to hold onto its leading position in the world if we do not prepare all of our children for lives of productive work, continuous learning, and meaningful citizenship To be sure, states are moving fitfully and slowly in the right direction but early learning for all should be a national priority, in which a far-seeing national government plays a strategic supporting role our nation is facing formidable challenges—two wars, a failing financial system, rising energy prices, a collapsing housing market, rising deficits, and an increasingly challenging job market we cannot afford to take a myopic view, letting current problems overshadow what should truly be our greatest long-term priority: our children, who—cliché or not—really are our future Mr President, a commitment to high-quality pre-k may show no tangible results while you are in office, because its benefits are compounded over the lifetime of a child This is probably why the actions of most elected officials fall short of their grand promises to invest in early education by making prek a priority, you can create a legacy that will last for generations to come Endnotes
1 Mead, sara, “open the Preschool door, Close the Preparation gap,” Progressive Policy Institute, september 2004, 2 brain development: fact sheets, Zero to Three, PageServer?pagename=ter_key_brainFAQ 3 heckman, James J , “The Case for Investing in disadvantaged young Children,” big Ideas for Children: Investing in our nation’s future, first focus, september 2008 4 heckman op. cit 5 Mead op. cit 6 The benefit of high-Quality Pre-k: fact sheets, Pre-k now, policy/factsheets/benefits.cfm 7 Mead op. cit. 8 “The state of Pre-school 2007,” The national Institute for early education research supported by The Pew Charitable Trusts, 2007 9 The state of Preschool 2007 national Institute for early education 10 Pre-k across the Country, national snap shot: fact sheets, Pre-k now, http://www. 11 The benefit of high-Quality Pre-k: fact sheets, Pre-k now, policy/factsheets/benefits.cfm 12 Caspe, Margaret and M elena lopez, “lessons from family-strengthening Interven-

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tions: learning from evidence-based Practice,” harvard family research Project, october 2006 13 riley-ayers, shannon and dorothy s strickland, “early literacy: Policy and Practice in the Preschool years,” national Institute for early education research; henderson, anne T and karen Mapp, “a new wave of evidence: The Impact of school, family and Community Connections on student achievement,” southwest educational development laboratory, 2002 14 svestka, sherlie s, “financing Preschool for all Children,:” erIC Clearinghouse on elementary and early Childhood education urbana Ill , 1995

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Putting energy in the white house | 91

To: The new President From: dave edwards Re: Putting energy in the white house


n the summer of 1859, the world’s first commercial oil well began pumping in Titusville, Pa over the next century, americans invented the modern oil economy

we fueled our own industrial revolution and two world wars, with a healthy surplus to export In more recent years, america has gone from being the world’s largest energy producer to the largest importer without a transformation of the energy industry, the unchecked american reliance upon fossil fuel will diminish our economy, distort our foreign policy, and further disrupt our natural environment we can do better—much better The united states has

the opportunity to be the world’s energy innovation leader, creating a cleaner, more secure, and more prosperous future This leadership would build a competitive advantage

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for the u s as the nation becomes less reliant on increasingly expensive and volatile fossil-fuel sources such leadership would clear the way for a new, vibrant export business, creating strong growth in high-value jobs In order to truly change the energy sector, you will need a dedicated team of experts to advise you, and they will need the full weight of the presidency behind them I therefore propose that you elevate energy policy within the white house by creating a national energy Council (neC) on par with the national security Council and the national economic Council no longer should energy be seen as a mere derivative of economic, security or environmental policy In fact, energy policy may have a bigger impact on our childrens’ future than anything else government does over the next decade—and you should organize your administration accordingly The national energy Council’s primary purpose would be to advise you on energy innovation It should be staffed by energy experts who coordinate with related agencies like the department of energy, the environmental Protection agency, and the Interior department In addition, there is a wealth of technical, operational, and investment talent within the cleantech industry that can help you and the neC encourage the development of new, transformative technologies and practices The neC could begin by focusing on three strategic initiatives: advancing science; modernizing the electrical grid; and spurring private investment in clean energy

1. Advancing Science
since the industrial revolution, technological development has enabled multiple waves of economic progress The transportation revolution that took place between the Civil war and the great depression saw the successive adoption of railroads, automobiles and aircraft The modern information-technology revolution began in earnest with the commercialization of computer mainframes in the 1960s later, in the 1980s, the spread of PCs and related software drove corporate efficiency over the following two decades, the development of the commercial Internet and mobile devices has created vast new opportunities for entrepreneurs and consumers looking forward, technology is poised to generate similar breakthroughs in the energy industry

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as with these transformational technologies of the 19th and 20th centuries, many of the most important energy technologies of today were developed in the united states from solar panels to modern wind turbines, government and academic labs across the country have advanced the technologies that we now hope will enable us to create a cleaner and more secure energy future This leadership position must not be squandered while the department of energy provides important funding and guidance to the national labs, the neC could help set research priorities for the country as a whole The neC should set standards—not pick winners The market will likely be better than government at choosing the least expensive technology for instance, a carbon-content standard for fuels is preferable to an ethanol standard because the former incents industry to attain a broadly accepted public-policy objective (reducing carbon emissions), while the latter simply skews the market toward a particular product at every turn, the neC should set standards that encourage our energy sector to advance the cause of energy security while also reducing pollution

2. Building a New Interstate Electricity Grid
as new communication systems enabled nationwide commerce in the early 20th century, it became clear that our road system was no longer sufficient to meet evolving demands as late as the 1940s, it still took roughly two months for a truck convoy to cross the country In response to this situation (and to the perceived civil-defense needs of the emerging Cold war), the federal government built the interstate highway system—a public project that enhanced america’s competitive economic advantages and increased productivity The current u s electricity system has deficiencies similar to those of the old road system The designers of the original electrical grid could not have foreseen—nor did they design for—the current system requirements for example, the present network cannot accommodate enough intermittent renewable generation, such as solar and wind power Its design is inadequate for the reliability and security needs of the digital age nor was it built to provide a recharging infrastructure for electric vehicles

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In short, a modernized grid is essential for unlocking the energy options of the future—and for providing a backbone for a robust 21st century economy a new “interstate electricity system” would deliver benefits analogous to those brought about by the interstate highway system half a century ago with the government setting design standards (such as for transmission ownership, access, and connection), the country can build a new energy infrastructure that connects local or remote sources of renewable energy with centers of demand The new system could also increase electricity reliability and security by incorporating dynamic storage and embedded intelligence throughout the network This new infrastructure will increase economic development, decrease reliance on foreign energy sources, and provide electricity that meets present and future demands as with the interstate highway system, a new national grid would restore the basis for america’s competitive advantage The neC could begin this work by resolving the complex regulatory issues that limit interstate transmission of electricity This would allow the united states to truly tap its renewable energy potential, sending the electricity generated by wind or solar power in one part of the country to markets hundreds of miles away another important step the neC could take in improving our power network would be to enable a wider range of parties to participate in electricity markets we are seeing the emergence of new companies looking to provide new sources of energy and demand-reduction services The telecommunications marketplace has been transformed by the entry of such new companies and services; electricity markets could follow a similar path

3. Catalyzing Private Capital
despite the current capital crisis, there are private dollars ready to be deployed to transform the energy industry Investors understand that this is one of the most promising sectors in the economy That said, the full realization of this potential will require a steady hand from government The duration of support is the most important factor in unleashing private investment The neC should focus on policies (in-

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cluding standards, mandates, and subsidies) that catalyze investment of private capital for a sufficient duration Many energy technologies and projects can take years to develop, requiring a long-term commitment from government in order to increase predictability for investors The federal government should not fund the transformation of the energy industry itself Instead, it should focus on long-term policies that mitigate investment risk, reduce scale-up cost, and send proper price signals to the market for instance, a cap-and-trade system can send a market cue for carbon reduction, while loan-guarantee programs can reduce the financing risk of an unproven technology

for the past eight years, america has been saddled with a retrograde energy policy tilted toward fossil fuels now you have a striking opportunity to begin our country’s transformation into a clean-energy economy while the sheer complexity of the problem may seem daunting, there is one theme that can unite these initiatives: enabling innovation Today’s sources and technologies will not solve our energy problems; new ones will be needed Innovation in energy generation and use will allow the united states to modernize its petro-centric energy industry and remain the world’s leading economy government policy must make the difficult trade-off to favor the innovative over the entrenched from the Model T to semiconductors to the Internet, the united states has proved time and again to be the most powerful force for innovation in the world now we must concentrate our nation’s collective ingenuity on reinventing the energy industry and employing the next generation of americans in a clean-energy economy To help meet these objectives, I hope you will put a national energy Council in the white house, both to demonstrate the priority you give the issue and to drive the necessary policy changes throughout the executive branch energy concerns should no longer take a back seat to other urgent national priorities The issue is too large, too complex to be managed across the usual patchwork of government bureaucracies The country will ben-

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efit greatly from a senior policy team that can devise strategies to enable energy innovation, creating a more profitable and sustainable future for the united states

energy efficiency as economic stimulus | 97

To: The new President From: daniel l sosland, derek k Murrow, and sam krasnow Re: energy efficiency as economic stimulus


ith the u s economy officially in recession, americans are anxiously awaiting your plan to stimulate a robust recovery The key is to

identify federal initiatives that deliver economic benefits quickly, reliably, and at substantial scale energy efficiency—a huge economic category that includes the design and installation of “green” insulation, lighting, building materials, appliances, vehicles, heating-and-cooling systems, and countless other technologies—fits your economic-stimulus needs ideally, with important additional benefits for the health of our environment and the security of our nation for all the excitement surrounding clean technology and renewable fuels, efficiency is the best near-term energy investment for creating jobs, reducing consumer-energy bills,

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spurring economic growth, and increasing energy independence new spending on efficiency will create employment in the here and now—and produce savings that last for years to come and, as you look ahead to this year’s Copenhagen conference on climate change, it is worth noting that gains in energy efficiency also provide the most immediate way to reduce greenhousegas emissions yet even with all of these obvious benefits, we are radically underinvesting in low-cost efficiency resources (see figure 1) we need to rebalance our investment choices in order to stimulate the economy, create jobs, increase our energy independence, and reduce greenhouse-gas FIGURE 1: CURRENT U.S. EFFICIENCY VS. emissions SUPPLY SPENDING FOR ELECTRIC AND In the time-honored NATURAL GAS CUSTOMERS tradition of american $215,494 federalism, the states are leading the way on energy efficiency from Annual Spending ($Million) hawaii to Maine, new programs are saving $91,722 energy at a fraction of the cost required to produce new units of $2,603 $530 energy for customers Electric Energy Electric Natural Gas Natural Gas In truth, however, the Efficiency Generation Energy Efficiency Supply Costs Investment Costs Investment states’ efficiency investSOURCE: CEE, 2008 EE Industry Report; & EIA for supply costs using HHub gas prices and total RC&I consumption and total electric revenues x 66% (estimate of energy/generation cost) ments remain underfunded Therefore, we urge you to consider including a matching-grant program for state efficiency programs in your economic recovery plan despite the documented economic gains from investing in efficiency, competing short-term demands for necessary capital often win out what’s worse, traditional utility pricing methods reward utilities for maximizing energy consumption rather than for helping customers meet their energy needs at the lowest possible cost This is especially counterproductive given the fact that energy-efficiency

energy efficiency as economic stimulus | 99

measures are cheaper than efforts to increase energy supply as shown in figure 1, americans spend approximately $215 billion annually on generating electricity, at a price of 6 cents to 12 cents per kilowatt hour (kwh) but we invest only $2 6 billion in making more efficient use of electricity, an enhancement that costs just 3 cents per kilowatt hour saved for natural gas investment, the picture is even more imbalanced we have a simple choice between low-cost efficiency and high-cost supply—yet each year we choose to spend more than a hundred times more on the more expensive resource furthermore, energy-efficiency investments produce direct employment in installation of equipment and building retro-fits They also create a multiplier employment effect in the wider economy, as money saved on energy bills flows to goods and services more likely to support local jobs than spending on fossil fuels In all, efficiency programs require an enormous range of different jobs and skills Program administrators hire energy-service companies to help consumers evaluate existing opportunities in their homes and businesses and to deliver incentives and assistance in making efficiency upgrades for example, an energy service company might use advanced equipment to identify energy leaks in a home, and then seal and insulate to reduce energy losses that drive up heating and cooling costs for a business customer, such firms might evaluate the benefits of making upgrades to lighting, motors, or roof insulation, and then provide technical and financial assistance in making those improvements expanding efficiency programs would spur the hiring of additional program administrators and energy service company technicians These jobs require training but often utilize existing skills an out-of-work contractor, for example, already knows how to install insulation or weatherize a home, and would require little additional training according to a recent study of efficiency efforts in California, for every job not created in the field of energy supply, thanks to reduced fuel use, more than 50 jobs are created in other parts of the state’s economy between 1976 and 2006, efficiency investments saved households $56 billion and generated 1 5 million jobs with a total payroll of more than $45 billion 1

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Increasingly, state policymakers and other stakeholders are recognizing that efficiency programs should be considered on a level playing field with other energy resources as states and utilities make choices about how to meet the energy needs of consumers and society as whole In addition to energy savings and job creation, the total direct benefits to consumers—including lower wholesale-energy prices and the reduced need for costly new generating plants, power lines, and pipelines—exceed costs by three to four times recently, several states passed laws that require increasing investments in energy efficiency, with some issuing a sensible mandate for utilities to invest in all energy-efficiency measures that cost less than traditional energy-supply options In Connecticut, Maine, Massachusetts, and rhode Island, emphasizing the economic logic of efficiency earned the support of large utilities, business organizations, low-income advocates, labor organizations, consumer groups, and environmental interests other states like California and Vermont have similar requirements efficiency programs do require upfront investments to deliver long and persistent benefits states that are increasing investments have recognized that high energy costs are not simply the result of rising prices for oil and other fuels There is another, potentially even more important factor driving up energy expenses—our unnecessarily high rates of consumption This is where efficiency programs come in by driving down consumption, they enable us to reduce energy costs while at the same time allowing us to sustain the same (or even higher) levels of economic activity a very small increase in rates to fund expanded efficiency programs reduces consumption and thus dramatically reduces total energy bills In addition, other sources of revenue are being used in the northeast to increase efficiency-program investments The most important is the regional greenhouse gas Initiative, the nation’s first carbon cap-and-trade program, which auctions pollution allowances to area power plants a majority of the auction revenue is being reinvested in efficiency programs that deliver even greater economic and environmental benefits a good example of state innovation can be found in Connecticut, where two major utilities, northeast utilities and united Illuminating, have developed a plan to increase total efficiency-program investments from $120

energy efficiency as economic stimulus | 101

million to more than $300 million annually, for a total of $1 billion invested over the next five years under this near-tripling of investment, net savings to the state’s consumers are projected at $2 5 billion Program costs will directly support new energy-service jobs and assist consumers in making efficiency upgrades also, the net benefit of $2 5 billion includes only the avoided costs of the energy sector, and does not consider the multiplier effect of billions reinvested in other parts of the state’s economy a similar plan has been developed by national grid in rhode Island to triple the level of efficiency investment over the next three years a recent study for rhode Island indicates that the state could increase investments from $15 million to $75 million per year at a cost still under 3 5 cents per kilowatt hour saved 2 similar studies exist in other states This suggests an opportunity to save consumers billions of dollars nationwide a stimulus of this size in a small state’s economy will deliver real benefits The federal government can adopt the logic that won over diverse stakeholders in the northeast, helping these states and the country as a whole make these important investments more quickly This would help stimulate the national economy and put us on track to recovery how much federal investment are we talking about? we recommend that washington direct somewhere between $3 billion and $3 5 billion every year for the next three years to existing state-level public or private energy-efficiency programs based on a 100 percent matching-funds program for every dollar of current state-run or utility-run efficiency investments, federal funding would provide an additional dollar to allow programs to double in size energy efficiency should be your administration’s highest priority for stimulus investment It builds on existing infrastructure; can be deployed rapidly; and has large and continuing economic, employment, and environmental benefits The federal government should harness states’ innovations and require electric and natural-gas utilities to advance any energy-efficiency measures that prove to be more effective than simply increasing energy supplies In addition, washington should set minimum targets for energy savings and require that efficiency be procured whenever it is available at lower cost than energy-supply options This commitment should supplement our nation’s necessary quest for larger, more reliable supplies of renewable fuels These long-term efficiency program commitments should also draw on rev-

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enue raised through a carbon cap-and-trade program, as reducing energy consumption through expanded energy-efficiency investments is the best way to reduce the overall cost of any cap-and-trade initiative The united states is currently one of the least energy-efficient countries in the world energy-efficiency programs allow homeowners and businesses to become more productive while freeing up capital for job creation and economic growth we should learn from business associations in the northeast that have recognized the link between energy efficiency and competitiveness by investing in energy efficiency, they harness the potential to drive down wasteful energy use and invest saved energy dollars in their core business The lesson is clear: energy efficiency equals economic growth Mr President, the time is right to implement this vital lesson nationwide Endnotes
1 holst, david r , 2008, energy efficiency, Innovation, and Job Creation in California, uC berkeley, available at: 2 kema, Inc , 2008, The Opportunity for Energy Efficiency that is Cheaper than Supply in Rhode Island, prepared for the rhode Island energy efficiency and resources Management Council

Making america the world’s Clean-Car leader | 103

To: The new President From: Jan Mazurek Re: Making america the world’s Clean-Car leader

environment In no policy area is a radical break from the bush administration needed more urgently Most of the oil we consume goes to power our cars, trucks and airplanes The gas we burn emits carbon into the atmosphere, heating up the earth’s climate To pay for imported oil, we ship hundreds of billions of dollars abroad each year, often to unfriendly and repressive regimes your administration can break that vicious cycle by speeding america’s transition to clean cars and clean fuels first you need to modernize outdated policies since the time of the last u s oil crisis, during the 1970s, america


veryone agrees that america must break its dangerous addiction to oil our nation’s security and prosperity demand it; so does the health of our

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has relied on Cafe (Corporate average fuel economy) standards to compel car companies to build vehicles that get better gas mileage It is important to note that Congress did not create Cafe to address global warming, a challenge that was not yet widely understood at the time Congress created Cafe as a way to force detroit to build fuel-efficient cars, nothing more Clearly, though, Cafe no longer makes sense at a time when global warming is fast approaching the point of no return, and when soaring demand from fast-growing nations like China and India is bidding oil and gas prices up on a permanent basis you should therefore phase out Cafe and replace it with a new policy that focuses on cutting carbon emissions from cars and trucks before describing that new framework, let’s review where things stand right now oil consumption is a major contributor to global climate change, accounting for one-third of u s greenhouse-gas emissions Passenger cars, light trucks, and suVs account for nearly one-half of the 20 million barrels of oil consumed in the u s each day If we are to sustain a car-centered national lifestyle, we must usher in a new era of clean, energy-efficient cars and trucks The bush administration has abdicated its responsibility to spur change, and americans have paid dearly for the absence of a responsible energy policy Instead of meaningful reform, conservatives cling defiantly to the status quo and mislead the american public with disingenuous plans to drill our way to lower gas prices In fact, there is no way for america to drill its way to energy independence The u s controls just 3 percent of the world’s proven reserves, so as long as our transportation system runs on oil, america will be dependent on foreign countries Instead of enriching such oil suppliers as Venezuela, saudi arabia, and russia, we need to start investing more u s energy dollars here at home

Lights Out at the Old CAFE
which brings us back to Cafe shortly after Congress created them, Cafe standards helped boost mileage standards by one-quarter subsequently, however, falling oil prices undermined the consensus for tough action so did

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some fierce resistance from detroit: automakers routinely complained that Cafe forces them to make costly trade-offs in terms of vehicle performance and safety They also claimed that higher standards would compel them to build vehicles that consumers do not want a key reason Cafe’s early successes stalled is because it set a lower miles-pergallon standard for trucks (20 7) than for passenger cars (27 5) not surprisingly, since Cafe’s inception in 1975 the share of new vehicles manufactured as light trucks (suVs, minivans, and pickups) has increased dramatically from 20 percent of sales to more than 50 percent of the market today In december 2007, democrats finally were able to lift the standard from 27 5 miles per gallon to 35 miles per gallon by 2020 That same year, a federal appeals court told the bush administration to close the suV loophole even with these tighter directives, the national highway Traffic safety administration (nhTsa), which is primarily charged with Cafe’s administration, has been stubbornly slow to translate these mandates into action In addition, Cafe still does a poor job of encouraging automakers to add more fuel-efficient models to their fleets for example, a manufacturer of many big and some small cars could have a hard time achieving the standards, but a maker of only small cars would not have any problem at all—even if the first manufacturer produced a more fuel-efficient small car than the second In other words, the present standard does not necessarily encourage either manufacturer to build a more fuel-efficient small car The combination of the suV loophole and the fact that Cafe only measures fleet averages has caused automakers to build more suVs, while trying to keep their “average” up by also making very small passenger cars This top-heavy, bottom-light approach means that consumers sometimes must choose between the cars they want and those that meet high fuel-economy standards we need a new approach It no longer makes sense to wrangle over incremental increases in a standard that focuses only on the input side of the equation—miles per gallon To curb the emissions that are overheating the planet, progressives should focus on the other side of the equation: the carbon output of tailpipe exhaust That is why you should call for replacing Cafe with a new standard based on our real aim—reducing carbon emissions This would have a galvanic

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effect on automakers and help make america the world’s leader in clean-car technology Carbon-based standards have several important advantages over Cafe Most notably, they move performance measurements away from miles per gallon—typically associated with gasoline—toward a standard that more closely measures environmental impact Measuring tailpipe emissions is really a more direct and efficient way to achieve Cafe’s goals look at it this way: If someone invented a car that ran on water, we would not be concerned with whether it got 20 miles per gallon or 30 miles per gallon efficiency for efficiency’s sake is fine, but what truly matters now is reducing carbon emissions—and the simple fact is that one of the best ways to emit less carbon is to use less oil

Follow California’s Lead
as on many other environmental issues, California is leading the way Its vehicle standards set limits on the amount of carhbon dioxide and other greenhouse gases that can be released from new vehicles, beginning with passenger cars, suVs, and pickup trucks sold in model year 2009 at least 18 states—representing 45 percent of the car market—have sought to follow California’s standard, but the golden state cannot get the process underway until the environmental Protection agency (ePa) grants it a waiver—a process that has been blocked by the bush administration California’s tailpipe standards for vehicles encourage manufacturers to comply by building cars that run on cleaner fuels, including diesel, biofuels, electricity and hydrogen The measure is designed to curb vehicle emissions of carbon dioxide and other greenhouse gases 30 percent by 2016 The California air resources board estimates that meeting California tailpipe standards would add, on average, about $1,000 to the sticker price of a new vehicle better efficiency, however, will save drivers about $700 per year in fuel If gasoline were to return to nationwide price levels of $4 or more per gallon (hardly an outlandish prediction), that means consumers can recover the higher up-front cost of their investment in just one and a half years an early and important priority will be for you to allow the ePa to grant California a waiver but an important first-term initiative will be to

