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Volume 11 | Issue 1 | Summer 2014 ARTICLES Quds Force “Jerusalem Force” Gregory J. Garcia

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The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania Michael T. Jackson

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Healing U.S.-Russia Relations Through Mutually Beneficial Space Cooperation Kathleen Karika

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Addressing the Non-Disclosure of 501(C) 4 Organization’s Political Donors Stephanie Mabrey

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Measuring and Understanding Economic Growth Outbreaks Samuel Malone Carlos Patino Luis Quintero

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Multiple Dimensions of Children’s Health Marina Manganaris and Monika Sklad

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Quds Force “Jerusalem Force” Quds Force and the Policy Implications for the United States Gregory J. Garcia

ABSTRACT Quds Force is the intelligence service of the Iranian Revolutionary Guards and a savvy adversary of the United States. Many of their direct operations and support for proxies such as Hezbollah satisfy the doctrinal definitions of terrorism. However, Quds Force presents a distinctly different threat than groups like al Qaeda. As a result, the United States must realistically assess its short term and long-term policy outlook in order to shape an effective strategy that supports its overarching goals with Iran. Keywords:

EXECUTIVE SUMMARY The Quds Force is the Iranian intelligence and special operations wing of the Islamic Revolutionary Guard Corps (IRGC) and one of the key adversaries of the United States among Iran’s foreign policy instruments. A study of the doctrinal definitions of terrorism indicates that Quds Force exhibited a terrorist past, especially in the 1980s. However, under its new commander, Quds Force has largely exited the terrorism business, preferring to focus its efforts on winnable political military objectives, especially in Lebanon, but also in Iraq, Syria, and Afghanistan among others. This strategy has enabled Iran to become the chief power broker in the Middle East. Quds Force’s general abstention from terrorism is in juxtaposition to stateless Sunni radicals, like al Qaeda, who are true terrorist organizations and pose the greater danger. Understanding how Quds Force fits into the definition of terrorism helps illuminate what policy the United States should formulate. The United States’ enhanced use of full-spectrum non-lethal operations towards Quds Force in concert with an overt diplomatic campaign is the ideal course of action to achieve national interests against a rival as complex as Iran. The U.S. should accomplish its geopolitical aims by the intensified use of nonmilitary repressive options,1 consisting of economic sanctions, enhanced security, intelligence gathering, and nonviolent covert operations,2 against Quds Force agents and their proxies. Moreover, the United States should consider the judicious use of coercive covert operations but avoid overt suppression campaigns due to the risk of a confrontation that would threaten other U.S. interests.

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Ultimately, the purpose of such a campaign of overt diplomacy and aggressive covert action is to (1) enhance the stability of the United States’ chief Gulf allies, (2) weaken the Iranian Quds Force’s ability to sustain Bashar al-Assad’s regime in Syria, and (3) enable the United States to extract concessions from Iran conducive to the U.S.’s long-term interests in the Middle East. A BRIEF HISTORICAL PERSPECTIVE ON IRAN The United States has a complicated past with Iran. In 1951, the popular and vehemently anti-British Iranian Prime Minister, Mohammed Mossaddegh, nationalized the Anglo Iranian Oil Company (AIOC) and later expelled all British personnel, thus terminating Britain’s most lucrative worldwide business and checkmating its interests in Iran.3 Given England’s deteriorating economic situation, England attempted to persuade the U.S. to intervene.4 However, President Truman proved sympathetic to the Iranians and antithetical to the worldview of the old imperialists who ran the AIOC. Preferring a diplomatic approach, Truman declined to help Great Britain retake their oil interests in Iran.5 That changed when Dwight Eisenhower was inaugurated as president in 1953. Ushering in veteran cold warriors John Foster Dulles as Secretary of State and Allen Dulles as Director of Central Intelligence, America now proved amenable to removing Mossaddegh from power. Fearing the fall of Iran to Communist power as China had done, Allen Dulles dispatched Kermit Roosevelt, grandson of President Theodore Roosevelt and then a senior intelligence officer in the CIA to commence a “countercoup” to remove the Soviet-leaning Mossaddegh who had all but marginalized the Shah.6 Roosevelt succeeded in fomenting the local campaign that

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supported the Shah’s decree to depose Mossaddegh and install a friendlier prime minister in Fazlollah Zahedi. Yet in 1979, after more than 20 years of ineffective and unpopular rule, the Shah abdicated Iran, and the pro-Western government disintegrated in the wake of the Islamic Revolution’s fury. The new government, led chiefly by a supreme Islamic leader and the Revolutionary Guards, proved antagonistic to the United States, culminating in the embassy takeover and subsequent hostage crisis. As a consequence, Iran has been effectively in a thirty-year conflict with the U.S. THE FORMATION OF QUDS FORCE Quds Force has proven an adaptive, cunning, and skillful adversary of the United States. While it has not inflicted any singular calamity comparable to the 9/11 attacks and may lack for the public attention received by al Qaeda, Quds Force is the more institutionalized power in the Middle East region. Quds Force, like Iran in general, demonstrates a strong forwardthinking capability to predict how events in the region might unfold. Quds Force was formed as part of the IRGC in the early aftermath of the Iranian Revolution of 1979. Iran’s first leader, Ayatollah Ruhollah Khomeini, intended Quds Force to protect the Islamic Revolution from outside forces and export the revolution abroad.7 Quds Force occupies the former United States embassy in Tehran, which now features a mural depicting an amalgamation of the Statue of Liberty and a grim reaper figure adorned in America’s colors. As an extension of the current Supreme Leader Ali Khamenei’s governance, Quds Force enjoys full autonomy to conduct its operations and carry out the ideals of the Islamic Revolution all over the world. 8 It is an elite branch of the IRGC and culls the best recruits Iran can offer. Quds Force enjoys great political and regional power and counts Iranian foreign policy in Lebanon, Syria, Afghanistan, and Iraq as foremost among its duties. The leader of Quds Force is Qassem Suleimani, who is considered by many to be one of the most powerful men in the Middle East. A veteran of the Revolutionary Guards during the Iran-Iraq war of 1980 – 1988, Suleimani shares a background like many other elites in Iran’s military and political power structure. Moreover, he holds significant influence with Iran’s supreme leader and the IRGC.9 Much of Iran’s success in expanding its influence in the Middle East can be attributed to him. Suleimani is the chief architect of the Iranian effort in Syria. Despite Quds Force’s terrorist past, most of the acts of terrorism perpetuated directly or indirectly by Quds Force occurred under the first commander, Ahmad Vahidi, who is now the Iranian Minister of Defense.10 Since taking over, Suleimani has greatly expanded Quds Force in both size and operational tempo but has not engaged in the same high profile terrorist attacks that marked Vahidi’s tenure in the 1980s and early 1990s. Ryan Crocker, former U.S. Ambassador to Iraq, worked with Suleimani in Geneva during the aftermath of 9/11. Crocker and Suleimani worked jointly support the U.S. operation to overthrow the Taliban in Afghanistan. Afterwards, Crocker

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noted that Suleimani clearly could not survive eight years of the bloody Iran-Iraq War without being a pragmatist.11 Despite the fractured relationship between Iran and the U.S., the Taliban is an enemy of Iran, too, with whom they shared a contentious Afghan border. The modern Quds Force is not necessarily against perpetuating terrorist strikes should it suit them. One of the most notable recent attempts at terrorism (and blunders) was its foiled plot to assassinate the Saudi Ambassador to the United States.12 Nevertheless, the general avoidance of terrorism campaigns and occasional diplomatic engagement between the two countries does indicate that Suleimani’s modern Quds Force probably has more in common with the old Soviet KGB of the Cold War than it does a true terrorist organization. Suleimani’s Quds Force bears little resemblance to form in 1983, which actually was more akin to a traditional terrorist organization, such as Black September, due to its routine employment of bombings, kidnappings, hijackings, and killing of civilians. POLICY CONSIDERATIONS Suppression campaigns, which are punitive or preemptive military strikes against terrorist targets,13 are unlikely to help the U.S. achieve its goals in the region and may only serve to obstruct them. The Quds Force is not an opponent to be underestimated; however, despite its violent past, Quds Force does not now present the same clear and present danger to American security and lives as the Sunni takfiris. Takfiris, Arabic for “those who accuse others of apostasy”, are typically Sunni Muslims who view the world in strict terms of believers and non -believers and who follow an inflexible interpretation of the Qur’an.14 The key difference from the Sunni brand of terrorism lies in the ability of the Quds Force and IRGC, as controlled apparatuses of a nation state, to restrain themselves and their proxies’ violence if necessary. Evidence of this restraint has been demonstrated most recently in Iraq. In late 2007, David Satterfield, a senior State Department official for Iraq and adviser to Secretary of State Condoleezza Rice, affirmed that the decline in Shia-driven attacks “has to be attributed to an Iranian policy decision” 15. Quds Force’s work with Hezbollah was the progenitor for its work augmenting the Badr Brigade and, to a certain extent, the unruly Mahdi Army (JAM) during Operation Iraqi Freedom. As a result of both U.S. operations targeting their leadership and proxy elements and likely a related policy decision by Tehran, JAM issued a freeze in 2008 to halt offensive operations against Coalition forces. This enabled the surge troops to shift full operational focus onto the hardcore, largely Sunni, al Qaeda in Iraq elements. There is an ironic sense of mutual shared interest in a stable Iraq even if ultimately both countries have engaged in hostile operations with each other to benefit the most from that relationship. Moreover, it indicates that an uneasy truce can be implemented when it suits both sides – something that has never been the case with any of the radical Sunni elements such as al Qaeda or the Taliban. In fact, even al Qaeda’s Sunni allies in the Iraq insurgency turned against it during the Anbar Awakening in reaction to its limitless brutality.

