The quality of care in the U.S. is spotty, despite costs vastly greater than those of any other nation. And almost 50 million Americans are uninsured.

To: President-elect Obama
From: Henry J. Aaron, The Brookings Institution
Date: January 16, 2009
Re: Reform Health Care

The Situation

The huge problems of the U.S. health care system are widely recognized: excessive spending, spotty quality, and poor access to services.

These problems are not new, nor is recognition of them. Even so, serious obstacles have frustrated past reform efforts and will confront yours: lack of ideological consensus; the size, complexity, and political clout of the health care industry; political distrust, particularly among people who are currently well insured; and geographic diversity in spending, coverage, and delivery systems. Furthermore, health reform means income redistribution–among payers and across service providers. Potential losers will fight hard, and they will have ample resources.

While these obstacles are formidable, the current financial crisis offers a unique impetus for health care reform. In comparison to the many hundreds of billions being spent to spur economic recovery, the near-term costs of achieving universal coverage—roughly $100 billion a year—now look less daunting. And legislation to reform health care provides an occasion for addressing devastating projected long-term deficits, attributable entirely to rising health care costs.

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During the presidential campaign, you presented a detailed program for reform of the financing and delivery of U.S. health care. That program included:

• health IT
• improved management of chronic and high-cost diseases
• comparative effectiveness research
• malpractice reform
• termination of excess payments for Medicare Advantage
• reforms to promote access to drugs at fair prices
• reinsurance for high-cost episodes of care
• a health insurance clearinghouse to improve access to individual coverage
• a required contribution toward the cost of employee health insurance by most companies
• financial assistance for people who cannot afford health insurance and to help small businesses meet their obligations to employees
• support for state-initiated reforms
• mandatory insurance coverage for children
• expansion of Medicaid and SCHIP

All of these ideas have merit; the crucial strategic question is whether to proceed step-by-step, or to move quickly with a large health care reform package.

Recommendations

Given the stakes, it is imperative that your health care reform effort succeed. The way the debate on health reform is framed is of utmost importance in creating public and political support. Repeating past failures of both Republican and Democratic presidents (including by Democratic presidents with congressional majorities as large as those the Democrats currently enjoy) would be devastating. Given the ongoing fiscal stimulus debate, SCHIP reauthorization, and the difficult environment for comprehensive reform, I recommend a step-by-step process to health care legislation.

That approach is not easy, nor will it be met with praise on Capitol Hill. For decades, many Democrats have regarded the achievement of universal health insurance coverage as the key step to completing the edifice of social insurance that began with enactment of the Social Security Act of 1935. The Clinton health reform effort was the last such attempt. Many members of Congress believe the edifice can now be finished.

Some would argue that focusing debate around a single piece of legislation could encompass most of the elements in your platform. Some leading members of Congress—most notably Senator Kennedy—favor this approach. It may facilitate the formation of coalitions supporting different components of the program and generate political momentum. For budget scoring, savings from particular actions (if recognized by CBO) can offset costs of other provisions, thereby reducing difficulties created by pay-go rules. One big bill may curb the effectiveness of efforts by interest groups violently opposed to particular provisions.

Disadvantages of an omnibus bill are that it will be staggeringly complex and very long. HHS Secretary-designate Tom Daschle has written that “. . . the challenge of passing a bill is directly proportional to its size.” The longer the bill, the greater the number and significance of the economic domains it will affect and the larger the number of opponents it will engender, just as the length of the 1,342-page Clinton bill became a deterrent to its passage. Those opposed to individual elements can coalesce into a wall of nay-sayers. The comprehensiveness of the bill will leave it vulnerable to allegations that it amounts to a “government takeover” of health care and expands bureaucracy. Moving a bill in Congress that contains elements overseen by several separate committees requires special arrangements that may prove problematic. Should the bill fail, its demise would blight your Administration.

A Step-by Step Approach

Fiscal Stimulus – The likelihood of quick passage of a fiscal stimulus package presents an opportunity—and a temptation—to attach health reform initiatives to a “bill that cannot fail.” An increase in the federal Medicaid match can and should provide billions of badly needed fiscal relief to the states and forestall state budget cuts that will intensify the economic slow-down. The temptation to add other health reform measures to the recovery bill should be resisted. Almost without exception, they are complex and politically divisive. Including them could slow passage of a recovery bill that should have been passed several weeks ago. Furthermore, hasty drafting risks design errors that will be hard to reverse.

SCHIP reauthorization – SCHIP expires March 31. Re-authorization is certain; its form is not. Congress is set to pass legislation similar to bills approved last year, which President Bush twice vetoed. Congress may add a few new elements, such as benefits for legal immigrant children and pregnant women and financial incentives to cover children eligible for Medicaid. This bill will pass quickly. While a strong case could be made on the merits of adding other reform features, such as coverage of parents of eligible children, such provisions could, provoke greater political resistance and can be addressed in legislation introduced later this year or next.

Additional Bills – Along with the positive steps achieved in the fiscal stimulus legislation and the SCHIP reauthorization, passage of other discrete elements of your program would constitute a watershed event in U.S. health care policy and create momentum for further advances For example:

• creation of a health insurance clearinghouse would reform the currently inefficient market for individual insurance, extend access to millions through the ability to buy into plans similar to the Federal Employees Health Benefits Program, and potentially enable workers to retain the same insurance plan if they change jobs
  
• support for an institute to conduct comparative effectiveness research—a necessary precondition to rational limits on the growth of health care spending—and to implement health information technology, which will make it much easier to manage resources more effectively and
  
• federal support of state reform efforts, can encourage states to extend coverage to millions more and to experiment with methods to improve quality and curb spending growth.

These reforms would not by themselves achieve universal coverage, end sub-standard care, or stop excessive growth of health care spending. But they would make material advances on all fronts and carry far less risk of political failure than the 'big bang' approach. They would immediately increase the number of insured Americans by about ten million and set the stage for covering millions more. And they would provide information that will eventually make cost control possible and sustainable.

In the longer run, predictable increases in health care spending mean that government will need substantially higher revenues even to sustain current commitments to Americans who are elderly, disabled, and poor. Still larger revenue increases will be needed to expand coverage, unless cost-cutting measures yield far greater savings than sober estimates now indicate. The introduction of the Medicare drug benefit, which increased the long-term fiscal gap by more than the entire projected deficit in Social Security, testifies to the risk of enacting short-term benefits without adequate attention to long-term fiscal consequences.

Strategies to boost revenues must be considered simultaneously with any responsible plan to extend coverage or reform the payment system. Options for boosting revenues include:

• an earmarked value-added tax
• increases in personal income tax rates (which should be linked to tax reforms that minimize inefficiencies and inequities)
• increased payroll taxes, and
• energy taxes.

Required Reading

• Healthy Choice: A Step-by-Step approach to Universal Health Care
  Henry J. Aaron, The New Republic, September 29, 2008
• Using Taxes to Reform Health Insurance: Pitfalls and Promises
  Henry J. Aaron and Leonard E. Burman, December 01, 2008
• Health Reform Through Tax Reform: A Primer
  Jason Furman, Project HOPE/ Health Affairs, May/June 2008
• Universal, Effective and Affordable Health Insurance: An Economic Imperative
  Jason Furman and Robert E. Rubin, Hamilton Project Discussion Paper, The Brookings Institution, July 2007
• Meeting the Challenge of Health Care Quality: Achieve Reforms in Medicare, Quality, & Malpractice
  Henry J. Aaron and Joseph P. Newhouse, Opportunity 08, February 28, 2007
• Meeting the Dilemma of Health Care Access: Extend Insurance Coverage while Controlling Costs
  Henry J. Aaron and Joseph P. Newhouse, Opportunity 08, February 28, 2007
• Slowing the Growth of Health Spending: We Need Mixed Strategies, and We Need to Start Now
  Joseph R. Antos and Alice M. Rivlin, Opportunity 08, August 15, 2007
• Concerns with Health Care Reform
  Henry J. Aaron, Senate Committee on the Budget, September 11, 2007
• An Examination of the Wyden-Bennett Health Reform Plan: Key Issues in a New Approach to Universal Coverage
  Edwin Park, Center on Budget and Policy Priorities, September 24, 2008
• An Iconoclastic View of Health Cost Containment
  Joseph P. Newhouse, Health Affairs, Supplement, 1993

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The 21st century will be defined by security threats that transcend borders, from climate change, nuclear proliferation and terrorism to conflict, poverty and economic instability.

To: President-Elect Obama
From: Carlos Pascual, The Brookings Institution
Date: January 15, 2009
Re: Restore American Leadership to Address Transnational Threats

The Situation

The 21st century will be defined by threats unconstrained by borders: the global financial crisis, nuclear proliferation, poverty, terrorism and climate change. No nation, including the United States, can confront these transnational challenges alone. To protect U.S. national security in today’s interconnected world, you and your national security team must revitalize American leadership and build international cooperation and effective partnerships.

The moment is ripe to overhaul the international system. Issues at the top of your foreign policy agenda—the global financial crisis, terrorism and conflict in the broader Middle East and South Asia, the Iranian nuclear threat, energy insecurity and the growing specter of catastrophic climate change—have highlighted global interdependence and weaknesses in the alliances and international institutions that must meet these challenges.

You will encounter soaring international expectations, but also effusive good will that provides a window of time for you to restore America’s global credibility. You will also encounter strong messages from key allies and partners that an early U.S. re-commitment to effective international cooperation, or “multilateralism,” is a top priority. Early signals of this commitment and a focus on global cooperation can extend the period of international optimism and support for your foreign policy.

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You have heralded the importance of rebuilding our alliances to meet the common challenges of the 21st century. You have repeatedly emphasized that America is strongest when it acts alongside strong partners. During your campaign, you committed to:

Talk to friends and foes: You spoke of tough, direct diplomacy without preconditions. You underscored that, if America comes to the table to work with global partners, the world will be far more likely to rally behind U.S. leadership.

Arrest Climate Change and Invest in Energy Security: By underscoring stewardship of a “planet in peril,” you have put climate change and energy security at the top of the U.S. agenda.

Expand U.S. Civilian Capacity: You committed to increase our civilian diplomatic and development capacities as essential investments to confront 21st century challenges.

Revitalize Non-Proliferation: You committed to resuscitate the Nuclear Non-Proliferation Treaty (NPT) regime of eliminating nuclear weapons, guaranteeing access to civilian nuclear power and tightening proliferation controls by ratifying the Comprehensive Test Ban Treaty, controlling fissile material and strengthening IAEA scrutiny.

Combat Global Poverty: To meet the Millennium Development Goal of cutting extreme global poverty in half by 2015, you advocated doubling our foreign assistance.

Refocus Counter-Terrorism: You recognized that defeating terrorism begins with law enforcement and intelligence, with military force a last recourse.

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The international community will look to the United States for leadership throughout the accelerated 2009 agenda—in April at the G20 economic summit and NATO summit, in May at an NPT preparatory conference, in July at the G8 summit and in December at a post-Kyoto climate conference. This requires quickly developing positions on complex issues with major domestic political implications in a complicated legislative environment. Merely coordinating policy across agencies, issues and international players will be extraordinarily difficult.

Use the UN: Deliver a major speech by mid-March outlining your international security agenda, affirming America’s commitment to international cooperation and creating a foundation for obtaining cooperation from others on critical issues. Addressing the General Assembly will signal U.S. support for the UN while fortifying your credibility on UN reform. This speech should emphasize:

• Expanding and revitalizing international institutions, including the UN Security Council and the G8, to encompass emerging powers
• Investing in poverty eradication during the global economic crisis, to assist vulnerable people in both industrialized and underdeveloped countries
• Supporting mandatory restrictions on greenhouse gases recommended by the Intergovernmental Panel on Climate Change
• Strengthening nuclear disarmament, with access to civilian nuclear power and stronger controls on proliferation
• Sharing the burdens of addressing pressing and complex global challenges with other leading nations, and
• Forging a global framework to sustain peace in the broader Middle East and South Asia.

Expand the G8: Shifting responsibility for addressing the economic crisis to the G20 reflects the reality that the G8 cannot resolve the world’s financial problems. The same is true on climate change, proliferation, transnational terrorism and international conflict. Quickly seek consensus with Italy, the G8 chair, and other major G8 players to welcome China, India, Brazil, Mexico and South Africa into negotiations. Even if, as some argue, the G20 is too unwieldy for all political issues, you can support a new “G13”—with regional observers from the EU, African Union and Arab League—equipped to craft solutions to major transnational problems.

Restructure U.S. Agencies: The Departments of State, Defense and Treasury—and the National Security Council (NSC) and Agency for International Development (AID), among others—were not structured to handle interconnected global issues. Rather than placing climate change, nuclear security, economics and terrorism into separate organizational cones, develop integrated management strategies that capitalize on ways these issues affect each other, and translate them into on-the-ground realities. For example, terrorism strategy should be translated into policies, institutions, capabilities and new practices in Pakistan and Egypt; global and bilateral agendas must intersect.

Effective management requires several enhancements:

• The NSC and National Economic Council directorates must contain the skills and expertise to coordinate diverse transnational issues.
• Counterparts of the NSC “sherpa” (the president’s lead adviser on the G8) in other agencies must coordinate policies across programs and countries.
• Within State, policy development must engage regional bureaus and embassies, including AID missions, to inject foreign realities into a global agenda.
• Although structured with a domestic focus, White House coordinating bodies on economics and climate change—issues integral to our relations with Europe, China, and others—must involve foreign policy officials.
• Congress must be persuaded that, just as we have invested in the military, now we must double the foreign affairs and foreign assistance budgets to build civilian capacities to address transnational threats to our security.

Use the G20 to Open Markets and Address Poverty: Protectionist policies aggravated the Great Depression. You will need to resist pressures for protectionism, especially due to fears of job displacement to China. There will be pressure for a cross-border carbon tax on Chinese products. That could lead to China curtailing its purchase of, or even selling, U.S. Treasuries. Europe would likely then impose a similar tax against U.S. products.

In preparing for the G20 economic summit, collaborate with British Prime Minister Brown, the World Bank, UN Development Program and non-governmental organizations to shape a stimulus package for the poor. A $50-billion initiative for the world’s poor would go far and could leverage private contributions.