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stitch these state efforts into a comprehensive federal tailpipe-standard program under a “tailpipe trading” system, makers of more fuel-efficient vehicles could sell credits to competitors who fail to make the grade, a system similar to the tradable emissions allowances that helped reduce acid rain all manufacturers would have a continuous economic incentive to innovate and improve fuel efficiency

A Tailpipe Trading System
This brings us to a separate but closely related reform proposal: the establishment of a cap-and-trade system for carbon emissions To set such a system in motion, the government would give away or sell trading allowances that add up to the total carbon-emissions limit set up under the cap emitters—such as energy producers and factories—can then sell excess trading allowances to those who cannot cheaply curb emissions This creates a powerful incentive for companies to reduce their own pollution levels In addition, an emissions-based standard, coupled with a tailpipetrading system, could be integrated into a nationwide “cap-and-trade” regime that limits all u s carbon-dioxide emissions from whatever source america is the only developed country that has not put a price on carbon emissions by bringing our nation into parity with other advanced economies on cap-and-trade, you would help galvanize action on three fronts first, a new u s cap-and-trade system would create the world’s largest carbon-dioxide market Putting a price on carbon-containing fuels will unleash a powerful torrent of investment in clean-energy technologies This, in turn, would generate billions of dollars in new business activity and millions of new jobs second, a tailpipe-trading system for carbon would give automakers a profit motive to produce cars and trucks that keep carbon-dioxide emissions under set limits Carmakers whose fleets miss the mark could buy carbontrading credits from any company subject to the national carbon cap (not just other carmakers), or pay into a fund that could be used to further spur innovation In other words, trading helps to reduce the total cost of building the fuel-efficient cars that americans want

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Third, there may be some administrative advantages to moving from miles-per-gallon to carbon standards The design and administration of such a program at the federal level could be moved away from the historically reform-averse nhTsa to the ePa, which already performs some Cafe testing and measurement programs and will most likely administer a national cap-and-trade system despite the promise of such a tailpipe-trading system, detroit carmakers have challenged the California emissions law, arguing that fuel economy is a national issue and not one to be decided state-by-state Mr President, you can end the gridlock by first granting California its long-sought waiver and then urging Congress to replace Cafe with a national tailpipe-trading system for carbon If history is any guide, the auto industry will at first resist any major policy shift, particularly at this financially challenging time In december 2008, the house of representatives approved a $14 billion loan to the big Three u s automakers The measure included a provision that would have barred the car companies from pursuing lawsuits against California and other states that want to implement tougher tailpipe emissions standards unfortunately, the white house insisted that the California waiver be dropped from the bill as it moved to the senate In any case, republicans killed the bill in the senate The white house subsequently offered detroit what essentially amounts to a three-month, $17 4 billion bridge loan, with no requirement that automakers meet more stringent state emissions’ standards Mr President, if you and Congress opt to provide detroit with additional taxpayer dollars, then automakers should have to hold up their own end of the bargain by producing a new generation of market-ready clean cars It would be in u s carmakers’ own interest to embrace the challenge of leading the world in the development and deployment of such vehicles The Japanese and german auto industries have seen the writing on the wall and are rushing to get ahead of the clean-fuel curve, starting with hybrid cars keeping the u s market sheltered from such trends would be a particularly short-sighted form of protectionism There’s a saying: “That which gets measured gets done ” by measuring carbon emissions, we can improve economic efficiency, protect our environment, and reduce our dependence on foreign oil These are objectives worthy of a new president

establishing a global environmental organization | 109

To: The new President From: Jan Mazurek and edward gresser Re: establishing a global environmental organization (geo)

dore roosevelt, it is time to build new environmental institutions that fit the challenges of our times—challenges as vast as the destruction of our forests, the manmade transformation of our climate, and the heedless eradication of entire plant and animal species The obstacles to action are many and profound The record of the kyoto Protocol, an international treaty that the bush administration refused to join, suggests that enforcing commitments will be at least as difficult as negotiating them kyoto’s challenges largely reflect an endemic weakness of global environmental policy even agreements that are aimed


r President, you are taking office at a moment of unprecedented environmental threats In the tradition of your great predecessor Theo-

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at problems far less scientifically complex than climate—for instance, the traffic in endangered species—are poorly monitored and, in many cases, ineffective The new president therefore must combine a robust climate-change policy with meaningful institutional reform—specifically, the creation of a global environmental organization, or geo even setting climate change aside, the need for geo is clear environmental policy is the orphan child of international law and institutions Those interested in preserving the environment are far less able to get things done at the global level than their colleagues in trade, finance, labor, and security for an illustrative comparison, look at trade policy The world’s most important trade negotiations, agreements, and enforcement actions are centered in a single institution, the world Trade organization (wTo) based in geneva, the wTo not only is the venue for the major contemporary trade negotiation—the doha round—but it also oversees 20 existing multilateral trade agreements on topics including services, farm subsidies, tariffs, information technology, and intellectual property In addition, the wTo has a single head, director-general Pascal lamy, whose background is as a leading french politician and european union Commissioner Its mandatory membership dues make the wTo staff independent from the control of its powerful members furthermore, each of the wTo’s 152 members has an ambassador who serves as a single point-person for trade negotiations and enforcement The whole membership reviews each country’s compliance with the full array of agreements once every three years—and when this oversight falls short, wTo members settle their differences through an average of 10 dispute settlement cases every month The institutions created for finance, labor, and security are similarly muscular for example, the world bank and International Monetary fund have overseen finance and development since 1945, with advice backed by real money for its part, the 90-year-old International labour organization has the power to set out core labor standards binding on all the world’s businesses, unions, and governments unfortunately, there are no global environmental institutions with anything like this level of credibility or effectiveness

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The lead international environmental body is the u n environmental Programme (uneP), an arm of the united nations located in nairobi Tellingly labeled a “programme” rather than an “organization,” it is run by a u n undersecretary—that is, a second-tier official—rather than by an independent leader Its funding comes from voluntary contributions rather than mandatory dues, and it is kept separate from the technical-aid organization known as the global environmental facility uneP’s annual budget is less than half that of the u s environmental Protection agency environmental agreements, as a result, are unsystematic and poorly enforced Their enforcing organizations are scattered around the world, with the agreement on desertification headquartered in germany, the Persistent organic Pollutants agreement in sweden, chlorofluorocarbon control in Quebec, and antarctic protection in Tasmania each of these entities has its own secretariat, whose enforcement and oversight procedures operate independently of the rest Participating countries are free to sign some agreements and ignore others neither governments nor interested citizens have an easy way to assess their obligations or their partners’ compliance It should be no surprise, then, that international environmental protection often fails The 1986 International Tropical Timber agreement—whose 35 staffers at their yokohoma headquarters are supposed to monitor and enforce limits on 21 million cubic meters’ worth of trade in tropical logs and timber—has been powerless to prevent the loss of more than one-tenth of the world’s tropical forested land since its signing The effort to protect sea turtles is a different illustration of the environmental system’s inadequacy—one showing the inherent organizational gaps of the current system, rather than a simple failure of enforcement governments have used the Convention on International Trade in endangered species to protect turtles from the relatively small threat of international trade in canned soup and turtle-shell jewelry, but the signatory nations have done nothing about a far greater threat to turtle species—the widespread destruction of nesting beaches Therefore, the turtle population continues to decline In calling for a stronger international regulatory system, Mr President, you could credibly point to the powerful example of american environmental law

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The current u s system of environmental regulation arose in large part from industry demands for a more level playing field The 50 separate sets of state policy that prevailed up until the late 1960s made compliance costly and uncertain for companies and created strong incentives for some states with weaker laws to serve as pollution havens In response, Congress passed laws during the 1960s that created the federal system of air, water, and waste laws in place today—much as the creation of the wTo in the 1990s unified a disparate group of tariff agreements; subsidy and anti-dumping codes; and intellectual property rules The time has come, Mr President, for something simpler, stronger, and better The environment needs a single organization, with mandatory dues and an independent chief of recognized international stature It should take control of the existing welter of agreements and serve as the main venue for enforcing them, fixing their weaknesses, and negotiating new pacts The case for geo is fundamentally simple global environmental protection means at least as much to the world’s present and future as trade, finance, labor, and security Therefore, we should take global environmental policy and institutions as seriously as we take these others The time to start is now for challenges that are global in scope, such as climate change, geo’s economic and environmental imperative is obvious and the need for such an entity will only increase a new climate-change agreement will require vastly complex obligations and monitoring mechanisms spanning many countries and thousands of industries, any new climate accord would require a clear, unbiased monitoring organization, as individual countries each seek to judge and enforce the compliance of all the rest even with the world’s good will and enthusiasm behind it, such an agreement could easily fail—and we simply cannot afford such a failure There is at least one other great benefit that geo could provide as you walk the halls of your new residence, take a moment to pause in front of the painting of Theodore roosevelt Through roosevelt’s leadership in the creation of our national-park system, the united states established itself as the global leader of environmentalism This proud legacy has been diminished by some of your recent predecessors, who did not take the rough rider’s legacy as seriously as they should have (a strange oversight, since they came from his party)

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now is your chance to reestablish america’s leadership as the founding nation of the environmental movement a new global environmental organization, featuring full american support and participation, would do exactly that

america’s nuclear waste and what to do with It | 115

To: The new President From: bill Magwood and Mark ribbing Re: america’s nuclear waste and what to do with It

time you looked out the window of your campaign bus, from bangor to bakersfield, you saw the ever-rising gas prices but as painful as three or four bucks a gallon might have been for the average american, you also noticed that the concern about fossil-fuel dependence cut deeper still— to fundamental questions of national security, economic growth, and environmental preservation whether we guzzle them as oil or mine them as coal, fossil fuels exact costs that we can no longer afford or ignore we need real alternatives—and, while we all recognize that fossil fuels will have to play a role for years to come, that does not include trying to drill our way out of the problem


r President, it should be clear to you that one of the most pressing issues of our time is america’s dependence on fossil fuels every

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The years of your presidency, then, must include some serious reckoning with this nation’s energy future—and with the vital question of how we shall wean ourselves off of fossil fuels In order to answer this question, you will need to push for a significant increase in energy research, particularly in the field of renewable sources like wind, solar, and biomass Perhaps even more importantly, you will need to push programs that will make the united states more energy-efficient so that our homes, businesses, and vehicles can operate more cleanly and cost-effectively yet while renewables will eventually increase our supply of clean energy, and efficiency programs will reduce demand, none of this will happen overnight In some parts of the country, these measures may not even meet the needs of a growing population and economy This means that, if we want to reduce our use of fossil fuels, we need to think about increasing the use of all non-fossil sources a candid discussion is needed—within your new administration and in the country as a whole—about nuclear energy, a non-climate-changing power source that is actually capable of generating significant amounts of energy in the near term The key to making nuclear energy a more viable alternative is the adoption of advanced spent-fuel recycling techniques to deal with one of nuclear power’s most vexing problems—the presence of radioactive waste material by accelerating research on advanced recycling, the united states could leapfrog other nations and produce an innovative response to the twin problems of curbing man-made climate change and alleviating the waste-storage problem More than three-quarters of america’s clean energy already comes from its 104 nuclear-power plants nuclear energy produces about 20 percent of the nation’s electrical power unlike coal (which generates just over one-half of america’s electricity), nuclear power does its work without emitting greenhouse gases In other words, expanding nuclear energy’s share of electrical production is one potential means of combating climate change Indeed, a growing roster of scientists believes that nuclear energy is an essential piece of any climate-protection strategy In fact, as our energy needs grow over the coming decades, many experts assert that we will need to expand nuclear power just to keep the share of emissions-free electricity at 30 percent

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nuclear power is controversial in many parts of the country, and much of the controversy revolves around a single fact: the united states still has not decided what to do with its nuclear waste, which can remain dangerously radioactive for thousands of years In some states, the waste issue has placed a hard limit on the growth of nuclear power for more than two decades, for example, Illinois has had a moratorium on new nuclear-plant construction until a safe storage method is developed California and wisconsin have similar measures on the books while concerns about greenhouse-gas emissions have caused the legislatures of all three states to consider a repeal of their reactor-construction bans, the very existence of such prohibitions demonstrates the political sensitivity of the waste issue even states such as south Carolina and georgia—in which utilities have signed contracts to build new reactors—are very concerned about the waste issue and demand a solution Therefore, if nuclear power is to have any chance of meeting its full potential as a reliable, relatively clean source of energy, we must figure out what to do with the leftovers but this is not just a matter of meeting future needs; there is a very practical, immediate reason for us to focus on the nuclear-waste issue remember, there is already enough nuclear generation going on in this country to produce a full one-fifth of the electricity needs of the world’s largest economy That means there is already a fair amount of nuclear waste (about 60,000 tons) sitting around, with more (about 2,000 tons) being produced each year The u s government has a statutory responsibility to take this waste— which is in the form of ceramic pellets in metal tubes—and dispose of it by law, this should have started in 1998 The government, however, has yet to take responsibility for a single pellet of spent fuel so where does it all go? right now, it is staying where it is—at the power plants that produce it The effort to create a deep geologic storage site at yucca Mountain, nev , while still moving forward, is under heavy fire from Congress and has had its budget slashed even if yucca Mountain were entirely successful, it still might not be enough If america expands its use of nuclear power, and we continue to produce nuclear waste at the present rate, using our present methods, we would need to build yet another yucca Mountain facility to deal with the waste

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This would, of course, then beg the question of where to build the next big waste site If the controversy over yucca is any indication, it could be a very long time before any such repository gets its first shipments of waste so, Mr President, you have a couple of very compelling reasons to make the unglamorous subject of nuclear waste a priority of your administration first, the lack of a clear national policy on waste prevents us from looking squarely at the bigger question of whether to increase the role of nuclear power second, we owe it to ourselves and to future generations to figure out just what to do with the waste we have already generated needless to say, the science of nuclear energy is extremely complex, and you do not have the time to bring yourself to full expertise in the subject (though such knowledge is not unheard of among individuals in your position; one of your predecessors, Jimmy Carter, did graduate work in nuclear physics and was an officer in the nuclear-submarine fleet) for now, though, there are some important technical developments on which you might want your secretary of energy to provide a briefing while looking to france for inspiration may or may not play well with domestic audiences, it is one of the first places to look for ideas on how to handle nuclear waste actually, the french (who get almost 80 percent of their electricity from nuclear energy) do not really think of it as waste, and therein lies an important difference between their approach and ours The united states uses what is called a “once-through fuel cycle,” in which the nuclear material in the fuel is used just once, the used fuel is put in a geologic repository, and that’s that but that leftover nuclear material still contains a lot of energy In fact, some have likened the “once-through” method to pulling a log out of the fireplace just because the bark has burned off let’s say you were to put a batch of nuclear fuel into a reactor after a three-year cooling-down period, 96 percent or 97 percent of that material is potentially reusable uranium or plutonium; only the remaining 3 percent or 4 percent is genuinely useless “waste ” france “reprocesses” that leftover uranium and plutonium into useable energy The final wastes undergo a procedure called vitrification, in which they are compacted into a stable glass log and placed into temporary storage The french do not have a permanent solution for their nuclear waste either, but, because of reprocessing, they have far less of it to deal with—about 10 grams

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per frenchman per year That is about three-tenths of one ounce, or slightly less than the weight of a u s half-dollar coin The bad news about this kind of reprocessing is that it is based on the same technology developed by the united states in the 1950s to make nuclear weapons This makes that technology very controversial in the united states In fact, nuclear-proliferation concerns played a major role in the Carter administration’s decision to cease federal support for reprocessing in the united states while our country may be a relative latecomer to reprocessing, however, new technology could enable us to vault past other nuclear nations american scientists are well on the way toward developing new processes that are both more proliferation-resistant than the existing technology and more environmentally friendly for example, u s researchers are exploring ways to break waste down into stable, non-radioactive materials using “fast reactors ” These reactors would be capable of using up more of the plutonium and other elements that today’s reactors simply cannot process using these technologies would reduce waste, minimize the long-term hazard nuclear waste poses to the environment—and also result in greater electricity production as we use nuclear material more efficiently another benefit of this work is that u s leadership can bring the world’s nuclear energy nations together to meet this challenge—both to our domestic benefit and to benefit of the world as a whole still, in the end, a major storage facility will be needed even the most advanced technology will leave small amounts of nuclear waste that must be stored for hundreds of years In addition to waste from ongoing energy production, the united states is storing large quantities of nuclear material left over from the Cold war and from the continued operation of the nation’s nuclear navy but technology can also give us more time to make sure that if we do require a repository, we will design one that meets our present and future needs nuclear energy is not a cure-all, and there will be many who raise objections to it some recent administrations have started out fully intending to reduce our use of nuclear energy, only to return to it at the end as part of the solution while it has clear benefits, nuclear power has its costs and its hazards, as do all forms of large-scale energy generation a pair of uranium

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leaks at french nuclear facilities in July caused public concern at precisely the moment when nicolas sarkozy’s government was looking to build more reactors yet the very reasons for france’s continued commitment to nuclear power— namely, to free itself from foreign oil and climate-changing greenhouse gases—are reasons that we must take seriously as well whether we, too, should increase our use of nuclear energy is one of the many important decisions you will have to make in your new job figuring out what to do with nuclear power’s waste product is central to that decision—and to our nation’s energy future

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new desIgns for naTIonal seCurITy

Creating a nuclear-fuel bank | 123

To: The new President From: sen evan bayh Re: Creating a nuclear-fuel bank


he 21st century has ushered in unprecedented demand for energy around the world given the rapid rates of growth in such developing countries

as China and India, prices for traditional sources of energy are likely to remain high supplies of oil, gas, and coal are

finite, so countries increasingly are looking elsewhere for affordable and clean sources of energy nuclear energy, which generates tremendous power with no greenhouse-gas emissions, is an obvious place to look but there’s a catch: as nuclear generating plants sprout up around the world over the coming decades, many new states will get their hands on nuclear technology and materials This will exponentially raise the risk of fissile or bomb-making material being acquired by rogue nations or terrorist groups as a member of the senate Intelligence

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Committee, I know all too well that terrorist networks continue to pursue the acquisition of a nuclear weapon and would not hesitate to use it we can ill afford to allow rising demand for nuclear energy to become a pretext for rogue nations seeking to acquire a nuclear military capability yet that is precisely what is happening right now in Iran and if that nation succeeds in defying the international community’s legitimate demands that it desist from developing nuclear capacities, other countries will follow suit That’s why I urge you, Mr President, to put nuclear nonproliferation at the top of your energy-security agenda I believe the threshold question is this: how do we respond to valid and growing demands for civilian nuclear energy worldwide without permitting more countries to acquire nuclear weapons? The answer, in my view, is to set up an international nuclear-fuel bank that would supply fuel to any country that agrees not to develop its own enriching and reprocessing facilities The fuel bank works like this: developing nations seeking civilian nuclear power for peaceful purposes are given access to a reliable and affordable supply of nuclear fuel In return, they must agree to forgo enriching uranium themselves They must also submit to rigorous inspections of their civilian reactors to guard against north korean and Iranian-style cheating This approach makes both economic and national-security sense we have learned a lot about the economics of nuclear power since the Treaty on the nonproliferation of nuclear weapons (often referred to as the nonproliferation Treaty, or nPT) was negotiated more than three decades ago for starters, there is an enormous surplus of uranium in existing enrichment facilities worldwide due to bigger economies of scale, it is now much cheaper for countries lacking enrichment capacity to purchase fuel from a central repository than to mine, enrich, and reprocess it themselves even a small enrichment facility would cost at least $1 billion to build and more than $100 million to operate each year but an international nuclearfuel bank could supply the same amount of fuel at market prices for roughly $15 million a year 1 an international nuclear-fuel bank would thus provide affordable fuel to countries genuinely interested in pursuing civilian nuclear power It would

Creating a nuclear-fuel bank | 125

allow countries to draw fuel for use in their own civilian nuclear reactors and then return the spent fuel for safe reprocessing under the oversight of the International atomic energy agency (Iaea) by removing incentives for developing countries to create their own fissile materials, we would reduce the prospect of nuclear weapons falling into the hands of the world’s most dangerous regimes such a bank would help to close what many regard as a dangerous loophole in the nPT The treaty has been widely interpreted to allow non-nuclear weapons states to develop uranium enrichment and spent-fuel reprocessing facilities if their use is intended exclusively for civilian nuclear energy The problem, according to leading defense experts ashton Carter and stephen laMontagne, is that “enrichment and reprocessing facilities allow states to cross into a proliferation ‘red zone,’ putting them dangerously close to a nuclear weapons capacity ”2 The loophole in question lies in the nPT’s article IV, which recognizes the “inalienable right of all Parties to the Treaty to develop research, production, and use of nuclear energy for peaceful purposes ” Iran claims to be exercising this “inalienable right” today as it enriches uranium for what it says are strictly civilian uses we should not forget, however, that north korea used precisely the same tactic to realize its nuclear ambitions, and we are perilously close to seeing history repeat itself—this time with an oil-rich nation that is deeply hostile to the united states and actively supporting international terrorist groups once this genie gets out of the bottle, there is no putting it back at a minimum, allowing Iran to obtain a nuclear warhead would be a regionally destabilizing event certain to spark a Middle east arms race at worst, it would be a global security catastrophe in which Tehran obtains the means to blackmail its european neighbors and threaten Israel’s destruction as Carter and laMontagne point out, the nPT is clear that the right it confers to peaceful atomic power can only be exercised in conformity with the nonproliferation obligations that Iran and other nuclear aspirants assumed when they signed it They add: “The solution to the red zone problem is to provide states with a multinational alternative to an indigenous nuclear fuel cycle. This will in-

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volve creating a multinational supply regime to provide enrichment and spent fuel removal services to states that abstain from domestic enrichment and reprocessing, submit to strict safeguards (such as those stipulated in the IAEA Additional Protocol), and reaffirm their intention not to purse nuclear weapons.” 3 last year, I co-authored legislation with sen richard lugar (r-Ind ) that would create exactly this kind of “multinational supply regime ” recently, several provisions of that legislation were signed into law The centerpiece of our approach was the first major federal investment in the creation of an international civilian nuclear-fuel bank The establishment of a fuel bank would cut short the debate over nucleartechnology development rights every nation would have access to civilian nuclear power so long as they are willing to abide by conditions that protect global security Countries that refuse fuel-bank services would come under immediate suspicion about their weapons intentions Iran contends that it is pursuing a civilian nuclear program to reduce domestic oil consumption and sell its excess oil on the global market If this claim is true, then surely Iran would leap at the opportunity for a more affordable supply of nuclear fuel after all, fuel-bank services would provide it with a faster and cheaper path toward achieving its stated objective of a purely civilian nuclear program of course, if Tehran’s pursuit of civilian nuclear power is a disingenuous ruse, as I strongly suspect, then its true ambitions will be revealed This evidence will make it easier to rally world opinion for more aggressive international action against Iran before it’s too late last winter, the senate appropriated $50 million for the department of energy to implement the fuel-bank concept Mr President, your administration’s challenge will be to encourage the other major nuclear powers to join an international consortium that would guarantee the fuel bank has adequate supplies as well as the ability to reprocess and store waste These points are crucial without credible assurances of an uninterrupted and affordable supply of fuel, it will be difficult to persuade potential customers that they should not develop domestic enrichment and reprocessing programs