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Quds Force’s ability to temper its agents and proxies stands in stark contrast to the Sunni takfiris, such as al Qaeda , who have a long track record of performing or inspiring unrestrained destruction around the world. The Sunni militants represent a lethal and unpredictable danger in that their violence is not controlled by a rational actor, does not pursue an achievable political-military purpose, nor offer the possibility of realistic diplomatic negotiation. Evidence of the Sunni brand’s inability to moderate its most extreme agents was seen in Iraq, too. Osama bin Laden proved unable to moderate Abu Musab alZarqawi, the maniacal Al Qaeda in Iraq leader until his death in 2006, for his indiscriminate and wanton violence against everyone including Sunni Muslim believers.16 The al Qaeda chief came to realize that such a rigid and vicious outlook would be unfavorably received among their supposed allies in Iraq and eventually undermine the movement. In that regard, bin Laden was correct as the Iraqi Sunnis did turn completely against al Qaeda in Iraq by 2007. Put simply, the takfiris cannot be reasoned with because they have no achievable strategic political-military purpose, and a nation-state actor does not control them. Three of the four bombers that perpetuated the 2005 “7/7” suicide bombings attacks in London were young British nationals of Pakistani origin with virtually no direct connection to al Qaeda.17 The four bombers were angry, radicalized young men who were recruited and trained but were given no definitive goal or understanding for how their actions would actually achieve some broader purpose. Despite believing otherwise, in reality, the London bombers were simply committing mass murder. These terrorists fall under the doctrinal definitions of terrorism 18 whereas that is no longer the case with Quds Force. While groups like al Qaeda truly warrant the full spectrum of counterterrorism capabilities to include lethal action, such a sweeping solution is less applicable for Quds Force agents and their surrogates. SHORT-TERM RATIONALE FOR A COVERT CAMPAIGN AGAINST QUDS FORCE Left to their own devices, Quds Force will likely prop up the Assad regime sufficiently enough to deal a major policy blow to the United States, continuing a long and effective campaign to subvert American foreign policy goals in the Middle East. Quds Force supplies the lifeblood that buoys the Assad regime: money, weapons, intelligence, training, and strategy. If allowed to succeed in Syria, Quds Force and Iran will preserve the “Axis of Resistance”, the political alliance of Islamic Shia states and substate groups consisting of Iran, Syria, Lebanese Hezbollah and Shia-controlled Iraq,19 that increasingly includes even the largely Sunni Palestinian Hamas. The result of a successful outcome for Quds Force in Syria would allow Iran to maintain its strong campaign of regional influence and dominance. However, an anti-Iranian government in Syria would be a major impediment to Quds Force’s designs of secretly and effectively using Syria in its campaign against Israel. More specifically, without Syria as an allied proxy and overland supply route, Iran’s ability to support Lebanese Hezbollah on its western border would be obstructed. Quds Force has gone to great efforts to stave off this outcome.20 Lebanon remains the foundation of

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Iranian foreign policy and Hezbollah is indisputably its most successful proxy. One American general, James Mattis, most recently the commander of U.S. Central Command with responsibility for the Middle East, noted that without this support the Assad government would have imploded already.21 Iran’s actions back up the general’s claim. Until Quds Force stepped in, the rebels, many of which were former officers and soldiers in the Syrian army themselves, had achieved stunning successes and taken significant territory from the Syrian government. Only once Iran intervened did the rebels begin to suffer increasing defeat, such as the loss of the strategic city of Qusayr near the Lebanese border to Hezbollah fighters. In February 2014, Quds Force further increased its support to Syria, with an estimated 60 to 70 Quds Force commanders on the ground managing the logistics and prosecuting the strategic facets of the war.22 This is on top of the estimated thousands of IRGC military officers and Hezbollah soldiers in Iran handling the tactical aspects of the war. Repressive options form the backbone of the U.S. strategy against Quds Force. These include some that the U.S. already employs, such as economic sanctions and intelligence gathering, and some that it probably does in secret, like non-violent covert operations. Non-violent covert operations include cyberwar and disinformation campaigns and are effective in disrupting insurgent crises, as in Syria, by reducing the level of violence and destabilizing the opposition.23 They are a useful weapon in the U.S. arsenal, especially in Syria where foreign infiltrators from Hezbollah-- the Revolutionary Guards-- and Quds Force carry the preponderance of the war effort. Coercive covert operations are the more sensitive and forceful option and as a result require a much more judicious approach due to the potential for failure. These include a mix of lethal and non-lethal, such as assassinations, sabotage, and extraordinary renditions.24 Lethal methods will not serve the U.S.’ interests and if anything will undermine them. Non-lethal coercive operations like sabotage, a classic example of which is the Stuxnet cyber operation, which ruined numerous Iranian nuclear enrichment centrifuges, are the better option for the United States to combat Quds Force’s and Iran’s regional power. LONG-TERM RATIONALE FOR UNDERMINING IRAN’S MIDDLE EAST INFLUENCE WHILE PURSUING DIPLOMACY Quds Force is a savvy operator in the Middle East and rival of the United States. In the 1980s, it helped plan high visibility kidnapping and terrorist attacks including the 1983 bombings of the U.S. Embassy and Marine barracks in Beirut. The barracks attack in particular is a closely guarded secret by Iran and Hezbollah – the name of the suicide van driver is still unknown to U.S. intelligence.25 Quds Force successfully augmented Hezbollah’s long crusade to expel Israel from Lebanon, which was finally accomplished in 2000, and dealt another major defeat to the Israel Defense Forces in 2006. Quds Force supplied and armed Shia militias early in Operation Iraqi Freedom, especially

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by providing the Explosively Formed Penetrator (EFP), which proved to be the most lethal improvised explosive device (IED) encountered by American Coalition forces.26 More harmfully, Quds Force has severely undermined the United States’ relationship with Iraq while increasing its own influence through the installation and manipulation of senior Iraqi leaders amenable to Iran.27 Now, it is directly involved in supporting the Syrian regime for strategic self-interest. Quds Force is quite different than the normal adversarial intelligence service given that it has perpetuated terrorist attacks against the U.S. in Lebanon and contributed to American service-member deaths in Iraq. As a result, Quds Force warrants a more aggressive spectrum of options than do other adversaries.

strains in the two countries’ relations and he has delivered a similar message each year since.33 Presumably, this was to draw contrast for Americans between the modern Iranian citizens and the hardline, inflammatory orations of Iran’s president, Mahmoud Ahmadinejad. Ahmadinejad was one of the most outspoken critics of the United States at the time, despite his limited actual power. Diplomatic events are few, but the U.S. has had rare, informal dialogue with Iran’s representatives as evidenced by the recent agreement between the two countries in Switzerland regarding nuclear enrichment and sanctions. Conciliatory options grant policymakers the flexibility to use non -repressive methods that can be beneficial to U.S. interests. 34 So far, the U.S. has avoided full-scale use of force.

Nevertheless, the United States’ relationship with Iran is not as black and white as it was in 1979. In 2013, the two countries completed negotiations in Geneva for a temporary agreement that would reduce Iran’s nuclear ambitions in exchange for a lifting of some economic sanctions. The agreement indicates the intent from both sides to pursue a more comprehensive solution to achieve their respective goals and also improve the fractious relationship between the two nations.28

Conciliatory options are effective though, especially against a calculating opponent like Iran, because they enhance America’s credibility locally and abroad. Meanwhile, non-military repressive options and coercive covert operations can still be employed simultaneously to further promote specific U.S. interests to great effect, such as forestalling Iran’s nuclear enrichment program. This strategy of overt diplomacy combined with covert action is actually not unlike Iran’s modus operandi. Iran is accustomed to presenting an innocuous and positive public posture while secretly giving Quds Force free rein to engage in extensive covert subterfuge in other countries.