Set Realistic Worldwide Expectations on Climate Change: The UN Framework Convention on Climate Change will produce an agreement in December in Copenhagen only if there is a credible U.S. commitment to restrict greenhouse gas emissions. It remains unclear if the Congress will be ready to support in 2009 legislation that will impose a price on carbon that will increase electricity prices and slow growth in carbon-intensive industries, many already hit by the recession. The worst case is for the United States to make commitments at Copenhagen that cannot pass the Senate, duplicating the Kyoto Protocol disaster. It would be better to re-gauge expectations and reset the calendar for a comprehensive agreement, making Copenhagen a stop in the journey, perhaps agreeing there on technology investments and dissemination. If expectations are to be recast, you must engage other leaders immediately to sustain international cooperation and avoid a fiasco.

Craft a Comprehensive Nuclear Agenda: Nuclear arms reductions with Russia – setting an initial target of 1,000 warheads each—are critical for global security and to get non-nuclear weapons states to cooperate on nonproliferation. Russia is an essential party to offer supplies of nuclear fuel and reprocessing of spent fuel, both critical to a possible package with Iran if it foregoes a weapons enrichment capacity. In turn, an Iran accord will set a new standard for other states seeking civilian nuclear power. The challenge then will be getting all states to accept the Comprehensive Test Ban Treaty, along with enhanced inspections and control of fissile materials used for military purposes.

Policy on nuclear security, Russia and Iran should be developed as a single package. You will need to engage personally with Russian leaders. It also would be wise to signal a willingness to engage Iran—in partnership with Britain, France, Russia, China and Germany—regardless of who wins Iran’s election in May, so that President Ahmadinejad cannot claim to hold Iran’s only key to international negotiations.

Use NATO to Consolidate Strategy on Terrorism and South Asia: A NATO failure in Afghanistan would show that the international community cannot save a fledgling democracy struggling with terrorists. Increased security must be part of the equation, but the political challenges are daunting:

• Narcotics account for two-fifths of Afghanistan’s gross domestic product and cause massive corruption, especially among the police.
• The government is discredited.
• No political strategy, beyond hits from predator drones addresses the governance void in Pakistan’s tribal areas, where the Taliban can regroup.

Your new special envoy on South Asia must work hand-in-hand with your UN and NATO representatives and advisers on Europe and South Asia to craft a comprehensive political strategy that can win approval at the NATO Summit—and ideally from the new G13, which would add China’s crucial voice to the discussion.

Conclusion

This massive agenda will move ahead relentlessly. The United States can either engage and shape it, or defensively react to events.

International polling demonstrates that others welcome American leadership—if the United States listens and abides by international rules. But, failing to cooperate could encourage other countries to take adverse unilateral actions. Quick, strategic action is imperative.

Required Reading

• Voices of America: U.S. Public Diplomacy for the 21st Century
  Kristin M. Lord, The Brookings Institution, November 2008
• Managing Global Insecurity: A Plan for Action
  Managing Global Insecurity, The Brookings Institution, November 2008
• Create a New Non-Profit to Complement Government Efforts: Mobilize the Private Sector and Make Government Smarter
  Background and Recommendations
• Winning the Right War
  Philip H. Gordon, Survival, Winter 2007-08
• Can the War on Terror be Won?
  Philip H. Gordon, Foreign Affairs, November/December 2007
• Managing Civil Violence & Regional Conflict
  Managing Global Insecurity, The Brookings Institution, May 2008
• Combating International Terrorism
  Managing Global Insecurity, The Brookings Institution, May 2008
• 7 Years to Climate Midnight
  Carlos Pascual and Strobe Talbott, The Washington Post, August 28, 2008
• Trouble Ahead for the Next U.S. President
  Strobe Talbott, Financial Times Magazine, January 04, 2008
• United Nations Reform and the U.S.
  Tuesday, February 08, 2005
  Washington, DC
• The United Nations in Iraq
  Carlos Pascual, The Brookings Institution, September 2007
• Toward a World Without Nuclear Weapons
  Ivo H. Daalder and Jan Lodal, Foreign Affairs, November/December 2008
• The Search for al Qaeda: Its Leadership, Ideology, and Future
  Bruce Riedel, September 30, 2008
• Engaging the Muslim World: A Communication Strategy to Win the War of Ideas
  Hady Amr and Peter W. Singer, Opportunity 08, 2007
• Managing Homeland Security: Develop a Threat-Based Strategy
  Jeremy Shapiro, Opportunity 08, February 28, 2007
• A Legal Framework for Detaining Terrorists: Enact a Law to End the Clash over Rights
  Benjamin Wittes and Mark H. Gitenstein, Opportunity 08, November 15, 2007
• Stemming Nuclear Proliferation: Prevent and Manage the Rise of New Nuclear Powers
  Michael E. O'Hanlon and Stephen P. Cohen, Opportunity 08, February 28, 2007
• Public Diplomacy and the New Transatlantic Agenda
  Kristin M. Lord, The Brookings Institution, August 15, 2008

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Dynamic forces are transforming the world. Increasing global competition, economic crises, and environmental and resource pressures are rewriting the rules for how America produces jobs, builds wealth, and conserves our natural heritage.

To: President-elect Obama
From: Bruce Katz and Robert Puentes, The Brookings Institution
Date: January 12, 2009
Re: Invest in Long-Term Prosperity

The Situation

The nation’s economic crisis requires attention to the principal drivers of prosperity—infrastructure, human capital and innovation. If leveraged and deployed strategically, these assets can help us achieve short-term job gains, keep pace with the increasing size and diversity of America’s population and move our nation toward durable prosperity, based on:

• productive growth that boosts innovation, generates quality jobs and rising incomes and helps the United States maintain economic leadership
• inclusive growth that expands educational and employment opportunities, reduces poverty and fosters a strong and diverse middle class, and
• sustainable growth that strengthens existing cities and communities, conserves natural resources and advances U.S. efforts to address climate change and achieve energy independence.

• Roads, transit, rail and ports speed the movement of goods and people within and across markets, facilitating greater business investment, enhancing agglomeration economies, promoting labor-market flexibility and opening new domestic and international markets.
• Improved infrastructure will assure a reliable energy supply, allowing firms to reduce operating costs, make sound long-term decisions and take full advantage of other infrastructure investments.
• Investments in infrastructure can support sustainable growth by reducing traffic congestion, linking transit to dense residential and employment nodes or supporting clean-fuel technologies.

Major infrastructure projects of the past—such as the interstate highway system in the 1950s—were associated with steep increases in productivity. This productivity has receded in recent decades as investments have lost direction and failed to focus on key areas. Without a national strategy for infrastructure, we are not experiencing the economic benefits of transformational programs like the interstates, the social benefits of iconic programs like rural electrification, or the sustainability benefits of air and water pollution control programs of the 1970s and 1980s.

In the absence of a unified strategy, special interest and congressional politics spread funding around the country like peanut butter on a slice of bread, with no effort to advance national priorities or use cost-benefit analysis to optimize our investments.

Further, current federal infrastructure policies and programs are highly compartmentalized, often working at cross-purposes. In transportation, for example, we are one of the few industrialized countries that fails to link aviation, freight rail, mass transit and passenger rail networks–a recipe for duplication and waste.

Equally disturbing is a pervasive lack of fact-gathering, analysis and performance assessment for the hundreds of billions of dollars spent. We cannot manage what we do not measure.

In sharp contrast, our global competitors provide impressive leadership. China is building the world’s most sophisticated network of ports and freight hubs. Germany is strengthening rail and telecommunication connections among major metropolitan areas and has a master plan for freight and logistics. Spain is a hothouse of wind and solar power production, spawning new specializations in finance, investment and law.

Our competitors also provide intellectual leadership. Canada, India, South Africa and Italy have specialized units throughout various government agencies to develop public-private partnerships. Germany, Britain, Denmark and others are establishing intricate webs of data, metrics, analytic tools and spatial planning techniques to base infrastructure investment decisions on facts and measure progress along clear national priorities. We need similar strategies and discipline.

Your Stance

As a candidate, you put forward a new vision for economic expansion that highlighted the role of our metropolitan areas and brought infrastructure to the forefront, with proposals to:

Strengthen America's Transportation Network: You offered several proposals to improve transportation, such as a national infrastructure and reinvestment bank to support projects that offer maximum return and leverage private financing. Your pledge to modernize our nation's antiquated air traffic control system is essential, and your support of new rail investments—passenger, freight, high-speed—is encouraging.

Invest in New Energy and Electricity: As you have said, achieving energy independence will not be easy. Investing in a smart electrical grid and renewable energy sources, retrofitting homes and other buildings and developing more livable and sustainable communities would help steer us toward independence.

Commit to a Metropolitan Strategy: As you told the U.S. Conference of Mayors last summer, issues like transportation, housing and education are inextricably linked, and they develop strength in metropolitan America. Our metropolitan areas offer more sustainable and efficient development patterns, supported by a range of transportation and infrastructure choices. In the 100 largest metropolitan areas 72 percent of seaport tonnage arrives and departs, 67 percent of interstate miles are traveled, 92 percent of air passengers board and transit miles are ridden and 93 percent of Amtrak passengers board.

Connect Rural America: Rural places do not always need the same infrastructure as densely populated urban areas, but, as you have said, they do need affordable broadband services. And better management of our nation's airwaves can help ensure enough spectrum for public safety and public health use.

The economic recovery package will direct billions of dollars towards infrastructure improvements. But, as you have said, what is most important is that “we won’t do it the old Washington way. We won’t just throw money at the problem.”

Further Recommendations

To achieve such goals as job creation and a green economy—and the even broader aims of productive, inclusive and sustainable growth—we need to reform as we invest. Getting it done right is more important than getting it done fast.

In the short term, you should ensure that infrastructure reform is part of the agenda, improve the White House policy structure on infrastructure issues and develop a national infrastructure bank. In the intermediate term, you should articulate a bold national vision on infrastructure, empower state and local governments and commit to evidence-based decisions.

Emphasize Infrastructure Reform: A crucial first step is to restrict substantial funding from the recovery package to investments that:

• secure and rebuild the system
• help transition to a clean, efficient, energy-independent future
• give some direct funding to metro areas, not just states and
• create millions of green jobs.

You should also create a National Recovery and Renewal Commission (NRRC) to oversee spending and develop a long-term strategy for infrastructure development and economic recovery.

Then your Administration should invest in coordinating and sharing information about the projects of the myriad federal agencies that construct, operate, maintain and use infrastructure. The NRRC should thoroughly examine the FY 2011 budget to make federal infrastructure spending transparent. It also should help sequence legislation on climate, energy and surface transportation.

Improve White House Organization on Infrastructure: The National Economic Council, Domestic Policy Council and Office of Management and Budget should coordinate efforts to meet infrastructure goals, and use these goals to guide spending. Climate and urban policy directors should be involved. Indeed, the principle focus of the new White House Office of Urban Policy should be on maintaining close coordination among the policy boards, relevant agencies, as well as the infrastructure commission.

Establish a National Infrastructure Bank: Permanent and independent, this bank would provide financial assistance for innovative infrastructure projects of true national significance, acting where national uniformity is needed or the scale and geographic reach of a problem requires national attention. It would give priority to public-private partnerships that stimulate market-led advances in energy efficiency and transit-oriented development.

Bank-funded projects might unblock major ports and gateways, develop a smart electric grid, modernize air traffic control, upgrade rural telecommunications and broadband networks, and improve and expand intercity passenger rail. Small-scale or local projects should be funded through an enhanced Community Development block grant program.

Present a Bold Vision: Over the intermediate term, your administration should take a rigorously strategic approach to infrastructure policymaking, taking into account globalization and the relationship of infrastructure to community-building and prosperity. It must draw from ideas of other nations and respect differences from one corner of our nation to another.

Empower States and Metropolitan Areas: The federal government needs new partnerships to promote environmental sustainability and strengthen metropolitan economies. A national Sustainability Challenge could be established to entice and fund partnerships that join housing, transportation, energy and other systems across states, localities and the private sector. Projects might cluster mixed-use facilities, build mixed-income housing close to transit stations, institute congestion pricing or extend commuter rails.

Commit to Evidence-based Decision-making: The federal government must replicate the web of data, metrics, analytic tools and spatial planning techniques deployed by other nations. This will enable us to determine how much money to spend and how to spend it better.

Conclusion

Today’s fiscally constrained environment demands a new approach to infrastructure policy, allowing us to upgrade our existing infrastructure, expand choices in moving people and goods (and ideas), ease the burden on household budgets and help us attain energy independence. Spending must produce real gains in productivity, inclusion and environmental sustainability—the foundation of short- and long-term prosperity.

Required Reading

Overview

• MetroPolicy for a MetroNation
  Jennifer Bradley, The Brookings Institution, June 2008
• MetroNation
  Alan Berube, The Brookings Institution, November 06, 2007
• MetroPolicy: Shaping a New Federal Partnership for a Metropolitan Nation
  Mark Muro, Bruce Katz, Sarah Rahman and David Warren, The Brookings Institution, June 12, 2008

Infrastructure

• Create a National Infrastructure Plan: A Unified Vision for Transportation Policy
  Background and Recommendations
• A Bridge to Somewhere: Rethinking American Transportation for the 21st Century
  Robert Puentes, The Brookings Institution, June 12, 2008
• Options for Metropolitan Transit Funding
  Robert Puentes, New York State Commission on MTA Financing, September 15, 2008
• An Economic Strategy for Investing in America's Infrastructure
  Manasi Deshpande and Douglas W. Elmendorf, Hamilton Project Strategy Paper, July 2008
• Infrastructure: Time to Compete to Win
  Lael Brainard, The Brookings Institution, July 22, 2008
• America’s Infrastructure: Ramping Up or Crashing Down
  Bruce Katz, Christopher Geissler and Robert Puentes, The Brookings Institution, January 2008
• America's Traffic Congestion Problem: Toward a Framework for National Reform
  David Lewis, Hamilton Project Discussion Paper, July 2008
• Pay-As-You-Drive Auto Insurance: A Simple Way to Reduce Driving-Related Harms and Increase Equity
  Jason E. Bordoff and Pascal J. Noel, Hamilton Project Discussion Paper, July 2008

Human Capital

• Expand the Earned Income Tax Credit: A Federal Investment in Workers
  Background and Recommendations
• Changing the Game: The Federal Role in Supporting 21st Century Educational Innovation
  Sara Mead and Andrew J. Rotherham, The Brookings Institution, October 16, 2008
• Assuring Student Achievement: Strengthen America through Education Reforms
  Hugh B. Price, Opportunity 08, 2007
• Metro Raise: Boosting the Earned Income Tax Credit to Help Metropolitan Workers and Families
  Alan Berube, David Park and Elizabeth Kneebone, The Brookings Institution, June 05, 2008
• Reforming U.S. Immigration Policy: Open New Pathways to Integration
  Audrey Singer, Opportunity 08, 2007

Innovation

• Create a National Innovation Foundation
  Background and Recommendations
• Stimulate Regional Economies
  Background and Recommendations
• Boosting Productivity, Innovation, and Growth through a National Innovation Foundation
  Robert Atkinson and Howard Wial, The Brookings Institution , April 22, 2008
• Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies
  Karen G. Mills, Elisabeth B. Reynolds and Andrew Reamer, The Brookings Institution, April 2008
• Prizes for Technological Innovation
  Thomas Kalil, A Hamilton Project Discussion Paper, December 2006

Quality of Place

• Shrinking the Carbon Footprint of Metropolitan America
  Andrea Sarzynski, Marilyn A. Brown and Frank Southworth, The Brookings Institution, May 29, 2008

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The president-elect faces enormous challenges in restoring financial stability, reviving economic growth and dealing with the shifting balance of world economic power.