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In addition, as the controversy over the yucca Mountain repository has made clear to americans, it is exceedingly difficult to forge an environmental and political consensus around ways to safely reprocess and store spent fuel storage is also hugely expensive under the fuel-bank idea, customers would pay a small surcharge to get rid of their wastes we must also strengthen the Iaea safeguards system The labs that examine nuclear samples collected by the international inspectors are horribly outdated Their scientists are using 1970s equipment amid dangerous working conditions I was shocked to learn that Iaea personnel are actually limited in the time they can spend analyzing evidence in the nuclear area of the labs, due to a dilapidated air-purification system we must make critical investments to see that these facilities are improved as more countries expand their nuclear-power infrastructure, the Iaea will be responsible for inspecting a growing number of samples It needs first-rate facilities and modern equipment to carry out this critical work If the cop on the beat does not have the tools to patrol the streets, then no one in the neighborhood will be safe finally, there is another important step your administration can take to shore up the world’s rickety nonproliferation framework: demonstrate to all that the united states intends to hold up its end of the nuclear bargain under the original nPT arrangement, non-nuclear states agreed to forgo nuclear weapons in exchange for a commitment by the nuclear “haves” to move toward disarmament Instead, as the Cold war intensified, the superpowers dramatically built up their nuclear arsenals eventually, under Presidents ronald reagan and george h w bush, the united states and ussr struck deals to reduce their nuclear stockpiles In this decade, President george w bush actually moved in the the opposite direction, rejecting the Comprehensive Test ban Treaty (CTbT) until the united states works to pass the CTbT, we will be hindered in our ability to lead by example on this critical national-security issue Too often in washington, we wait for crises to develop before taking action Mr President, america must not make the mistake of embracing a reactive posture on this issue when it comes to preventing the spread of nuclear weapons, the consequences of inaction are costs we can ill afford to pay

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1 ashton Carter and stephen laMontagne, “Containing the nuclear red Zone Threat,” The american Interest, spring 2006 2 Ibid 3 Ibid

achieving Peace and Prosperity in the greater Middle east | 129

To: The new President From: edward gresser Re: achieving Peace and Prosperity in the greater Middle east

s you take office, you face a financial crisis more dangerous than any in decades you inherit two wars, an angry russia, a China claiming its place among the world’s great economic powers, anti-american populism in south america, and a shaky nuclear status quo in north korea you are launching an ambitious domestic agenda—on everything from health reform to climate change—just as government finances collapse This is a lot some would say it’s more than enough but let me argue for one big addition: a major effort to support the Muslim-world economy, with trade policy as the central tool we should waive tariffs on goods from the greater Middle east in order to encourage investment, job creation, and development in the world’s most troubled region


130 | Memos to the new President

Our Gravest Problem
why should this be a priority, when you have so much else to do? because our nation’s relationship with the Muslim Middle east is our gravest challenge That’s right—even with a financial crisis threatening our economy, it is our troubled interaction with the greater Middle east (defined, for these purposes, as the band of nations running from Morocco to Pakistan) that truly represents the most serious threat to our national security and well-being and so far, none of our efforts to stabilize or pacify this region have worked we have tried aid programs, military action, sanctions, and diplomacy each of these approaches has failed to arrest the region’s deterioration There is another alternative, one that offers greater promise than anything we have yet attempted It is trade policy—supported by aid, diplomacy, intelligence, and military capability—that offers the best hope for truly constructive change in the greater Middle east let me offer a bit more detail first, consider three specific facets of our relationship with the majority-Muslim countries from north africa to Central asia: • This relationship is vexed by a series of individual crises: fragile stability in Iraq; alarming slides in afghanistan; a potential civil war in lebanon; confident belligerence in Iran; deadlocked arab-Israeli dialogues; and a nuclear-armed Pakistan that, in the aftermath of the Mumbai attacks, may be in for a period of renewed tensions with India and deepening uncertainty about its ability to control its own security services • The united states faces a stalemated “war on terror” in which military and intelligence tools are approaching their limits, while al Qaeda and its associates seem to be regaining strength; and • we must contend with broadly hostile public attitudes throughout the Muslim world: polling finds that Muslim-world publics view america with suspicion at best and intense hostility at worst, complicating any american diplomatic initiative and making american support for political reform exceptionally difficult

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The global economic crisis is likely to intensify all of these problems Pakistan, with all of the security challenges just mentioned, is close to sovereign default and financial collapse oil exporters in the Persian gulf may see their incomes fall by 50 percent this year—which is bad for them, but even worse for countries like lebanon, afghanistan, Iraq, Turkey, bangladesh, and (once again) Pakistan, which rely on remittances from workers in this region Thus, social pressure in the Muslim countries will rise, swelling the pools of unemployed and angry young men that extremist movements recruit as their foot soldiers

The Standard Policy Tools are Failing
why should trade policy, controversial as it is among american progressives, be the mechanism for helping to bring about positive change in the greater Middle east? The modest answer would be that previous mechanisms simply have not worked The bush administration made military and intelligence actions the center of policy soldiers and spies had some important successes after the sept 11 attacks, notably in driving al Qaeda out of its former havens in afghanistan but a military-centered u s policy has also deepened Muslim public anger, with the Iraq war in particular bringing american motives under grave suspicion Traditional progressive remedies, unfortunately, are not much more compelling one perennial idea is a big new aid program, often labeled a “Marshall Plan for the Middle east ” but aid to Pakistan in the 1970s and 1980s did not help moderate Pakistani politicians nor have aid programs for egypt brought development or eased anti-american sentiment finally, a new Marshall Plan for a region which earned a trillion dollars selling oil last year does not make sense what about sanctions as a way to push reform? no area of the world is more sanctioned than the Middle east To put it mildly, its politics have not improved how about democratic reform in the arab lands? unfortunately, the Iraq war cracked whatever base of Muslim-world support existed for it would solving the arab-Israeli dispute be the key to stability in the region? no doubt it would help but this has proved quite difficult to achieve, and it

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probably is not enough on its own: after all, al Qaeda itself emerged as the Clinton administration tried to bridge the Israeli-Palestinian divide in the oslo process all of this is not to say that aid is pointless, or that sanctions are never an option, or that there is no reason to revive the Middle east peace process, or that we should not support democratization It is simply to suggest that these classic progressive policy prescriptions are not enough—and never will be something else is needed

Why Trade? A Look at the Muslim World’s Depression
The missing element in u s policy has been economics The Muslim world has endured a prolonged and little-recognized economic depression failure in trade is among its main causes, and trade policy is therefore a practical strategy for fighting unemployment and generating an economic recovery in the region let’s begin with the obvious question: why does the greater Middle east produce extremists when other regions generally do not? Paul Collier, in The bottom billion, suggests an answer his statistical analysis of civil wars found that neither democracy nor autocracy nor historic grievances have close association with outbreaks of civil war only two things do: low income and economic contraction according to Collier: “[A] low-income country faces a risk of civil war of about 14 percent in any five-year period. Each percentage point of growth knocks off a percentage point from this risk. So if a country grows at 3 percent, the risk is cut from 14 to 11 percent; if its economy declines at 3 percent, the risk increases.” 1 history elsewhere suggests a strong link between economic suffering and radicalism In the 1930s, european fascism and communism drew strength from the depression The revolutionary communist movements of southeast asia and latin america during the 1960s and 1970s likewise emerged during periods of deep economic stress and withered as economies recovered The greater Middle east may not be so different, even though its characteristic extremism is derived from perverse interpretations of religious doctrine rather

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than from nationalism or TABLE 1: DEMOGRAPHIC BOOM, egalitarianism ECONOMIC BUST This region was the Greater Middle Share of unrecognized loser of the East Population World Exports “globalization” era between 1982 (the year the 1980 400 million 13.5 percent first oil boom ended) and 2000 710 million 4.5 percent 2000, its people endured simultaneous demographic growth and economic contraction as Table 1 shows, its combined populations grew by more than 300 million people Meanwhile, its share of world trade and investment collapsed Taken together, a rising population and a shrinking economy mean poverty according to the un development Program’s widely praised studies of the arab economies, arab per-capita gdP fell by nearly 25 percent between 1980 and 2000, from $2,300 to $1,650 2 The region’s unemployment rate became the world’s worst—the International labour organization places it at 12 percent, double the world’s 6 3 percent rate among young people, it is 25 percent 3 In such times, ordinary people feel—correctly—that their future is bleak and their children’s is likely to be worse governments fall into discredit, and radicals find an audience The oil-fueled surge of growth since 2005 is no solution while it has brought a gush of cash into the region, commodity-export booms, even in good times, do little to create jobs rather, they tend to centralize power and increase inequality The evanescent gains of such periods are always prone to sudden collapse when prices turn down even today, petro-optimism is fading, as the high oil prices of 2006 and 2007 fall The reality is that the greater Middle east remains isolated from the global economy: The region’s share of manufacturing and farm trade remains minuscule, accounting for only 1 percent of the world total even though the region comprises a full 10 percent of the globe’s population anyone who thinks foreign aid can make a decisive difference here should think again Consider first its modest scale—all world aid programs combined total approximately $120 billion annually, one-half of the money saudi arabia alone earns from oil and like oil cash, aid does little to help with

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unemployment effective programs that can help willing governments create better schools, strengthen women’s rights, improve business climates, and provide more effective public services are important but the region needs jobs most of all, and here trade is more effective: one shipping container filled with Pakistani towels, for example, puts 485 men and women to work

The Perversity of the Current American Trade Regime
supporting growth and job creation through trade is our best chance to bring down the political temperature in the Middle east but today we are doing just the opposite—america’s trade regime tilts sharply (albeit unintentionally) against the Muslim world
Country Imports Tariff Penalty Tariff Rate

Bangladesh Pakistan Turkey Tunisia Indonesia Brazil WORLD Lebanon France UK Norway Egypt Russia Saudi Arabia Venezuela South Africa

$3.4 billion $3.6 billion $4.6 billion $0.45 billion $14.4 billion $25.0 billion $1.94 trillion $0.1 billion $41.2 billion $57 billion $7.2 billion $2.4 billion $19.6 billion $35.2 billion $37.4 billion $9.1 billion

$523 million $365 million $169 million $12 million $840 million $452 million $26.1 billion $1 million $378 million $412 million $28 million $10 million $61 million $45 million $38 million $7 million

15.4% 10.1% 3.7% 2.7% 5.8% 1.8% 1.4% 1.0% 0.9% 0.7% 0.5% 0.4% 0.3% 0.1% 0.1% 0.01%

U.S. International Trade Commission

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as Table 2 shows, our permanent tariff system imposes higher penalties on the goods big Muslim countries (saudi arabia excepted) export than on those we buy from wealthy countries on average (excluding products brought in under free-trade agreements), american tariffs are approximately 2 4 percent but for the exports most important to Pakistan, egypt, Turkey, bangladesh, lebanon and other countries in the region—clothes, bedsheets, towels, shoes, glass, luggage, ceramics—the average tariff rises to 15 percent Pakistan, infuriatingly, gets the same tariff penalty on $3 6 billion in towels and clothes that france receives on more than $40 billion in medicines, wines, paintings, and airplane parts second, our collection of free-trade agreements and trade preference programs places many Muslim countries at a disadvantage vis-à-vis direct competitors elsewhere in the world for example, each Pakistani towel gets a standard tariff penalty of 9 1 percent The same towel, imported from any of 73 competing countries enrolled in trade preference programs or a free Trade agreement, gets no tariff at all

Toward a Better Trade Program
Peacemaking and political reform are failing in the greater Middle east you will need to show the region’s young people that they can find a job, support a family, and offer their children something better neither military policy nor sanctions nor aid can do this Trade has the best chance—and it is sad to see america’s present trade policy doing the opposite
Country Top Export Tariff Penalty (Muslim state) Tariff Penalty (FTA/ preference country)

Pakistan Bangladesh Indonesia Turkey

Cotton terry towel Men’s cotton pants Cotton pullover shirts Travertine building stone

9.1% 16.6% 16.5% 3.7%

0% 0% 0% 0%

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you have a chance to put it right I suggest a simple waiver of tariffs on goods from moderate Middle eastern nations that denounce terrorism and cooperate in regional peace efforts This step alone would spur investment and job creation The best goods to target with such a waiver would be clothes, home textiles, and light manufactures in ceramics and glass—these industries create urban jobs—along with some selected farm products like olives and olive oil to bring some money to rural areas To be truly effective, such a waiver should be instituted not only by the united states, but also by europe, Japan, and China all of these economic powers have obvious stakes in a Middle east that is more stable, less violent, and better able to balance oil revenue with normal and healthy farming and manufacturing sectors The cost to american taxpayers would be nil—in fact, they would get modest benefits from the program through lower store prices nor would the remaining american workers in these light industries lose Tariff waivers would simply divert some imports from more diversified, faster-growing China, India and Vietnam

The Need to Act Fast
The important thing is that this program start soon, because the status quo will deteriorate quickly as the financial crisis spreads from rich world to poor, a few billion dollars more in purchases of towels, raisins, and T-shirts from places like karachi, Istanbul, Tunis, and beirut will pull hundreds of thousands of young people off the streets and into factories and offices where they can earn salaries and as this proceeds, radicals will find their pools of support shrinking, while your diplomats will find the region’s problems somewhat more amenable to compromise solutions of course, you already have a big agenda, and trade is controversial among progressives but our gravest single problem is worth an exceptional response your opportunity to reshape our relationship with the Muslim world is now— building on the good feelings aroused by your election, before the worst of the financial crisis hits Take the opportunity a year from now, it may be gone

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1 Collier, Paul, The bottom billion: Why the Poorest Countries are Failing and What Can be Done About It, oxford university Press, 2007, pg 20 2 un development Program, Arab Human Development Report 2002, page 88, available at 3 International labor organization, key Indicators of the labor Market, 2007, Chapter 9, pg 7:

Taking naTo global | 139

To: The new President From: will Marshall Re: Taking naTo global

needs a new sense of common purpose as america’s next president, you will face no more important task than defining a coherent mission for naTo in the 21st century—a mission that transcends the alliance’s origins as a strictly regional pact and reinvents it as a force for global stability naTo was founded nearly six decades ago to protect western europe from a militant and expansive soviet union since the collapse of the ussr, naTo has grown and the world has shrunk now, in an era of growing interdependence, the vital interests of america and europe—and the threats to those interests—are literally everywhere, from the melting ice of the arctic to the killing fields of sudan


he north atlantic Treaty organization is the most successful defense alliance in history Today, however, the alliance is stumbling blind, and it badly

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no longer confined to north america and western europe, the “free world” now encompasses liberal democracies on every continent asia’s surging economic growth, now centered in China, has moved the world’s center of gravity eastward naTo has failed to keep pace with these changes as an almost exclusively western club, it is an anachronism in today’s multipolar world you should seize the opportunity to lead naTo’s transformation from a north american-european pact into a global alliance of free nations by opening its doors to Japan, australia, India, Chile, and a handful of other stable democracies, naTo would augment both its human and financial resources what is more, naTo would enhance its political legitimacy to operate on a global stage The core purpose of this enlarged, diversified naTo would be to defend the community of open societies against terrorism, weapons of mass destruction, rogue dictators, and disorder arising from failed states but a naTo of truly global scope also could reinforce the wider international community’s efforts to keep the peace and uphold the rule of law In situations where a broad consensus for action exists, it could work with the united nations to stabilize conflicts, prevent genocide, and deliver humanitarian aid to victims of natural and manmade disasters Taking naTo global may seem like a radical leap, but in fact it is already happening since the Cold war ended, the alliance has improvised a series of responses to security and humanitarian crises outside naTo’s traditional ambit It has used force to stop ethnic cleansing in the balkans; gone to war with al Qaeda and the Taliban in afghanistan; trained police and security forces in Iraq; and delivered emergency supplies to victims of natural disasters from Indonesia to new orleans The question isn’t whether naTo should go “out of area,” it is whether naTo can do so effectively without enlisting new partners in key regions around the world some will object that expanding naTo’s membership in this way could divide the world into democratic and autocratic camps you should firmly reject such fears In the first place, the decision by democracies to band together to defend themselves did not cause the first Cold war and will not trigger a new one expanding naTo into eastern and southern europe has brought stability to those regions, and the alliance’s defensive character poses

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no military threat to russia Moreover, while membership in naTo entails adherence to liberal political values, there is no common set of authoritarian principles around which to organize an opposing coalition In fact, adding other leading democracies to naTo would reaffirm america’s internationalist strategy, which sees our country’s safety as tied ineluctably to cooperation with other free societies It should be part of a broader strategy to update the 1940s-vintage institutions of collective security and liberal internationalism, from the united nations to the bretton woods system, to reflect the new distribution of power in the 21st century harry Truman put it this way in 1949, in words that still ring true: “we have learned that the defense of the united states and the defense of other freedom-loving nations are indivisible we have learned that we can serve our country best by joining in the common defense of the rights of all mankind ” a bigger, more diverse naTo could be a means of reasserting the primacy of those rights today

NATO’s Expanding Role
when the soviet union collapsed in 1989, the alliance had accomplished its mission but few on either side of the atlantic were eager to disband the west’s greatest strategic asset on the contrary, President Clinton launched the first of two waves of naTo expansion that have swelled its ranks from the original 12 members to 26 Today albania and Croatia await entry, and, despite vehement russian objections, ukraine and georgia are knocking on naTo’s door expansion was crucial to consolidating the allies’ Cold war victory, but it did not furnish naTo with a new strategic rationale nonetheless, naTo has engaged in a series of ad hoc, precedent-shattering interventions yugoslavia’s breakup posed the first post-Cold war test In 1999, naTo reluctantly took the offensive for the first time, launching air strikes on serbia to stop the ethnic cleansing of Muslims in kosovo on the day after sept 11, 2001, our european partners invoked article 5, which says that an attack on one is an attack on all after initially (and foolishly) rebuffing our allies’ offer of help in ousting the Taliban and al Qaeda from afghanistan, President bush relented, and naTo, in yet another first,

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found itself embroiled in a ground war far from its home theater of operations In 2003, with the un’s blessing, naTo assumed command of the International security assistance force (Isaf) in afghanistan, which includes nearly 48,000 troops from 40 countries The Taliban’s revival, however, has generated rising Isaf and civilian casualties and is feeding growing pressures in most european countries to bring troops home leaders in the u s and europe worry, with good reason, that failure in afghanistan would spell the end of the alliance If naTo cannot maintain the cohesion to prevail in a conflict all agree is justified morally and strategically, how could it muster the political will to act in more ambiguous circumstances? Persevering in afghanistan is essential, but it will not answer the basic question hanging over the alliance: what is naTo’s raison d’être in today’s world of growing interdependence and multiple centers of power? some say that, with a newly bellicose russia attempting to assert a “privileged sphere of influence” in georgia and other neighboring states, naTo’s original mission no longer seems so obsolete It is certainly possible that europe, to avoid antagonizing russia, will slow down or postpone indefinitely georgia and ukraine’s entry into naTo but it is doubtful that Moscow poses a credible military threat to europe, which today is bigger, richer, and better armed More worrisome is the political leverage russia gets from feeding europe’s appetite for oil and gas while russia merits a watchful eye, more acute dangers facing both the united states and europe are jihadist terrorism; Iran’s drive for nuclear capabilities; Pakistan’s instability; and the rise of radical groups like hezbollah and hamas The allies also face common problems of global order, such as the continuing slaughter of ethnic africans in darfur; the outbreak of piracy around the horn of africa; and the growing risks of climate change China poses no direct security threat to the naTo partners, but its fastgrowing military threatens to upset the balance of power in east asia furthermore, China’s stunning economic growth rates, sustained over more than two decades, have led beijing to challenge the post-Cold war hegemony of liberal ideas by touting the superiority of its model of market Maoism The shifting locus of world power is the best argument for defining a new strategic mission for naTo that looks beyond europe In a multipolar world,

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neither the united states nor europe can afford to go it alone but even if their relative strength has eroded, transatlantic unity remains the ballast for a stable international system based on individual liberty, human rights, and the rule of law This alliance would be stronger still if expanded to include free nations in other, more volatile parts of the world likely candidates include Japan and south korea, which have entrenched market democracy in east asia; India, which is modernizing rapidly and dominates south asia; australia and new Zealand, liberal bastions in the south Pacific; and Chile and brazil, which have stood against a rising tide of authoritarianism in south america More controversially, some Italian leaders have even broached the idea of offering naTo membership to Israel naTo already is talking about developing “partnerships” with other democracies but it ought to go a step further and develop an orderly procedure, modeled on the Partnership for Peace initiative with the former warsaw Pact countries, for extending membership in the alliance to those that want to join “an active global partnership must necessarily place naTo at the center of a worldwide web of like-minded states that acts as an anchor of stability on the international system, expanding alliance influence and integrating those willing and able to join naTo on strategic stabilization missions,” says Julian lindley-french, of the Center for applied Policy at the university of Munich offering naTo membership to some stable, non-western democracies should be a strategic priority for the united states for several reasons: first, it would extend naTo’s military reach and resources in ways that would make americans and citizens of other member states safer The inclusion of such non-european powers as Japan, India, and Chile also would change the face naTo presents to the world and enhance its legitimacy in the eyes of people who traditionally have been suspicious of the west second, it would bolster global stability Just as naTo already is providing logistical support to the african union’s u n -sanctioned force in darfur, an enlarged naTo would give the international community a more powerful tool for carrying out vital tasks ranging from peacekeeping to emergency relief around the world

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Third, it would continue to provide a hedge against turmoil and conflict in eastern and southern europe and, if georgia is admitted, in the Caucasus fourth, it would create an incentive for rising democracies like brazil and south africa to stay on the path of liberal reform, lest they disqualify themselves for membership

Costs and Risks
The idea of taking naTo global obviously must be subjected to a careful weighing of costs and benefits some will object that adding non-european members—which would require a revision of the 1949 treaty—would transplant naTo in the inhospitable soil of non-western cultures The same, however, could have been said about Turkey, a naTo stalwart from the beginning nor is it clear that the addition of, say, Japan or australia would dilute naTo’s cohesion or undermine its sense of common values and purposes more than the addition of albania or bulgaria skeptics note that europeans are generally more risk-averse than americans while the united states already offers tacit or explicit security guarantees to many of the likeliest candidates for naTo membership, europeans might see a global naTo as a recipe for intruding the alliance into other countries’ security problems, such as the family feud between north and south korea, or the India-Pakistan standoff over kashmir one of the key lessons of 9/11 is surely that ignoring conflicts in faraway countries is no guarantee of safety in today’s interconnected world Terrorists with links to al Qaeda have already struck several european capitals a nuclear arms race in the Middle east will pose a greater danger to nearby europe than to distant america Turmoil in nigeria or Central asia could disrupt europe’s energy supplies In addition, having cast themselves as defenders of human rights and international law, europeans cannot in good conscience turn their faces from mass slaughter in places like darfur or Congo no nation or alliance of nations can define its security any longer in narrow geographic terms as britain’s Tony blair has argued, political as well as economic interdependence is a fact, and a nation’s self-interest increasingly depends on its ability to cooperate with other countries to solve problems it