Additionally, as one former CIA Inspector General noted, the United States typically does not engage in lethal operations against foreign intelligence operatives of its nation-state adversaries because it would only lead to a cycle of revenge killings that accomplish nothing.29 In any event, Israel, by virtue of their proximity to Iran and existential threat faced by their influence, is more likely to favor and exercise lethal action against Iranian targets, thus negating any particular need for the U.S. to perform such operations directly. WHAT HAS THE UNITED STATES DONE ABOUT IRAN’S EXPANDING INFLUENCE? The United States already employs many counterterrorist and antiterrorist options against Iran, primarily taking the form of non-military Repressive Options such as economic sanctions, intelligence gathering, covert operations, and enhanced security.30 Non-military repressive options allow the U.S. to deploy its great economy of scale advantage in new technologies and organizational resources. The economic sanctions are typically the most controversial methods if only because they are the most well known measures to the public and visibly impact the overall economy and populace. Other measures are largely covert such as the 2010 discovery of the Stuxnet virus in which the United States and Israel are believed to have worked jointly to damage Iran’s nuclear enrichment facilities through offensive cyber operations31. The U.S. may wish to increase the usage of these operations because they have proven effective in gaining leverage over Iran diplomatically. Nevertheless, despite a number of aggressive operations against Iran in recent years, the U.S. has also adopted a number of conciliatory options,32 which include diplomacy, social reform, and concessionary options, towards Iran. For instance, President Obama delivered a friendly message to the Iranian people in a 2009 White House video. The president acknowledged the

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Indeed, open displays of force are unlikely to be effective against Quds Force given their resilience and propensity for decentralized operations. Direct military strikes upon Quds Force assets would certainly cause damage but the second and third order of effects would be extremely volatile. These effects would undoubtedly undermine America’s long-term interest of pursuing both diplomatic and covert methods to achieve its aims in the Middle East. QUDS FORCE: TERRORIST ORGANIZATION OR INTELLIGENCE AGENCY? Answering this question is important because the United States would adopt two very different approaches in engaging each type of organization – one fully lethal, one typically not lethal. Determining which definition best fits Quds Force requires an evaluation of doctrinal understandings of what terrorism means, the causes that drive it, and more specifically, how Quds Force has morphed over the past 30 years. Put simply, Quds Force was at one time a terrorist organization but is not now. Richardson35 ascribes seven requisite characteristics to terrorism that are instructive to determining how Quds Force could have started as a terrorist organization until evolving out of it. First and foremost, the terrorist act must be politically inspired. Clearly, the actions of Quds Force starting in the early 1980s were politically inspired as they not only desired to defend and export the Islamic Revolution, but also gain a foothold in Lebanon through their support for Hezbollah against Israel. Although Quds Force’s support for Hezbollah’s operations may not constitute the direct execution of terrorist acts by their own Iranian operatives, they aided and abetted every facet of the Hezbollah leaders to include serving as handlers for the key

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Lebanese Hezbollah commanders, Imad Mughniyah and Hassan Nasrallah. One of these high-level handlers, Sheikh Hossein, secretly received money from Iran through Quds Force, to support his campaign in Lebanon. 36 Therefore, it is fair to suggest that Quds Force played enough of a role in Hezbollah operations to qualify as more than a mere sponsor and satisfy the political requirement. In post-9/11 parlance, Quds Force and Iran have harbored terrorists who perpetuated acts of politically inspired terrorism. The second characteristic is that the terrorist act must involve the use of or threat of violence. This characteristic applies since Quds Force’s support for Hezbollah’s operations involved numerous violent attacks on Israeli targets, fomenting civil war in Lebanon, and notably the major attacks on the U.S. embassy and marine barracks in 1983. For instance, the 1972 Munich slayings of Israeli athletes by Black September constitutes an obvious use of politically motivated violence. A plane hijacking by armed foes that results in a casualty-free ransom exchange comprises a threat of violence and thus is still terrorism. However, the Stuxnet cyber operation that wrecked Iran’s centrifuges in its Natanz facility would not constitute terrorism because the event was distinctly non-violent in nature. Rather, this type of operation would simply be called sabotage. In fact, “cyber terrorism” is a misnomer.37 Third, the point of the terrorist acts is to send a message, not necessarily defeat the enemy. Quds Force helped Hezbollah conduct numerous operations in the 1980s to send a message to its adversaries through its actions. One notable case is the hijacking of Kuwait Airways 422 in 1988, an operation planned by Mughniyah. The terrorists demanded the release of a number of detainees arrested by Kuwait for their parts in the bombing of the French and U.S. embassies in Kuwait in 1983, 38 one of which was the brother-in-law of Mughniyah.39 Kuwait would not accede to the demands that led to the execution of two civilian hostages onboard. Ultimately, the hijacking crisis would end with an agreement for clemency in exchange for releasing all hostages. The hijackers certainly tried to send a message to the government of Kuwait though they did not achieve their end goal of freeing Mughniyah’s brother-in-law. Richardson’s40 fourth characteristic of terrorism is that the act and target must have symbolic significance. U.S. embassies are by definition considered American soil and therefore the bombings of the U.S. embassies in Kuwait and Beirut in 1983 constitutes strong symbolic significance in attacking the American “homeland” as a show of force against the U.S. presence in Lebanon. In addition, Kuwait Airways 422 had onboard several members of the Kuwaiti royal family, relatives of the Emir, making that act also symbolically important to achieving the terrorists’ ends. The fifth characteristic is that terrorism must be the actions of sub-state actors, not states. Quds Force of course is not a substate group as it is the governmental intelligence arm of Iran’s Revolutionary Guards. However, Quds Force played a direct but highly secretive role in approving, planning, and funding Hezbollah hijackings, kidnappings, and car bomb operations.

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Because Hezbollah is a sub-state actor and Iranian proxy, the support received from Quds Force in the 1980s and early 1990s qualifies as direct sponsorship of sub-state terrorism under this characteristic. According to one former CIA operative, Quds Force was actually behind many of the assassinations, coups, and kidnappings of foreigners during these decades.41 Conversely, the Central Intelligence Agency’s support for the various warlord factions in Afghanistan against the Soviets in the 1980s would not constitute terrorism because this support would fail the third and fourth characteristics. The United States fully intended to defeat the Soviet Union in Afghanistan, through its military and intelligence support, in order to stem or undo the expansion of Communism. In fact, President Reagan believed the Soviet Union itself could be unraveled through intense economic and military pressure wherever possible. 42 Moreover, its targets were not symbolic but rather military targets, such as the employment of Stinger missiles against Soviet 24D helicopter gunships.43 Sixth, the target audience must be different from the victim of a terrorist act. The target audiences of many of Quds Force’s early operations were the governments of Israel and the United States, even if the victims were employees at embassies, soldiers, and kidnapped foreigners. In other words, the terrorists are trying to alter the actions of a larger group, such as a government or influential person, using often random and interchangeable victims to represent the larger audience. In recent years, this is arguably more of a gray area as Quds Force and Hezbollah aimed its operations at distinctly governmental targets, thus creating little separation between victim and audience. However, in the 1980s, this requirement was satisfied by their early employment of kidnappings, hijackings, and bombings of non-governmental targets. Finally, the seventh defining characteristic is the premeditated targeting of civilians.44 This is the most critical component because targeting civilians is different than any other type of political violence. Deliberate harm to civilians, instead of occurring as an infrequent act of overkill and excess in warfare, becomes normal practice as an intentional strategy. For instance, the Allied bombing of cities in Italy during World War II resulted in collateral damage and casualties to civilians but the purpose was to attack Axis military sites and support the Allied invasion of southern Europe. Therefore, that campaign would not constitute a premeditated intent to harm civilians. Al Qaeda’s attacks on the World Trade Center in 2001, however, intended to crash planes full of civilian passengers into skyscrapers full of other civilians. It was Al Qaeda’s intent to kill civilians as their means of striking the United States and instilling fear into the populace. In Quds Force’s support of Hezbollah, the past employment of kidnapping operations and bombings in Lebanon, or sectarian murder of Sunnis in Iraq is intended to commit civilian-targeted violence for the purpose of subverting those respective governments’ interests. By each of these characteristics, Quds Force fully fits the definition of terrorism for most of its history, particularly for the first 15 years of its existence. In the post-millennium era,