To: President-elect Obama
From: Eswar Prasad, The Brookings Institution
Date: January 9, 2009
Subject: Restore Global Financial Stability

The Situation

With financial systems around the world ravaged by the global economic crisis, economic aftershocks are likely to reverberate through the end of, and perhaps beyond, 2009. Even though the crisis originated in the United States, the world is greeting your presidency with an outpouring of goodwill and hope. While grappling with enormous challenges in getting our own economy back on its feet and fixing our financial system, your administration has a singular international opportunity: America can reclaim its leadership role in the world economy—it must lead by example and embrace multilateralism.

Unilateralism is no longer a viable strategy. The world has become so interconnected—through flows of goods, capital and people—that every major country’s economic policies have worldwide effects. Many countries, especially the industrial ones, are challenged to repair their financial systems and make them more resilient. They must rethink many aspects of financial market regulation, both national and international. For emerging-market countries, the challenge is to rethink the financial development pattern and take the right lessons from the crisis.

In the short term, many countries need to rework macroeconomic policies to forestall a long and deep recession. They also face medium-term challenges, especially bringing public finances under control to deal with aging populations and other problems.

Greater cooperation among the world’s major economies would be hugely beneficial in meeting all these challenges. A cooperative approach can actually enhance America’s leadership role. While the United States needs to put its own economic house in order first, the global repercussions of domestic macroeconomic and financial policies also must be kept in mind.

You can set the tone early on in three ways:

• Take forceful actions to get the U.S. economy restarted, but in a disciplined and well thought-out fashion that jump-starts the economy now, but then tackles long-term challenges and global macroeconomic imbalances.
• Develop an approach to fixing the broken financial system that is driven by facts and careful analysis rather than ideology. This means taking the lead on keeping world trade and financial markets operating smoothly.
• Approach global economic issues and catalyze reforms of international financial institutions in a genuine spirit of multilateralism.

Your Stance

On issues of the economy and globalization, your campaign focused correctly on the needs and concerns of American workers. You advocated fair trade with foreign nations in order to strengthen the U.S. economy and create more American jobs. That was the right choice. But, as president, you will need to address the nation's economy as part of an interconnected, global set of issues.

You also advocated diplomatic action and multilateral engagement to address other pressing problems across the globe—in Asia, Africa and Latin America, as well as Europe and the Middle East. Your campaign positions establish a solid platform for effective multilateralism on economic issues as well.

Further Recommendations

National and International Financial Regulation: The crucial set of first steps consists of reforming the regulatory structure in the United States, increasing transparency and moving managerial incentives away from excessive risk-taking. Rather than rushing precipitously toward more regulation, your administration should carefully strive to strike the right balance between making government regulation more effective and improving private monitoring.

Redesign of financial regulation must respond to the reality that financial institutions now have global reach. The concept of financial regulation at a supra-national level has some merits, but it is still unclear whether any international agency can effectively coordinate cross-border regulation, especially among countries with different levels of financial development and regulatory capacity.

At any rate, it is important as a minimum to use the Bank for International Settlements (BIS) and International Monetary Fund (IMF) as forums where best practices are evaluated and disseminated. The United States should push for broadening the membership of the Financial Stability Forum to include the major emerging market economies, as proposed in the recent G-20 Communiqué.

For many emerging markets, the reform agenda includes strengthening domestic banking systems, developing “plain-vanilla” derivatives (such as currency derivatives), increasing access to the formal financial system and building up regulatory capacity. Your administration could earn much international goodwill by providing guidance and technical assistance to middle- and low-income economies on these basic aspects of financial development, rather than single-mindedly pushing for greater capital account liberalization or greater access for U.S. financial firms.

Trade: This is a perilous time for free trade, as countries focus on strengthening their own economies; already trade protectionism is rising in various guises. Indeed, actions taken by our government to prop up some U.S. industries, such as the auto industry, appear to the rest of the world as protectionist. Your administration will need a strategy to extricate government from direct involvement in these industries once the economy and financial markets settle down.

You then should take bold steps to reinvigorate trade discussions—by tackling the seemingly intractable problem of agricultural subsidies, for instance. Unilateral actions may benefit the United States itself and help bring other countries to the table to restart trade talks.

Your administration will need to make a strong argument against efforts to block foreign investments in U.S. companies without good cause. National security is a valid concern but, all too often, merely a figleaf for financial protectionism. Such efforts have created animosity among countries that wished to invest in the United States and simultaneously faced U.S. demands to open up their own markets.

Strategic Economic Dialogue (SED) with China: Relations with China should develop into a genuine partnership. The relationship can be made more productive by using the SED as a forum to address common challenges. Do not focus on the exchange rate between the U.S. dollar and the Chinese renminbi or the U.S.-China bilateral trade imbalance. Rather, use the dialogue to persuade Chinese officials that a flexible exchange rate would help make progress on their own key priorities: independent monetary policy, financial sector reforms and economic growth that is more balanced and less reliant on high levels of investment and exports.

Similar dialogues with other pivotal countries can set a tone of constructive bilateral engagement. Indeed, countries like India would welcome deeper engagement so long as the United States undertakes dialogue in a collaborative spirit rather than by presenting a list of economic demands on economic issues.

Macroeconomic Policies for the Present and Future: Creative monetary and fiscal policies are essential now to pull the economy back from the brink. The priorities you have articulated in recent speeches—increasing expenditures on infrastructure and education and revamping the health care system—will indeed improve the economy’s long-term productive potential as well. Nevertheless, the piper will someday have to be paid—government finances will have to be repaired to bring down the budget deficit and public debt. Large public deficits have kept the national savings rate very low in recent years, fueling large current account deficits.

Global macroeconomic imbalances—large current account deficits in many industrial countries, notably the United States, and corresponding surpluses in many emerging markets, notably China—were not the root cause of the financial crisis but certainly added tinder to the flames. Once the U.S. economy has begun to recover, you will need to take steps to bring government finances into balance over the medium term (as others have noted the plan matters more than a precise target date).

Reform of IMF Governance: The global economy needs a credible multilateral institution to serve as an impartial referee. The IMF is capable of providing independent critical advice on countries’ macroeconomic policies and their financial systems. Along with the BIS, it can facilitate the more efficient functioning of international financial markets. However, the IMF has been weakened by the perception that it largely follows the bidding of the United States and other advanced economies, denying the emerging markets the voice they deserve.

To strengthen the IMF’s credibility as an impartial monitor, the United States should use it to evaluate its own financial and macroeconomic policies. Your administration should also push for reforms to increase the voting shares of large emerging markets and increase the IMF’s capital base, (perhaps through additional contributions from countries with large stocks of foreign exchange reserves, in exchange for giving them more voting rights).

Conclusion

The process by which you generate and implement ideas and policies to deal with the unprecedented economic challenges of our times will determine not just America’s economic future, but also the future of the global economic, trading and financial systems. On all these fronts, America is capable of regaining its moral authority and the goodwill of the international community—if its president acts as a statesman for the world.

Required Reading

• Restore America's Global Economic Leadership
  Background and Recommendations
• Emerging Lessons from the U.S. Financial Crisis
  Eswar Prasad, Project Syndicate, September 25, 2008
• Top 10 Global Economic Challenges Facing America's 44th President
  The Brookings Institution, October 2008
• Shoring Up the Economy
  Barry P. Bosworth, October 14, 2008
• International Cooperation for the Financial Crisis
  Ralph C. Bryant, The Brookings Institution, October 02, 2008
• Can America Still Lead in the Global Economy?
  Lael Brainard and David Lipton, The Brookings Institution, August 2008
• The Financial Crisis and Emerging Markets
  M. Ayhan Kose and Eswar Prasad, The Brookings Institution, September 24, 2008
• A Brief Guide To Fixing Finance
  Martin Neil Baily and Robert E. Litan, The Brookings Institution, September 22, 2008
• Can Latin American Economies Deflect the Financial Crisis?
  Mauricio Cárdenas, The Brookings Institution, September 22, 2008
• On the Politics of Financial Meltdowns
  Raj M. Desai, The Globalist, October 08, 2008

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Peace in the Middle East remains an elusive goal and an expanding arc of Iranian influence has empowered extremists throughout the Middle East.

• inappropriate educational systems
• underperforming economies
• oppressive autocratic governments, and
• a culture that feels threatened by globalization.

Only by helping the region resolve these problems can we eliminate the threats it poses to the United States—terrorism and endemic instability that jeopardize global energy supplies and regularly ensnare the United States and the other great powers. A process of long-term reform has begun in many parts of the region, and you have an opportunity to lend it critical support by recognizing that:

• Reform must be internally driven, although externally assisted. We cannot know better than the people of the region what they want, nor should we try to impose our vision on them.
• The Arab regimes must be treated as partners in change, not adversaries. All of them understand that pressures in their societies make change inevitable, which is why they are at least making gestures toward reform.
• Gradualism is a virtue, not a sin. Moving step-by-step encourages the regimes’ acceptance of reform and allows identification of problems before they develop into crises.
• Reform efforts must be multilateral. We cannot reform the Middle East by ourselves. Many others, particularly in Europe, are willing to help. Moreover, because of the region’s rampant anti-Americanism, it may be wiser to let others take the lead.

In short, your Administration will need to adopt a long-term, comprehensive strategy toward the region’s many threats.

Further Recommendations

What is needed in the Middle East is a return to intensive, creative diplomacy. Launching three diplomatic initiatives simultaneously, while preventing Iraq and Afghanistan from descending into chaos, is a tall order, but may avoid having the Middle East force its way onto your agenda in even more problematic ways and will leave you with more support at home and abroad for necessary alternatives should your efforts fail.

Iraq: Oil-rich Iraq’s long-term stability remains a vital U.S. interest. Everything else your Administration seeks to accomplish in the Middle East will require Iraq’s stability. Return to civil war—still a real possibility—will undermine all American initiatives and could exacerbate the global economic crisis by sparking another oil shock.

The U.S. troop “surge,” changes in strategy and tactics, the “Anbar Awakening” and other factors have dramatically improved the war’s trajectory since the beginning of 2007. However, problems still abound, especially Iraq’s dysfunctional politics. Sectarian alliances have collapsed, and individual parties now regularly form alliances across ethnic and sectarian lines. But this fluidity carries great risk, and several dangerous scenarios are emerging, including the potential for Prime Minister Maliki or someone else to try to make himself dictator, for Iraq’s rebuilt military to mount a coup, or for militia parties to subvert the political process to gain dominance. Your leadership will be needed to help guide Iraqi political development toward equilibrium and avoid a slide back into civil war.

Consequently, the American role—particularly the military’s role—in Iraq remains as important as ever. During the next two to three years, you will need American forces to:

• prevent the Shi’a-dominated government from suppressing minorities or political rivals
• ensure that Iraq’s 2009 elections (provincial in January, municipal in spring, and parliamentary in winter) are fair and free
• help new, more secular and inclusive political parties secure roles in governing Iraq, and
• reassure all former fighters that they will not be attacked by government or other forces.

None of this need preclude a drawdown of American forces, as codified in our new Status of Forces Agreement (SOFA) with Iraq. However, it will mean calibrating the drawdown’s pace. If current trends continue, shifting four brigades to Afghanistan in 2009 should be feasible, unless new problems emerge in Iraq. As much as our forces in Afghanistan need reinforcement, our mission in Iraq is far more consequential.

Iran: Iran eventually may prove the most important and vexing problem your Administration faces. Iran is uncomfortably close to being able to produce the fissile material for nuclear weapons if it chose to do so. While Tehran’s intentions remain ambiguous, all of its neighbors will assume the worst and act accordingly: Israel may take preventive action; Arab states may compete to develop their own nuclear options. Meanwhile Iran’s prestige and influence remain high throughout the region, where its promotion of violence and challenge to Israel and the Arab states has greater appeal than the American-led effort to promote reform and peaceful resolution of conflicts.

Iran’s economy is reeling from corruption, mismanagement, low oil prices and international sanctions. Unemployment and inflation, both in the 25-30 percent range, have caused widespread public outrage. As a result, nearly all of Iran’s leaders recently have indicated willingness to talk with the United States. But are they actually willing to make concessions on their nuclear program, support for terrorism and efforts to subvert regional stability?

Your decision to try to engage Iran is appropriate but needs to be part of a larger strategy. Your goal should be to convince Iran to desist from problematic behavior in return for U.S., Western and international agreement on a package of incentives: to lift sanctions, provide economic assistance, address Iran’s understandable security concerns and accept Iran as a player with legitimate interests in the Middle East.

The terms of the package should be made public, so the Iranian people can see that it is an attractive offer. All available public opinion data indicate that the Iranian people are far more interested in their economy than in their nuclear program, suggesting popular support for such an offer. The more the regime believes that the people will support the deal, the more likely it is to accept it.