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cannot solve alone That puts an even higher premium on collective defense institutions like naTo on President bush’s watch, the transatlantic alliance suffered a “neardeath” experience when it split over Iraq you must give high priority to repairing the damage and rebuilding mutual trust More than that, however, you should offer our european partners a bold vision for refounding naTo as a global alliance capable of defending liberal ideas in a global age

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To: The new President From: Jim arkedis Re: national security Planning for the long Term

and america’s is unquestionably the best in the world but as the last eight years have shown, military power alone cannot protect our interests in an age of unconventional conflict Today, our security planners are still spending dollars as if our biggest threat were a soviet-style military competitor as a result, we have overinvested in weapons ill-suited to overcoming just the kinds of security challenges we face today: insurgency; genocide; transnational terrorism; and a growing traffic in the technologies of mass destruction at the same time, america must grapple with the security implications of a broader array of global problems,


r President, your administration needs to rethink how the united states defends itself national defense starts with a strong military,

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including the failure of nation-states, the competition for scarce energy resources, and the impact of climate change dealing with these threats and global problems requires the judicious use of all the sources of u s strength and influence in the world, not just the blunt instrument of military power The united states must now turn its attention toward building more robust civilian instruments of national security—a stronger foreign service; revitalized public diplomacy; more trade and development aid; better intelligence collection; and new stabilization and nation-building forces—to temper instability and quell rising threats unfortunately, such civilian capacities remain vastly underdeveloped your administration has an opportunity to jolt our strategic thinkers into the 21st century If we are going to find the right mix of military and civilian capacities to address today’s security problems, we need to put our nation’s civilian national-security institutions on a more equal footing with our military capability To accomplish this, I propose that you replace the Quadrennial defense review, which is due to be conducted next year, with a broader Quadrennial national security review such a review would assess non-traditional as well as conventional military threats to our nation’s security Just as importantly, it would identify the mix of civilian and military tools the united states needs to defuse such threats and, if possible, prevent them from arising in the first place

Strengthening Civilian Power
It may seem ironic, but the person leading the charge today for incorporating civilian capacities into national-security planning is none other than the man who runs the Pentagon—defense secretary robert gates your selection of secretary gates to continue his stewardship in your administration is a sound decision on many levels no one can speak with greater credibility about the limits of u s military power in achieving our security objectives “In recent years the lines separating war, peace, diplomacy, and development have become more blurred, and no longer fit the neat organizational charts of the 20th century,”1 gates said in a speech last summer he has also called for “a dramatic increase in spending on the civilian instruments of national security ”

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finding the right mix between military and civilian capacities demands that we ask tough questions about national-security spending priorities It will be difficult to increase civilian power without weighing those costs against current military spending plans The dollar disparity between military and civilian security spending is staggering In 2009, the Pentagon will spend more than $527 billion, and that does not even include $15 billion a month—secured via “emergency appropriations” bills in Congress—for operations in Iraq and afghanistan To that, Mr President, add your campaign pledge to increase the size of the army and Marine Corps The average cost per year for one soldier or Marine has shot from $75,000 in 2001 to $201,000 in 2007—a price tag that will not go down for a while, even if we reduce deployments in Iraq and afghanistan over the long term 2 so, depending on how quickly the military recruits new troops, expanding the ground forces by the pledged 92,000 personnel could add another $18 4 billion per year to the defense department’s budget in the near future by contrast, civilian instruments of national security receive significantly less The state department’s budget (which includes the u s agency for International development, or usaId) will be about $39 5 billion in 2009;3 4 the department of homeland security will get approximately $50 billion;5 and though the intelligence community’s budget lurks in classified shadows, it was estimated in 2008 to be roughly $47 5 billion (though much of that is counted in the defense department’s budget) 6 all told, a back-of-the-envelope calculation indicates that the Pentagon receives five times as much funding as all of the other security-related branches of the federal government combined gordon adams of american university offers this blunt assessment of the bush administration’s blank check to the Pentagon: “It is increasingly clear that defense leadership and the armed services have moved into a totally unconstrained view of military spending They refuse to make choices or set priorities, maintaining that they need it all and then some nor do they offer strategic justification for such a historically unprecedented level of defense spending ”7 The policy of the bush administration, adams concludes, was “to continue to grow the u s military, making it a principle [sic] instrument in implementing washington’s national security strategy, with no concern about

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the balance in statecraft between the military and our foreign policy and foreign assistance programs ”8 because it has so much more money than civilian agencies, the Pentagon often ends up usurping civilian roles for example, the defense department conducts public diplomacy,9 builds local infrastructure,10 and delivers humanitarian assistance in post-disaster relief efforts 11 In perhaps the most notable example of the militarization of classically civilian security functions, the newly minted afrICoM (the Pentagon’s command covering africa) bills itself as a “different kind of command … that includes significant management and staff representation by the department of state, usaId, and other agencies ”12 In essence, the Pentagon has been put in charge of u s foreign policy toward africa secretary gates has warned about the potential consequences of this trend: “[T]he United States military has become more involved in a range of activities that in the past were perceived to be the exclusive province of civilian agencies and organizations. This has led to concern among many organizations … about what’s seen as a creeping ‘militarization’ of some aspects of America’s foreign policy. “But that scenario can be avoided if … there is the right leadership, adequate funding of civilian agencies, effective coordination on the ground, and a clear understanding of the authorities, roles, and understandings of military versus civilian efforts, and how they fit, or in some cases don’t fit, together.” 13 sometimes, of course, it makes sense to use our military—with its globespanning infrastructure and efficient command-and-control system—to respond to urgent crises The Pentagon can provide emergency relief to faraway places faster than anyone else assets like the usns Mercy—essentially a floating military hospital used during humanitarian disasters—could never fall within the state department’s bailiwick but other non-military missions—like making america’s case to the world through public diplomacy—should generally be handled by civilians with the necessary expertise, not by soldiers

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here are three specific examples of how you could fortify u s civilian national-security capacities: • Create a successor to the United States Information Agency. william galston of the brookings Institution calls for a department of global Information and Communications In the information age, galston argues, “global public understanding of america’s institutions, culture, and political values is as important as the work of traditional diplomats and warriors ”14 • Establish a Cabinet-level Department of International Development and Reconstruction. larry diamond and Michael Mcfaul advocate such an entity to manage overseas economic development, democracy promotion, disaster relief, and post-conflict reconstruction 15 • Beef up the State Department. nothing better symbolized the bush administration’s denigration of diplomacy than its decision to put the Pentagon in charge of its Iraq policy you have rightly promised to put vigorous diplomacy back at the center of u s foreign policy, and that will take resources as the stimson Center points out, “Increased diplomatic needs in Iraq, afghanistan, and ‘the next’ crisis area, as well as global challenges in finance, the environment, terrorism and other areas have not been supported by increased staffing ”16

A Quadrennial National Security Review
To meet the evolving security challenges of the 21st century, your administration must update america’s institutions for national-security planning Planners in the united states must focus on long-term strategic objectives as well as immediate threats; they must prioritize issues and direct scarce resources for the most effective balance of military and civilian power The 9/11 Commission’s report offers a cautionary tale of what happens when u s leaders fail to set clear priorities had military and civilian agen-

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cies worked together to counter the growing threat from al Qaeda, the worst may have been avoided: “While [U.S. counterterrorism officials] might prod or push agencies to act, what actually happened was usually decided at the State Department, the Pentagon, the CIA, or the Justice Department. The efforts of these agencies were sometimes energetic and sometimes effective. Terrorist plots were disrupted and individual terrorists were captured. But the United States did not, before 9/11, adopt as a clear strategic objective the elimination of al Qaeda.” 17 The problem is that our government lacks a mechanism for ranking strategic priorities, or for integrating the efforts of our military and civilian agencies to advance those priorities by broadening the scope of the Pentagon’s Quadrennial defense review, your administration could create such a mechanism following the soviet union’s dissolution, President Clinton initiated the “bottom-up review” (bur) in 1993, a comprehensive review of military strategy and force structure 18 The bur evolved into the Quadrennial defense review (Qdr)—a recurring Pentagon study that analyzes strategic military objectives and identifies potential threats 19 The next Qdr is due in 2009 This process has its merits, but it is limited to the military, and thus fails to take into account the vital civilian elements of our national security That is why I urge you to turn the Qdr into a Quadrennial national security review (Qnsr)—a multi-agency process to identify and prioritize both military and civilian threats and strategic objectives every four years The Qdr considers only problems that the military could solve, but the Qnsr would be decidedly more inclusive, considering any potential threat to our national security, whether it is a direct military challenge, a humanitarian crisis, or something altogether different a Qnsr could promote long-term strategic foresight on two crucial fronts first, it would require american security planners to assess asymmetric challenge, along with traditional military threats second, it would require the security bureaucracy to take stock of the long-term strategic landscape and determine what remedy best meets each challenge

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how would a Qnsr work? as Michèle flournoy and shawn brimley have suggested, a security review could be roughly modeled on President eisenhower’s Project solarium 20 In 1953, eisenhower initiated this process by convening multiple security teams to form independent policy prescriptions for dealing with the soviet union The strength of Project solarium lay in its diversity—each team advocated a specific position, and eisenhower chose a course of action based on competing analyses similarly, you could establish multiple security teams from across the political spectrum to identify and debate our biggest threats of course, they will not come back with identical reports, but that is the point: only independent analyses of america’s strategic objectives will foster the kind of open, imaginative thinking we need on our most pressing security challenges Ideally, each panel should be composed of past and present heads and ranking deputies from the departments of defense, state, homeland security, and perhaps Justice, as well as from the intelligence community In addition, the panels could include individuals with experience from the executive, legislative, and judicial branches; strategic thinkers from the active-duty military ranks; and academic experts

National Security Strategy and Planning Guidance
a Qnsr would provide the broader institutional framework for recognizing our challenges, but the national security Council must coordinate efforts to meet them The Qnsr can be the basis for two other national-security documents: the legally mandated national security strategy (nss) and a new, more detailed policy blueprint, the national security Planning guidance (nsPg) The goldwater-nichols act of 1986 required the president to submit a national security strategy to Congress, but “each administration from President ronald reagan on has treated this statute primarily as a requirement to explain and sell its policies to the public rather than an opportunity to undertake a rigorous internal strategic planning process,” according to the flournoy and brimley study 21 we need to take fuller advantage of the nss This document should cease to serve merely as a public-relations exercise, and instead become what Con-

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gress intended it to be: a highly practical strategy statement that articulates a whole-of-government vision of national defense To execute the strategies outlined in each nss, the national security Council should write a parallel document for department chiefs This document, the national security Planning guidance, would provide a classified and specific plan for carrying out strategy, assigning discrete security missions to military and civilian agencies alike

america must use all of its might—diplomatic, economic, and moral, as well as military—to deal effectively with the conflicts and problems of the 21st century since the end of the Cold war, however, we have allowed our civilian power capacities to atrophy, and over the last eight years the bush administration has relied excessively on military power to respond to new security challenges you have rightly promised to rebalance america’s capacities, and your impressive national-security team reinforces that commitment what’s lacking is an action-forcing mechanism for achieving the right mix of military and civilian security tools a Qnsr, occurring at the beginning of every presidential term, would fill that vacuum It would institutionalize strategic foresight in our government, allocate funding by mission rather than by agency, and give every branch of our nation’s security apparatus clear marching orders by creating such a review, you would strike a blow for accountability in government as well as for our nation’s security Endnotes
1 secretary of defense robert gates, speech: “u s global leadership Campaign (washington, d C ),” July 15, 2008, available at aspx?speechid=1262 2 T x hammes, “strategic Pause and future Conflict,” Progressive Policy Institute, november 2008, pp 6, available at 3 office of Management and budget, budget for department of state and International Programs, available at

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4 usaId 2008 budget request, available at fy2008cbj_highlights.pdf 5 department of homeland security, budget-in-brief; budget_bib-fy2009.pdf 6 korade, Matt, “If now Is the Moment for ‘smart Power,’ how exactly will It work?”, Congressional Quarterly, november 30, 2008 7 gordon adams, “The True Cost of defense spending,” bulletin of atomic scientists, available at 8 Ibid 9 Peters katherine McIntire, government executive Magazine interview with Michael doran, January 10, 2008, available at 996&dcn=todaysnews 10 Panneton, John a, “The Irreplaceable seabees”, sea Power July 2007, available at http:// 11 naval historical Center, “Tsunami disasters and the us navy,” available at http://www. 12 afrICoM u s Military website, 13 secretary of defense robert gates, speech: “u s global leadership Campaign (washington, d C ),” July 15, 2008, available at aspx?speechid=1262 14 galston, william, “Creating a new Public diplomacy Cabinet Post,” spring 2008 available at 15 diamond, larry and Michael Mcfaul, “seeding liberal democracy,” from With All Our Might: A Progressive Strategy for Defeating Jihadisim and Defending Liberty,” will Marshall, ed , rowman and littlefield, 2006 16 The stimson Center, “a foreign affairs budget for the future: fixing the Crisis in diplomatic readiness,” october 2008, available at 17 The 9/11 Commission report, Chapter 4, available at report/911Report_Ch4.pdf 18 see Center for strategic and budgetary analysis, available at http://www.csbaonline. org/2006-1/1.StrategicStudies/Bottom-Up_Review.shtml 19 see Center for strategic and budgetary analysis, available at http://www.csbaonline. org/2006-1/1.StrategicStudies/QDR.shtml 20 flournoy, Michele and shawn w brimley, The Princeton Project on national security, strategic Planning for u s national security: a Project solarium for the 21st Century 21 Ibid

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To: The new President From: harvey rishikof Re: a national security Court


ore than seven years after President bush declared a war on terror, america still lacks a legitimate legal framework for bringing terror-

ists to justice This failure to devise fair and open procedures for detaining and trying suspects has gravely damaged the u s struggle against transnational terrorism no one has made this point more forcefully than you your pledge to shut down the guantanamo bay deten-

tion camp underscores your determination to bring u s counterterrorism policy under the rule of law as a practical matter, however, it will be difficult for you to close gitmo without an appropriate legal framework for adjudicating terrorism cases such a framework is urgently needed Much of world opinion sees the secretive military tribunals at guantanamo

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bay as a violation of america’s professed commitment to civil liberties, due process, and the transparent rule of law This is especially true in Muslim countries, where the united states is waging a moral and political struggle against Islamist extremists khalid sheikh Mohammed, the mastermind of 9/11, has sought to exploit such attitudes by offering to plead guilty in hopes that the tainted tribunals will sentence him to death and thereby make him a martyr he withdrew his plea when told he might instead wind up in civilian courts, whose legitimacy is not in question and where a death penalty would not be guaranteed Meanwhile, at home, a series of court decisions has whittled away the legal underpinnings of the bush policy, including military commissions The white house had insisted that america’s civilian justice system, with its transparency and elaborate constitutional safeguards, would not be able to strike the right balance between procedural rights and national security In fact, modern terrorism raises a host of nettlesome questions for our traditional institutions of government and justice: Is terrorism a crime or a political act? should it be prosecuted under the laws of armed conflict or the criminal-justice system? Is terrorism primarily a domestic or foreign issue? do international conventions govern the confinement and interrogation of terrorists in the united states? does it make a difference if the victims of terrorism are combatants or non-combatants? what is the appropriate due process for different categories of detainees, unlawful belligerents, and terrorists? The bush administration, Congress, and the federal courts have struggled with such questions for the last seven years The current answers have satisfied neither the american public nor the international community The truth is, our current court system is ill-equipped for the difficult task of trying non-state actors who strike civilian targets having studied this legal dilemma in detail, I would like to recommend for your consideration a novel institutional solution: establish a national security Court dedicated to these cases The thrust of the idea is to have a dedicated set of federal trial judges working with an expert bar of federal and military prosecutors and defense counsel—all with high-level security clearances such a court could accommodate the particular challenges of prosecuting terrorism cases in a manner wholly consistent with the Constitution, the common law, international conventions, and the relevant statutes

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This would be no sealed-off star Chamber; trials would be open to the public unless there were truly compelling reasons to limit access in a particular case such openness would help give our own people and our allies the necessary proof that the united states is reasserting its identity as a champion of human rights and due process we already have specialized courts in the federal system for particularly complex issues requiring unique knowledge, including bankruptcy, patents, copyrights, taxation, and international trade In short, we have ample precedent for a security-oriented court dedicated to complicated issues requiring the development of substantive and procedural expertise a specialized court would allow our system to handle not only the unique legal complexities of terrorism, but the physical risks as well such a court could employ security measures that are more stringent than those found in most federal courthouses, with state-of-the-art facilities and procedures for holding and transporting suspects; transmitting or receiving televised testimony; storing evidence; and protecting judges, jurors, and witnesses The court could be established anywhere in the united states, probably in a location far removed from such potential targets as new york or washington, d C ultimately, however, the rationale for establishing a national security Court lies less in the need for physical security than in the need for a more effective, more open, more credible means of trying accused terrorists The current adjudicative framework for the post-9/11 terrorism detentions and prosecutions has undermined american credibility at a crucial juncture; weakened national confidence in our political institutions; and called into question our commitment to the letter and spirit of our own laws

How We Got Here
The root of the problem lies in the bush administration’s unwillingness to think constructively about the different possible legal responses to terrorism with america on a war footing, the white house pushed a highly expansive definition of executive privilege that diminished the constitutional roles of the other two branches of the federal government for example, it argued against the jurisdiction of the courts for judicial review of decisions, asserted presidential authority for “coercive interrogation”

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without consulting Congress, and denied that the geneva Conventions apply to the trials of accused terrorists in the united states The supreme Court has rebuffed the bush administration’s assertions of executive power and its denial of the applicability of international conventions Just in the past year, a spate of court cases has reinforced the need for an alternative legal framework for dealing with terror suspects: • In June 2008, the d C Court of appeals found insufficient evidence to sustain a determination that huzaifa Parhat, a uyghur detainee in guantanamo, was an “enemy combatant ” The Court subsequently released several uyghur detainees from guantanamo (Boumediene v. Bush); • also in June, a sharply divided supreme Court rejected the Military Commission act’s limits on habeas corpus rights for enemy combatants; and • In november 2008, a u s district Court ordered the release of five detainees from guantanamo bay responding to habeas corpus petitions, the court found that there was insufficient evidence for the united states to lawfully detain them as enemy combatants The overall message from these decisions is clear: The bush administration’s policy of relying on military commissions to try terrorist suspects is not working Judges have cited insufficient reviews of evidence, chain of custody problems, tainted testimony, and the fear of exposing “sources and methods” employed by u s intelligences agencies against suspected terrorists for its part, Congress has attempted to strike its own balance on due process, passing the detainee Treatment act of 2005 and the Military Commission act (MCa) of 2006 These measures, however, remain controversial The current process is an ungainly civil-military hybrid process overseen by judges with limited expertise in terrorism and security matters This expedient affords neither the protections of the american criminaljustice system nor those of the traditional military code of justice some have argued that if the military-commission process is flawed, the

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civilian federal criminal courts are up to the challenge, or that perhaps the uniform Code of Military Justice can be the answer Thus far, however, the criminal prosecution of terrorists has strained the resources of federal courts and garnered only about three dozen convictions In addition, the existing approach has put at risk future operations through disclosure in open court of methods and sources of intelligence furthermore, our current court system has run into difficulty by applying criminallaw rules of evidence to national-security cases that may sometimes require different standards of admissibility for its part, the military’s court-martial system is widely respected but it was created to handle a limited cast of defendants—soldiers, spies, and traditional prisoners of war It was not designed to be part of a 21st century ideological struggle against transnational terrorists—a struggle that has blurred many of the traditional distinctions that govern our approaches to law and strategy

Precedents From Home, Lessons From Abroad
In building a national security Court, some basic issues need to be addressed: how would such a court fit into the existing judicial system? how would the judges be assigned? what would be the scope of the court’s power, and who would oversee it? for an example of how another western nation has confronted these questions, we can look to france under the legendary magistrate judge Jeanlouis bruguière, the french have created a terrorism-court system that, while not wholly applicable to the american model, might still offer some ideas for how to proceed as explained by Marc Perelman in Foreign Policy, france established a comprehensive antiterrorism law in 1986, establishing a centralized unit of investigating magistrates who have jurisdiction over all terrorism cases 1 In the french system, an investigating judge is essentially a special prosecutor in charge of a secret, grand jury-like inquiry through which he can file charges, order wiretaps, and issue warrants and subpoenas These judges can request the assistance of the police and intelligence services; order the preventive detention of suspects for six days without charge; and justify keeping

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someone behind bars for several years pending an investigation The judges have international jurisdiction when a french national is involved in a terrorist act, be it as a perpetrator or as a victim Clearly, this is by no means an ideal to be adopted wholesale by the american justice system several of the french magistrates’ powers would run far afoul of proper constitutional safeguards in the united states It is worth noting, however, at least one benefit of the french system that we could readily emulate: It has produced a pool of specialized judges and investigators adept at prosecuting terrorist networks yet even if we were to agree on the value of such specialization, how might we organize any u s security-court system? The court could be similar in structure to a federal trial court, as provided for under article III of the Constitution, with appeals to a designated circuit This is the approach taken in the Military Commissions act The court could, however, also be established under the authority of Congress as defined in the Constitution’s article I, with a 10-year or 14-year appointment for judges The precedent here would be federal bankruptcy court, in which an expert bench decides cases that fall within its specialized area of expertise, and appeals proceed to a federal circuit under this approach, the new court could have jurisdiction for terrorist cases both domestic and international, involving either american or foreign defendants The court would need to craft flexible rules of procedure to accommodate the nuances of the cases presented, and the development of such rules would be yet another benefit of a specialized national security Court a further wrinkle that needs to be ironed out is the relationship of the new national security Court to the foreign Intelligence surveillance act (fIsa) court Congress created in the wake of the CIa scandals of the 1970s one approach you might consider would be to expand the jurisdiction of the present fIsa trial court to create a new national security Court some modifications would be needed for the appointment of fIsa judges, which currently is the sole prerogative of the Chief Justice of the united states In addition, the closed nature of fIsa proceedings would need to change in order to accommodate a broader class of terrorism cases To explore and resolve all these critical issues, a federal national security

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Court Commission should immediately be established, with the mission to create a model legislative proposal within six months The commissioners should be representatives drawn from the executive branch, the legislative branch, the military, the private defense bar, the nongovernmental organization community, and other knowledgeable parties different approaches should be evaluated—civilian criminal courts, the uniform Code of Military Justice, a specialized security court, international tribunals, and comparative approaches from the civil-law tradition There is already considerable support for the idea of a specialized national security Court in the legal and political community, from both sides of the political spectrum Proponents range from neal karlen, a defense counsel for detainees, to Jack goldsmith, a former department of Justice official in the bush administration attorney general Michael Mukasey also has indicated his support for such a proposal The reason for this support is simple: our legal system has not yet adequately responded to the challenges presented by modern terrorism Terrorists do not fit into our traditional legal classifications we can continue to improvise, compromising our federal criminal procedures, trespassing upon our constitutional values, and alienating our allies alternatively, we can demonstrate our commitment to the rule of law by creating an institution that can handle new challenges without damaging our principles samantha Power, a harvard social theorist whose work is quite well known to you and your national-security team, has called “for new tools, new rules, and new mindsets” for the problems of the 21st century a national security Court meets all three requirements 2 Endnotes
1 Perelman, Marc, “how the french fight Terror,” foreign Policy, January 2006 2 Power, samantha, “our war on Terror,” The new york Times, July 29, 2007, http://www.