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however, Quds Force qualifies for only some characteristics. The organization does not engage in violent acts against symbolic targets, random victims unconnected to the audience, nor pursue a premeditated strategy of wanton harm toward civilians. Indeed, Iran has made the broader policy decision to avoid traditional terrorist acts such as airliner hijackings and hostage taking because these acts openly challenge other governments to respond. Iran discovered by the late 1980s and early 1990s that they provided little return on investment for their regional interests and only threatened to undermine their gains in Lebanon fighting Israel. Instead, the Iranian modus operandi is to employ the Revolutionary Guards as a military and guerilla organization now with Quds Force serving as the paramilitary intelligence service performing its most covert action. THE THREE R’S: REVENGE, RENOWN, AND REACTION Richardson45 argues that all terrorist movements have two types of goals: short-term organizational objectives and long-term political objectives. Both Shias (e.g. the Iranian Quds Force) and Sunnis (e.g. al Qaeda) have achieved widely disparate success in pursuit of their long-term political interests. Whereas the Shia elements within the Axis of Resistance have gained significant sway in the Middle East, under Iran’s hegemony, despite the fact that they are the demographic minority, the Sunni terrorist groups have predictably failed to create a 7th century Islamic Caliphate styled on its unbending interpretation of Islam or turn Muslims fully against all secular powers. Sunni terrorists are effectively stateless groups with no broad host nation support, and moreover, have accomplished little but the killings of countless people. More damaging to their movement was the Arab Spring of 2011 thar toppled several countries’ secular governments leading to new elections and leadership completely devoid of involvement by al Qaeda. Al Qaeda was simply no longer the agent of change and could not compete with the people-oriented influence and momentum of the Arab Spring.46 The protesters demanded new governments and freedoms, noticeably lacking the violent jihadist zeal of al Qaeda. Few exercised calls for return of the Sharia Law and, moreover, the protests highlighted the lack of allure that al Qaeda has47 as an ideological movement, lacking traction and relevance. On the opposite end, Quds Force has achieved for Iran many milestones of Iran’s long-term political interests. Forcing Israel out of Lebanon in 2000 and subsequently defeating their 2006 incursion through Hezbollah was a major long-term political and military victory, which enhanced their appeal in the region immensely. Where the difference between America’s Sunni takfiri and Shia adversaries is even more noteworthy is in the pursuit of the secondary objectives. Richardson48 suggests that terrorists have achieved these much more readily than lasting long-term objectives and summarizes them as the Three R’s: Revenge, Renown, and Reaction. Terrorist movements nearly always fail to achieve lasting, long-term change but do often achieve some of these limited, short-term objectives. Modern Quds Force

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operations routinely fail at least one of these three categories of secondary objectives that normally define terrorist organizations. In 1994, the Quds Force under its first commander, Ahmad Vahidi, played a direct role in the terrorist attack on the Jewish Cultural Center in Buenos Aires.49 The attack killed dozens of civilians and was allegedly in retaliation for Israel’s assassination of the Hezbollah Secretary-General in 1992,50 thus satisfying the Revenge qualification. This operation, like many others, obviously sought a reaction from the Israeli government and people, satisfying also the Reaction element. Iran conspicuously conveyed to Israel that provoking them would result in violent and specific retaliatory attacks. However, the Argentina bombing fails the Renown component. The Iranians, as is their custom, went to extreme lengths to hide their involvement. While few experts ever actually doubted Iran’s participation, Hezbollah operatives technically carried out the attack, further providing a layer of deniability. Tehran kept quiet, choosing not to acknowledge nor glamorize the incident. Quds Force, like Iran, demonstrably avoids the Renown aspect to its operations, choosing always to operate clandestinely through allied proxies and sleight of hand. Little about Iran’s operations suggests a desire for short-term secondary objectives unless they are distinctly tied to long-term plans. While this particular act would constitute terrorism undoubtedly, terrorism in the broader practice fails to deliver Quds Force and Iran the long-term objectives it is really after, which are increased power and influence in the Middle East. Ultimately, that is chiefly why Quds Force and Hezbollah exited the terrorism and civil war business in the late 1980s and early 1990s.51 A predilection for clandestine subtlety cannot be said of the Sunni terrorists who make a perceptible effort to achieve revenge, renown, and reaction. Al Qaeda has never shied away from claiming credit for even failed attacks, nor have the perpetrators been afraid to claim publicly whom they were carrying out the attacks for. According to bin Laden, the 2002 Bali bombings that killed 202 civilians carried out by Jemaah Islamiyah but funded by al Qaeda served as retribution for the U.S. War on Terror and Australia’s role in East Timor. 52 The 2005 “7/7” bombings in London utilized British nationals citizens that caused widespread shock among the British as a result of the perpetrators’ seemingly innocuous and ordinary backgrounds. In addition, several of the 7/7 bombers freely carried identification, which enabled British law enforcement to discover a bomb factory in Leeds that was intended to sustain additional bomb attacks.53 Al Qaeda, unlike Quds Force, routinely satisfies revenge, renown and reaction. A key divergence between the operations executed by Quds Force and its proxies is that they are eliciting a reaction from a specific government since its past targets are typically military or governmental. The Khobar Towers housed U.S. Air Force personnel when they were destroyed by a car bomb by the Quds Force-supported Hezbollah in 1996 to coerce the U.S. to remove troops from Saudi Arabia. The 1983 bombings targeted U.S. Marine Corps barracks and U.S. embassies to undermine America’s presence in Lebanon supporting Israel’s occupation.

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In Buenos Aires, Argentina, the 1992 bombing of the Israeli embassy and 1994 bombing of the Jewish Cultural Center were retaliatory strikes.54 Quds Force has not acted to avoid civilian deaths, but each attack seems to have a very specific non-civilian main target and a broader purpose in the long-term. Attacks by al Qaeda, its affiliates in the Arabian Peninsula and Africa, or its loose network of cells and radicalized followers abroad such as the 7/7 bombers, on the other hand, time and again have explicitly targeted distinctly non-military targets to inflict maximum casualties on civilians and elicit a reaction of fear from ordinary citizens. Before his death, Osama bin Laden routinely chastised America and the west over a number of years for what he perceived as crimes against the Muslim World. Al Qaeda’s quarrel with the United States on rare occasion features some specific political military dispute, such as the stationing of foreign troops in Saudi Arabia. However, al Qaeda’s means of addressing it lacks political and military specificity found in Quds Force’s modern campaigns. For instance, the 2005 7/7 attacks in London slew 52 random civilians in the subway system. Al Shabaab terrorists massacred random civilian shoppers and mallgoers at Westgate Mall in Nairobi, Kenya. The 2002 Bali bombings killed hundreds of multinational people on vacation at a nightclub. None of these attacks can truly claim a defined political or military objective. In each case, the operations were clearly motivated by Revenge, Renown, and Reaction. CONCLUSIONS While al Qaeda and its related affiliates fit every element of Richardson’s55 seven characteristic definition of terrorism, Quds Force operates in a gray area where the lines between terrorism and military guerilla warfare blur often, especially in recent years. The Sunni takfiris offer the United States no hope of reconciliation or negotiation and necessitate full-spectrum lethal action and suppression campaigns. The perpetrators of these attacks are often simply disaffected individuals lashing out with little true idea of the long-term interest of the attack who may not even be aware that theirs is a suicide attack. The four suicide bombers in the 7/7 attacks exemplify this. At least two of the bombers were recruited locally in London and sent off to Pakistan for training before returning to the United Kingdom. 56 All were 30 or younger with two of the four just 18 and 19 years old respectively and two converting to Islam in the years leading up to the attack. One of the bombers, Mohammad Sidique Khan, said this in a recorded statement aired on Al Jazeera several months afterwards: “Your democratically elected governments continuously perpetuate atrocities against my people all over the world. And your support of them makes you directly responsible, just as I am directly responsible for protecting and avenging my Muslim brothers and sisters.” 57 Khan demonstrated his tenuous grasp of the broader purpose for the attack, as he did not perceive a clearly defined objective, target, or audience. The atrocities committed against his Muslim brothers and sisters are not specified, nor even are the governments. Khan blames seemingly anyone who is a citizen for supporting any of these governments evidently by virtue of the votes they cast or taxes they pay. Ultimately, Khan’s