It is late in the day to pull off this breakthrough. Still, a bona fide effort to engage Iran can also serve as a “best shot” for securing international support for much harsher sanctions if necessary. As the Bush Administration demonstrated, a unified West can impose painful sanctions on Iran without Russia and China, but the harshest sanctions will require their support. Persuading Russia to support our vital interests will require that you be prepared to take Russian interests elsewhere into account. You should be ready to agree to put on hold plans for missile defense in Europe or to slow NATO expansion, if necessary. Moscow and Beijing will not be serious about harsher sanctions as long as Japan and many European nations drag their feet, so you will need to secure a much stronger Western consensus than now exists.

Tenacity will be important. The Iranians probably will not have reached consensus about accepting a negotiated settlement before sitting down at the table with us. Some Iranian leaders will doubtless see talks as a useful ploy to delay sanctions and buy time for their nuclear program. Those who favor a negotiated resolution will probably hope to use the fact of the talks themselves to advance their position in Tehran. Even under the best circumstances, dealing with Tehran is going to be a difficult, drawn-out process. The Iranians will feel a sense of urgency only if the United States comes to the table as the leader of a united international community.

The Israeli-Palestinian Conflict: Promoting a comprehensive end to the Arab-Israeli conflict is essential to an integrated Middle East strategy and would enhance America’s credibility in the region and increase pressure on Iran.

You will enter office with a Gaza crisis demanding immediate attention. While the fighting there underscores difficulties in resolving the Israeli-Palestinian conflict, it may present an opportunity to jump-start your diplomacy. Israel prefers to avoid an all-out invasion of Gaza that would generate high casualties on both sides, subject it to international condemnation and undermine Palestinian and Arab moderates. Hamas would prefer to avoid losing control of Gaza. By offering a sustainable ceasefire that ends rocket attacks on Israel, leads to Israeli troop withdrawals from Gaza, prevents smuggling of weapons into Gaza and includes international monitoring of the flow of goods and people, you may be able to convince both sides to de-escalate. A ceasefire in Gaza might also create pressures on Hamas to reconcile their differences with Fatah, enabling Palestinian President Mahmoud Abbas to speak again for all Palestinians.

Success in Gaza could serve as a springboard for a diplomatic initiative to resolve the larger conflict, where it is urgent to try for a two-state solution while it remains feasible. Intractable issues, divisions on both sides, and the questionable ability of the Palestinian Authority make a sustainable peace agreement unlikely for now. But these factors – and the conflict in Gaza – argues for an approach that lays the foundation for future success by improving Palestinian security forces, strengthening the West Bank economy and halting Israeli settlement activity there while resuming the final status negotiations initiated last year.

The Arab states will urge you to take this initiative. You should expect them to play a critical role in bolstering Palestinian moderates and promoting Palestinian unity. They should also be encouraged to convince Israelis of the prospect of a 23-state solution, with every Arab state recognizing Israel.

Syria First?: Pursuing peace between Israel and Syria might hold out the best prospects for early success, because both sides seek a deal and Turkish mediators laid the groundwork last year. Such an agreement would reduce the likelihood of a larger conflict and reduce Iran’s influence. It also would strengthen moderates in the region, put pressure on Hezbollah and Hamas and provide pan-Arab cover for Palestinian compromises with Israel. It also might encourage Iran to take more seriously your offer of engagement, out of concern that, far from dominating the region, it might be left behind.

In other words, you should work for a package deal in which the achievement of peace will produce Syria’s strategic realignment. However, if you make this the focus of your peacemaking strategy the Syrians, like their Iranian allies, will play for time. So, instead of “Syria first,” you should invoke a “Syria also” approach, simultaneously pursuing normalized relations with Iran, a two-state solution to the Palestinian problem and Israeli-Syrian peace. This will create synergies across the board.

Required Reading

• Restoring the Balance: A Middle East Strategy for the Next President
  Richard N. Haass and Martin S. Indyk, November 01, 2008
• How to Leave a Stable Iraq
  Stephen Biddle, Michael E. O'Hanlon and Kenneth M. Pollack, Foreign Affairs, September/October 2008
• Innocent Abroad: An Intimate History of American Peace Diplomacy in the Middle East
  
• Does the Palestinian-Israeli Conflict Still Matter?
  Shibley Telhami, The Brookings Institution, June 2008
• The Changing Nature of State Sponsorship of Terrorism
  Daniel L. Byman, Saban Center Analysis Paper, May 2008
• Iraq Index
  
• Middle East: A Path Out of the Desert
  Kenneth M. Pollack, washingtonpost.com, July 29, 2008
• Back to Balancing in the Middle East: A New Strategy for Constructive Engagement
  Martin S. Indyk and Tamara Cofman Wittes, Opportunity 08, 2007
• Countering Iran's Revolutionary Challenge: A Strategy for the Next Phase
  Peter W. Rodman, Opportunity 08, 2007
• Waning Chances for Stability in Iraq: Navigating Bad Options in Iraq
  Carlos Pascual and Kenneth M. Pollack, Opportunity 08, 2007
• Diplomatic Strategies for Dealing with Iran
  Suzanne Maloney, Center for a New American Security, September 2008
• The Looming Crisis: Displacement and Security in Iraq
  Elizabeth Ferris, The Brookings Institution, August 2008

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Seven years after the 9/11 attacks, the border region between Pakistan and Afghanistan remains the front line in the war on terror.

The Situation

You inherit a dangerous crisis in South Asia. The war in Afghanistan is not being won. Al Qa’eda has built a stronghold in the mountains between Pakistan and Afghanistan. The November attacks in Mumbai painfully show the serious threat of jihadist terrorism. As a result of those attacks, tensions are running high between India and Pakistan, two nuclear-armed countries that have fought four wars.

Your administration will need to deal urgently with many interrelated dimensions of the crisis:

• The Taliban insurgency in Afghanistan is becoming stronger and has succeeded in creating an atmosphere of great insecurity. In much of Afghanistan’s south and increasingly in its east, government officials, international advisers and even local district chiefs do not dare travel outside provincial capitals without military escort.
• In many locales the insecurity has brought economic development to a standstill. Afghanistan is one of the poorest countries in the world; lawful economic opportunities remain meager for many, and only international aid saves millions of people from dire food crisis.
• Poppy cultivation and the drug trade are burgeoning, providing resources for the insurgency and fueling government corruption.
• The Afghan people are questioning the performances of the government of President Hamid Karzai and the international community. The people are deeply troubled by the growing insecurity, the weakness and corruption of the government, the rise in criminality and the lack of rule of law.
• Across the border in Pakistan, the Taliban and Al Qa’eda enjoy safe havens and have integrated themselves into a complex web of jihadist groups. Despite some of these groups’ long-standing links to the Pakistani intelligence services, they increasingly threaten the security of Pakistan itself.
• Pakistan is a fragile and failing state with weak civilian leadership, reflecting a long history of military coups and ineffective governance, and a collapsed economy.
• The current tensions between India and Pakistan easily could escalate into a proxy war in Kashmir or Afghanistan, if not into a direct military confrontation. Highly dangerous in itself, an escalation would—as before—divert Pakistan’s military resources away from its border with Afghanistan and weaken the government’s resolve to take on the jihadist groups.

Despite the grave situation, there are several promising opportunities:

• The Mumbai attacks underscore, for Congress and the general public, the strategic importance of the region and the need for broad, multilateral and coordinated efforts against terrorism in South Asia and globally. There is now a general recognition in the United States that the war in Afghanistan is not going well and needs an infusion of resources and a new strategy.
• Our NATO allies and countries in the region are looking to your administration for leadership and a new direction in Afghanistan. They also look to you to spur multilateral engagement with Pakistan.
• The Afghan people are similarly turning to your administration to help reverse the disturbing trends in their country. Despite their current dissatisfaction, the people as a whole have not embraced the Taliban. They still want an Afghanistan free of oppressive armed groups, warlords and criminals and capable of satisfying their fundamental economic needs.
• Although weak and facing multiple internal challenges, the Pakistani civilian leadership of President Asif Ali Zardari has repeatedly indicated its willingness to reach accommodation with India and counter the terrorist threats facing both countries.

Your Stance

During the campaign, you identified the resurgence of Al Qa’eda and the Taliban in Pakistan and Afghanistan as the greatest single threat to U.S. security. You repeatedly promised to refocus attention and resources on the region by:

• Increasing troop levels in Afghanistan. Three more American brigades have been authorized already. Reductions in troop deployments to Iraq will permit further increases in Afghanistan.
• Seeking a similar contribution from our allies. Your political capital and a new focus on Afghanistan will enable you to show how the allies can contribute to success in the region in a productive, sustained way.
• Pressing the Afghan government to meet more of the needs of its population and tackle corruption and the opium trade. Your administration’s increased engagement can help convince the Kabul government to take resolute action against corruption, including drug trafficking, and improve governance, especially if our contributions are backed by additional technical assistance from other countries. It is equally necessary to find ways to strengthen provincial and district governments.
• Increase nonmilitary aid to Pakistan while holding it accountable for disrupting Taliban safe havens and providing security along the border with Afghanistan. The Biden-Lugar bill that would commit $15 billion in development aid to Pakistan over 10 years provides a vehicle for assistance. While beefing up economic assistance, you need to stress to Pakistan that jihadist terrorism now threatens its own security and that combating terrorism is in its own national interest.

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In addition to implementing your campaign proposals, you should broaden your efforts in South Asia, demonstrating further your vision and resolve.

Security in Pakistan: You should continue counterinsurgency aid and training for the Pakistani military, enhanced with careful monitoring of the flow of dollars. Although U.S. military action against high-level jihadists in the Federally Administered Tribal Areas may sometimes be warranted, such strikes should be undertaken with great care to avoid civilian casualties.

Security in Afghanistan: It is necessary to increase troop levels in Afghanistan. In addition to obtaining greater deployment of NATO troops, you should continue efforts to enlarge the Afghan National Army, which ultimately must hold responsibility for the country’s security. Swift reform of the Afghan National Police, now widely seen as corrupt and incompetent, is also necessary, as is strengthening the Afghan judicial system. These institutions need to focus on delivering the essential rule of law to the population.

Although earning the confidence of Afghan tribal leaders is important, the tribes are unprepared to assume a military role in the counterinsurgency. Fractious, fundamentally weak and caught up in local disputes, they have a poor record in fighting the Taliban. Similarly, strategic negotiations with the Taliban hold little promise of success. Although a mechanism for demobilizing individual fighters and small splinter groups would be highly beneficial, the Taliban leadership has repeatedly shown a lack of interest in any outcome short of NATO withdrawal.

Socio-Economic Development and the Drug Trade: Socio-economic development is critical for Afghanistan’s future, for sustaining any gains in security and for achieving progress in counter-narcotics. It should lead to improvements in infrastructure, irrigation and micro-credit and to the creation of value-added chains and employment. And, it should be directed to high-value, labor-intensive crops as well as to off-farm income, such as from textiles. Targeting high-level drug traffickers in Afghanistan is essential. Eradication of poppy crops should focus on areas where there are enough lawful economic activities to offer a viable alternative.

Development efforts should be imbedded in a regional economic framework that also helps develop Pakistan’s border areas.

Donor Coordination: Lack of coordination among the Afghan government and the international actors hampers both security and development. While several initiatives have been undertaken to improve coordination, they have proved insufficient so far. Your administration can help build organizational structures to streamline program management and make greater use of existing mechanisms.

Public Awareness Campaign: Many development projects have improved the lives of the Afghan people; roads and wells have been built. Yet, inundated with Taliban propaganda, the Afghan people appear mostly unaware of these successes. In Pakistan, the United States—rather than Al Qa’eda and Tehrik-i-Taliban Pakistan—is blamed for the violence that is ravaging the country. To win local support, the administration should craft and sufficiently fund an effective public awareness campaign.

Regional Framework: Unfortunately, the Mumbai attacks are likely to derail any rapprochement between India and Pakistan, including over Kashmir. Yet, it is critical that your administration help the two countries deescalate the current tensions and avoid a military confrontation or a proxy war. While urging Pakistan to cooperate more fully in counterterrorism efforts, the administration should engage India in a direct and robust relationship. However tragic and destabilizing, the Mumbai attacks can inject an important sense of urgency into regional stakeholder deliberations, by showing that terrorism in any form cannot be tolerated and that a platform for multilateral engagement must be constructed. Besides Afghanistan, Pakistan and India, engagement should also include Europe and our other important allies in Afghanistan, as well as China, Russia, Iran and Saudi Arabia.

Conclusion

You may wish to consider outlining your overall strategy toward South Asia in your Inaugural address, when Americans and leaders across the globe will be listening carefully. The upcoming NATO summit in April 2009 will provide another important opportunity to roll out a new policy for the region.

Success is vital. A complete state failure in Pakistan would generate a grave and severe crisis, as would any serious military confrontation between India and Pakistan. Across the border in Afghanistan, failure against the Taliban would indicate how limited the United States and the international community can be in helping countries achieve security and development. The world is looking to you for leadership in reversing dangerous trends and building a security framework in a vital region.

Required Reading

• Pakistan and Terror: The Eye of the Storm
  Bruce Riedel, Annals of the American Academy of Political and Social Science, July 2008
• Expand the U.S. Agenda toward Pakistan
  Bruce Riedel, Opportunity 08, May 06, 2008
• Terrorist Safe Havens in Pakistan
  Bruce Riedel, The American Academy of Political and Social Science, September 10, 2008
• Opium Licensing in Afghanistan: Its Desirability and Feasibility
  Vanda Felbab-Brown, The Brookings Institution, August 2007
• The Poppy Problem
  Vanda Felbab-Brown, Washingtonpost.com, September 21, 2007
• NATO: Enlargement and Effectiveness
  Philip H. Gordon, Senate Foreign Relations Committee, March 11, 2008
• Pakistan's Second Last Chance
  Stephen P. Cohen, Asian Journal of Public Affairs, Summer 2008
• The U.S.-Pakistan Strategic Relationship and Nuclear Safety/Security
  Stephen P. Cohen, Senate Committee on Homeland Security and Government Affairs, June 12, 2008

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With the financial crisis sounding emergency alarms, the president-elect must immediately assert leadership in developing a second stimulus plan and in overseeing how the Treasury Department implements the Emergency Economic Stabilization Act of 2008.