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To: The new President From: Jordan Tama Re: reforming defense acquisition


ur weapons-procurement process is broken nearly 50 years ago, President dwight eisenhower presciently warned in his farewell address

of the growing power of the military-industrial complex reluctant to offend members of Congress, eisenhower removed from a draft of that speech a reference to the third side of the “iron triangle” that controls defense acquisition: politicians determined to keep assembly lines humming in their states and districts The draft, even more than the final version of the speech, was only too prescient Today, procurement decisions are in fact often dominated by narrow economic and political interests—not by the most pressing military needs of our nation at a time when america has plunged into a deep economic crisis while fighting two wars and facing unconventional threats

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around the globe, we can no longer afford the status quo It is time, Mr President, to revamp our weapons-procurement process to match the nationalsecurity realities of the 21st century examples of just how broken the current system has become are all too easy to find defense secretary robert gates has testified that the united states does not need any more f-22s beyond those currently planned yet in november 2008, the Pentagon released $50 million to buy parts for four new f-22s beyond the 183 already under contract—only after warding off congressional demands to appropriate an additional $140 million for 20 new planes 1 To take another example, after purchasing 180 C-17 cargo planes over two decades, the defense department decided in 2006 to stop buying the aircraft, concluding that dollars would be better spent on other weapons systems a powerful coalition of lawmakers won approval to keep production lines open by ordering 25 more planes at a cost of over $2 billion from 2000 to 2007, the long-term procurement budget jumped from $790 billion to $1 6 trillion despite this huge increase, the government accountability office reports that measurements of acquisition value and ontime performance have not improved 2 for example, the estimated cost of the army’s massive future Combat systems project—essentially a wireless network of weapons and vehicles—already has doubled to over $200 billion since its inception in 2003 and is well behind schedule 3 The stage is set for a major overhaul of the way we buy weapons specifically, I urge you to convene a presidential commission to propose fundamental changes in military procurement It’s easy to dismiss a blue-ribbon commission as a “typical washington approach,” but my research on national-security commissions reveals that they have often been critical to enacting reform

The Problems
how has the procurement situation gotten so bad? The parochial interests of defense contractors, the military services, and their political allies form the iron triangle that drives poor acquisition decisions Contractors scatter production plants throughout as many congressional districts as possible every year, the services submit weapons wishlists, knowing the Pentagon rarely

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vetoes any requests Then lawmakers, eager to demonstrate their support for jobs at home, grant the requests without a second glance In a perfect world, acquisition priorities would be grounded in a clear national-security strategy for instance, if our strategy gave priority to stability and counterinsurgency operations, then procurement would focus on the development and production of weapons designed for asymmetric warfare, like unmanned aerial drones but the reality is far from rational acquisition priorities are established in large part by the military services, which often advocate funding their own favored projects, rather than programs that best meet our national-security needs or the warfighting requirements of the combatant commanders Moreover, the services and contractors have a shared interest in lowballing cost estimates and providing overly rosy forecasts of the capability of proposed weapons systems since each service knows that it will be allocated a finite budget, it can gain approval for more projects by understating the estimated cost of each project similarly, contractors have a perverse incentive to bid unrealistically low to win weapons deals, knowing they can simply raise unit costs later by the same token, the services and contractors inflate their pet weapons’ proposed capabilities and downplay their technological risks because Congress and the secretary of defense are more likely to fund programs that promise impressive results an added problem is the hollowing-out of the defense department’s acquisition workforce from 1995 to 2005, the Pentagon’s staff for managing and overseeing procurement contracts was cut in half, on the mistaken belief that the private sector could do the work and police itself efficiently Today, the defense department simply does not have enough acquisition personnel with the technical expertise to provide independent assessments of the likely cost and reliability of proposed systems, or to oversee contractor performance The all-too-common result: The government authorizes the development of more weapons systems than we can really afford; production falls years behind schedule; and systems fail to live up to expectations These problems have been exacerbated by a growing reliance on supplemental budget requests to fund procurement supplemental bills are supposed to fund emergency expenses—like operating expenses for the wars in

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Iraq and afghanistan—but the bush administration and Congress have used them to add tens of billions of dollars in funding for weapons acquisition under the rubric of the “war on terror ” In reality, most of these buys are unrelated to any current emergency or near-term contingency This backdoor funding ploy distorts the entire national-security budgeting process because supplementals receive less scrutiny from budget overseers Perhaps even more importantly, such maneuvers diminish any incentive to make difficult decisions about trade-offs between desired programs secretary gates deserves credit for publicly questioning the continued emphasis on a conventional-force modernization effort that will not equip us for the complex, irregular conflicts likely in the foreseeable future but so far, even he has been unable to significantly change many outdated priorities he has rarely overruled a major service request, typically making only small changes to the services’ proposed budgets

Reform the Acquisition Process
The good news is that you have a political opening early in your presidency to reform the acquisition process and start buying the weapons we truly need for the threats we actually face The key is to build consensus quickly for the adoption of reforms that are likely to face opposition from powerful quarters your administration needs to take three steps to force Congress and the Pentagon to spend money more wisely first, reform requires strong presidential leadership Many powerful interests reap profits from the current system, and you’ll have to make a persuasive case to the broader public for fundamental change second, you need to strengthen the capacity of the office of the secretary of defense and the office of Management and budget to assess trade-offs among proposed acquisition programs Those offices should work collaboratively with the services as they are compiling weapons requests, so that overseers can give proposed systems the scrutiny they need early in the process, instead of merely reacting to wish lists This approach will require hiring and retaining more acquisition profes-

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sionals a key challenge is to recruit talented system engineers who can often earn far more money in the private sector In addition, you could bolster the authority of the under secretary of defense for acquisition, technology, and logistics to reject service requests Third, and most important: Create a presidential commission to propose sweeping changes in the way the Pentagon acquires weapons history offers an instructive example of how a commission can spark significant change In 1985, ronald reagan established a commission chaired by david Packard in response to a spate of Pentagon procurement scandals for months, members of Congress and journalists had been chastising the Pentagon for purchasing items ranging from spare parts to toilet-seat covers at exorbitant prices The commission’s report identified many problems in acquisition—from overly complex regulations to unwieldy management structures—and recommended reforms designed to centralize and standardize procurement procedures The Packard Commission’s proposals included the establishment of an under secretary of defense for acquisition to set overall procurement policy and the creation of a clear hierarchy of acquisition executives and managers in each of the services These and other recommendations were enacted into law in 1986 The reforms triggered by the commission created a more uniform and effective management structure for acquisition, but persistent deficiencies in procurement policy remained Moreover, the reforms’ effectiveness was undermined by the erosion of the defense department’s acquisition workforce over the last dozen years a new commission can help kickstart a new round of needed changes why would such a commission be useful? because even a reform-minded president and secretary of defense cannot overhaul the acquisition process successfully without some buy-in from the military services and Congress a commission’s prestigious and diverse membership, careful deliberative process, and persistent advocacy for its proposals can build support for reform among the key constituencies that are part of the acquisition process a commission can also provide cover for policymakers to support reforms that are resisted by powerful actors This has been the function of the base realignment and Closure (braC) commissions, which somewhat depoliti-

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cized the base-closure process and thereby made possible the necessary shuttering of several hundred excess military installations how the commission is designed will shape its prospects for success My analysis of the impact of more than 50 national-security commissions over the past three decades reveals that commissions are more successful when their scope is relatively narrow accordingly, the commission’s mandate should be limited to acquisition, rather than covering all aspects of defense management and policy such a limited scope will facilitate consensus on specific recommendations, and will prevent the commission’s energy from being diffused so broadly that it cannot be influential in any single area The commission’s membership is also critical It should represent important constituencies without being dominated by parochial perspectives one representative from each of the services should serve on the commission, but these should be retired senior officers who are widely respected and known for their independence from service orthodoxies other commissioners could include one former secretary of defense and member of Congress from each party, a former under secretary for acquisition, a former chief executive officer of a major defense contractor, and an independent expert on procurement all of these appointments should be made with an eye to ensuring that the commissioners are likely to be open to endorsing significant reforms that address the most serious acquisition problems The benefit of naming commissioners who are retired from public office is that such individuals are less likely to be motivated by partisan concerns or personal ambition, making unanimity more likely unanimity will also be facilitated by keeping the overall membership relatively small; no more than 12 commissioners should be named a competent staff will be essential for the commission, but it should not be headed by personnel detailed from the services or other entities that might have a vested interest in the commission’s findings you should instruct the commission to report relatively soon, within six months of your inauguration Commissions that conduct their work quickly tend to have greater impact because they are more likely to issue recommendations while interest in reform remains high an early deadline will also allow you and the secretary of defense to act on the commission’s recommen-

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dations within your first year in office, when your ability to institute reforms is likely to be greatest a final tip: while the commission should not be a permanent body, it should be given authority and funding to promote its recommendations for three additional months after it reports The most successful commissions, such as the 9/11 Commission, do not simply disband upon issuing their proposals Instead, they use their stature and connections to advocate for adoption of their recommendations building on the 9/11 Commission’s model, you could even ask the commission to issue a report card a year after the release of its conclusions This would give the defense department and Congress an extra incentive to pay the commission due heed

Ideas for Reform
The commission will come up with its own ideas for improving acquisition, but you should ask it to consider the following potential reforms: • structuring procurement contracts so that they motivate contractors to achieve desired outcomes—for instance, by withholding fees in response to cost, schedule, or performance shortfalls, and providing extra payments to reward outcomes that exceed contract parameters • requiring more rigorous testing of new technologies before decisions are made to go forward with full-scale development and production of weapons systems by investing more time and money in testing early in the process, major problems down the line can be avoided or mitigated • Closely assessing whether each major acquisition program now in development or production is needed based on our national-security strategy and existing capabilities This would be an especially controversial component of the commission’s work, but unanimous commission recommendations to cancel programs could help build the political consensus necessary to do so • establishing a government fund to provide job retraining and other assistance to communities that experience the closure of production plants

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The purpose of this fund would be to give members of Congress an incentive to refrain from funding the production of unnecessary weapons programs simply to maintain jobs in their districts

good ideas for acquisition reform are not hard to find, but the political will to fix the broken process has been in short supply given that some $180 billion per year is spent on defense research and acquisition, improving the process can save taxpayers huge sums of money while aligning procurement more closely with our true national-security priorities This goal is all the more important given today’s budget crunch and the number of defense gaps that we must fill to meet new security threats and challenges by moving quickly to create a presidential commission, you can set the stage for a badly needed acquisition overhaul Endnotes
1 borak, donna, “Pentagon oks $50M funding for 4 more lockheed jets,” The associated Press, december 4, 2008, available at 997RuSQ_fhBzfU4oNwD94DMDRG7 2 government accountability office, “defense acquisitions: assessments of selected Programs,” March 2008, available at 3 klein, alec, “The army’s $200 billion Makeover,” The washington Post, december 7, 2007, available at AR2007120602836.html?sid=ST2007120602927

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affordable healTh Care for all

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To: The new President From: david b kendall Re: health reform that Pays for Itself


espite our nation’s enormous financial and economic difficulties, you have promised to press ahead on health-care reform That’s the right de-

cision although expanding coverage is expensive, the prospect of millions more u s workers losing their benefits in this recession makes the case for reform even more urgent your challenge is to find ways to pay for universal coverage without either dampening the chances for an economic recovery or loading even more debt on the next generation over time, health-care reform can and should pay for itself after all, our system is larded with waste—by some estimates accounting for as much as 30 percent of total government spending rooting out waste and redundancy, however, will not happen overnight, and it will require upfront investment to boost the quality and efficiency of medical care

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one particularly promising cost-containment strategy is to promote the spread of high-quality, integrated health-care systems, like the Mayo Clinic 1 Mayo costs the government 17 percent less than the national average for treating the sickest Medicare patients, while providing excellent care uniformly raising the quality of health-care in america would thus yield enormous savings, which could finance reform and perhaps even help to defray soaring Medicare costs as the baby boomers retire Progressives in Congress seem inclined to enact health-care reform soon and worry about budget deficits later, after the economy recovers They point out that Congress passed a $700 billion bailout for wall street without agonizing over the deficit at a cost of approximately $100 billion a year, healthcare reform seems like a relative bargain, and would produce a healthier, more productive workforce to boot of course, long-term fiscal discipline also is critical to the nation’s economic health In time, too much debt will undermine the value of the dollar, drive up interest rates, and put america deeper in hock to foreign lenders we cannot just add another trillion dollars for health reform to the nation’s balance sheet and hope things will turn out all right but if health-care reform could pay for itself over several years, it would do no lasting harm to the u s economy In that case, it would be a public investment as well as an immediate boost to public consumption, as the uninsured buy medical services they might otherwise have forgone

A Federal Health Budget
Therefore, I recommend that you call upon Congress to create a federal health budget as an action-forcing mechanism to balance public-health spending and savings If projected savings do not materialize, Congress would have to take action to ensure the health budget stays in balance Congress has accepted such self-discipline in the past In the 1990s, it set caps on the budget that, if breached, triggered automatic across-the-board spending cuts In this case, it would not be fair to make other public programs pay for excessive health-care spending Instead, the consequences for overspending should be confined to the health sector, in the form of either automatic spending cuts or specific allocations of taxpayer dollars

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a federal health budget, of course, would directly control only government spending on health care, not private spending but since government picks up more than one-half of the nation’s health-care tab, its efforts to control spending by reducing waste and inefficiency will have a strong impact on private markets In short, a federal health budget can ensure that health-care reform pays for itself here are the key steps for creating such a mechanism: 1. Set a baseline for all federal health-care spending. This would include Medicare, Medicaid, and the federal government’s tax subsidy to employers who provide job-based health insurance under existing budget rules, the tax subsidy is not identified as an annual budget item even thought it costs the federal government more than $200 billion in untapped revenue each year by accounting for all major spending—including both direct entitlement spending and tax subsidies—this step would establish a working baseline for the federal health budget 2. Set targets for projected spending based on the best examples of efficient health-care delivery. for example, health-care spending in salt lake City and rochester, Minn —two cities with large integrated-health operations (Intermountain healthcare has its headquarters in salt lake City, while rochester is the home of the Mayo Clinic)—is dramatically less than the national average, with no adverse effect on the health of either community If universal coverage is to be fiscally sustainable, such high-quality care should be the rule, not the exception The white house and Congress should base national targets for federal health-care spending on a simple national goal: every community should have health care that is as good and economical as that provided by the Mayo Clinic 3. To implement the Federal Health-care Budget, you should propose a new, independent Health Fed, modeled after the Federal Reserve and its regional banks. The health fed would break the country into regions and work with local officials, employers, hospitals, and insurers to achieve regional health-spending targets This new entity would share the savings in the

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federal health budget with states in the same way that Medicare has recently struck gain-sharing agreements with doctors and hospitals 4. To ensure that a Federal Health Budget is truly cutting waste rather than essential medical services, there must also be annual assessments of patients’ health outcomes. The u s agency for healthcare research and Quality already issues an annual national healthcare Quality report, but this should be expanded to include a more comprehensive assessment of health coverage and services such data would allow the administration and Congress to set targets for patient outcomes at the same time it sets spending targets 5. Keep the Federal Health Budget in balance. If the projected savings from reform are insufficient to pay for expanding coverage, changes in spending and revenues should be automatically triggered one option would be to cut Medicare provider payments another would be to tighten limits on the $200 billion tax exclusion for job-based coverage Congress would retain the discretion to preempt any automatic actions with reforms of its own for example, it could ask the health fed to assemble a package of budget changes for an up-or-down vote, in the same way that trade agreements are ratified and military bases are closed and of course, Congress could shun tough action altogether, creating a health-care deficit but at least it would have to do so in plain sight, with the political consequences that would entail

Funding Necessary Reform
If Congress acts responsibly, a federal health budget would create a virtuous cycle of quality improvement and reduced costs as individual providers and insurers found better and cheaper ways to provide care and coverage, the targets for federal spending and patient outcomes would be reset, and this would create pressure to spread the efficiency gains throughout the healthcare system by slowing the rate of increase in health-care costs generally, we could ease the enormous strain that the boomers’ health-care costs will soon start exerting on the federal budget

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although establishing a federal health budget could help ensure that health-care reform pays for itself in the long run, it is still important to reduce poorly designed public health-care subsidies in the short run by restructuring those subsidies, we can raise the initial funding for the federal health budget and begin a new cycle of health-care savings that will greatly benefit our economy and our public health for example, senate finance Committee Chairman Max baucus (dMont ) rightly points out that the current tax expenditure for job-based coverage is a logical source of financing for expanding coverage for employees, health-care benefits, unlike wages, are tax-free This tax break benefits highly paid executives most of all, since they are in the highest tax brackets In fact, the health-care exclusion is the only major tax break that is unlimited for each taxpayer as a result, it tends to inflate spending on medical services That is one reason why medical inflation runs two or three times higher than general inflation eliminating the tax break for job-based health benefits altogether, as sen John McCain (r-ariz ) proposed during his presidential campaign, would be highly disruptive for tens of millions of americans who get their coverage at work but capping the amount of health spending that is exempt from taxes would limit the subsidy for high-income workers and give every worker the same benefit In this way, the federal government could save many billions of dollars that could be used to defray the upfront costs of expanding coverage to the uninsured The tough question is this: where should the cap be set? If it is too low, it might induce employers to cut back coverage for essential health-care services rather that trimming waste Moreover, workers and labor unions have fought hard for comprehensive benefits and have given up wages to keep those benefits until workers can see how reform can reduce their health costs without sacrificing quality, it will be hard to achieve political consensus on tight caps Instead, Congress should consider setting a loose cap initially, and then tightening it later in order to help keep the federal health budget in balance expanding coverage while at the same time acting to restrain costs is the truly progressive way toward affordable health care for all americans Many cost-saving initiatives, such as improving primary care for chroni-

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cally ill patients, will reduce the need for expensive health-care services like hospitalizations naturally, the loss of such income will be an unsettling prospect for medical specialists and hospitals but as uninsured americans get coverage, they will purchase more of the specialized services they could not previously afford The promise of new income from formerly uninsured patients will soften most of the short-term impact on doctors and hospitals over the longer term, as cost-saving measures kick in, providers will see an increased demand for their services from a rapidly aging population when that happens, though, the nation will need another round of productivity increases from its health-care workforce in order to avoid dramatic benefit cuts or tax increases In short, Mr President, your twin challenge is to cover the uninsured in the short term and set the stage for financing the baby-boom generation’s retirement in the longer run This is why health-care reform and budget reform must go hand in hand The link between health-care reform and fiscal responsibility is the key to holding together a broad, bipartisan coalition in Congress It is the political prerequisite for comprehensive health-care reform after all, fiscal conservatives will not embrace new spending on health care without some means of assuring long-term fiscal discipline liberal members will rightly balk at anything less than covering all americans doctors and hospitals will look askance at reforms that threaten their incomes healthcare reform that pays for itself is the way to finally break the logjam on universal coverage Endnote
1 david kendall, “Improving health Care—by ‘spreading the Mayo’ (the Mayo Clinic Model, That Is),” Progressive Policy Institute, Memos to the next President, 2008, available at

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To: The new President From: david b kendall Re: Improving health Care—by spreading the Mayo (the Mayo Clinic Model, That Is)


oters in the united states consistently rank health care as a top concern, second only to their worries about the state of our economy They seem

to have two distinct but related things in mind: the moral imperative of insuring all americans and the economic imperative of controlling runaway health-care costs your predecessor made zero progress on either front your administration will have to do better, despite drastic deterioration in the nation’s finances with money tighter than ever, the progressive response to the public’s demand for action on health care is to get greater value from each dollar spent This will ease the strain on working families who face soaring insurance premiums It will also come as a welcome relief to u s

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businesses facing foreign competitors who pay nothing for their workers’ health care This step would also relieve pressure on public budgets squeezed by double-digit inflation in medical costs finally, crucially, it will foster public confidence that long-overdue efforts to cover all americans will not break the bank The unreasonably high cost of health care in the united states is a deeply entrenched problem that must be attacked at its root for decades, we have been paying more for health care without getting better value in return Just think: If the price of gasoline had gone up as much as health-care spending since 1980, we would be paying more than $9 per gallon These skyrocketing costs are the driving force behind americans’ frustration with health care why, for example, are our regular doctors so rushed they barely have time to see us? because insurance companies and government programs have capped fees for primary care, creating an economic incentive for doctors to cram in more patients rather than devote quality time to those who need it Meanwhile, u s companies are paring back coverage or dropping it altogether as they try to cut costs to compete against low-wage competitors abroad, or against high-wage workers covered by tax-financed national health insurance The health-care crisis threatens to hobble key sectors of our government states have less to spend on education and roads as public health-care programs consume an ever-larger share of their budgets furthermore, the federal government is bracing for a fiscal tsunami as the oldest members of the massive baby-boom generation retire and start claiming health and retirement benefits The path out of this dilemma begins with the recognition of a basic paradox: unlike cars, furniture, or clothing, quality in health care actually costs less, not more That is because a big chunk of our medical bills goes to pay for unnecessary care The scale of waste is shocking: Peter orszag, director of the Congressional budget office, estimates that 5 percent of the nation’s gross domestic product—$700 billion per year—goes to tests and procedures that do not actually improve health outcomes Thus, dramatically reducing waste and raising the quality of health care is not just a good idea from a medical perspective—it is also the best way to hold down health-care costs

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Consider a concrete example of this paradox: the world-famous Mayo Clinic in rochester, Minn Mayo’s reputation for first-rate care attracts patients from all over the world, including many for whom money is no object but riches have not corrupted Mayo To the contrary, Mayo offers all its patients Cadillac care at Chevy prices a dartmouth study showed that Mayo costs the government 17 percent less than the national average for treating Medicare patients with major chronic diseases 1 Mayo is not the only example of a high-value health provider Intermountain healthcare in utah takes care of chronically ill Medicare patients for nearly one-third less than the national average geisinger Medical Clinic in danville, Pa , even offers patients a warranty against medical failures The federal government boasts a success story of its own: the Veterans’ administration (Va) under President Clinton, this much-maligned agency underwent a dramatic turnaround The Va cut hospitalization rates in half by improving access to primary care for veterans with chronic illnesses at the same time, the Va improved the health of veterans with heart problems and other diseases what these organizations have in common is a commitment to “integrated care ” although they vary in the particulars, each gives patients a lead doctor who coordinates all their care, including their interactions with hospitals and specialists each uses health-information technology to boost efficiency through continuous improvements in medical practice each pays health-care professionals for the value, not the volume, of the services they provide how can we drive the entire u s health-care system toward this integrated-care model? well, as our new president, you could issue a “Mayo challenge” based on a simple proposition: every american should have access to health care as good and economical as that provided by the Mayo Clinic next, you could use the power of the bully pulpit to focus policymakers’ attention on the many obstacles that stand in the way of integrated care for example, doctors typically are paid on a “fee-for-service” basis That encourages them to order more services—more procedures, more tests, more examinations—but it does not necessarily lead to the best, most efficient, or most medically appropriate care according to brent James at Intermountain healthcare, hospitals typically spend more than one-half of their budgets on unnecessary treatments, including efforts to correct preventable foul-ups