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rationale for the attack is as Richardson58 describes: to achieve revenge on behalf of a group, in this case all Muslims, that he identifies with, in which their adversaries are to blame for whatever their woes. Conversely, the modern Quds Force under Qassem Suleimani are not after revenge for revenge’s sake on behalf of some broader demographic. When they have pursued a vengeful act in their terrorist past, such as the Israeli embassy bombings in Argentina, even then the purpose was to attack a governmental target to convince a governmental audience as retribution for the assassination on Hezbollah’s leader and indicate that future assassinations would not come without reprisals. The attack did not distinctly target random, interchangeable civilian victims like the 7/7 attacks did. Iran has a very definite geopolitical goal in mind outside its borders, which is to become the chief power broker in the Middle East. They have affirmed this through their actions: a long campaign in Lebanon against Israel, their lethal involvement in Iraq against the United States, and lately, their devoted support to sustain Assad’s regime in Syria. Unlike the Sunnis, who have yet to achieve any of their nebulous aims, Iran has used Quds Force to achieve many of theirs. Arguably, none were more significant to the Iranians and persuasive to the region’s Muslims than Israel’s defeat and expulsion from Lebanon in 2006. The modern Quds Force at least leaves the door ajar for the possibility of alternative solutions, such as diplomacy, as evidenced by the occasional negotiation or temporary working relationship in pursuit of some common objective. This suggests that the policy of the United States towards the Iranian Quds Force is best served by the increased use of conciliatory options, non-military repressive options, and non-lethal covert operations to support its strategic goal of achieving strategic concessions from Iran. Such a dual-sided approach is not unlike how Iran has long avoided direct confrontation with the U.S. in favor of indirectly aggressive methods. In conjunction with rare conciliatory outreach, this strategy has allowed Iran to mollify the U.S. when the political situation deteriorates too much toward open confrontation or to promote its public image in a positive light to gain the zeal of Muslims in the Middle East. There is a popular saying often attributed to Islamic culture that “the enemy of my enemy is my friend”. The United States and Iran have been enemies for 30 years now but they share a more diffused, less stable, and more murderous enemy in the stateless Sunni takfiris. Iran has as much to lose from the radical and uncompromising terrorists emanating out of tribal Afghanistan, Pakistan, and any other country where young, moldable individuals are susceptible to recruitment to kill random civilians – whether it be Shias at a mosque in Iraq, train passengers in London, or American vacationers in Bali. It is no easy decision to look past what Quds Force has done as a terrorist organization in the 1980s and conclude that a sensible approach is conciliatory in nature, in contrast with the consistent military strategy engaged as against any other terrorist organization. The images of Americans held captive and the embassy ransacked in

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1979 are not readily forgotten. It is even more painful to look past the slayings of more than 200 U.S. service members in Lebanon and many more in Iraq and adopt some semblance of a working relationship with the same organization and country that perpetuated them. However, balancing a guardedly reconciled approach in concert with a judicious but aggressive

campaign of non-violent and coercive covert operations against Quds Force’s operations is the best approach for the United States’ short-term and long-term interests.

Gregory J. Garcia MPA ’14

Price School of Public Policy, University of Southern California Greg is a second year MPA at the Sol Price School of the University of Southern California. Before coming to USC, he worked as a consultant to federal clients with Booz Allen Hamilton and served for five years in the U.S. Army, deploying to Iraq in 2007. While at USC, Greg has focused his elective selections on courses related to homeland security policy and analysis and public management. He performed a summer fellowship in Mayor Rahm Emanuel’s office in 2013 and is currently a selected scholar and researcher at the Department of Homeland Security’s Center for Risk and Economic Analysis of Terrorism Events at USC.

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SOURCES 1)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 290292.

19)

2)

Ibid., 290-292.

20)

3)

Kermit Roosevelt. Countercoup: The Struggle for the Control of Iran. New York: McGrawHill Book Company, 1979, 100-101.

Dexter Filkins. "The Shadow Commander." The New Yorker, September 30, 2013, 2.

21)

Ibid., 10.

22)

Ruth Sherlock. “Iran boosts support to Syria.” The Telegraph, February 21, 2014, accessed April 8, 2014, http://www.telegraph.co.uk/ news/worldnews/middleeast/iran/10654144/ Iran-boosts-support-to-Syria.html

4)

Torey L. McMurdo. "The Economics of Overthrow: The United States, Britain, and the Hidden Justification of Operation TPAJAX." Studies in Intelligence Vol. 56 No. 2, 2012: 1526.

5)

Stephen Kinzer. All the Shah's Men. New York: Wiley, 2003, 3.

6)

Kermit Roosevelt. Countercoup: The Struggle for the Control of Iran. New York: McGrawHill Book Company, 1979, 56.

7)

8)

9)

The Telegraph. Iran's Revolutionary Guards: Quds force, October 4, 2007, accessed September 30, 2013, http:// www.telegraph.co.uk/news/ worldnews/1565107/Irans-RevolutionaryGuards-Quds-force.html. The Israeli Intelligence & Heritage Commemoration Center. The Qods Force, an elite unit of the Iran's Islamic Revolutionary Guards Corps, spearheads Iran's global terrorist campaign. Ramat Hasharon: The Meir Amit Intelligence and Terrorism Information Center, 2012: 1-31.

10)

Ibid., 20.

11)

Dexter Filkins. "The Shadow Commander." The New Yorker, September 30, 2013, 5.

12)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 292

14)

Christopher M. Blanchard. Islam: Sunnis and Shias. Washington, DC: Congressional Research Service, 2009: 2, http://www.fas.org/ irp/crs/RS21745.pdf

16)

17)

18)

23)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 305.

24)

Ibid., 292.

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 3-20.

Robert Baer. The Devil We Know: Dealing with the New Iranian Superpower. New York: Crown Publishers, 2008, 35.

42)

Robert M. Gates. From the Shadows: The Ultimate Insider's Story of Five Presidents and How They Won the Cold War. New York: Simon & Schuster, 1996, 194-197.

43)

Steve Coll. Ghost Wars: The Secret History of the CIA, Afghanistan, and bin Laden, From the Soviet Invasion to September 10, 2001. Penguin: New York, 2004, 148-149.

44)

Louise Richardson. What Terrorists Want. New York: Random House, 2006,6.

Robert Baer. The Devil We Know: Dealing with 45) the New Iranian Superpower. New York: Crown 46) Publishers, 2008, 66.

26)

Michael R. Gordon. "Deadliest Bomb in Iraq Is Made by Iran, U.S. Says." The New York Times, February 10, 2007, accessed October 16, 2013, http://www.nytimes.com/2007/02/10/world/ middleeast/10weapons.html?pagewanted=all.

48)

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 71-103.

28)

Paul Richter. "Iran agrees to nuclear limits." Los 49) Angeles Times, November 24, 2013.

29)

Frederick P. Hitz. The Great Game: The Myth and Reality of Espionage. New York: Random House, 2004: 126-130.

30)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 287310.

50) Kim Zetter. New Clues Point to Israel as Author of Blockbuster Worm, Or Not. October 1, 2010, accessed November 4, 2013, http:// 51) www.wired.com/threatlevel/2010/10/stuxnet52) deconstructed/. Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 290291. Barack Obama. The President's Message to the Iranian People. Washington, DC, March 19, 2009.

Rohan Gunaratna. "The Arab Spring: Is Al Qaeda on the Wrong Side of History?" Counterterrorist Trends & Analysis Journal, Vol 3, Issue 9, 2011: 1-4. Brian Michael Jenkins. Al Qaeda in its Third Decade: Irreversible Decline or Imminent Victory?, Santa Monica: RAND Corporation, 2012: 5.

Dexter Filkins. "The Shadow Commander." The New Yorker, September 30, 2013, 9.

31)

Ibid., 6.

47)

27)

The Israeli Intelligence & Heritage Commemoration Center. The Qods Force, an elite unit of the Iran's Islamic Revolutionary Guards Corps, spearheads Iran's global terrorist campaign. Ramat Hasharon: The Meir Amit Intelligence and Terrorism Information Center, 2012, 20 Robert Baer. The Devil We Know: Dealing with the New Iranian Superpower. New York: Crown Publishers, 2008, 228. Ibid., 165. Tony Parkinson. “'Bin Laden' voices new threat to Australia,” The Age, November 14, 2002, accessed October 25, 2013, http:// www.theage.com.au/ articles/2002/11/13/1037080786315.html.

53)

Charles A. Lieberman and Serguei Cheloukhine. "2005 London Bombings." A New Understanding of Terrorism, 2009: 241.

54)

Matthew Levitt. Policy Focus 123: Hizbollah and the Qods Force in Iran's War on the West. Washington, D.C.: The Washington Institute for Near East Policy, 2013: , 3

Robert Baer. The Devil We Know: Dealing with 55) the New Iranian Superpower. New York: Crown Publishers, 2008, 68. 56) Louise Richardson. What Terrorists Want. New York: Random House, 2006, 4.

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 3-20.

Michael Ross. "Hijackers Seize Kuwait Jet, Threaten Emir's Relatives." The Los Angeles Times, April 6, 1988, accessed November 26, 2013, http://articles.latimes.com/1988-04-06/ news/mn-495_1_kuwait-airways.

57)

Ibid., 243.

58)

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 41-42.

34)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 290.

35)

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 3-20.

36) Karen DeYoung. "Iran Cited in Iraq's Decline in Violence." The Washington Post, December 23, 2007, accessed October 16, 2013, http:// 37) www.washingtonpost.com/wp-dyn/content/ article/2007/12/22/AR2007122201847.html. M.J. Kirdar. Al Qaeda In Iraq. Washington, DC: 38) Center for Strategic and International Studies, 2011: 9. Charles A. Lieberman and Serguei Cheloukhine. "2005 London Bombings." A New Understanding of Terrorism, 2009: 233-248.