To: President-elect Obama
From: Martin Neil Baily, The Brookings Institution
Date: December 11, 2008
Re: Rebuild Financial Institutions and Confidence

The Situation

The economic crisis facing the nation as you take office is more challenging than the set of economic conditions facing any President since World War II. Today, the U.S. economy is in recession and expected to experience further declines in employment and production over the next several quarters. The financial problems that originated in the United States have now spread to Europe and Japan, and many emerging market economies are also hard-hit. It falls to you, at the beginning of your Administration, to mitigate the ongoing recession, restore confidence in the U.S. financial system and lead the world economy back from the brink.

Your Stance

During the campaign you spoke forcefully about the need for immediate assistance for homeowners, not a bailout for irresponsible mortgage lenders. Your specific recommendations – including modifying the terms of mortgages, further assurances for credit to banks and additional asset purchases – were all substantively correct and well received.

Washington’s messy response to the financial crisis has left most taxpayers feeling exploited. Even more important, the underlying problem has not yet been solved, and the financial sector is still very weak. The key tasks now are to show what is being done to resolve the crisis, explain why it is being
done and develop a strategy that will be followed resolutely—not an easy job given the complexity of the problems.

Recommendations

Beyond passage of an immediate stimulus package there is much to be done to rebuild both the financial markets themselves and confidence in those markets.

Dealing with the Financial Meltdown: Overall, the Federal Reserve gets a very good grade for its handling of the crisis. You should reiterate your support for Chairman Ben Bernanke, because it is essential that he stay on the job at least until the worst of the crisis is past.

The Treasury response has been more of hit and miss. It is possible that the $700 billion designated for the economic rescue package will not provide enough funding to deal with the problems that have developed in the large global banks. Some analysts are saying that the amount eventually needed will top $1 trillion. Whatever the number, you must lay out a clear plan to Congress for how to spend the second $350 billion that the current Treasury team has not yet requested. Or, if necessary, you must make the case for an even larger allocation of funds. Restoring the solvency and liquidity of the financial sector is essential to getting the economy back on its feet.

The TARP strategy also was aimed at increasing price transparency in the market for bank assets, partly to stabilize the equity prices of financial institutions. The par or book value of mortgage-related assets is now well above their real worth, given their likely default rates. However, the fire-sale price for these assets, if institutions were forced to sell them quickly, is too low. So what is the right, Goldilocks price that stands between these two numbers and represents their underlying economic or hold-to-maturity, value?

To arrive at the right number and provide stability, there may be ways of leveraging TARP funds, together with liquidity provided by the Fed, to provide back-up liquidity to buyers of distressed mortgage securities. The Federal Reserve Board is approving such an approach for providing liquidity for securities backed by auto loans and possibly other consumer loans. Some variation on this strategy could be used for real estate, both residential and commercial, to increase the volume of trading of these securities and narrow uncertainties about their value. Another way to provide clearer valuations is to commission independent experts to estimate the values of the distressed securities.

The Treasury now says that it is willing to inject equity capital into a wide range of non-banking institutions: insurers, finance companies and financial affiliates of commercial companies. To qualify, however, non-banks must own a bank or thrift institution. In response, some insurance companies are looking around for small thrifts to buy in order to access the capital—which seems a dubious way to run things. It would be better to develop criteria specifying which non-bank financial institutions may access government funds and when government aid will stop.

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A few large banks commendably have modified mortgages on their own, realizing that this is less costly than foreclosure. But the hard job is to persuade entities servicing mortgages held in securitized pools to act similarly. Contracts governing these servicers generally prohibit them from modifying mortgages without the approval of a super-majority of the securities holders, which can be difficult to achieve.

FDIC Chair Sheila Bair’s proposal to have the TARP fund bear half the loss of any mortgage modification might not prove very effective. Reportedly, some of the borrowers of IndyMac (the failed thrift that the FDIC is now operating in conservatorship) whose loans were modified have already re-defaulted. Trying to keep people in homes they really cannot afford is going to fail.

The best approach to stabilizing the housing market may be to lower the mortgage interest rate. Regardless of the mechanism used to help borrowers facing foreclosure, government must find cost-effective ways of bringing overall mortgage rates down, especially for borrowers who qualify for conforming loans from Fannie or Freddie (or for loans of lower amounts, such as those insured by FHA). Lower interest rates increase the value of houses and thus, more than any other measure, could put a floor under housing prices. This would change consumer psychology and start the economy’s healing process.

According to the Freddie Mac survey, the average interest rate on a 30-year fixed rate conformable mortgage in the week of November 20, 2008, was 6.08 percent with 0.7 percent points. In the same week, the benchmark 10-year Treasury bond rate was below 3.2 percent. This low Treasury interest rate has not translated into lower rates on conforming mortgages because, in part, the spread between the yield on Fannie and Freddie bonds and Treasuries has widened, as Fannie and Freddie investors are still demanding a substantial risk premium to hold their bonds.

To get mortgage interest rates down closer to the Treasury rate, Congress should explicitly enable the Treasury to guarantee current GSE bondholders against default and include in the guaranty all those who purchase GSE bonds during the next 18 months. Making clear that this debt is guaranteed could bring down interest rates on conforming mortgages by at least a percentage point and provide a needed positive jolt to the housing market.

Further Recommendations: Facing the Fiscal Challenge

The past eight years of federal deficits have caused the national debt to soar. Even more important, however, is the aging population. Social Security faces substantial shortfalls in the future as benefit payouts start to exceed tax receipts, and Medicare and Medicaid will swallow the federal budget unless something drastic is done to control their growth.

Congress and the Bush Administration are adding $1 trillion or more to the federal debt. Some fraction of this may be paid off, as the assets the Treasury is buying generate returns, but taxpayers certainly will face increased interest payments as a result of the support given to the financial sector.

In addition, you are suggesting a very large stimulus package, perhaps in the range of $600 billion over two years, along with tax relief for most Americans, added infrastructure spending, investments in new energy technologies, broader health insurance coverage, and aid for states and localities.

Granted, a substantial stimulus package should be passed quickly to halt the current economic freefall. But the question of long-run fiscal stability also must be addressed.

Historically, to raise money, the Treasury issues debt and sells much of it abroad. As a nation, we have borrowed enough overseas to finance federal budget deficits and then borrowed even more to pay for the consumption binge of recent years. That is not going to change quickly; undoubtedly, we will continue to borrow huge amounts from China, Japan, oil producers and Europeans over the next few years. However, there is a limit to the sustainability of this strategy. The United States cannot go on running bigger and bigger deficits and borrowing ever-increasing amounts from the rest of the world.

The foreign borrowing so far has been done on terms favorable to the United States. But, the rate of interest we pay will start to rise over time, unless we have a credible plan for fiscal stability.

Your Administration can provide markets with a powerful signal of long-run fiscal prudence by including as part of any short-run stimulus a set of declining long-run targets for future structural budget deficits, as a percentage of GDP. (The structural deficit adjusts for the impact of cyclical ups and downs). You can submit a realistic budget plan to Congress each year that is consistent with the long-run targets. Any congressional changes to the budget should be on a PAYGO basis. Emergency appropriations (hurricanes and such) must trigger a readjustment of either future spending or taxes. It is not absolutely essential that the federal budget be balanced four years from now, but it is vital that good budget targets are set and maintained.

Conclusion

Without a commitment to long-run fiscal soundness, there is significant risk that investors here and abroad will lose confidence in the nation’s ability to manage its financial affairs. Should that happen, the U.S. government and the private sector will have to pay much higher interest rates on any debt issued, threatening the economic recovery in the short run and our economic growth over the long run. That risk we must not take.

Required Reading

• Learning from the Economic Mess
  Alice M. Rivlin, House Committee on Financial Services, October 21, 2008
• Ideas for a Second Stimulus
  Martin Neil Baily, House Committee on the Budget, October 20, 2008
• Main Street Needs a New Stimulus
  Martin Neil Baily, Real Clear Politics, October 21, 2008
• Monetary Policy and the State of the Economy
  Alice M. Rivlin, House Committee on Financial Services, February 26, 2008
• A Brief Guide To Fixing Finance
  Martin Neil Baily and Robert E. Litan, The Brookings Institution, September 22, 2008
• Making the Rescue Package Work: Asset and Equity Purchases
  Martin Neil Baily and Robert E. Litan, The Brookings Institution, October 10, 2008
• If, When, How: A Primer on Fiscal Stimulus
  Douglas W. Elmendorf and Jason Furman, The Brookings Institution, January 10, 2008

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The fight against global poverty has become a fight for global security.

The Status Report: Obama's Commitment to Global Development

"Global development efforts must be fundamentally improved. Doing so will address American values and interests by reducing global poverty, supporting the emergence of more capable partners and mitigating transnational threats."

Read more of Noam Unger's update on this memo »

Your Stance

Your commitment to embrace the Millennium Development Goals and make them America’s goals is a useful point of departure for renewed global cooperation on development. Additionally, you are now positioned to follow through on additional global development commitments you have made. They include: 

• Eliminating the global education deficit, in part by establishing a global education fund and enacting the Education for All Act. 
• Connecting our efforts to confront climate change with our strategy to alleviate global poverty. 
• Creating a new fund for Small and Medium Enterprise in partnership with the private sector and applying that fund in support of your goal to end all malaria deaths by 2015. 
• Continuing a strong U.S. role in the fight against HIV/AIDS, tuberculosis and malaria while increasing U.S. contributions to the Global Fund and leading a collaborative multi-stakeholder effort to improve health infrastructure in developing countries. 
• Spurring research and innovation to bolster agricultural productivity and markets in poor countries. 
• Reforming governance of the IMF and World Bank.

Your pledge to lead foreign assistance reforms is a fundamental cross-cutting issue and demands your sustained attention. It offers the chance for bipartisan support, since the platforms of both political parties called for foreign aid reforms and strengthened international development policies.

The sound investments you have proposed must be backed up by resources. Your support for increasing foreign assistance is particularly important since it a small part of the budget, but a part that is key to our global engagement and security. As the financial crisis unfolds, the world will be watching to see whether the United States fulfills its international commitments to poverty reduction. Now, in the face of global economic adversity, is precisely the time to honor our commitments in a way that motivates other donors and reinforces the critical message that in a globalized world, what happens in poor countries matters to the United States more than ever.



Recommendations

To reach the goals you laid out during the campaign, your policy must follow four broad principles.

Renew international cooperation. The United States cannot act alone or with a narrow band of “like-minded” governments. As you have articulated, the new American role is to bring the world together as you bring America together, to advance our “common security by investing in our common humanity.” Our approach to developing countries must be driven by a new thrust of American leadership toward international cooperation and coordination.

Ensure that the substance of U.S. foreign assistance echoes the priorities of the American people. The United States led the effort to redefine international development cooperation from an exclusive focus on economic policy and what came to be a doctrinaire commitment to market liberalization to the multi-sectoral approach embodied in the Millennium Development Goals. The Millennium Development Goals are aspirational goals tied to themes – healthy lives, educational opportunity, gender equality and economically and environmentally sustainable livelihoods – that resonate with people everywhere. The goals are also operational realities with specific, quantifiable targets, which virtually all nations are committed to meeting by 2015.

But in the past eight years, the United States has fudged its commitment by footnoting communiqués, foot dragging in inter-governmental conferences, and faking alignment with the MDGs by simply naming its new initiative the “Millennium” Challenge Account while not aligning its programs and policies with the MDGs. You can redefine America’s role with a commitment to these aspirational and operational goals. And you must prioritize consultation with Congress to build support for U.S. development cooperation, and bring our efforts more in line with those of nearly all large donor nations.

Mobilize American generosity and goodwill. You can redefine the idea of our government programs to mobilize and amplify the already generous efforts and instincts of the American people. Individual donations from the United States to the developing world have increased to roughly $26 billion a year, exceeding official development assistance. More than 50,000 Americans volunteer their time overseas each year. Our official development assistance efforts ought to leverage these private initiatives, and infuse U.S. foreign assistance programs with a wider array of Americans with special skills and talents to provide greater technical and professional capacities. Simply put, Americans want to help, and your government can lead the way.

Your administration can create platforms and flexible funding mechanisms within the U.S. foreign assistance apparatus to encourage collaboration among key stakeholders, including major philanthropists, high-profile advocates, multinational corporations and especially a vocal and energized public working through grassroots and faith-based networks.

Use every tool available, and coordinate internal efforts. Development cooperation with poor countries in concert with other donors does not exclusively pivot around aid. Reduction in trade barriers can stimulate exports that generate jobs, incomes and financial flows equivalent to and often more effective than aid flows. Debt reduction is a form of aid. Attracting capital flows, as emerging market economies demonstrate, replaces aid. We need policy coherence across these varied instruments to ensure that our efforts work positively in developing countries, rather than potentially working at cross-purposes. Many industrial countries use their ministers of development cooperation as a focal point for assessing policy coherence and for orchestrating and coordinating government efforts across departments and agencies. The U.S. government has no such focal point.

Further Recommendations

Elevate development to a cabinet-level department. Your administration has the promise and potential to provide the next great, seminal moment for America’s leadership in the world, along the lines of the immediate post-World War II period of international institutional innovation and the Kennedy years of inspiring overseas engagement. To redefine America’s role in the world, you will need to seize opportunities to call for and construct a new era of international cooperation.

Specifically, you will need a leader in your administration to meet the day-to-day policy challenges required to forge a new era of development cooperation and craft global development strategy. By focusing on the “4 C’s,” this official would lead coordination efforts with other international development actors, forge coherence among United States policies and instruments that affect the developing world, build the necessary capacity to effectively address 21st century development challenges and engage in close consultation with Congress and the broader community of key stakeholders inside and outside of government.

Therefore, the single most important move you can make is to appoint a widely recognized and respected American at the helm of a new cabinet-level Department for Global Development. As one of three pillars in the broadly accepted “3D” national security troika of defense, diplomacy and development, the last of the three should be elevated to equal standing, not just in rhetoric but in reality. Most other donor governments have ministers of development cooperation. We do not. More importantly, the profile of development in the American public mind is often overshadowed by short-term diplomacy or the urgency of defense requirements. Congress thinks of development as aid rather than as international cooperation.