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another obstacle to integrated care is the fact that individuals rarely get to choose their own health insurance Most americans have job-based coverage, which means their employers pick their health plans To please their workers, employers typically choose plans that include as many area doctors as possible such sprawling networks of providers, however, are rarely as efficient as smaller groups of doctors capable of working as an integrated team government programs and policies also pose obstacles to integrated care both Medicare and Medicaid, for example, use price controls to clamp down on fee-for-service payments to doctors This gives doctors an incentive to generate a high volume of services to make up for the lower prices, regardless of whether those services are medically necessary similarly, the federal tax code gives workers and employees a bigger tax break for spending more on care, regardless of whether it is efficient or not The sad truth is, current public policies subsidize mediocre medicine and fail to systematically encourage economical, high-quality care of course, the government cannot simply order doctors to practice integrated care but it can offer incentives for its voluntary adoption here’s how:

Step One: Change the Medical Payment System
The federal government should encourage all those who pay for health care— employers, insurers, consumers, and public programs—to shift from the current fee-for-service model to a “package price” for a specific set of health-care services for example, a patient having surgery would receive a single bill for all necessary medical services rather than separate bills from each specialist here is another possibility: Patients could pay a package price for a medical “home base”—an integrated-care network that would coordinate all of their primary, preventive and chronic disease care To make such sweeping changes across today’s fragmented delivery and payment system, the federal government should create regional public-private partnerships with the nation’s 60 employer-led coalitions, which already cover 34 million americans These partnerships should also include state governments, some of which—like washington under gov Christine gregoire— have already launched their own efforts to encourage integrated care

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In addition to embracing the new payment system, the partnerships would share data on patient outcomes and costs to determine which models of integrated care are the most cost-effective armed with such evidence, the partnerships could also weed out overpriced medical services unlike other countries, the united states does not ration or limit access to innovative products and services That creates a special responsibility for researchers and doctors to be discriminating about the use of new technology and techniques If two treatments or drugs are equally effective from a clinical standpoint, then all payers—from private health plans to Medicare and Medicaid— should refuse to pay for the most expensive one To support such decisions, the federal government should invest more in assessing the comparative effectiveness of medical products, devices, and practices

Step Two: Let Individuals Choose Their Own Health Plan
To offer consumers a menu of competing health-insurance plans, states should set up purchasing pools as an alternative to employer-chosen coverage federal employees and members of Congress already have such a system, called the federal employees health benefits program (fehb) but with only about 15 percent of the market in the washington, d C , area, fehb is not big enough to stimulate the formation of integrated health-care systems In wisconsin, a similar purchasing pool (called an “insurance exchange”) for state employees covers more than 25 percent of the Madison market for decades, this program has enabled workers to choose from competing plans based on standard benefits and common yardsticks of price and quality recently, it stopped paying more to health-care plans that merely cost more without showing proof of better patient outcomes as a result, doctors have been encouraged to join integrated-care groups health-care costs in the region are 14 percent below the statewide average The federal government should take a similar approach to covering Medicare’s 44 million beneficiaries by pegging Medicare payments to cost-effective outcomes, the federal government can use its enormous purchasing power to

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spur development of integrated-care options for seniors currently enrolled in Medicare’s traditional fee-for-service program finally, washington can supply consumers with better information about the price and quality of care offered by health plans and providers The Consumers’ Checkbook guide to health plans, for example, helps federal employees choose every year from at least nine health plans such tools will become even more convenient and customized when services such as googlehealth and Microsoft’s healthVault automatically filter data to match a patient’s individual health needs

Step Three: Leverage Federal Health-Care Spending to Encourage Savings from Integrated Care
government programs and subsidies add up to 57 percent of the nation’s health-care spending That spells a lot of potential leverage to encourage integrated care but the last thing we want is for Congress to stifle innovation by micromanaging medical payments as it does now with Medicare price controls Instead, Congress should create a new regulatory body modeled loosely on the federal reserve board to oversee new systems of medical payments a health fed, as former sen Tom daschle has proposed, would set national goals for health-care spending and patient outcomes based on the potential gains from integrated care for example, if states fail to meet their goals for higher quality and lower costs, the health fed would allow the residents of those states to buy health insurance in a fehb-like system, creating a large competitive market for health care Conversely, the health fed could reward states that exceed their goals with extra funds to offset costs of covering the uninsured

The Difference Between Integrated Care and Managed Care
americans are famous for their ingenuity but when it comes to health care, we have managed to create a system that delivers high-cost medicine of un-

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even quality, when what we need is exactly the opposite: a system that delivers high-quality medicine at reasonable cost In producing such a system, policymakers will have to rebut the inevitable criticism that integrated care is just a rebranded version of managed care The first rebuttal to this assertion is that managed care was not a complete failure after insurance companies began aggressively managing health-care costs in 1994, spending in the entire sector held steady at just under 14 percent of gdP through 2001 since then, health-care expenditures have risen to more than 16 percent of gdP, but the seven-year run of essentially stable healthcare costs was no small achievement The second rebuttal is that managed care as practiced by the insurance companies was based on indiscriminate cost control It sparked a backlash among doctors and patients who complained that health plans were denying coverage of necessary services In contrast, integrated care is doctor-led and restrains costs by eliminating services that doctors themselves determine are medically unnecessary, and by serving patients without costly errors or gaps in care More will have to be done to reform the legal and regulatory systems that surround health care Perhaps most fundamentally of all, individuals need to take more responsibility for their own health habits Those changes go beyond the scope of this memo reducing costs by raising quality through the widespread adoption of integrated care is the first and most important step Endnotes
1 “Tracking the Care of Patients with severe Chronic Illness: dartmouth Medical atlas of 2008,” dartmouth Institute for health Policy and Clinical Practice, Press release, 2008,

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To: The new President From: david b kendall Re: health Courts for Medical Justice


s you prepare to tackle america’s health-care dilemmas, I urge you to bear in mind that reforming the medical-malpractice system is essential to

restraining health-care costs and covering the uninsured The reason for this link is straightforward doctors are the key to eliminating waste in health care, because they order most of the tests, medications, and procedures that patients receive Their fear of getting slapped with malpractice lawsuits gives them a perverse incentive to order more care than patients may actually need such “defensive medicine” is costly; it is thought to account for between 4 percent and 9 percent of overall u s health-care spending That is enough money to make a very substantial contribution on your pledge to guarantee all americans access to health insurance To tap into this resource, we should

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reform the current tort system with new, specialized health courts that can dispense medical justice more evenly and raise the quality of care 1 There are compelling moral and ethical reasons for legal reform The current system disserves patients injured in the course of medical treatment It does nothing to compensate the vast majority of injured patients, only 2 percent of whom ever file a claim, according to researchers at harvard university for patients with a serious injury (a disability lasting six months or more), the current system compensates only one in 14 people 2 another inequity is that patients with the same or similar injuries receive vastly different sums of money from the current system—ranging from many millions of dollars to nothing at all The malpractice system is also notoriously expensive and inefficient high legal fees and court costs consume more than 50 percent of court awards 3 The portion of the award that patients actually get to keep takes a very long time to arrive estimates of the average time between the discovery of an alleged malpractice and the payment of judgment or settlement range from three to five years, and some cases can take as long as eight to 10 years to resolve Injured patients are twice abused—once by the medical system and again by the legal system The mere prospect of a nasty and prolonged court battle would be enough to scare away able-bodied patients; injured patients must run legal marathons what’s worse, the burden of fighting for compensation falls most heavily on those who need financial help the most, yet are often least able to fight for it—the elderly, the poor, and the disabled The responses to this irrational legal system have been equally irrational: doctors do what they must to protect themselves from lawsuits, but not all they can to prevent the injuries from occurring in the first place The national academy of sciences estimates that 48,000 to 98,000 patients die each year in u s hospitals due to avoidable medical errors a small number of providers account for the majority of the suits, awards, and settlement costs in any given specialty yet in the current environment, the entire health-care system pays the price—and we all suffer costlier, lessefficient care as a result furthermore, lawsuits frequently stem from a doctor’s poor communication and interpersonal skills, not necessarily from actual malpractice state

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licensing boards need a legal system that distinguishes between poor communication and actual malpractice, in order to determine the appropriate professional remedies Medical mistakes are usually not caused by willful neglect on the part of an individual provider Instead, they occur because small problems compound themselves through the complexity of modern medicine open discussion of errors is vital to the learning and self-improvement process within the medical profession, but the seemingly random blame game promoted by the legal system impedes such discussion In fact, only 5 percent of doctors and nurses say they are very comfortable talking about mistakes and near-misses in the current legal environment 4

A Specialized Health Court
In order to deliver fair compensation, prevent future injuries, and eliminate the wasteful practices of defensive medicine, the nation needs an alternative approach to medical justice—a routine compensation system administered by specialized health courts These courts would be administrative in design, similar to other long-standing, effective alternatives to traditional courts such as the procedures used in workers’ compensation cases under workers’ compensation systems, anyone injured on the job submits a claim form through his or her employer to either an administrative law judge or a board, depending on the state If the judge or board determines that the injury occurred on the job, a worker receives compensation according to a schedule of benefits that takes into account the severity of the injury, the degree of disability, the worker’s age, and his or her pay level Injured workers cannot sue employers in a traditional court—the compensation system provides an alternate mechanism for justice, one that the supreme Court has upheld as constitutional a health-court system would be similar to the workers’ compensation system in two ways first, there would be a schedule of benefits to compensate patients for medical injuries second, patients would receive quick and consistent damage awards an injured patient would submit a simple claim form, available through

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his or her health-care provider, to a review board that would investigate the claim and determine if it represents a clear, uncontestable case of malpractice If so, the board would simply order the injured patient’s health-care provider to pay damages according to the schedule of benefits Complex cases would receive a full trial, but the court would hire its own medical experts to advise it in order to avoid the problem of dueling experts The same pot of money that currently goes to a very small portion of injured patients in the form of supersized jury awards should instead be spread over a greater number of patients who would all receive the same award amounts for similar injuries Consistent awards according to clear principles would calm doctors’ fears of seemingly random lawsuits This, in turn, would enable doctors to focus on delivering the treatment that patients actually need, rather than on defending themselves against the slightest threat of a future suit even if malpractice awards cost the nation the same in total, there would still be a net economic gain because the cost of defensive medicine would decline In fact, malpractice awards themselves would also likely decline over time, as investments in prevention paid off

Removing the Biggest Obstacle
The key obstacle to creating a nationwide system of health courts is the familiarity that doctors, patients, and lawyers all have with the current system The devil you know is better than the alternative for many americans That is why a successful strategy for establishing health courts must involve winning the public’s trust Modifying our justice system is difficult—as it should be but it has happened before when there has been an urgent need and widespread political agreement for example, the workers’ compensation system arose from a consensus by both labor and management that the court system was not helping injured workers other areas of reform that moved away from classic tort law include the no-fault auto insurance system, as well as cases involving injuries related to vaccinations and childbirth The pressure to reform the medical liability system has ebbed and flowed with the contest between two of our most powerful professions when rates

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skyrocket, doctors push for strict caps on jury awards however, trial lawyers rightly argue that such caps would also limit access to justice for the few injured patients who today receive compensation To end this unproductive political battle, it is time to begin small-scale experiments that can reveal the benefits of reform to both doctors and patients—without limiting access to justice In short, health courts need to get a foot in the policy door here are three measures to launch health courts and build consensus for broader change: 1. Encourage states to experiment with alternatives to the current legal system. sens Max baucus (d-Mont ) and Mike enzi (r-wyo ), along with reps Jim Cooper (d-Tenn ) and Mac Thornberry (r-Texas), introduced the “fair and reliable Medical Justice act” in May 2007 This legislation would authorize states to serve as “laboratories of democracy” and provide grants to test health courts and other alternatives to the current medical-malpractice tort system The act calls for the secretary of health and human services (hhs) to award as many as 10 demonstration grants for a diverse set of alternatives for up to a five-year period The demonstrations would be awarded to applications pursuing the following goals: • Improving the reliability of the medical-liability system for prompt and fair resolution of disputes; • encouraging the disclosure of health-care errors by providers; • enhancing patient safety by detecting, analyzing, and reducing medical errors and adverse events; • Maintaining access to liability insurance for providers; and • giving patients the opportunity to voluntarily withdraw from participating in the program a multi-stakeholder panel would review the applications for the demonstration grants and advise hhs on how to proceed your administration

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could play an important role in encouraging states to move forward with this important health-care reform 2. Create health courts for patients injured by federal medical providers. all medical-malpractice cases against federal health-care providers such as the Veterans administration fall under the federal Tort Claims act This act limits attorney fees, so injured patients have less access to justice than they would under most state laws Congress can expand legal access for these patients and establish a model for medical justice It should authorize the creation of experimental health courts within the various federal health-care programs covered by the federal Tort Claims act It should also direct agencies to work with federal judges to create health courts either within the existing judicial structure or separate from it once established, these health courts could cover whole classes of providers, such as obstetricians who work within Medicaid or other public programs Medicaid already pays for 40 percent of the nation’s births, and as a result bears a major cost of the current malpractice system obstetrics has the some of the highest liability-insurance rates, and access to an obstetrician is a problem for pregnant women in many parts of the country some communities, such as libby, Mont , have asked local obstetricians to join the staff of a public-health clinic in order to get the malpractice coverage available through the federal government under the federal Tort Claims act This represents a clear example of how an improved judicial process could bring practical health-care benefits 3. Establish a Medical Liability Best-Practices Center. To get a healthcourt system started, Congress should create a best-practices center within the u s agency for healthcare research and Quality This entity would develop a catalogue of predetermined medical-malpractice scenarios that health courts and even regular courts could use as the basis for quick adjudication The center could develop a schedule of benefits so that compensation to injured patients doesn’t vary unpredictably It would convene a panel of independent experts to consider many common medical injuries, and weigh u s awards against those for similar injuries in other countries—such as britain— that routinely use a schedule of benefits

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To evaluate these legal tools, the center should develop criteria for assessing the performance of the medical-malpractice liability system To the greatest degree possible, the criteria should be based on desired outcomes such as patient compensation and the reduction of legal costs states should also use the same criteria to evaluate their own liability system, in order to identify areas for improvement

The goal of this alternative health-court system should be to compensate all seriously injured patients according to clear legal standards about appropriate care such compensation would give doctors a strong economic incentive to invest in preventing injuries where mistakes repeatedly occur, doctors could avoid the cost of compensation by investing time and resources to prevent them in the future a health-court system, then, would not only provide surer justice for past harms; it would also help bring about better health care for all americans in the years to come add to this the fact that health courts would greatly help reduce medical costs, and the case for such a system becomes quite compelling indeed Endnotes
1 see udell, nancy and david kendall, “health Courts: fair and reliable Justice for Injured Patients”, Progressive Policy Institute, february 17, 2005; kendall, david, “Toolbox: Medical Malpractice reform,” American Interest, winter, 2008; 2 localio, a russell, et al , “relation between Malpractice Claims and adverse events due to negligence: results of the harvard Medical Practice study III,” New England Journal of Medicine, July 25, 1991 3 data sharing Project, Physician Insurers association of america, services/research.htm 4 “fear of litigation study,” harris Interactive, april 1, 2002

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To: The new President and the nation’s governors From: david osborne Re: reinventing health Care— The role of the states

our gross domestic product on health care, almost double the european average,2 yet the world health organization in 1997 ranked the united states 37th in the world for the overall quality of its health-care system 3 large american firms are at a competitive disadvantage because they spend so much more on health care than their foreign competitors but the fiscal squeeze is particularly debilitating in the public sector by 2005, state and local governments were spending 21 percent of their money on health, almost double the figure from 1972 4 states spent one-third of their money on health by 2005,5 and within a decade, if present trends continue, the health sector alone will devour one-half


ealth care is bankrupting america since 1960,

costs have accelerated 10 percent a year—dou-

bling every 7 5 years 1 we spend 16 percent of

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of state spending similarly, Medicaid and Medicare under current policy would consume one-half of all federal revenues within 15 years 6 yet all this money does not always buy us high-quality health care according to the rand Corporation, patients receive the right care only about half of the time between 48,000 and 98,000 patients die annually because of medical errors in hospitals Meanwhile, 45 7 million people have no health insurance, and the Institute of Medicine reports that 18,000 of them die prematurely every year because they cannot get the non-emergency care available to those with insurance Many more suffer poor health because they lack care our health-care system is in slow-motion collapse no one is happy with it: not doctors, not nurses, not hospital administrators, and surely not patients Tinkering around the edges will not fix it, and simply expanding access to insurance is not enough unless we are prepared to pay significantly higher taxes, we have to control costs while we expand access and improve quality The federal government must be involved in the solutions, because it finances roughly 56 percent of all health care in america 7 but health-care markets differ from state to state: urban states have different practice patterns than rural states, for example some states have significant numbers of large, integrated health plans, such as the Mayo Clinic, kaiser Permanente, and Intermountain healthcare; in others, such integrated plans barely exist hence, successful reform models will differ from state to state while the federal government should lead, it can use the states as its laboratories federal action should encourage the states to experiment and identify best practices, so we all learn which models are most effective in which types of markets washington should provide some up-front funding, and then set goals for the states, with regard to both cost control and healthcare outcomes The federal government should reward states that exceed the goals with extra funding to offset their costs for covering the uninsured for states that fail to meet the goals, the federal government should implement a backup plan that would allow consumers to pick high-quality, lower-cost health plans sponsored through federal reform recent examples show just how successful this approach can be state action with a federal backup plan is the same approach Congress used to improve health-insurance regulation under the 1997 health Insurance Portabil-

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ity and accountability act allowing states to act as laboratories of innovation was also the methodology behind welfare reform; by the time the federal bill passed in 1996, thirty-six states had already achieved welfare reform, using federal waivers with federal support and incentives, states can cut the gordian knot of our profligate, dysfunctional health-care system To cut costs by 25 percent, improve quality, and cover every citizen, states should pursue seven big strategies: 1. Invest in public health and encourage healthy behavior; 2. Replace fee-for-service payment with managed competition among health plans that charge annual per-patient fees; 3. Encourage integrated, managed service-delivery systems that use information technology and best practices; 4. Encourage health plans to purchase “cycles of care” for medical conditions; 5. Create statewide electronic health-records systems; 6. Institute new policies to encourage rational end-of-life care; and 7. Develop a new system of health courts to contain medical-malpractice costs. This paper will explore all seven of these strategies first, though, it will briefly survey the present state of health care in america—and the consequences of adhering to a failed status quo

The Costs
health care has turned into the Pac-Man of the public sector, eating up tax dollars that once went to education, transportation, even public safety

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Percent of Total Spending K-12 Education

25 20 15 10 5 0
1970 1975 1980 1985 1990 1995 2000 2005
SOURCE: Bureau of Economic Analysis, National Income and Product Accounts (NIPA) Table 3.1.


Safety Human Services Transportation

figure 1 shows the 35-year trend at the state and local level, where growth in health-care expenditures has accompanied declines in spending on other vital needs because states pay for almost one-half of Medicaid, the problem is most acute at the state level figure 2 shows that if current trends continue, health
Percent of State Spending (AII Funds)

40 30 20 10 0
1987 1991 1995 1999 2003 Education Health Medicaid

Transportaion Public Assistance Corrections 2007 2011 2015

SOURCE: for 1987-2005 data, National Association of State Budget Officers; projections of health care spending (dotted line) calculated by author.