York: Random House, 2006, 4-5. 41)

25)

32) Matthew Levitt. Policy Focus 123: Hizbollah and the Qods Force in Iran's War on the West. Washington, D.C.: The Washington Institute for 33) Near East Policy, 2013: 1-15.

13)

15)

9

GlobalSecurity.org. Qods (Jerusalem) Force, Iranian Revolutionary Guard Corps (IRGC Pasdaran-e Inqilab). July 28, 2011, accessed September 30, 2013, http:// www.globalsecurity.org/intell/world/iran/ qods.htm.

Erik Mohns and André Bank. "Syrian Revolt Fallout: End of the Resistance Axis?” Middle East Policy 19, no. 3 2013: 25.

39)

Robert Baer. The Devil We Know: Dealing with the New Iranian Superpower. New York: Crown Publishers, 2008, 80-81.

40)

Louise Richardson. What Terrorists Want. New

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Charles A. Lieberman and Serguei Cheloukhine. "2005 London Bombings." A New Understanding of Terrorism, 2009: 235.


THE HEINZ JOURNAL

The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania Severance Tax Impact Michael T. Jackson

ABSTRACT Opposition to proposals for the implementation of a severance tax on natural gas extraction in Pennsylvania is typically based on the claim that such a tax would substantially reduce drilling investment in the Commonwealth. Using historical data on the responsiveness of drilling to changes in natural gas wellhead prices, this paper projects the impact of a Pennsylvania severance tax at three hypothetical rates. Consistent with past estimates for other states, this paper finds that a Pennsylvania severance tax would have a substantially smaller impact on drilling investment than predicted by a recent industry-funded study. This finding is policy relevant because the potential benefits of a severance tax (in terms of increased public revenues) must be weighed against its impact on employment growth in the natural gas industry, which is likely to be proportional to its impact on drilling investment. Keywords:

INTRODUCTION

Pennsylvania natural gas industry, have included proposals for a new 5% severance tax as part of their energy policy platforms.5

A severance tax is a tax on the extraction of nonrenewable mineral resources within a particular jurisdiction, payable by the firms that conduct the extraction activity.1 In the majority of cases, the tax is assessed as a fixed percentage of the market value of production, although a few U.S. states impose a fixed fee per unit of production.2 To date, the Commonwealth of Pennsylvania has not imposed a severance tax, despite large projected increases in natural gas production attributable to the exploitation of the Marcellus Shale. Instead, in February 2012 the General Assembly voted to levy an “impact fee” on unconventional gas wells. The fee differs from a severance tax in that it does not vary with production; rather, it is assessed at a flat per-well amount that varies yearly depending on the average annual price of natural gas.3 Proponents of a Pennsylvania severance tax argue that it would raise substantially more revenue than the impact fee. For example, Wood (2013) projects that a severance tax with the same effective rate as West Virginia’s would, in the 2013-2014 fiscal year, generate approximately $303 million in additional revenue relative to the impact fee. By the 2018-2019 fiscal year, the projected revenue differential increases to $881 million.4 For this reason, multiple Democratic gubernatorial candidates, while expressing general support for the continued growth of the

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In response, industry representatives have argued that a severance tax would reduce investment in new gas wells. For example, the Marcellus Shale Coalition, which describes its mission as “provid[ing] in-depth information to policymakers, regulators, media, and other public stakeholders on the positive impacts [of] responsible natural gas production,” has stated that a severance tax “would without question result in less capital investment into the Commonwealth, fewer jobs and even less revenue generated for the citizens of Pennsylvania.”6 Republican Governor Tom Corbett has based his opposition to a new severance tax on similar claims.7 Are these claims credible? To be sure, the underlying economic intuition is straightforward: severance taxes reduce the after-tax wellhead price of natural gas (that is, the price received by well owners), thereby reducing the return on investment in natural gas wells and possibly rendering higher-cost wells uneconomical. The more interesting question, however, concerns the magnitude of the reduction that might be expected. Therefore, in this paper, I estimate the impact of a severance tax on investment in new natural gas wells in Pennsylvania, using monthly time series data on the historical responsiveness of drilling to changes in the wellhead price of natural gas. Specifically, I estimate several ordinary least squares regression

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models with the number of new gas drilling permits issued by the Pennsylvania Department of Environmental Protection (DEP) as the dependent variable, and the real wellhead price of natural gas as the independent variable of interest. I then simulate the effect of several hypothetical severance tax rates on projected future drilling levels. This strategy takes advantage of the fact that an X% severance tax levied on the value of production has the effect of reducing the unit price received by the producer by exactly X%.8 Consequently, the imposition of a severance tax should have the same effect on the drilling investment decision as an ordinary fluctuation in the nominal wellhead price. The remainder of the paper proceeds as follows. Section 2 reviews the existing literature relating to the effects of state severance taxes on investment and production in extractive industries. Although the body of literature is sizeable, there currently exists only one published study—funded by the Marcellus Shale Gas Committee, an industry trade group—that focuses on natural gas drilling in Pennsylvania. I specify my empirical models in section 3, and report and discuss my results in sections 4 and 5. Section 6 concludes. APPROACHES TO SEVERANCE TAX ANALYSIS Broadly speaking, two approaches to severance tax analysis are prevalent in the literature. The first (henceforth referred to as the “Hotelling approach,” as it is based on Hotelling’s [1931] theory of optimal resource extraction) entails the specification of a dynamic optimization model in which producers choose the profit-maximizing extraction path over a specified depletion period—usually at least 40 years. The model is “calibrated” by estimating its component cost and production functions based on historical state- or field-level data. Its first order conditions are then solved to predict both production and drilling effort (proxied either by the number of new wells or by total footage drilled) in each year of the specified time period. Thus, if the severance tax rate (together with state-specific property and corporate income taxes, to account for interaction effects) is included as a parameter in the model, this approach provides insight into how the severance tax changes the optimal time path of production and drilling.

decrease in the wellhead price, an approach justified by the fact that severance taxes are assessed as a percentage of total production value. These models are typically estimated using data from a single state. Using this approach, Lozada and Hogue (2008) find that a 1% increase in Utah’s severance tax rate reduces the annual number of new oil wells by 0.94% and the annual number of new natural gas wells by 0.41% (at prices of $100/barrel and $3/Mcf, respectively).13 Iledare (1995) finds that a 1% increase in West Virginia’s effective severance tax reduces natural gas drilling footage by less than 0.3%. 14 Deacon et al (1990) find that the imposition of a 6% severance tax in California reduces the annual number of new oil wells by an average of 6.4%.15 While these three appear to be the only studies that apply elasticity estimates to the analysis of severance tax changes, there are a number of other studies that use static econometric models to estimate the elasticity of oil and natural gas drilling with respect to price—that is, the percentage decrease in drilling that results from a 1% decrease in price. Table 1 summarizes the results of a selected sample of those studies. In addition to the above-referenced studies, a study by Considine et al (2009) focuses specifically on natural gas drilling in Pennsylvania. As part of a larger study into the potential economic implications of Marcellus Shale development, Considine et al (2009) analyze former Governor Ed Rendell’s proposal for a 5% tax on the value of natural gas production, plus a $0.047/Mcf surcharge on the volume of production. They find “this tax would reduce drilling activity by more than 30 percent.”22 Unfortunately, the authors do not provide a detailed description of their methodology, which limits the comparability of their results both with those found in the existing literature and with my own. In addition, the study was not peer-reviewed and was funded by the Marcellus Shale Gas Committee, an industry trade group, which may raise suspicions of bias. Nevertheless, given that this appears to be, to date, the only Pennsylvania-specific study of the responsiveness of drilling activity to a hypothetical new severance tax, it will serve as a useful basis for comparison to my results. MODEL SPECIFICATIONS AND DATA SOURCES

To my knowledge, all of the existing studies that utilize the Hotelling approach focus on oil drilling, rather than natural gas drilling. Nevertheless, their results may provide a useful benchmark for comparison with the results of this study, insofar as oil and gas are both non-renewable energy resources whose extraction is capital intensive. Altogether, these studies (Chakravorty et al 2009,9 Kunce 2003,10 Kunce et al 2003,11 and Gerking et al 200012) find that a 1% increase in the severance tax rate can be expected to generate anywhere from a 0.6% to a 3.71% reduction in oil drilling.

I use monthly time series data from January 1993 through December 2012 to estimate four empirical models. All four models have the same dependent variable: PERMITS, defined as the number of permits for gas or combined oil and gas wells issued by the Pennsylvania Department of Environmental Protection (DEP) in a given month.23 The number of permits issued is the most readily available proxy for planned investment in Pennsylvania natural gas wells, as data are available on a monthly basis from the DEP’s website. I include the following categories of permits in each month’s count: “Drill and Operate” permits, “Redrill” permits, and “Drill Deeper” permits.