Fusing the four strategic responsibilities of international coordination, policy coherence, capacity building and political and strategic consultation on global development matters will provide focus and momentum. Success requires a cabinet-level profile to credibly communicate that the United States is serious about ushering in a new era of international cooperation.

Without cabinet status, voice and volume cannot compensate for the lower-level profile accorded to development issues. Without independent standing apart from the State Department, our long-term investments in poverty alleviation, conflict prevention and democratization will continue to suffer from subordination to short-term political objectives. Without unified leadership accountable for our assistance to developing countries, our efforts will continue to be plagued by bureaucratic fragmentation and our investments will yield underwhelming impacts. By setting the vision and ultimately appointing an outstanding American as your Secretary for Global Development, you will give convincing evidence that “America is back” and ready to become a leader and a partner in a new era of international cooperation to address the major challenges of the 21st century.

Required Reading

• U.S. Foreign Assistance: Reform to Lead in the 21st Century
  Lael Brainard and Noam Unger, Los Angeles Times, June 16, 2008
• Top 10 Global Economic Challenges Facing America's 44th President
  The Brookings Institution, October 2008
• Global Development 2.0: Can Philanthropists, the Public, and the Poor Make Poverty History?
  Lael Brainard and Derek Chollet, August 01, 2008
• U.S. Foreign Assistance: Reinventing Aid for the 21st Century
  Lael Brainard, House Subcommittee on State, Foreign Operations, and Related Programs, January 23, 2008
• Foreign Assistance: Reform Now for Smart Power
  Lael Brainard, The Brookings Institution, July 30, 2007
• Foreign Assistance Reform: Then, Now and Around the Bend
  Noam Unger, InterAction's Monday Developments, July 2007
• Foreign Assistance Reform: Successes, Failures, and Next Steps
  Lael Brainard, Senate Committee on Foreign Relations, June 12, 2007
• Executive Recommendations by the Brookings-CSIS Task Force for Transforming Foreign Assistance for the 21st Century
  Lael Brainard, The Brookings Institution, Fall 2006
• Security by Other Means: Foreign Assistance, Global Poverty, and American Leadership
  Lael Brainard, February 01, 2006

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A new administration presents an ideal opportunity to reshape the nation’s tax code. Improving the equity, simplicity and efficiency of the tax system will help to better prepare taxpayers, businesses and the economy for the challenges that lay ahead.

The Status Report: Obama and the Tax System

"President Obama took office faced with a declining economy on the verge of collapse, a crisis that appropriately overrode many other policy concerns. His administration responded aggressively with a stimulus package that contained spending increases and tax cuts that were large, diversified and relatively prolonged over time. "

Read more of William Gale's and Benjamin Harris's update to their memo »

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To: President-elect Obama
From: William Gale and Benjamin Harris
Date: December 4, 2008
Re: Fix the Tax System

The Situation

Given the nation's economic slowdown and financial crisis, and the inevitable increase in the deficit that will result from efforts to address these problems, tax policy will feature prominently over the next four years. This offers an enormous opportunity to achieve your goals in health care and energy policy; to make taxes simpler and fairer; and to restore fiscal balance in the long run.

In the short term, taxes might play a role in the broad stimulus and economic restructuring package you have identified as an immediate priority upon taking office. However, direct investment in infrastructure, aid to states, an extension of unemployment benefits, and measures to stabilize the housing market should take precedence.

• Investments in U.S. infrastructure should be a crucial part of the stimulus package, since "shovel-ready projects" can immediately put federal funds to work and bolster U.S. competitiveness and environmental sustainability.

• The federal government should provide additional aid to hard-pressed states to help fund Medicaid and general budget expenditures. Because states have balanced-budget rules that require spending cutbacks when revenues fall, federal aid is sure to be spent.

• A significant part of the stimulus package should address the declining housing market and reduce foreclosures.

Your Stance

During the campaign you promised broad-based tax relief to middle class families, tax breaks for small businesses and companies that create jobs in America, the restoration of fairness to our tax code and a return to fiscal responsibility. The underlying tax system needs repair of both chronic and urgent problems. Almost all of the tax cuts enacted since 2001 are slated to expire at the end of 2010. The alternative minimum tax (AMT) threatens to grow out of control. And over the long term, the nation faces a fiscal gap so large it will require both tax increases and spending reductions.

Your ability to reform the energy and the health care sectors, two of your highest priorities, also depends on creation of rational and effective tax rules.

Recommendations

Besides the stimulus package, three distinct opportunities exist to move tax legislation through Congress: the need to reform how our nation produces and consumes energy, challenges to the provision of health care and the expiration of the Bush tax cuts in 2010.

Energy: The nation's long-term challenges related to energy production and consumption require bold solutions. Government simply must make it more expensive to use and emit carbon by either a direct tax on carbon emissions or a "cap and trade" system, with the government selling "permits to pollute." The two approaches are economically equivalent and would produce wide-ranging benefits: the societal cost of producing and consuming carbon would be included in the price of goods like gasoline and electricity; energy security would rise; environmental damage would decline; and federal revenues would increase. Senator McCain supported the cap-and-trade mechanism during the presidential campaign, and many members of both parties continue to support it, making this reform an increasingly politically-feasible option.

A carbon tax or a "cap-and-trade" system would provide significant incentives for development of alternative energy sources and would render unnecessary the existing panoply of targeted energy subsidies.

Health: Health care reform presents a variety of complex issues. By far the most significant tax issue is the employer deduction for employee health insurance premiums. Allowing such a large part of employee compensation to be deductible leads to gold-plated health insurance policies, gives a larger benefit to high-income taxpayers, and leads to billions of lost tax revenue every year, while disadvantaging families without employer-based coverage. Reform options include:

• capping the deduction on employer benefits, which would mitigate, but not resolve, some of these problems;
• converting the deduction into a fixed refundable credit for the employer; or,
• converting the deduction into a fixed, refundable credit for individual workers.

The third reform was supported by Senator McCain and consequently may provide the basis for discussion of bi-partisan reforms of the health care system.

Long-Term Fiscal Balance: Since 1962, federal tax revenues have averaged about 20 percent of GDP. Under current projections, federal spending is projected to rise gradually and to reach about 27 percent of GDP by 2030, fueled mainly by increased spending for Social Security, Medicare and Medicaid. Unless Congress and your Administration are willing to make draconian cuts in these entitlement programs, the budget will require tax reforms that generate revenues well above 20 percent of GDP in the next decade.

Sensible structural reforms would combine the fiscal responsibility and progressivity of the Clinton years — without the complexities of targeted subsidies — and the lower marginal tax rates of the Bush years. In addition to fulfilling your campaign pledge to provide tax relief to middle-class families, reforms would give attention to revenue levels, the growth of the AMT, and loopholes in the taxation of capital income. Such a system could be created by reducing and restructuring tax expenditures in order to broaden the tax base and using the increased revenues to hold rates down and eliminate the AMT.

Addressing this issue in a timely manner is important, but the legislation can be delayed until the economy is back on track.

Saving and Capital Income: The taxation of capital income — the return from saving — in the current system is, in plain terms, a mess. Capital income is taxed at greatly different rates depending on the type of investment, how it is deployed, the type of financing, and so on. Taxpayers use these conflicting rules to their advantage, leading some analysts to conclude that the country collects little if any net revenue from capital income taxes. The solution is to tax all capital income once and only once at the full income tax rate. Reforming this part of the system would require your Administration to address several issues simultaneously.

• First, integrate corporate and individual capital taxation only for income stemming from new corporate investment. There is no reason to give tax breaks on income from old investments; those tax breaks amount to windfall gains.

• Second, remove individual-level taxation of corporate dividends and capital gains (on new investments) only if the corporation has paid the full tax on the income. To the extent it has not, corporate dividends and capital gains should be taxed at the full individual rate, not capped at 15 percent.

• Third, strengthen efforts to eliminate corporate tax shelters. This could include both increased enforcement as well as altered accounting procedures that require more conformity between income reported to shareholders (book income) and income reported to the IRS (taxable income).

• Fourth, engage in a wholesale attack on corporate subsidies — for example, subsidies directed towards the agriculture, mining, oil, and timber industries.

Additionally, the tax code needs to be restructured to encourage more Americans to save and to equalize the tax benefits of savings for low- and middle-income taxpayers:

• First, your Administration should require every firm (with possible exceptions for the smallest businesses or those who do not use electronic payroll services) to enroll new workers automatically (with opt-out provisions) in a traditional defined-benefit retirement plan, a 401(k), or an IRA. Businesses also should be required to set various default features of the plans to promote saving, although workers could always override those defaults.

• Second, you should support legislation that replaces current tax deductions for retirement savings with a new program of universal, 30 percent matching contributions from the government for qualified household deposits to 401(k)s and IRAs. Currently, low-income households enjoy much weaker immediate incentives to contribute than do high-income households. This policy would shift incentives markedly, but cost the Treasury the same as existing tax deductions.

Rationalize Deductions, Exclusions and Credits: The tax system subsidizes scores of economic activities through a variety of deductions, exemptions, exclusions and credits. Broadly speaking, many deductions and exemptions should be transformed to credits to give taxpayers of different income levels equal benefit. In addition, credits aimed at meeting social policy objectives should be refundable, so that they provide benefits to the households who need the funds most.

The best solution would address each of the current deduction categories directly. Charitable contributions should be fully deductible; this preserves the largest incentive for giving for the highest-income households, and also ensures that those who give away all of their income would not owe tax. After the housing crisis passes, the mortgage interest deduction should be converted to a refundable first-time homebuyers' tax credit. This would generate revenue, would improve homeownership rates and would eliminate incentives to buy ever-bigger houses with ever-bigger mortgages. Deductions for state and local taxes could be eliminated as part of AMT reform; if the AMT is allowed to grow as it will under current law, few taxpayers will be eligible for the state and local deduction, anyway.

Simplify Taxes and Improve Administration: Every year the U.S. tax system becomes more complex. As a prime example of potential simplification, the IRS could implement a "return-free" system — which exists in dozens of countries — giving taxpayers the option of receiving pre-completed tax forms from the IRS that require only their verification. Return-free filing could be achieved for as many as 50 million taxpayers with relatively minor changes in the tax code.

The number of households that could avoid filing would be further increased and other simplifications would occur if the personal exemption, child credit, and earned income credit were consolidated and if the standard deduction were increased. Increasing the standard deduction by the value of a personal exemption and reducing the number of personal exemptions by one would raise revenue and would reduce the number of taxpayers who must itemize. Similarly, education subsidies and retirement saving programs could be consolidated and streamlined.

An intelligent reform plan also must equip the IRS with the resources to enforce and administer the tax system. Many taxpayers simply do not pay what they owe. Providing the IRS with additional resources for enforcement generally would boost revenues and produce a fairer distribution of the tax burden.

Fortifying the tax system, as suggested here, is essential to securing the economic gains that need to be made for our country's short, medium, and long-term future.

Required Reading

• Individual Taxpayers and Federal Tax Reform
  William G. Gale, Senate Finance Committee, May 13, 2008
• The Tax System: Too Complex, Unfair and Outdated
  William G. Gale, The Sacramento Bee, May 15, 2008
• Metro Raise: Boosting the Earned Income Tax Credit to Help Metropolitan Workers and Families
  Alan Berube, David Park and Elizabeth Kneebone, The Brookings Institution, June 05, 2008
• Facing the Music: The Fiscal Outlook at the End of the Bush Administration
  Alan J. Auerbach, Jason Furman and William G. Gale, The Brookings Institution, May 08, 2008
• Fixing the Tax System: Support Fairer, Simpler, and More Adequate Taxation
  William G. Gale, Opportunity 08, February 28, 2007
• Back from the Grave: Revenue and Distributional Effects of Reforming the Federal Estate Tax
  Leonard E. Burman, Katherine Lim and Jeff Rohaly, Tax Policy Center, October 20, 2008
• An Updated Analysis of the 2008 Presidential Candidates’ Tax Plans: Revised August 15, 2008
  Leonard E. Burman and others, Tax Policy Center, September 12, 2008
• The Expanding Reach of the Individual Alternative Minimum Tax
  Leonard E. Burman, William G. Gale and Jeffrey Rohaly, Tax Policy Center, May 2005
• Achieving Progressive Tax Reform in an Increasingly Global Economy
  Jason Bordoff, Jason Furman and Lawrence H. Summers, Hamilton Project Strategy Paper, The Brookings Institution, June 2007
• An Economic Strategy to Address Climate Change and Promote Energy Security
  Jason Furman, Jason E. Bordoff , Manasi A. Deshpande and Pascal Noel , Hamilton Project Strategy Paper, October 2007

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Too many Americans leave school with inadequate skills, and too many working families struggle to make ends meet.

The Status Report: Obama’s Commitment to Creating Opportunity

Isabel Sawhill and Ron Haskins update this memo and give President Obama a composite score of B-, applauding his fast action to create more opportunity in the recession but questioning the sustainability of the measures to help families. Sawhill commends Obama for initiating sound social policy, including attempts to curb teen pregnancy. Haskins raises concerns about balancing new policy with long-term budget constraints.

Read more of Ron Haskins's and Isabel Sawhill's update to this memo »

The Situation

Throughout the campaign you spoke about the problems of poverty and the need to increase educational and economic opportunities for all Americans. There are many who expect you to develop and support a set of anti-poverty initiatives in your first several years in office. A deepening recession will only increase concern about these issues; the number of Americans in poverty will almost surely increase this year and next.

You are well acquainted with many of the key aspects of this problem:

• Based on official statistics, over 37 million Americans—one in eight—live in families with income below the official U.S. poverty level. This poverty rate has changed little in recent years. Poverty rates are particularly high among single mothers and their children, people of color and recent immigrants.

• While low family income creates serious economic stresses, poverty is most challenging when low-income families face a host of closely related problems, including poor local schools, inadequate health care, unsafe neighborhoods and limited employment opportunities.

• Long-term poverty is most damaging, particularly among children, and occurs most frequently in high-poverty urban and rural areas.

• The way most Americans escape poverty is through work, yet many families with working adults are still poor because of low skills, low wages or unstable employment.

Your efforts in this area should focus on three major goals:

• Incentivizing and supporting low-wage workers. There is ongoing and bipartisan political support for assistance to low-skilled working adults and their families; you should capitalize on this.