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care will devour half of all state spending within 10 years 8 every time health care gobbles up another percentage point—every 1 2 years—we lose the equivalent of 150,000 teachers 9 The worst cost explosion is occurring at the federal level, because washington pays for Medicare and more than one-half of Medicaid In 1972, these two programs consumed 5 6 percent of the federal budget; by 2006, the figure was 20 9 percent 10 figure 3 shows the most frightening data: according to projections made by the Congressional budget office, under current policy Medicaid and Medicare would consume one-half of all federal revenues within 15 years, while social security and interest on the debt would consume the other half 11 as these graphs demonstrate, solving the insurance problem without solving the cost problem is a mirage Pennsylvania governor ed rendell had it exactly right when he told The New York Times, “If we’re ever going to have accessible health insurance for all americans, we have to begin by containing costs If costs continue to spiral out of control, there is no way the government can afford to pay for it ”12 fortunately, high-quality health care costs less, because it keeps people healthier, eliminates waste, and ensures that patients get the right care the first time
1970 1980 1990 2000 2010 2020 2030 2040 2050
SOURCE: Congressional Budget Office: The Long-Term Budget Outlook 2005

Plus Interest on Debt

Plus Social Security Federal Revenue Plus Medicare Medicaid

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The Diagnosis
To develop a workable solution, it helps to understand four basic problems our system faces first, the core purpose of our current system is to treat symptoms, not to sustain health we spend most of our energy and money responding to illness, rather than preventing it second, most medical institutions are designed to provide episodic care for acute illnesses, but the real burden has shifted to chronic problems that need continuing and coordinated care, such as diabetes, asthma, cancer, heart disease, and aIds “In fact,” report health-care experts alain enthoven and laura Tollen, “about 45 percent of noninstitutionalized americans have chronic illnesses, and they account for 75 percent of personal health-care spending ”13 More than 40 percent of them have more than one chronic condition 14 unfortunately, our health-care institutions were not designed to provide coordinated care for chronic conditions Third, our system is so fragmented among myriad medical practices, hospitals, and insurance companies that it produces enormous waste Complex administrative processes consume 25 percent to 30 percent of all health-care dollars 15 because multiple specialists dealing with the same patient rarely coordinate their care, patients fall through the cracks according to a 2004 report by the President’s Information Technology advisory Committee, one out of five lab tests must be repeated because previous records are not available, and one of seven hospital admissions occurs for the same reason 16 fourth, our fee-for-service payment system creates perverse incentives Providers make more money by performing more services Indeed, if a hospital makes a mistake or omits something important and the patient has to be treated again, that hospital makes more money than it would have if the procedure had gone well studies prove that fee-for-service payment leads to more care but worse outcomes It actually creates disincentives to improve quality or make care more cost-effective, because practitioners who find ways to cut back on procedures make less money John wennberg and elliott fisher at dartmouth university have studied Medicare data for decades Their research shows that in regions with more

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doctors, rates of hospitalization and procedures are far higher—often twice the level of regions with fewer doctors yet this higher spending does not yield better outcomes or more satisfied patients—it yields just the opposite 17 other studies show the same pattern with blue Cross blue shield insurance 18 Christine Cassell, president of the american board of Internal Medicine, sums it up succinctly: “There is a stark correlation between reduced utilization and better outcomes ”19 wennberg believes that up to a third of the $2 4 trillion we spend on health care each year is wasted on unnecessary treatments, overpriced drugs, and end-of-life care that yields nothing “The Medicare system could reduce spending by at least 30 percent while improving the medical care of the most severely ill americans,” he argues 20

The Cure: Seven Strategies for States
reformers have put forth two general models to fix this ailing system some propose a single-payer, single-administrator system to cut administrative costs They cite the fact that Medicare spends only 4 percent of its budget on administration, and their ideal model often looks like Medicare for all unfortunately, this model would leave fee-for-service payment in place— insuring continued rapid cost inflation nor does it address the fragmentation that creates so much waste on a practical level, it would require us to put the health-insurance industry out of business, a daunting political task Conservatives typically prefer to intensify the market dynamics in the system by making consumers more sensitive to the price of medical services They propose to do so by maintaining insurance for catastrophic costs, but with high deductibles Many conservatives also favor health-savings accounts (hsas), which give individuals money they can use to purchase medical services experience suggests that this would change consumer behavior, in both good ways (more efficient use of health care) and bad (less use of needed drugs and therapies by the chronically ill, leading to hospitalization and higher costs) This “consumer-directed” strategy fails to address the real cost drivers in the system, because it leaves fee-for-service medicine in place It also fails to

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change the incentives guiding the vast majority of health-care purchases by most estimates, 90 percent of health-care costs are incurred by only 30 percent of the population 21 These people will quickly exceed their deductibles, at which point 100 percent of their medical bills will be covered, and any incentive to shop for cheaper care will disappear The truth is, market dynamics in health care are unlike those in other industries, and simply pushing harder on those dynamics will not solve the problem Third-party payment is inevitable if we want people to get health care when they become seriously or chronically ill, but third-party payment also destroys a consumer’s incentive to shop for the best deal In addition, many consumers are incapable of shopping effectively health care is extraordinarily complex, and patients often find it difficult to make informed choices among treatments and doctors finally, while technological advances drive costs down in most markets, they drive costs up in health care when we buy a car or a computer, we use it for a time and then dispose of it to purchase another model, one that happens to be better and cheaper, because technology has advanced but health care is different each of us gets only one body, and we naturally do everything we can to keep that body going In health care, when new technologies succeed, they keep people alive when those people get old, their systems begin to fail at that point, we use more technology, at great expense This timeless but inconvenient fact explains much about the economics—and the politics—of modern health care we need a third way, an approach to health care that goes beyond the ideologies of left and right It is built on the seven proposed initiatives introduced earlier, each of which will now be discussed in detail 1. Invest in health. one way of describing america’s health-care problem is that we experience too much care and not enough health our most important goal, after all, is not health care, but health and the biggest obstacle to good health for many americans is not a lack of care, it is their own behavior according to the u s Centers for disease Control and Prevention, four big factors influence our health: personal behavior; the environment (ele-

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ments in our air, water, homes, communities, workplaces, and food); access to health care; and our genetic makeup of these four, personal behavior accounts for 50 percent of the variance in our health The environment (physical and social) and genetics account for about 20 percent each, and health care for only 10 percent 22 nevertheless, we spend 88 percent of our health resources on treatment, but only 4 percent on changing personal behavior 23 (see figure 4 ) If we want better health, we must invest in changing behavior and cleaning up the environment we all know that smoking causes cancer, heart disease, and other health problems, and for 40 FIGURE 4: HEALTH IMPACT VS. SPENDING (CENTERS FOR DISEASE CONTROL AND years, our governments INSTITUTE FOR THE FUTURE)24 have been working to reduce smoking rates, 10% Access to care with substantial suc20% Environment cess but obesity has become an even greater Access 20% Genetics 88% problem according to to care the Centers for disease Control, by 2006, one Health 50% in four americans was behavior obese and 36 5 perHealth behavior 4% Other cent were overweight 25 8% Health Impact Health Spending obesity leads to diabetes, heart disease, and many other health problems Medical research proves that consistent exercise lowers the risk of obesity, diabetes, heart disease, cancer, osteoporosis, depression, and high blood pressure,26 yet fewer than one-half of american adults get the minimum exercise necessary to enjoy these rewards—30 minutes of aerobic activity most days of the week 27 state leaders should pick the top five behaviors that undermine health in their states—such as poor diet, inadequate exercise, smoking, drinking, drug use, and poor parenting—and lead massive public campaigns to change those behaviors for instance, a state might create a healthy lives Trust with the power to define the 25 food and beverage products that create the most harm and levy

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taxes on them based on the amount of health-care spending they generate The trust could then be empowered to use that money to create financial incentives for people to exercise, stop smoking, and the like we could require health plans to include similar incentives—such as discounts for people who regularly use an exercise facility, do not smoke, and have healthy weights—and to charge extra for those who smoke, are overweight, or drink to excess (united healthcare, the nation’s largest health insurer, recently unveiled just such a plan, based on successful experience with this approach by some employers 28) we could also give employers financial incentives to create effective “wellness programs” for their employees, with the same goals schools, both public and private, can play a role Twenty states fall below the national health objective of providing seven recommended vaccinations to 95 percent of kindergartners In those states, and in any other states that fall below the national standard, public-health departments could organize universal vaccinations for schoolchildren 29 all states could provide annual dental checkups in school, because only one-half of children ages 2 to 17 get them 30 finally, why not ask schools to require participation in physical education or sports every day, as we did a generation ago? If the school day must be lengthened to accomplish this, so be it Creating healthy habits at a young age will pay dividends for a lifetime another necessary element of a health-promotion agenda is “secondary prevention”: once a condition occurs, we must ensure that it is managed well, to minimize its effects for instance, we should make sure that people with diabetes change their diets and receive proper care Many diabetics find their illness difficult to control, and some develop expensive complications: between 1988 and 1994, diabetes accounted for nearly 9 percent of adult hospitalizations, 12 percent of nursing-home admissions, and 10 percent of adult deaths 31 Programs such as enhance wellness, in seattle; active for life, in austin; and a Matter of balance, in boston; educate patients and their families and help them manage such chronic conditions Canada, the united kingdom, and australia have adopted such strategies 32 states could do likewise, contracting with proven disease-management programs to implement statewide efforts They could also create incentives to encourage health providers to focus on secondary prevention

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2. Replace fee-for-service reimbursement with managed competition among health plans that charge annual per-patient fees. In a rand Corp study, group medical practices that charged a set prepaid fee cost 25 percent to 30 percent less than those operating on a fee-for-service basis 33 The fundamental reason was that the prepaid physicians had clear financial incentives to become more cost-effective, as enthoven and Tollen explain: “Prepayment rewards doctors for keeping patients healthy, for solving their problems in economical ways, and for avoiding errors. It encourages superior ambulatory care for patients with chronic conditions, thereby reducing their need for hospitalization. In contrast, the fee-for-service payment system gives doctors powerful financial incentives to do more (and more costly) procedures, which may not be in patients’ best interests, financially or clinically.” enthoven and Tollen go on to argue that prepaid delivery systems, such as health maintenance organizations (hMos), have similar incentives and even more weapons to improve quality: “… [A] system prepaid for total costs can examine the full spectrum of care to find opportunities for cost reduction, not just shifting costs to other parts of the system. For example, a prepaid delivery system can evaluate new technologies for their cost-effectiveness and impact on quality and can deploy them as needed. … “Prepaid (and partially prepaid) integrated delivery systems are far ahead of small groups and individual doctors in the use of quality-enhancing decision support tools, disease registries, guidelines, automated reminders, performance feedback, patient self-management, linkages to community resources, and electronic medical records.” 34 To capture some of these benefits, states should create purchasing pools involving all their programs—Medicaid, the state Children’s health Insurance Program (sChIP), state employees’ and retirees’ plans, and others—and invite health plans to compete for this market on a prepaid basis, based on

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both price and quality They should partner with any private and nonprofit employers willing to join the pool wisconsin’s insurance program for state employees offers a good example of how states can use prepayment to stimulate price competition between health plans The program defines a basic benefit package, asks health plans to submit bids specifying the annual dollar amount they would charge for this package, and then ranks those bids The wisconsin program uses price and quality measures to define three tiers Plans in Tier 1, which are low in price and high in quality, cost the least for state employees If they prefer a more expensive plan—because their family physician is not part of a Tier 1 plan, for instance—they are free to choose it and pay part of the difference The vast majority of members choose Tier 1 plans, and this fact creates an incentive for health plans to lower their prices (Members can switch plans once a year ) wisconsin put this three-tier approach into effect in 2003 In dane County, which includes Madison, the state employee plan covers 25 percent to 30 percent of the private (non-Medicare and Medicaid) market by 2006, costs in dane County for individual and family plans had fallen 14 percent below the statewide average and 30 percent below the most expensive regions of the state 35 Cost increases would probably slow even more in dane County if the competition were sharpened and people had to pay more for Tier 2 and Tier 3 plans Pool participants should have to pay the full cost difference between the Tier 1 plan and any Tier 2 or Tier 3 plan they choose, in order to maximize the incentive to pick a Tier 1 plan The one danger of prepayment is that health plans and providers could make money by simply withholding care from members, such as by refusing to do certain procedures or making it difficult to schedule appointments Plans that did this would quickly lose most of their subscribers, of course To prevent such behavior in the first place, states could include points for quality in the formula used to rank health plans They could also generate quality and customer-service rankings of the health plans that bid for state business each year, and make them available to the public This would create a powerful market incentive for prepaid plans to deliver sound customer service If a state crafted such a purchasing pool for all its programs, each plan in the system would provide the same essential benefit package, although indi-

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viduals and employers would be free to purchase additional coverage The state and its private-sector partners would define the benefits package based on hard evidence about which services were most cost-effective To control drug costs, the package would include a preferred drug list generic drugs would require the lowest co-payments; non-generics on the preferred list would be slightly more expensive; and those not on the preferred list would be the most expensive The state would use the size of its pool to negotiate steep discounts for drugs on the preferred list by creating joint purchasing consortia with other states, it could increase its bargaining power even more The benefits package could have a deductible and require co-payments, to discourage wasteful use of medical care Preventive care and chronic care should be covered without deductibles or co-payments, however, because such charges can discourage people from getting the treatment they need (a recent study of three managed-care plans with co-payments of more than $10 for drugs showed a 20 percent reduction in the use of diabetes medications 36) This leads to more emergency-room visits, more hospitalizations, and more nursing-home care as the New England Journal of Medicine explained in an editorial: “Attempts to save money through the redesign of insurance plans—involving caps on benefits and increases in out-of-pocket spending for prescription drugs—result in the delivery of poor care to chronically ill patients. … We should be reducing the barriers to treatment and encouraging patients to take appropriate medications for the recommended duration, rather than increasing these barriers by limiting benefits.” 37 health savings accounts (hsas) could also be useful elements of the benefit package, for those with jobs and sufficient incomes by creating a $1,200 annual deductible and offering an $800 annual health-savings account, for example, a state could give residents an incentive to shop carefully for health services, as well as the ability to select from an expanded menu of choices, because they could use the hsa to buy services not covered by the benefits package To make this mechanism more effective, states would need to help consumers understand the prices of different

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medical services, perhaps by requiring that providers post their prices on a state-sponsored web site To protect against “adverse selection,” in which unlucky health plans attract older or sicker people who drive up their costs, each individual covered by the state purchasing pool would be “risk-adjusted”—meaning that the price the state paid to health plans would reflect the individual’s degree of risk upon entry In addition, a state would be wise to offer reinsurance to health plans, to cover the cost of catastrophic cases without risk adjustment and reinsurance, health plans would submit higher bids, to limit their risks one of the most important contributions a true reform package could make would be to separate health insurance from employment under our current approach, employers who provide health insurance are at a severe disadvantage in the marketplace, a fact that is driving more and more of them to drop this benefit employees are reluctant to change jobs, for fear of losing their health insurance People with pre-existing health conditions live in fear of losing their jobs, because they could never get insurance on their own They can even face obstacles to getting new jobs, because their insurance is so costly The political hurdles to shifting from employer-based insurance to a taxfinanced system would be daunting, however Insurance companies would face a huge loss of market hospitals and doctors would see their power to charge higher prices severely limited by the competitive dynamics of the new marketplace state leaders would have to convince businesses and individuals to pay higher taxes in order to fund the system an analysis by the lewin group of one such proposal in wisconsin indicated that employers’ health-care costs would decline more than their taxes would go up, in part because firms that did not provide insurance would now have to pay their share 38 still, any proposal for a significant tax increase faces tough sledding The alternative is to build a pool that captures at least 30 percent of the market and use it to reshape the system, as wisconsin has in dane County a state would begin with its own government employees and retirees, Medicaid, the state Children’s health Insurance Program (sChIP), and other state health plans, and then add local government and education employees to the pool In the typical state, these groups total more than 21 percent of the market 39

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In addition, states should invite private and nonprofit employers to join the pool If a state adopted a mandate that residents have health insurance and offered subsidies for low-income people, it could also add many of the uninsured to the pool—another 16 percent of the population in the average state once the system had demonstrated the power to restrain health-care inflation, more employers would join in order to save money because more participants would increase the system’s power to control costs, the state could offer businesses guaranteed prices for several years, to induce them to join If the model could slow annual price increases, more and more employers would be tempted to join the pool once half of the state was in the pool, the politics of moving to a tax-financed system that covered all residents would get easier 3. Encourage integrated, managed service-delivery systems that use information technology and best practices. The approach I described would reward integrated, managed health systems and provider groups, as it has in dane County, because they are more efficient examples of such systems include hMos like kaiser Permanente and Minnesota’s healthPartners; medical groups like the Mayo Clinic, the Cleveland Clinic, and geisinger health system; and emerging networks like north Carolina’s Community Care, which serves 745,000 Medicaid patients some of these systems employ physicians as staff members, while others pay independent practitioners some, like kaiser, are fully integrated, even owning their hospitals others, like Community Care, are virtual networks that knit together many private practitioners and hospitals to act as one coherent system according to wennberg and fisher, regions dominated by integrated, managed systems have costs up to one-third lower than other areas 40 one reason is that integrated plans have the financial resources to create electronic health record (ehr) systems, which reduce both waste and error rates a second reason is that they have a built-in incentive to prevent disease, because prevention brings down their overall costs a third is that they have both the resources and incentives to use best practices (“evidence-based standards of care,” in industry lingo) fourth and finally, they can use a more

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cost-effective mix of personnel: fewer doctors, more nurse practitioners, midwives, medical assistants, and nutritionists several of these factors help such systems deliver higher quality, as well Their integrated nature also helps: Patients fall through the cracks less often In the fragmented world of most private practices, when a physician refers a patient to a specialist, there is often no coordination for patients with complex conditions, this can lead to problems for instance, a specialist might prescribe a medication that interacts badly with medications the patient is already on, because the specialist is unaware of the patient’s medications and the patient has forgotten to tell him or her Integrated, managed systems typically require that every member have a medical “home”—a physician who acts as his or her primary caregiver and is responsible for coordinating his or her care states could require that every person in the state purchasing pool have such a medical home some systems even provide “case management” for patients who consume a great deal of health care (one percent of the population uses 27 percent of all health-care dollars, and 5 percent consumes more than one-half of all medical expenditures 41) These are typically people with chronic conditions that require a great deal of care, often by multiple doctors sometimes the doctors do not coordinate, as noted sometimes patients do not comply with their physicians’ instructions—because they are elderly, or do not speak english, or are alcoholics, or have mental problems They do not take the medications prescribed; they do not return for follow-up visits; they do not follow the doctor’s behavioral recommendations Community Care in north Carolina has begun to use case managers to work with these patients and their physicians to ensure better compliance, better coordination among multiple physicians, and thus better health 42 similarly, the Monroe Plan, a managed-care organization in rochester, n y , has reduced admissions of babies to neonatal intensive-care units by helping pregnant women on Medicaid get prenatal care and avoid risky behaviors every dollar invested in the program has saved $2 43 states could push the adoption of all these practices faster with incentives, such as extra points in the ranking system for degrees of integration and management They could even reward integrated systems that demonstrate efficiency and high quality with “charter health plan” status as with charter schools, char-

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ter health plans could be given greater flexibility under state (and federal, if possible) regulations, in return for greater accountability for outcomes some may say this model is simply “managed care,” which has been tried and rejected Indeed, managed care by integrated health-maintenance organizations was on the rise throughout the 1970s and 1980s, and it did help slow health care inflation in the 1990s but it was derailed by a backlash from consumers and doctors in the late 1990s The use of managed care was flawed in three ways first, most employers did not give consumers a choice of plans—they chose one plan and offered it to all employees, who were unhappy if their doctor was not in the chosen plan 44 second, few employers encouraged maximum price competition, because they chose one plan and paid virtually the entire premium for employees Third, managed care did not penetrate enough of the market in most regions to drive prices down significantly 45 a few large employers got the incentives right, however They asked various plans to bid, then paid a fixed price for plans and let their members choose any plan—but required them to pay extra for more expensive ones This created a powerful incentive for plans to lower costs according to enthoven and Tollen, “when employers pay a fixed-dollar amount and each employee can keep the full savings, experience shows that high percentages of employees choose economical care for example, 70 percent to 80 percent of active employees and dependents covered by the university of California, CalPers, and wells fargo in California choose hMos ”46 wisconsin’s experience in dane County indicates that both patients and doctors can be satisfied in such a system, as long as they have choices It also demonstrates that a government can restrain costs by including just 30 percent of the market in its managed competition arrangement This is true because most health plans compete for state employees, and when they make changes to become more efficient and effective to capture that market, those changes affect the rest of their business 4. Encourage health plans to purchase “cycles of care” for medical conditions. while health plans would compete to reduce prices in the system we have described, many would still be stuck paying fees for services to physicians and

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hospitals states should work to move them to payment for packages of care for specific medical conditions, such as nine months of obstetrical care and delivery, a knee replacement, or a year of treatment for diabetes In Redefining Health Care, Michael Porter and elizabeth olmsted Teisberg argue that we will get better, cheaper care if medical providers have to compete based on the price and quality of full “cycles of care” for medical conditions If medical groups had to compete based on price and the results they produced over a full cycle of care (which could be multiple years), they would face very different incentives In short, they would be rewarded not just for performing procedures, but for driving down their costs by eliminating errors, managing chronic patients more effectively, providing care in doctor’s offices rather than hospitals, helping their patients make healthy lifestyle choices, and the like as Porter and Teisberg point out, care that produces better outcomes is often cheaper, because preserving health is cheaper than managing disease To make this possible, we will need to measure and report risk-adjusted medical outcomes for each condition and provider—a big job, one that is perhaps best suited to the federal government as the data become available, states should not require health plans to purchase cycles of care, but they should certainly encourage it staff-model hMos may not need to do this, because they own their hospitals, have physicians on salary, and do not use fee-for-service reimbursement as long as health plans have to compete on price and quality, those that provide the best outcomes for the money will win the competition In the process, however, states should create incentives to encourage plans to abandon fee-for-service payment for instance, states could take off points in the rating system for plans that stick with fee-for-service reimbursement of physicians and hospitals To enable conversion to payment for cycles of care, states could create electronic exchanges—websites on which physicians and hospitals would list their prices and outcomes for each cycle of care, enabling health plans (and individuals) to purchase the most cost-effective options states might even encourage plans to offer a voucher option: If a woman became pregnant, for example, she might be given a voucher for $5,800, which she could use to purchase nine months of care and delivery If she

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could find the same care for $5,300, she could pocket the savings; if her preferred doctor charged $6,500, she would have to pay the extra amount In this way, health plans could give providers an incentive to offer lower prices 5. Create statewide electronic health record systems. as noted, one of every five medical tests must be repeated, and one in seven hospitalizations is ordered because records are missing or information is unavailable The price tag for all of this needless repetition is enormous: The redundant hospital admissions alone cost $30 billion a year 47 Many integrated-delivery systems now have ehr systems, but the majority of american physicians and hospitals do not yet use them, and most private systems cannot interact with one another Perhaps the best system has come from a surprising quarter: the Veterans health administration (Vha) between 1995 and 2005, while the rest of the country suffered through a doubling of health-care costs, the Vha’s cost per patient remained level with 10,000 fewer staff members, the Vha more than doubled the number of patients it served 48 The Vha’s ehr system is the most advanced in the world leaders from britain, germany, and other countries seeking to create ehr systems visit to learn about it, and the government of Mexico is installing it in its largest health-care provider system In 2006, the Vha system won a prestigious Innovation in american government award how does it work? every Vha physician is linked by computer to the system he or she has access to every patient’s entire medical record, including all x-rays, CT-scans, and test results The doctor enters all notes and prescribes all medications electronically The Vha has mined the data the system has accumulated—and other sources of medical knowledge—to develop best-practice guidelines, which the system provides to physicians through timely reminders for instance, it might remind a doctor that a patient with diabetes is due for a retinal exam, or that an older patient should be immunized against pneumonia If a doctor is prescribing a medication that will interact with another drug the patient takes—or to which the patient is allergic—the computer will flag it The system costs the Vha $78 per patient per year: less than the cost of repeating a single lab test It has saved billions of dollars while dramatically

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improving quality errors on prescriptions—which are bar-coded, not handwritten—fell from the national average of 5 percent to a fraction of 1 percent study after study has concluded that the Vha’s quality of care is superior to private-sector care not surprisingly, customer satisfaction has soared: on surveys using the american Customer satisfaction Index, the Vha outscores private health-care providers ehr is not the only reform responsible for these improvements, but it has had a huge impact and believe it or not, the Vha’s software is available to anyone who wants it, free of charge The federal government is already offering states outcome data on providers from its Medicare database, if they will create electronic information exchanges governors should use their bully pulpits to convene the leaders of every major health care provider, insurance company, and employer into a consortium devoted to creating a statewide system as good as the Vha’s within five years (some states might simply choose to adopt the Vha software ) financing could be shared among the state and those who would benefit the most: insurance companies and integrated-delivery systems To encourage widespread adoption, a governor could announce that at the end of five years, his or her state would cease reimbursing any provider not using the system The potential for improvement is enormous In addition to the kind of savings and quality improvements experienced by the Vha, ehr systems could give individuals access to their own records, test results, and the like on a web portal (To protect their privacy, individuals could determine who was allowed access to their records ) To extend the system’s reach, a patient’s entire medical record could be put on a smart card that could be read by any computer some day we may even be able to pay for our health services instantaneously, with a swipe of our smart cards states could also use the ehr system to gather data on quality and outcomes and make this information available to patients on the web portal 6. Institute new policies to encourage rational end-of-life care. no one knows exactly how many of our health-care dollars go to elderly people in their last year of life, but 25 percent is a good guess This is one reason american health care is so expensive: we succeed in keeping many people