The second approach to severance tax analysis, and the one utilized in this study, entails the estimation of a much simpler static model in which drilling is specified as a function of the wellhead price and other control variables. An increase in the severance tax rate is then simulated as an equivalent percentage

In Specification 1, I include only a single independent variable: REALPRICE, defined as the real wellhead price of natural gas in dollars per thousand cubic feet. I consider the wellhead price to be the best proxy for the price that well owners expect to receive per unit of production, which is the relevant price when

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The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania

considering the responsiveness of drilling to price changes. Nominal wellhead price data are available on a monthly basis for the U.S. from the Energy Information Administration (EIA).24 I use the commodity Producer Price Index (PPI), available on a monthly basis from the Bureau of Labor Statistics (BLS), 25 to adjust the price data for inflation. Unfortunately, the EIA’s wellhead price data for Pennsylvania are available only on an annual basis from 1967 through 1995. While it would be ideal to use state-level wellhead prices for Pennsylvania, rather than national-level averages, I was unable to locate publicly available non-EIA sources for Pennsylvania wellhead prices. As a result, I consider the EIA’s national-level data to be the best substitute. All else equal, higher natural gas prices correspond to higher expected returns on investment in new wells; accordingly, I expect a positive coefficient on REALPRICE. Note that I use a log-log specification in order to allow an elasticity interpretation of the coefficient on REALPRICE.

and real wellhead prices between January 1993 and December 2012.

1) Ln(PERMITS) = α1 + α2Ln(REALPRICE) + ε

The F statistics indicate that all four specifications are globally significant. The results for Specification 1 indicate that price variations alone account for nearly 40% of the month-to-month variation in the supply of new wells. The addition of the time trend in Specification 2 adds a significant amount of explanatory power to the model, bringing the adjusted R-squared to 0.8148. By contrast, neither the level of proved reserves, nor the existence of the impact fee adds much explanatory power when they are included as controls. All variables are statistically significant at the 0.01 level in all specifications.

In Specification 2, I follow Deacon et al (1990) and Berman and Tuck (1994) in including a time trend (TIME) as a proxy for advancement in drilling technology. 2) Ln(PERMITS) = β1 + β2Ln(REALPRICE) + β3TIME + ε

In Specification 3, I add a control for the level of proved reserves of dry natural gas in Pennsylvania (RESERVES), in billions of cubic feet. Proved reserves data are available on an annual basis from the EIA.26 Intuitively, it seems logical to expect that growth in the size of a state’s known natural gas reserves will attract drilling investment to that state; thus, I expect a positive coefficient on RESERVES. 3) Ln(PERMITS) = γ1 + γ2Ln(REALPRICE) + γ3TIME + γ4Ln (RESERVES) + ε

Finally, in Specification 4, I include IMPACTFEE, a dummy variable for the months in which Pennsylvania’s impact fee for unconventional wells was in effect; February through December 2012. Because the fee is assessed at a flat per-well rate rather than as a percentage of the value of production, it cannot be interpreted as a reduction in the per-unit price received by well owners; consequently, a separate variable is necessary in order to control for the effect of the fee on drilling levels. I use a dummy variable because the size of the fee did not vary between February and December 2012.27 It is worth noting that the fee was applied retroactively to wells that were operational in 2011.28 However, I assume that the retroactivity clause was not anticipated by drillers prior to the fee’s passage, and therefore had no effect on drilling decisions in 2011. Since the impact fee represents an increase in the per-well drilling cost, I expect a negative coefficient. Because the EIA’s reserves data series ends in 2011, I am unable to include the RESERVES control in Specification 4. 4) Ln(PERMITS) = δ1 + δ2Ln(REALPRICE) + δ3TIME + δ4IMPACTFEE + ε

Table 2 reports summary statistics for PERMITS, REALPRICE, and RESERVES. Figure 1 shows fluctuations in drilling permits

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RESULTS I estimated all four specifications using ordinary least squares (OLS) regression. There are 240 observations for every specification except Specification 3, which, due to the lack of available reserves data for 2012, has 228. Table 3 reports coefficients for all four specifications, with standard errors in parentheses. I ran additional regressions, not reported here, to verify that the results for each specification are robust to the use of alternative deflators—specifically, the core Consumer Price Index and the GDP Deflator—in calculating the real wellhead price. DISCUSSION

All coefficients have the expected signs, with the exception of the negative coefficient on RESERVES. One possible explanation for this somewhat counterintuitive result is a nonlinear relationship between reserves and drilling effort. Iledare (1995) posits an effect wherein a high level of reserves (specifically, a high reserve-production ratio) at a particular field may be interpreted by drillers as a “glut,” causing them to scale back drilling effort for a period of time.29 In simpler terms, it is possible that once reserves reach a certain threshold, drillers cut back on exploratory drilling in favor of utilizing existing wells to draw down reserves. In order to test the plausibility of this explanation, I added a quadratic term to Specification 3 (this modified version of Specification 3 will henceforth be referred to as Specification 3a). As seen in Table 4, when the quadratic specification is used, the coefficient on RESERVES becomes positive and statistically significant as initially expected, while the negative coefficient on the quadratic term confirms that the marginal effect on drilling diminishes, and eventually becomes negative, as reserve levels increase. Neither the coefficient on REALPRICE nor the overall explanatory power of the model is substantially affected relative to the linear specification. The coefficient on the IMPACTFEE control is also somewhat surprising, though in magnitude rather than sign. It suggests that the imposition of the impact fee reduced the number of new wells per month by nearly 60%. However, since the control is in the form of a dummy variable, it may be picking up other effects that were specific to 2012. For example, media reports have cited recent improvements in drilling efficiency and productivity that may have decreased the number of new wells necessary to

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The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania

obtain a given increase in production.30 Consequently, at least several more years’ worth of data, incorporating some variation in the size of the fee, will be necessary in order to fully isolate the fee’s impact on drilling. The estimate of the elasticity of drilling with respect to price varies substantially between the specifications, ranging from 0.229 in Specification 3a to 1.005 in Specification 1. Because this elasticity is interpreted as the percent change in drilling per percent change in price, it is the primary result of interest in projecting the impact of a new severance tax on drilling investment. Consider a severance tax on the wellhead value of natural gas production with a statutory rate of X%. Assuming that drill owners are price takers and that no deductions or credits for the cost of production are permitted, the tax has the effect of decreasing the net price received by the well owner by exactly X%. Thus, the effect of the tax on drilling investment should be identical to the effect of decreasing the wellhead price by X%.31 It is important to note, however, that the price variable in my specifications is given in real terms while a severance tax is equivalent to a reduction in the nominal wellhead price. Consequently, we cannot simply conclude that the reduction in drilling resulting from a 1% severance tax would be equal to the estimated real price elasticity. Rather, it is necessary to compare the amount of drilling predicted by the model over some time period at a particular severance tax rate with that predicted in a no-tax scenario. With this in mind, I utilized my estimated coefficients to project the total number of new wells over the 20-year period from January 2014 through December 2033. For projected nominal prices in the no-tax scenario, I used the projected annual Northeast spot prices reported in the EIA’s 2013 Annual Energy Outlook (AEO).32 To project drilling at a particular severance tax rate, I simply decreased the EIA’s projected nominal prices by the statutory rate. To translate nominal prices into real prices, I assumed that the commodity PPI grows at a monthly rate of 0.23%, its average monthly growth rate over the 1993-2012 period. The AEO reports annual national-level projections for proved reserves without any state-by-state breakdown.33 Consequently, I assumed that, beginning in 2012, Pennsylvania’s proved reserves grow at the same rate as the national total. Based on these assumptions, Table 5 reports the projected percentage reduction in the total number of new natural gas wells drilled in Pennsylvania between January 2014 and December 2033, relative to the no-tax baseline, at several hypothetical statutory rates (drawn from other U.S. states). Due to the variation between the specifications in terms of the estimated price elasticity, I include “optimistic” projections based on Specification 3a (with a price elasticity of 0.229), “pessimistic” projections based on Specification 1 (with a price elasticity of 1.005), and baseline projections based on Specification 2 (with a price elasticity of 0.559). I did not generate projections based on Specification 4 due to the problems with the impact fee control discussed above. Therefore, the historical responsiveness of natural gas drilling in Pennsylvania to changes in wellhead prices suggests that the effect of a new severance tax would be quite small. Specifically, it