• Ensuring an effective safety net. Not all adults can or should be expected to work, particularly the elderly or those with serious physical or mental disabilities. And not all able-bodied adults can find jobs in a high-unemployment economy.

• Creating opportunities in high-poverty neighborhoods. Low employment, limited public services, low school completion and housing problems (such as high rates of foreclosure) create cumulative problems in high-poverty urban and rural communities.

If you are effective in these three areas, you will also be effective at perhaps the most important cross-cutting need: improving opportunities for children. To reduce poverty rates in the long run, we have to ensure that today’s poor children have greater opportunities than their parents—or grandparents.

Your Stance

You put many good policy ideas on the table during your campaign; now the current economic concerns and the long-term budget deficit problems require that you establish priorities for action. Here are suggested high priorities for early action from among the policies you discussed in the campaign, corresponding to the three goals mentioned above:

• Incentivizing and supporting low-wage workers – Enact an expanded Earned Income Tax Credit (EITC) for low-wage workers without children: Currently, only working parents who live with their children can receive a large EITC. But labor force participation rates are falling among less-skilled men (particularly men of color), many of whom do not live with their children but have child support obligations. We need to “make work pay” for all low-wage workers in low-income families. This initiative could generate bipartisan support and produce a major political win early in your administration.

• Ensuring an effective safety net – Reform the Unemployment Insurance (UI) system: Temporarily extending UI benefits for the long-term unemployed in this recession is part of the proposed stimulus package that you support. Rising unemployment rates can also provide political impetus for the broader UI reforms you’ve proposed. Only a little more than one-third of workers currently receive support from UI when they lose their jobs. Because states are partners in the design and funding of the UI system, this agenda will take close collaboration with governors and some financial sweeteners to get states as well as the private sector to agree that more people need UI coverage.

• Creating opportunities in high-poverty neighborhoods – Promise Neighborhoods and Internet connections: You have committed to creating 20 Promise Neighborhoods, each providing a full network of services—such as early childhood education, violence prevention, and after-school programs—with coordinated efforts at urban reform. This is an excellent way to test these ideas, but please build in a serious evaluation of these efforts so that we learn something about what works. You’ve also committed to expanding Internet connectivity in low-income neighborhoods, both rural and urban. Bringing the Internet to communities is important both symbolically and substantively, just like the rural electrification projects of the last century.

Two broad major policy areas where you have committed to pursue reforms are also highly important to low-income Americans:

• Educational reform: You have repeatedly emphasized the need for more comprehensive preschool education, for better K-12 schools, and for funding that allows all Americans to plan for schooling beyond high school. In the long run, these may be the most important anti-poverty initiatives you create.

• Health care reform: A long-term viable funding plan for Medicaid and Medicare will assure health care to poor families and the elderly; more comprehensive reform that provides coverage to the many workers who are not covered by their employers will make low-wage jobs more attractive and will improve health and productivity.

Further Recommendations

In addition to your campaign proposals, here are some additional items to include in your near-term list of priorities:

• Re-establish an effective safety net for mothers and children. The welfare reforms of the 1990s went too far in shrinking the safety net for families with children. An increasing number of single mothers, particularly those who face barriers that make it difficult to hold full-time stable jobs, are not receiving badly needed cash public assistance. It’s time to rethink the rules by which the Temporary Assistance to Needy Families block grant is distributed. Particularly in the current economic environment, states need additional funds to help difficult-to-serve populations who can’t readily find work.

• Assist high-foreclosure neighborhoods. As you deal with the mortgage and housing problems, it is particularly important to focus on neighborhoods with a high foreclosure rate, where homeowners with no personal financial problems have seen the value of their homes plummet. As you assist mortgage-holders, you should give particularly high priority to houses in these neighborhoods. Work to keep families in their homes or encourage banks to expedite resale and re-occupancy. In some neighborhoods with too many empty houses, it may be attractive to offer a “homesteading” option to allow a family to buy an empty house at a low price and do their own repairs.

• Modernize poverty measurement. Our current poverty measurement statistic is inadequate, based on 1950s data and 1960s methodology. It’s time to ask the Census Bureau to produce and publish a modern poverty statistic, which will provide a much better sense of who is poor in America and the trends in poverty over time. Legislation on this will be introduced in the House and Senate in the new term. The Administration should move out front on this issue and make it happen. Best of all, this move requires good statistical judgment but is low-budget.

• In the current recession, think about options to provide special funding for the unemployed to pursue additional training. Too many Americans lack a high school degree or any post-high school training. Some will call for you to fund public works jobs in the face of rising unemployment. There are reasons to support some job creation programs, especially for disadvantaged youth. But it would be even better if these youth had an incentive to complete high school or pursue additional training. Similarly, extended UI benefits could include special funds available to those willing to build their skills for the next job.

As President, you are in a unique position to use the bully pulpit to keep problems of poor Americans on the agenda. Coming from the south side of Chicago, you are particularly well suited to bring together a broad coalition of leaders and experts concerned about poverty. You can talk credibly about the values of personal responsibility, marriage and family cohesion, and work effort, complementing policies to strengthen the safety net and support low-income working Americans.

Many of these initiatives cut across several Cabinet-level departments and other agencies. You need a “Poverty Czar,” someone in the White House who’s charged with coordinating anti-poverty policy and who has authority to bring together all of the players on these issues and produce an ongoing policy agenda.

Finally, you’ll consider following the lead of Tony Blair, who made poverty reduction a major goal of his government. Several organizations are pushing the “Half in Ten” campaign, an effort to cut poverty in half in the next 10 years. More conservatively, “Half in Twenty” still would get people’s attention. After releasing a new poverty statistic one year into your administration, you’ll have a new baseline from which to launch this goal. This is a goal we can meet, if there is the political will and interest to try.

Required Reading

• Reversal of Fortune: A New Look at Concentrated Poverty in the 2000s
  Elizabeth Kneebone and Alan Berube, The Brookings Institution, August 08, 2008
• Why the United States Needs an Improved Measure of Poverty
  Rebecca M. Blank, Subcommittee on Income Security and Family Support of the House Committee on Ways and Means , July 17, 2008
• How Can We Reduce the Rising Number of American Families Living in Poverty?
  Rebecca M. Blank, Joint Economic Committee, September 25, 2008
• A Plan for Reducing Poverty
  Ron Haskins, Charles Stewart Mott Foundation Project, August 2008
• Fulfilling the Commitment: Summary of Principles and Recommendations for Reforming Federal Student Aid
  The Report from the Rethinking Student Aid Study Group, College Board, September 2008
• Attacking Poverty and Inequality: Reinvigorate the Fight for Greater Opportunity
  Isabel V. Sawhill and Ron Haskins, Opportunity 08, February 28, 2007
• High Priority Poverty Reduction Strategies for the Next Decade
  Rebecca M. Blank, Charles Stewart Mott Foundation Project, August 2008
• Low-Income Families and Communities
  Alan Berube, August 12, 2008
• Urban and Regional Policy and Its Effects: Vol. I
  Margery Austin Turner, Howard Wial and Hal Wolman, June 01, 2008
• Employment-Based Tax Credits for Low-Skilled Workers
  John Karl Scholz, Hamilton Project Discussion Paper, December 2007
• Success By Ten: Intervening Early, Often, and Effectively in the Education of Young Children
  Isabel V. Sawhill and Jens Ludwig, Hamilton Project Discussion Paper, The Brookings Institution, February 2007

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Both presidential candidates repeatedly listed energy security and climate change as a top priority—second only perhaps to addressing the economic crisis.

The Status Report: Obama and Energy Security

"President Obama and his team deserve an “A” for their engagement at Copenhagen. He moved away from the cumbersome UN treaty protocol process, and in the direction of a General Agreement to Reduce Emissions."

"The first action taken by President Obama was to make significant investments in the new “green” economy through the American Recovery and Reinvestment Act, which provided billions of dollars for energy efficiency, renewable energy, electricity and transportation infrastructure improvements"

Read William Antholis's and Charles Ebinger's update on their memo »

The Situation

Building a secure energy future—including heading off catastrophic climate change—was a top campaign priority, second only to meeting the ongoing global economic crisis. Successfully addressing both issues simultaneously will require determination, bipartisan leadership and political courage.

Despite competing priorities, we recommend that energy be a cornerstone of your first term, and that you push for domestic energy legislation before moving forward aggressively with global diplomacy. Your inaugural address can lay out this agenda, and introduce the “Energy Security and Climate Protection Act of 2009” to expand on your campaign proposals in low-cost, high-impact ways. This approach would address two separate but complementary challenges:

• First, in the medium term, the legislation will expand on your pledges to stimulate investment in alternative energy sources and energy infrastructure, by also emphasizing energy-efficient transportation systems, particularly through a federal-state partnership.
• Second, over time, it will expand on your proposals to slash greenhouse gas emissions, by also launching a global diplomatic energy security campaign and revamping our domestic energy policy institutions.

To accomplish all of this, you will need to invest significant political capital, but this surely is a battle worth fighting.

Your Stance, and Further Recommendations

Your support for reducing greenhouse gas emissions by 80 percent by 2050—and for a cap-and-trade system—set the stage for a new approach to climate change and energy security. Now a more detailed work plan is needed.

Medium-term: Slash Oil Dependence and “Green” our Infrastructure in a Decade. Short-term energy markets are impossible to predict or control. Indeed, the recent energy price roller-coaster has dramatically shifted the terrain of policy debates. Members of Congress will pressure you to keep energy prices low and will question whether we can afford investments in new technologies at a time of economic belt-tightening.

We recommend that you argue that we cannot depend on price declines or be held hostage to price volatility. Reliance on a single commodity for 70 percent of our transportation remains an economic and geopolitical risk that will only get worse when economic growth resumes. Reducing oil dependence will take time. And broader investment in green infrastructure should support this goal. For at least the next 20 years the vast proportion of our transportation fleet will remain dependent on petroleum-based fuels. But we must start now.

• Renewable energy and conservation: As you proposed in the campaign, switching our transportation fleet to renewable liquid fuels and linking our cars to the electricity grid transfers energy costs to more reliable and predictably priced sources. However, because the start-up costs are high, it has been hard to know whether alternatives can compete with oil. Your policies can begin to eliminate this uncertainty. As you laid out in the campaign, the nation can switch half of the auto fleet to plug-in hybrid electric vehicles by 2025, cutting oil consumption by one-third and carbon emissions dramatically. We also can eliminate the carbon footprint further by switching to cellulosic bio-fuels (such as ethanol made from products other than corn).

Conservation also is critical, and you should follow through on your campaign pledge to double automobiles’ fuel efficiency. You can go further by promoting similar conservation in trucks and airplanes and emphasizing mass transit and commercial rail.

• Federal-state partnership on energy infrastructure and standards: Your campaign pledges to ramp up energy efficiency and expand renewable energy can be best accomplished if you launch a new partnership with state governments, which spend half of all infrastructure funds, most notably on public transportation and smart-growth infrastructure. The variation in state policies—and their climate footprints—is extraordinary. For example, states set standards on air and water pollution, which should be harmonized so that industry does not confront 50 different standards.

The federal government also should provide funding and work with states to meet your campaign pledge to set standards for a “smart electric grid.” Likewise, coordination with the states is necessary to establish a national renewable portfolio standard (requiring utilities to use renewable energy sources to provide a specified minimum, such as 10 or 20 percent, of all electricity they deliver), as well as to set limits on offshore oil and gas drilling to protect the environment.

Long-term: Comprehensive Transformation of our Carbon Economy. Cutting CO₂ emissions by 80 percent by 2050 requires establishing a “price signal,” which will allow industries to plan and will encourage markets to develop in a way that eliminates or captures emissions as efficiently as possible. This system must have several components:

• Domestic cap-and-trade; invest in coal and nuclear. We recommend you implement an economy-wide cap-and-trade program, as you pledged in your campaign. Each year the government will either allocate emissions rights or auction them, and companies will buy and sell rights among themselves. Annual emission allowances will decrease over time—eventually cutting total emissions by 80 percent—with responsibilities shared among oil refineries, power plants and energy-intensive industries.

You have supported auctioning permits, as opposed to allocating them, as more efficient and less subject to political distortions. To control inadvertent stringency or laxity in the cap, you also should consider supporting the “banking” and “borrowing” of emissions permits.

Last summer cap-and-trade legislation failed in the Senate, with many Democrats from both coal-producing and coal-dependent states opposed. The coming recession will hit those states particularly hard, making these key votes even tougher to obtain. You can clear this political hurdle in three ways that build on your campaign promises:

• First, explicitly commit to use a portion of the auction revenue to pay for your medium-term alternative energy investments.
• Second, launch a 20-year R&D initiative to prove that carbon capture and storage technologies are viable and can be provided at reasonable cost. Coal is abundant, indispensable and—if carbon emissions continue unabated—devastating for the earth’s climate. More than half of our electricity comes from coal, and over 200 years’ worth of coal reserves lie within our borders. .
• Third, we recommend that you work domestically and internationally to license and build the next generation of nuclear reactors. Industry should develop a plan of action to raise the contribution of atomic power to 35 percent by 2050. Industry and regulators together must guarantee public safety on nuclear waste storage, and your diplomacy is needed to ensure that expansion of civilian nuclear power is both environmentally safe and strategically secure.

• International: global energy diplomacy built on domestic action. Once domestic legislation is passed—but not before then—you will be in a position to negotiate a General Agreement to Reduce Emissions (GARE). Replacing the Kyoto Protocol with a “general agreement” will take advantage of lessons learned in successful trade negotiations. For example, the process must start with domestic U.S. action and then ratchet upwards, in sync with other nations. It would be particularly helpful if Congress grants you “Climate Protection Authority” – also patterned on “Trade Promotion Authority.” Once so empowered, you and your negotiators can work with other nations to align mutual ambitions in cutting carbon emissions and establishing a system to trade emissions permits across borders.

The GARE will avoid another major drawback of a “treaty protocol”: it does not need a two-thirds majority in the Senate, a minefield where countless treaties go to die. It requires only simple majorities in both houses.

Ask Congress for a resolution supporting a broader energy security diplomatic campaign that addresses a range of energy security issues. This would include convening of a special “E8” summit, bringing together the top eight energy consumers and contributors to the climate crisis: the United States, European Union, China, Russia, India, Japan, Brazil and South Korea.