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alive into their eighties, and then spend an enormous amount in their last few months, as their systems collapse In many cases, this serves no rational purpose and pleases no one but doctors and nurses are taught to do everything they can to help patients, and in the absence of specific policies that tell them otherwise, that is what they do should a state pay for a knee replacement for an 82-year-old who is expected to die of lung cancer within a year? should it pay for heart bypasses for 89-year-olds? governors should engage the public in a wide and deep consultation process to begin to answer such questions In addition, they should require that all members of the state purchasing pool have living wills, and define a default living will for anyone in the state pool who has not created one Including nursing homes and other forms of long-term care in the state purchasing pool is also critical Medicaid spends 68 percent of its money on long-term care for the aged, blind, and disabled, who make up only 27 percent of its enrollees 49 It pays for nearly half of all long-term care 50 Most long-term care is provided on a fee-for-service basis, with little coordination Managed care for fixed prices—in which members can choose their plans and switch annually if they are not happy—provides incentives for health plans to find the most cost-effective setting for each person, whether in his or her residence, a nursing home, a rehabilitation hospital, a chronic long-term care hospital, or a day program oregon, arizona, florida, Texas, and wisconsin have already proven that such programs improve quality and cost-effectiveness 51 oregon’s case-management approach has reduced claims by roughly 50 percent 52 “Cash and Counseling” programs in several states, which give patients some Medicaid money each month to purchase their own goods and services, also show promise by helping people make choices that keep them out of nursing homes and hospitals 53 The next step would be to integrate managed care for those who are eligible for both Medicaid and Medicare—among the most challenging populations, because they are both poor and elderly Medicare and Medicaid policies do not always mesh well, and when both programs are paying for services, overall costs tend to be higher 54 Minnesota’s senior health options Program, which integrates Medicare and Medicaid in one managed-care program, has significantly reduced the

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number of preventable hospital and emergency-room admissions 55 Massachusetts also has a small integrated program, called senior Care options The Commonwealth Care alliance, which manages care for 2,000 people under this program, has reduced costs significantly in two years while registering impressive customer satisfaction and very low levels of disenrollment 56 after integrating care for the “dual eligibles,” a state could ask Medicare for a waiver to integrate all Medicare recipients into its managed-care purchasing pool 7. Develop a system of health courts to contain medical malpractice costs. finally, we need to rethink the way we handle medical malpractice our current approach drives physicians to practice “defensive medicine,” performing more tests and procedures than necessary so they can prove they covered all the bases if they are sued Meanwhile, more than 99 percent of those who suffer medical negligence are never compensated,57 and physicians get no clear signals about standards of care 58 This is a dysfunctional system david kendall at the Progressive Policy Institute has come up with a bold solution: Create a system of health courts, similar to the system that handles workers’ compensation claims, to make it easier and cheaper for patients to seek reimbursement kendall explains: “A health court system would be similar to the workers’ compensation system in two ways. First, there would be a schedule of benefits to compensate patients for medical injuries. Second, a health court system would be designed to provide quick, consistently fair damage awards. … An injured patient would submit a simple claim form, available through her health care provider, to a local health court review board. These boards would investigate claims and determine if they are clear, uncontestable cases of malpractice. In such cases, they would simply order the injured patient’s health care provider to pay damages according to a schedule of benefits. “After a health court review board has ruled whether or not a case is cut-anddry, appeals of that decision, along with cases that are not clear-cut, would

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go to trial before a health court judge. … Lawyers would represent both parties. But unlike malpractice cases in civil trials, health courts would render decisions that would help shape clear legal standards for medical practice. In addition, the health court judges, not the plaintiffs or defendants, would hire expert witnesses to settle questions about medical standards. When health court judges find incidents of malpractice, they would determine awards using the same schedule of benefits applied by the review board.” 59 kendall believes that health courts would be less expensive than today’s system because more than 50 percent of court awards go to legal costs and lawyers’ fees Medical malpractice premiums should fall, he reasons, as compensation becomes more predictable and the new system clarifies standards of practice

almost every idea in this paper is already working somewhere in the country, with the exception of end-of-life policies and health courts all are achievable, with the proper application of political will If, by employing the measures spelled out in this paper, a state could hold annual health-care cost inflation to 3 5 percent, while the rest of the country continued to experience the customary 10 percent inflation, it would cut health costs by 26 percent in just five years at that point, universal coverage would be more affordable but the most powerful argument for this approach is the cost of not taking it within 10 years, if we do nothing, health care will consume one-half of state revenues and almost one-half of federal revenues where would we find the money to meet such runaway costs? If the future is like the past, we will throw people off Medicaid, narrow the list of treatments covered, and increase deductibles and co-payments for state employees we will lay off teachers and eliminate extracurricular programs in our schools we will cut aid to local governments, who will in turn lay off police we will defer maintenance on our infrastructure, even as our bridges collapse and more people clog the roads and rails and we will raise taxes Meanwhile, 50 million americans will be without health insurance This is a future none of us wants The time to act is now

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1 “Table 1: national health expenditures aggregate and per Capita amounts, Percent distribution, and average annual Percent growth, by source of funds: selected Calendar years 1980-2002,” u s Centers for Medicare & Medicaid services (formerly the health Care financing administration), January 2004, nhe/historical/t1.asp The exact average annual increase in total spending on health care from 1960-2002 was 10 19 percent 2 World Health Statistics 2007, world health organization, 2007, whostat2007/en/index.html In 2004, the last year for which the who has data, the united states spent 15 8 percent of gdP on health care and the european region average was 8 6 percent 3 The World Health Report 2000 – Health Systems: Improving Performance, world health organization, 2000, annex Table 1: “health system attainment and performance in all Member states, ranked by eight measures, estimates for 1997,” 152, whr/2000/en/whr00_en.pdf 4 bureau of economic analysis, national Income and Product accounts (nIPa) Table 3 16, “government Current expenditures by function,” september 2006 5 data for everything but the “health” line is from State Expenditure Report Fiscal Year 1995 (washington, d C : national association of state budget officers, 1996) and State Expenditure Report Fiscal Year 2005 (washington, d C : national association of state budget officers, 2006) The national association of state budget officers (nasbo) only measured total state health spending from 1997 through 2003, and there is no other reliable source of this data In 2003, nasbo’s figure was 31 5 percent: see 2002-2003 State Health Expenditure Report (washington, d C : Milbank Memorial fund, national association of state budget officers, and reforming states group, June 2005) nasbo’s data shows health care’s percentage of total state spending rising 0 8 percentage point a year, on average, between 1997 and 2003 If the rise continued at that rate, the 2005 figure would amount to 33 1 percent 6 Congressional budget office, The Long-Term Budget Outlook (washington, d C : Congress of the united states, december 2005) 7 selden, Thomas M , and Merrile sing, “The distribution of Public health spending in the united states, 2002,” Health Affairs, 27, no 5 (2008): w349-w359 (published online 29 July 2008; 10 1377/hlthaff 27 5 w349) 8 Current trends are a 10 percent annual increase in the cost of health care (see endnote 1) and a 6 5 percent annual increase in state spending over the past 30 years (personal communication from the national association of state budget officers staff, July 6, 2007) 9 according to the u s bureau of labor statistics, average teacher earnings, including salary and benefits, are $49 72 per hour (bls does not track annual earnings for teachers ) If teachers work a 40-hour week for 39 weeks, this totals $77,563 20 according to the national association of state budget officers, total state expenditures in 2005

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10 11

12 13

14 15


17 18 19 20 21 22

were more than $1 2 trillion one percent of this amount is $12 billion dividing by $77,563 20 yields 154,713 teachers nasbo measured the full cost of state health care for only six years, 1997 through 2003 In that time it increased from 26 6 percent to 31 5 percent of all state spending, an increase of 4 9 percentage points—a rate that equals a 1 percentage-point increase every 1 2 years Congressional budget office, “historical budget data,” shtml Congressional budget office, The Long-Term Budget Outlook (washington, d C : Congress of the united states, december 2005) The Cbo releases this report every two years The 2007 report was no longer a projection of current trends, however In that report, the Cbo projected current trends for 10 years and then assumed that the annual increase in the cost of health care would slow to the rate of gdP growth This would be a dramatic slowing, and under current policy, there is no reason to think it will happen sack, kevin “a state finds no easy fixes on health Care,” The New York Times, July 10, 2007 enthoven, alain C , and laura a Tollen, “Competition in health Care: It Takes systems to Pursue Quality and efficiency,” Health Affairs, web exclusive, sept 7, 2005, w5-427 They cite C hoffman, d rice, and h y sung, “Persons with Chronic Conditions: Their Prevalence and Costs,” Journal of the American Medical Association 276, no 18 (1996): 1473-1479 Institute of Medicine, Crossing the Quality Chasm: A New Health System for the 21st Century (washington, d C : national academy Press, 2000) see kahn, James g , richard kronick, Mary kreger, and david n gans, “The Cost of health Insurance administration in California: estimates for Insurers, Physicians, and hospitals,” Health Affairs 24, no 6 (november-december 2005): 1629-1639; and steffie woolhandler, Terry Campbell, and david u himmelstein, “Costs of health Care administration in the united states and Canada,” New England Journal of Medicine 349, no 8 (aug 21, 2003): 768-775, President’s Information Technology advisory Committee, Revolutionizing Health Care Through Information Technology (arlington, Va : national Coordination office for Information Technology research and development, 2004), reports/20040721_hit_report.pdf Mahar, Maggie “The state of the nation’s health,” Dartmouth Medicine, spring 2007, 27-35, Ibid Ibid Ibid berk, M l , and a C Monheit, “The Concentration of health Care expenditures, revisited,” Health Affairs 20, no 2 (2001): 9-18 Institute for the future, Health and Health Care 2010: The Forecast, The Challenge, 2nd edition, san francisco: Jossey-bass, 2003

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23 Ibid 24 Institute for the future, op. cit. 25 data are from the Centers for disease Control and Prevention’s behavioral risk factor surveillance system, 09&state=UB 26 warburton, darren e r , Crystal whitney nicol, and shannon s d bredin, “health benefits of Physical activity: the evidence,” Canadian Medical Association Journal 174: 801-809, March 14, 2006, 27 hobson, katherine, “Making fitness easy,” U.S. News & World Report, June 26, 2006, 28 appleby, Julie “Insurance rewards healthy workers,” USA Today, July 10, 2007, htm?csp=34&POE=click-refer; and appleby, Julie, “Plan bases deductible on health Tests, sees Costs fall,” usa Today, July 10, 2007, health/2007-07-10-insurance-united-health_N.htm?csp=34&POE=click-refer 29 Centers for disease Control, “Vaccination Coverage among Children entering school—united states, 2005-06 school year,” MMWR Weekly, oct 20, 2006, http:// 30 “More than half of u s Children don’t get yearly dental Checkups,” AHRQ News and Numbers, feb 2, 2006, published by agency for healthcare research and Quality, u s department of health and human services, rockville, Md , news/nn/nn020206.htm 31 goldfield, norbert, et al , A Consumer-Driven Health Care Cost Control Agenda for Massachusetts: 17 legislative Proposals boston, Ma : health Care for all, March 2007, 11 32 Ibid , 13 33 J P newhouse and the Insurance experiment group, Free for All? Lessons from the RAND Health Insurance Experiment, Cambridge, Mass : harvard university Press, 1994 34 enthoven and Tollen, “Competition in health Care,” 421-2 35 kraig, robert, Regional Variations in Wisconsin Health Insurance Costs: A Preliminary Analysis Madison, wis : Institute for one wisconsin, oct 30, 2006, http://advwisc.3cdn. net/170af59ed6e9822ac8_mzm6b9tcg.pdf. 36 goldfield et al , a Consumer-driven health Care Cost Control agenda for Massachusetts, 21 37 Ibid 38 The lewin group, The Wisconsin Health Plan (WHP): Estimated Cost and Coverage Impacts, Final Report, prepared for The wisconsin health Project, June 4, 2007, figure 39, p 64 lewin found that, for private employers now offering health insurance, current spending is $9 191 billion, the assessment for the wisconsin health Plan would be $8 41 billion, and after other costs and tax cuts were factored in, those employers’ net costs in the new system would be $9 147 billion—$44 million less than they were previously spending after “wage effects” were taken into account, their savings would

reinventing health Care—The role of the states | 223

increase to $575 million 39 from 2002–2003 State Health Expenditure Report: In fiscal 2003, states reported a total population of 290 5 million, a total Medicaid caseload of 40 million, and 4 2 million sChIP beneficiaries (see Table 49) according to the Statistical Abstract of the United States, in 1999 there were about 17 5 million state and local employees These numbers, which do not include retirees or other state health programs, add up to roughly 62 million out of 290 5 million, or 21 3 percent 40 Mahar, op. cit., 34 41 The Health Report to the American People, Citizens health Care working group, March, 2006, 42 bobvjerg, randall r , and barbara a ormond, “site Visit report,” prepared for Innovations in american government 2007 awards Program, ash Institute, John f kennedy school of government, harvard university, april 23, 2007, 4-5 43 bella, Melanie, stephen goldsmith, and stephen a somers, “Medicaid ‘best buys’ for 2007: Promising reform strategies for governors, an Issue brief,” Center for health Care strategies in hamilton, n J , and ash Institute at harvard university, december 2006, 2, 44 “research showed that dissatisfaction was concentrated among people in hMos without a choice,” according to alain enthoven e-mail, June 2007 45 for more on these three reasons, see alain enthoven, “employment-based Insurance is failing: now what?” Health Affairs, web exclusive, May 28, 2003, w3 237-249, http:// 46 enthoven and Tollen, “Competition in health Care,” w5-429 47 kendall, david b , Fixing America’s Health Care System, Progressive Policy Institute, september 2005, 48 The entire discussion of the Vha is based on several sources: “Creating a Culture of Quality: The remarkable Transformation of the department of Veterans affairs health Care system,” Annals of Internal Medicine, 141, no 4, aug 17, 2004, 316-318, www. ; asch, steven M , et al , “Comparison of Quality of Care for Patients in the Veterans health administration and Patients in a national sample,” Annals of Internal Medicine, 141, no 12, dec 21, 2004, 838-945,; Healthcare Papers: New Models for the New Healthcare, 8, no 4, 2005, published by longwoods Publishing Corp , Toronto, Canada,; evans, dwight C , w Paul nichol and Jonathan b Perlin, “effect of the Implementation of an enterprise-wide electronic health record on Productivity in the Veterans health administration,” Health Economics, Policy and Law, 1, 2006, 163-169 (published by Cambridge university Press); Perlin, Jonathan b , “Transformation of the u s Veterans health administration,” Health Economics, Policy and Law, 1, 2006, 99-105; krugman, Paul “health Care Confidential,” The New York Times, Jan 27, 2006; gaul, gilbert M , “revamped Veterans’ health Care now a Model,” The Washington Post, aug 12, 2005; Veterans health Information systems and Technology architecture, 2006 supplementary ap-

224 | Memos to the new President

49 50 51 52 53 54 55 56 57 58


plication to the Innovation in american government awards Program, april 5, 2006; and rodwin, Victor and roger kropf, “site Visit report,” prepared for Innovations in american government 2007 awards Program, ash Institute, John f kennedy school of government, harvard university, May 1, 2006 bella, et al, “Medicaid `best buys’ for 2007,” 3 Ibid , 4 Ibid Ibid wilson, will, “a Counselor’s Calling,” Governing, July 2007, 53-56 goldfield, et al , A Consumer-Driven Health Care Cost Control Agenda for Massachusetts, 12 Ibid , 4 Ibid , 14 Ibid , 10 kendall, david b , Fixing America’s Health Care System: A Progressive Plan to Cover Everyone and Restrain Costs, Progressive Policy Institute, september 2005, 10, www.ppionline. org Ibid , 11

about the authors | 225

abouT The auThors
Jim Arkedis is the director of the Progressive Policy Institute’s national security Project, where his work has focused on national security planning and budgeting; intelligence; and international politics Prior to joining PPI, he was a counterterrorism analyst at the naval Criminal Investigative service, specializing in terrorism trends, tactics, and strategies in europe, north africa, and the Middle east he writes for the PPI security blog Loranne Ausley currently serves as chair of the florida health kids Corporation and senior policy advisor for the lawton Chiles foundation she was a member of the florida house of representatives from 2000 to 2008, where she sponsored key pieces of legislation focused on improving educational and growth opportunities for florida’s children Evan Bayh, u s senator from Indiana, was elected to his second term in november 2004 senator bayh, a democrat, currently serves on five senate committees, including armed services and the select Committee on Intelligence Prior to his senate service, bayh served two terms as governor of Indiana he is a former chairman of the democratic leadership Council (dlC) Joel Berg is the author of the new book, All You Can Eat: How Hungry Is America?, published in 2008 by seven stories Press he is also executive director of the new york City Coalition against hunger before joining the Coalition in 2001, berg served for eight years in the Clinton administration in senior executive service positions at the u s department of agriculture, helping launch the ameriCorps national-service program and public-private partnerships to fight hunger Katie McMinn Campbell serves as a policy analyst for the democratic leadership Council and Progressive Policy Institute, working on a variety of domestic-policy issues she is the creator and primary author of MovingUpUSA. org, a blog focused on social mobility and poverty reduction Previously, she

226 | Memos to the new President

worked as a fellow for rep artur davis (d-ala ), assisting with education, housing, budget, and rural-poverty issues Dave Edwards is a partner at VantagePoint Venture Partners in silicon Valley Previously, he was an equity-research analyst at Morgan stanley, with a portfolio that spanned the solar, wind, efficiency, storage, and bioproducts markets Prior to that, he was a partner at Thinkequity Partners and founder of that firm’s cleantech practice edwards also served as a buy-side analyst for a hedge fund and as a partner for Charles river Ventures; worked in project finance at kenetech windpower; and was a product manager at apple Computer and Macromedia Tom Freedman is a PPI senior fellow and president of the strategic consulting firm freedman Consulting, llC he has served in government as senior adviser to the president in the Clinton white house, and as legislative director to thenrep Charles schumer (d-n y ) freedman has published opinion articles in a variety of newspapers including The New York Times, The Christian Science Monitor, and The Washington Post Edward Gresser has been director of PPI’s Trade and global Markets Project since 2001, after serving as a senior staffer for sen Max baucus (d-Mont ) from 1993 to 1998, and as policy adviser to the u s Trade representative from 1998 to 2001 he is the author of Freedom From Want: American Liberalism and the Global Economy (2007) and numerous internationally cited articles on such topics as economic relations with the Muslim world; relations with China; and asian economic integration David B. Kendall is the director of PPI’s health Priorities Project his work has explored issues ranging from health-information technology to medical-malpractice reform Prior to joining PPI in 1994, kendall worked on Capitol hill for reps Michael a andrews (d-Texas) and James r Jones (d-okla ) In 1993, he served on the President’s Task force on national health Care reform Ed Kilgore is a PPI senior fellow, as well as managing editor of The democratic strategist, an online forum he was previously vice president for policy at the democratic leadership Council; communications director for former

about the authors | 227

u s sen sam nunn (d-ga ); and a federal-state liaison for three governors of his home state of georgia Sam Krasnow is an attorney at environment northeast (ene) he is also an appointee to the governor’s efficiency advisory Council in Massachusetts and the energy efficiency and resources Management Council in rhode Island he also serves on the board of directors of the new england Clean energy Council Eugene A. Ludwig is chairman and chief executive officer of Promontory financial group and its affiliate, Promontory Interfinancial network ludwig is the former u s Comptroller of the Currency In that post, he alleviated the credit crunch in 1993; modernized bank regulation and supervision with standards that have been copied internationally; brought bank failures from hundreds a year to zero; greatly expanded the Community reinvestment act and lending to low- and moderate-income americans; brought lending discrimination suits against banks (involving dozens of suits and tens of millions of dollars in fines) for the first time in american history; and spearheaded efforts to modernize the banking industry Bill Magwood is a principal with the washington, d C , consultancy advanced energy strategies for seven years, he served as head of the u s government’s civilian nuclear-energy technology program first appointed by the Clinton administration and then maintained for a full term of the bush administration, his was the longest tenure of anyone chosen for that position during this time, he served as chairman for both the organization for economic Cooperation and development’s steering Committee on nuclear energy and the generation IV International forum he previously managed nuclear programs at the edison electric Institute and worked as a scientist with westinghouse electric Corporation Will Marshall is president of PPI after working on Capitol hill and in u s senate campaigns, he helped to launch the democratic leadership Council, where he served as policy director he was an editor of the books With All Our Might, Mandate for Change and Building the Bridge: Ten Big Ideas to Transform

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America, in addition to other offerings Marshall serves as a member of the d C Public Charter school board Jan Mazurek has directed PPI’s energy and climate work since 2001 Mazurek is an expert in greenhouse-gas market design and clean-energy technologies she has published one book with the MIT Press (2003) and co-authored a second with Johns hopkins/rff (1998) Jessica Milano is a PPI fellow and an economic and financial consultant in washington, d C she holds a master’s degree in applied economics from The Johns hopkins university and a degree in government from the london school of economics Derek K. Murrow is director of policy analysis at environment northeast, where he directs ene’s federal and northeast energy work he also serves on the board of stone environmental, where he had previously served as a director and group manager David Osborne is a senior partner of The Public strategies group he previously served as a senior adviser to Vice President al gore, helping to run the national Performance review (nPr) he was the chief author of the nPr report, called by Time “the most readable federal document in memory ” osborne is the author or co-author of five books, including Reinventing Government, a New York Times bestseller Robert C. Pozen has served as chairman of Mfs Investment Management since 2004 he is also an independent director of Medtronics and bCe (bell Canada enterprises) Pozen previously served on President bush’s Commission to strengthen social security, developing two models for closing the system’s long-term deficit, as explored in the articles “retiring on a budget,” New York Times (feb 2004), and “arm yourself for the Coming battle over social security,” Harvard Business Review (nov 2002) Mark Ribbing has served as the director of policy development at PPI since June 2007 Previously, he worked as a reporter for The Baltimore Sun and

about the authors | 229

as an aide to the mayors of new york and st louis his articles on politics and policy have appeared in numerous publications, including The Wall Street Journal, The Christian Science Monitor, and U.S. News and World Report Harvey Rishikof is professor of law and national security studies and former chair of the department of national security strategy at the national war College in washington, d C he previously served as legal counsel to the deputy director of the fbI, focusing on policies concerning national security and terrorism and acting as liaison to the office of the attorney general as dean of the roger williams university school of law, rishikof introduced courses on national security and the Constitution in association with the naval war College in newport, r I he is a former federal law clerk for the hon leonard I garth of the united states Court of appeals for the Third Circuit Doug Ross is Ceo of the university Prep schools in detroit he served previously as a Michigan state senator, commerce director of Michigan, and assistant secretary of labor in the Clinton administration Daniel L. Sosland is executive director at environment northeast, a nonprofit research and advocacy organization that he co-founded in 1999 he serves on the boards of directors of the northeast energy efficiency Partnerships and the u s Climate action network Jordan Tama is the co-author, with lee hamilton, of A Creative Tension: The Foreign Policy Roles of the President and Congress, and has published articles in Foreign Policy, The Atlantic Monthly, Asian Survey, International Affairs Review, and the LBJ Journal of Public Affairs Jordan has served as a writer and editor for the Princeton Project on national security, a special assistant to the president of the woodrow wilson Center, and a junior fellow at the Carnegie endowment for International Peace he is a fellow of the Truman national security Project Paul Weinstein Jr. is PPI’s chief operating officer and Visiting fellow at The Johns hopkins university he is a former senior white house policy advisor to President Clinton

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