This campaign should put a special emphasis on an international collaborative effort to address coal, which has the potential to transform the climate debate worldwide. This should include making good on the U.S. promise to contribute to the new Clean Technology Fund at the World Bank – an effort spearheaded by Secretary Paulson, and which likely would be well received in the developing world. A new coal-fired electricity facility is added in China every week, and the economies of India, Pakistan, Indonesia, South Africa and Poland depend on coal. The United States must both lead and cooperate.

One-on-one energy diplomacy will be vital with China and India, in particular. Neither bears any responsibility under Kyoto, and both are reluctant to take on new obligations. They must come to see their own interest in building a more reliable and environmentally sustainable energy future. Both also must become critical partners in confronting nuclear renegades, such as Iran and North Korea.

Even with dramatic oil-price declines, powerful oil-rich nations (such as Russia and Saudi Arabia), as well as hostile regimes (such as Venezuela and Iran), must be central in your thinking about the broader energy security challenge. The fall in oil revenue will pose major problems for the stability of the entire group of oil-rich states, even if it does not affect their outward taunts and behavior. It is in our country’s interest and theirs to begin to work toward ensuring “stability of oil demand” in exchange for “stability of oil supply.”

• Reorganizing Government. A new era in energy policy will require a thorough going overhaul of our governing institutions.
  
  At the White House, a new National Energy and Climate Council, patterned on either the successful National Security Council or National Economic Council models, will dramatically signal the urgency of these issues. This will require a redesign of the 10 energy-related Cabinet agencies and corresponding committees of Congress.

Specifically, the Department of Energy (DOE), Department of the Interior and Environmental Protection Agency will need to be redesigned to:

• advance the clean energy investments you have proposed
• reorder policy priorities towards energy efficiency, and
• develop less intensively carbon-based fuels and end-use technologies.

In particular, you will also have to determine whether DOE, EPA, Treasury, or a new SEC-type agency should establish and operate the domestic emissions trading system. Given the oversight shortcomings that contributed to the recent financial crisis, any new market must be well regulated.

• 7 Years to Climate Midnight
  Carlos Pascual and Strobe Talbott, The Washington Post, August 28, 2008
• Drilling Our Way to the Future
  Bryan K. Mignone, The Hill, September 24, 2008
• China’s Energy Policies and Their Environmental Impacts
  Erica S. Downs, U.S.-China Economic & Security Review Commission, August 13, 2008
• Preventing the Tragedy of the CO2 Commons: Exploring China’s Growth and the International Climate Framework
  Warwick J. McKibbin, Peter J. Wilcoxen and Wing Thye Woo, The Brookings Institution, July 2008
• Exploring China’s Growth and the International Climate Framework
  Warwick J. McKibbin, Peter J. Wilcoxen and Wing Thye Woo, The Brookings Institution, July 2008
• Five “Gs”: Lessons for Governing Global Climate from World Trade
  William Antholis, conference paper for Climate Change, Trade and Competitiveness, June 9, 2008
• An Economic Strategy to Address Climate Change and Promote Energy Security
  Jason Furman, Jason E. Bordoff , Manasi A. Deshpande and Pascal Noel , Hamilton Project Strategy Paper, October 2007
• An Equitable Tax Reform to Address Global Climate Change
  Gilbert E. Metcalf, Hamilton Project Discussion Paper, October 2007
• A U.S. Cap-and-Trade System to Address Global Climate Change
  Robert N. Stavins, Hamilton Project Discussion Paper, October 2007
• Building a Secure Energy Future: A Challenge for New Presidential Leadership
  Jonathan Elkind, Opportunity 08, 2007
• Ending Oil Dependence: Protecting National Security, the Environment and the Economy
  David B. Sandalow, Opportunity 08, 2007
• Freedom from Oil: How the Next President Can End the United States' Oil Addiction
  David B. Sandalow, September 13, 2007
• Tackling Trade and Climate Change: Leadership on the Home Front of Foreign Policy
  Strobe Talbott and William J. Antholis, Opportunity 08, 2007
• Diving in the Deep End: Help Water Agencies Address Climate Change
  Patricia Mulroy, Opportunity 08, February 07, 2008
• Balancing Climate Change and Global Development
  Lael Brainard and Nigel Purvis, The Brookings Institution, August 2008
• Shrinking the Carbon Footprint of Metropolitan America
  Andrea Sarzynski, Marilyn A. Brown and Frank Southworth, The Brookings Institution, May 29, 2008
• Climate Change, Trade and Competitiveness: Is a Collision Inevitable?
  Monday, June 9, 2008
  Washington, DC

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Winning an election in a polarized nation is one thing—governing it is quite another.

The Status Report: Assessing Obama's Leadership

"Three days after Barack Obama won the historic election last fall, I urged him in this memo to make sure that his party’s control of the Senate and House of Representatives did not encourage complacency within his new administration. I further recommended that he temper expectations. His chances of success would be greatest, I wrote, if he stayed focused and recognized from the outset what could be realistically accomplished in four years."

Read more of Darrell West's update on his memo »

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The Situation

Now that you have been elected president, the hard work of governance begins. You hold strong majorities in the Senate and House, but you must make sure that your party’s control of the federal government does not encourage complacency within your administration. In 1993-94, Democrats controlled both the presidency and Congress, yet Bill Clinton was unable to win a single vote on health care reform, the centerpiece of his domestic agenda. Republicans proved to be strong and committed adversaries and Democrats never united behind his major policy goals. Earlier, President Carter had a similar experience with even larger majorities in Congress.

In the weeks ahead, you face several important tasks. You must:

• unify the country
• staff your administration
• identify your priorities
• address immediate and crucial policy challenges, and
• fix our political system.

All these imperatives require leadership, coalition-building, implementation and communications.

As you expect, intractable forces—political, institutional and media-related—will complicate your best efforts over the next four years. The big Democratic victories in 2006 and 2008 hardly spell the end to political polarization in the United States. Voters remain cynical about politicians. Reporters will cover every development as combat, rather than part of a deliberative process. You will find both public and media discourse to be edgy, opinionated and sometimes unfair.

Many observers believe that the effectiveness of our political system in making tough decisions—especially those that would impose short-term costs in exchange for long-term benefits—has deteriorated greatly in recent years. Good examples are the recurring stalemates over climate change, trade, immigration, health care and Social Security. The current state of the economy virtually guarantees you will encounter difficulties delivering on your key promises.

Before you entered politics, you were a law school professor; now yours is the biggest classroom of all. Take advantage of the “teachable moment” of a new presidency to inform people what America needs to do to regain the right track. With more than four in five citizens believing the country is headed in the wrong direction and public trust in government at an all-time low, defusing public skepticism and overcoming institutional obstacles will be a major challenge.

Your Stance

With respect to governance, you’ve often said you want to introduce a new bipartisan tone and change the Washington culture (described by Ronald Brownstein of the National Journal as “the second civil war”). You have already signaled this approach by reaching out to Warren Buffet for economic advice and to Senator Lugar for foreign policy counsel. And you will no doubt appoint Republicans to important Cabinet and sub-Cabinet positions. The real test of your commitment, however, will be your initial legislative forays.

The need to deal immediately with the financial meltdown and likely recession provide an opportunity to launch your administration with the support of both parties. The widespread agreement that steps must be taken to stabilize the financial markets, design a new financial regulatory system and adopt measures limiting the depth of recession allows you to engage Republicans in serious deliberations at the outset. Moreover, the enlarged Democratic majorities in the House and Senate give you and congressional leaders the flexibility to build broad coalitions in support of these measures.

These initial steps can be followed with a series of legislative proposals that naturally attract support across party lines, including public funding of stem-cell research, expansion of the State Children’s Health Insurance Program and new subsidies for renewable fuel research and development. The point is to start with legislative proposals that avoid reigniting bitter partisan battles. As you proceed to address your highest priorities—such as health care and tax policy—you should direct members of your administration and congressional leaders to seek the involvement of key Republicans willing to engage in serious deliberations.

Your posture toward Congress can go a long way to reducing the intense polarization of the parties and the institutional maladies that arise from it. The Speaker and Senate Majority Leader can restore a more positive spirit in the House and Senate if you persuade some members of the opposition to shift from permanent campaign to lawmaking mode.

Further Recommendations

Temper Expectations: Your chances of success will be greatest if you stay focused and recognize from the outset what you realistically can accomplish in four years. The public needs to understand this, too. In fact, your biggest communications problem as president-elect may be “high expectations.” You campaigned on a platform of change, and voters expect dramatic breakthroughs. They think you will pull American troops out of Iraq, fix the economy, improve health care and make our schools perform better, all without raising taxes (except for those making over $250,000).

Without reversing any of your major pledges or sacrificing the vision and inspiration you bring to American politics, you need to lower expectations about how quickly you can turn things around. People understand it will take years to work through the mortgage and financial crises. The obvious need for fiscal stimulus provides you with an opportunity to advance major policy priorities and work with members of the opposition party.

Educate Citizens about the Need for A New Leadership Approach: As my colleague William Galston has pointed out, our political system was designed for a slow-paced agrarian economy, at a time when America’s role as a superpower could barely be imagined. Today, trade and information flow instantly around the globe, and the United States has by far the world’s largest economy and unsurpassed worldwide influence.

Americans are ready for a new approach to governance if its virtues are clearly explained. While leaving the Constitutional structure of checks and balances firmly in place, you and the congressional leadership of both parties could promote improvements in the mechanics of joint decision-making by the executive and legislative branches. There needs to be more meaningful consultation between these branches, less polarization in the judicial nominations process and more civility in civil discourse.

Employ Technology as a Game-Changer: Consider transforming the executive branch through technology just as you transformed campaigning. You democratized fundraising through the Internet and engaged a record number of campaign donors. You employed social networking sites such as Facebook and MySpace to identify supporters and organize events.

Now, digital innovations are needed in the public sector. Appoint a chief technology officer who will bring the public sector up to the standard of top private-sector innovators such as Amazon and eBay. You already have said that, as president, you plan to create “a centralized Internet database of lobbying reports, ethics records and campaign finance filings in a searchable, sortable and downloadable format.” In addition, you proposed to develop a “contracts and influence database” that will publicize how much money federal contractors receive, how much they spend on lobbying and how effectively they fulfill government contracts. Improving transparency will help reporters, watchdog groups and the general public keep track of where government money is going.

Extend Technology Innovation to Electronic Rulemaking and Feedback: Online forums allow citizens to comment about proposed federal regulations. This opens administrative agencies more to the general public and reduces the power of big, special interests. In the same way, electronic town halls could give you and Cabinet officers a chance to explain what you are doing and get feedback from ordinary people. Put complaint lines and surveys on government web pages and keep track of visitors’ evaluations of public-sector performance. This will give you up-to-the-minute feedback on which agencies are doing well and which ones need a kick in the pants. As an example, the Office of Management and Budget web site www.ExpectMore.gov lists federal programs that are performing well or falling short based on benchmarking criteria.

Restore the Media Fairness Doctrine and Requirements for Television Public Affairs Broadcasting: At present, television and radio—on which Americans depend heavily for news and information—generally do not produce or promote thoughtful or deliberative civic discussions. The idea behind media deregulation in the 1980s was that satellite technologies and cable television would allow for presentation of diverse viewpoints, so there was no longer any need for the Federal Communications Commission to ensure political balance or fairness.

That approach has proved largely ineffective. With profits falling, traditional media sources too often produce little substantive information and fail to give citizens adequate knowledge about their government. America needs a marketplace of ideas equal to the policy challenges. Once you’ve made progress on your top legislative priorities, you could devote attention to improving civic discourse in America and encourage the development of new media outlets.

Conclusion

You have gone through a rough campaign where tens of millions of dollars were spent attacking your character, policy vision and past associates. You should pretend those attacks never happened. Don’t hold grudges. Befriend your enemies, and tell Republicans you meant all that talk about bipartisanship. To show you are serious, put adversaries in your Cabinet—a leadership style that worked for your home-state hero, Abraham Lincoln. Ask leaders who opposed you for advice. With the federal government facing a trillion-dollar deficit, an economy in recession and two wars abroad, you are going to need all the help you can get!

Keep in mind that your friends and family members can get you in big trouble. Tell your friends not to ask for preferential treatment because they are Friends of Obama. Ditto for campaign donors—giving you a contribution during the campaign does not entitle someone to important privileges.

Most presidents lose popularity during bad economic times. Franklin Roosevelt was an exception. He gained political support during the Great Depression because he exuded hope and confidence and was willing to try bold new approaches. He kept people thinking about the future, not dwelling on the past or on present misfortunes. You have a similar opportunity to inspire people and lead with confidence. Stay focused on your top initiatives and use your fresh political capital judiciously.

REQUIRED READING

• What Do We Do Now?: A Workbook for the President-Elect
  Stephen Hess, October 01, 2008
• Red and Blue Nation? Volume II: Consequences and Correction of America's Polarized Politics
  Pietro S. Nivola and David W. Brady, February 01, 2008
• Prevent Federal Court Nomination Battles: De-Escalating the Conflict over the Judiciary
  Russell Wheeler, Opportunity 08, November 20, 2007
• Reviving the Social Contract: Economic Strategies to Promote Health Insurance & Long-Term Care
  William A. Galston, Opportunity 08, February 28, 2007
• One Year Later: Is Congress Still the Broken Branch?
  Sarah A. Binder, Thomas E. Mann and Molly Reynolds, The Brookings Institution, January 2008
• “Change” or Plus Ça Change…? Pondering Presidential Politics and Policy after Bush
  Pietro S. Nivola and Charles O. Jones, The Brookings Institution, September 2008
• Religion and American Politics: More Secular, More Evangelical...or Both?
  E.J. Dionne, Jr. and John C. Green, The Brookings Institution and American Enterprise Institute, February 2008
• The Broken Branch: How Congress is Failing America and How to Get It Back on Track
  Thomas E. Mann and Norman J. Ornstein, Oxford University Press, 2006
• The Second Civil War: How Extreme Partisanship Has Paralyzed Washington and Polarized America
  Ronald Brownstein, Penguin Press, 2007
• The Corruption of American Politics: What Went Wrong and Why
  Elizabeth Drew, Birch Lane Press, 1999

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