13

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is instructive to compare my results to those reported by Considine et al (2009). The proposal analyzed in that study—a 5% tax on total production value, plus a $0.047 surcharge per thousand cubic feet of production—would, over the 20-year period and at the projected wellhead prices used in my analysis, be approximately equivalent to an average effective tax rate of 5.72% on total production value. Thus, my results suggest that, even in the pessimistic scenario, this proposal would reduce new drilling between 2014 and 2033 by 5.75% relative to the no-tax scenario, a far cry from that study’s projected reduction of over 30%.37 It is also worth noting that my method is likely to overstate the impact of a given statutory severance tax rate. The reason for this is that “pure” severance taxes are rare: most states that levy severance taxes also offer a number of offsetting deductions and credits that allow drillers to reduce their annual severance tax burdens. Consequently, states’ effective severance tax rates— defined as the “ratio of taxes (or royalties) collected from a particular tax to the [total] value of production” in the state— tend to be lower than their statutory rates.38 For example, Wood (2013) calculates West Virginia’s 2011 effective severance tax rate as 4.347%, compared to its statutory rate of 5%.39 If Pennsylvania followed other states’ lead in offering drilling incentives, a given statutory rate would likely be associated with a smaller percentage reduction in drilling than projected in Table 5. CONCLUSIONS Based on historical evidence as to the elasticity of natural gas drilling in Pennsylvania with respect to the wellhead price, I find that the impact of a severance tax would be substantially smaller than that predicted by a previous industry-funded study. Specifically, my estimates imply that the 5% severance tax proposed by several gubernatorial candidates would reduce new drilling by between 1.17% and 5.026% over a 20-year period, depending on which specification is used to generate the projections. It is important to note that my findings should not be interpreted as providing unequivocal support for the imposition of a severance tax in Pennsylvania. My projected reduction in new drilling is small, but it is not zero. Ultimately, policymakers will need to weigh this cost against the prospect of a new state revenue stream, the economic benefits of which would depend on the extent to which it was directed towards high-return public investments such as infrastructure improvements, education, research, and so forth. It is also worth noting that, to the extent that natural gas drilling generates negative environmental externalities, a tax that reduced drilling investment could theoretically be welfare enhancing. Such are the considerations that will need to be weighed against a possible reduction in employment growth in Pennsylvania’s natural gas industry. There are at least three reasons for caution in applying my results. The first, as noted in Section 3, is my use of U.S.-level rather than Pennsylvania-level wellhead prices. While I assumed that U.S.-level wellhead prices are a reasonable proxy for state-

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The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania

level wellhead prices, this may not be the case for some of the latest observations in my time series: the EIA noted that spot prices at a Pennsylvania trading hub recently began to diverge from Henry Hub spot prices due to long-distance pipeline capacity constraints.40 Consequently, a usable time series of state -level wellhead prices would provide a more accurate measure of the prices received by owners of Pennsylvania wells, and therefore more accurate estimates of the effect of a tax applied to Pennsylvania production. Secondly, the fact that my model is estimated using single-state time series data implies that it may not fully pick up the role of cross-state differences in after-tax prices in driving drillers’ investment decisions. A single-state model implicitly assumes that the question facing drillers is binary: “To drill in Pennsylvania, or not to drill in Pennsylvania?” In reality, of course, the decision is more complex: drillers have the option of spreading their investment among many states, and a model estimated using a panel of cross-state wellhead price and tax data might well show drilling to be more sensitive to state-level tax changes than my results imply. Ideally, such an analysis would also take into consideration cross-state differences in non -price determinants of investment decisions, such as labor and material costs, regulatory regimes, transportation infrastructure,

and proximity to markets. Finally, my static modeling methodology, while consistent with the approach taken by some previous researchers, is somewhat crude. The use of calibrated dynamic optimization models to compare optimal extraction paths in the pre-and-post tax scenarios is undoubtedly the “gold standard” in the severance tax simulation literature, and the application of this methodology to the Pennsylvania natural gas industry would seem to be a worthwhile direction for future research. With the above caveats acknowledged, the effects that I estimate for Pennsylvania are broadly consistent with what would be expected based on the results of previous studies focused on other states. Consequently, it seems safe to view the results contained in this paper as reasonably accurate, albeit rough, first approximations for the specific case of Pennsylvania. When placed in the context of the existing literature, my results can serve as a useful starting point for estimating the magnitude of, and assessing industry claims relating to, the trade-offs associated with proposals for a Pennsylvania severance tax. 1)

Michael T. Jackson MSPPM ‘15

Heinz College, Carnegie Mellon University Mickey is a second-year Master of Science in Public Policy and Management (MSPPM) candidate at Carnegie Mellon University's Heinz College. His primary interests are in quantitative approaches to policy analysis and evaluation, with an emphasis on social and economic policy at both the federal and sub-federal levels.

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The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania

SOURCES 1)

2)

3)

Mitch Kunce and William Morgan, “Taxation of Oil and Gas in the United States 1970-1997,” Natural Resources Journal 45 (2005), 77-101.

“Fee Schedule,” Public Utility Commission, https://www.act13-reporting.puc.pa.gov/ Modules/Disbursements/FeeSchedule.aspx. Ibid.

5)

Katie Colaneri, “Democratic Frontrunner for Governor Proposes Severance Tax on Shale Gas,” National Public Radio, last modified September 4, 2013, http://stateimpact.npr.org/ pennsylvania/2013/09/04/democraticfrontrunner-for-governor-proposes-severancetax-on-shale-gas.

7)

8)

9)

Katie Colaneri, “Democratic Frontrunner for Governor Proposes Severance Tax on Shale Gas,” National Public Radio, last modified September 4, 2013, http://stateimpact.npr.org/ pennsylvania/2013/09/04/democraticfrontrunner-for-governor-proposes-severancetax-on-shale-gas.

Ujjayant Chakravorty, Shelby Gerking, and Andrew Leach, “State Tax Policy and Oil Production: The Role of the Severance Tax and Credits for Drilling Expenses,” in U.S. Energy Tax Policy, ed. G.E. Metcalf (Cambridge: Cambridge University Press, 2011), 305-337.

11)

Mitch Kunce, Shelby Gerking, William Morgan, and Ryan Maddux, “State Taxation, Exploration, and Production in the U.S. Oil Industry,” Journal of Regional Science 43, no. 4 (2003): 749 -770.

15

17)

18)

Robert Deacon, Stephen DeCanio, H.E. Frech 19) III, M. Bruce Johnson, and Joseph P. Kalt, Taxing Energy: Oil Severance Taxation and the Economy (New York, Holmes and Meier, 1990).

Mitch Kunce, “Effectiveness of Severance Tax Incentives in the U.S. Oil Industry,” International Tax and Public Finance 10, no. 5 (2003): 565-587.

13)

16)

“MSC Statement on Pa. Shale Development,” Marcellus Shale Coalition, last modified October 10, 2013, http:// marcelluscoalition.org/2013/10/msc-statementon-pa-shale-development.

10)

12)

14)

Jacquelyn Pless, “Oil and Gas Severance Taxes: States Work to Alleviate Fiscal Pressures Amid the Natural Gas Boom,” National Conference of State Legislatures, last modified February 2012, http://www.ncsl.org/research/energy/oil-and15) gas-severance-taxes.aspx.

4)

6)

content.csbs.utah.edu/~lozada/Research/ Severance_Taxes/LozHog_Final.pdf.

Shelby Gerking, William Morgan, Mitch Kunce, and Joe Kerkvliet, “Mineral Tax Incentives, Mineral Production and the Wyoming Economy,” Wyoming Department of Administration and Information, Economic Analysis Division, last modified December 1, 2000, http://eadiv.state.wy.us/mtim/ StateReport.pdf.

Omowumi O. Iledare, “Simulating the Effect of Economic and Policy Incentives on Natural Gas Drilling and Gross Reserve Additions,” Resource and Energy Economics 17, no. 3 (1995): 261-279.

ng_pri_sum_dcu_nus_m.htm. 25)

“Producer Price Index – Commodities” [data file], Bureau of Labor Statistics, accessed October 24, 2013, http://www.bls.gov/ppi/ #data.

26)

“Dry Natural Gas Proved Reserves as of 12/31 (Summary)” [data file], Energy Information Administration, accessed October 24, 2013, http://www.eia.gov/dnav/ng/ ng_enr_sum_a_EPG0_R11_BCF_a.htm.

27)

“Fee Schedule,” Public Utility Commission, https://www.act13-reporting.puc.pa.gov/ Modules/Disbursements/FeeSchedule.aspx.

28)

Scott Detrow, “Mapping Pennsylvania’s Impact Fee by County,” National Public Radio, last modified February 9, 2012, http:// stateimpact.npr.org/pennsylvania/maps/ mapping-the-impact-fee-by-county.

29)

Omowumi O. Iledare, “Simulating the Effect of Economic and Policy Incentives on Natural Gas Drilling and Gross Reserve Additions,” Resource and Energy Economics 17, no. 3 (1995): 261-279.

30)

Laura Legere, “EIA: Better Drilling, Bigger Wells Driving Marcellus Growth Despite Fewer Rigs,” National Public Radio, last modified October 24, 2013, http://stateimpact.npr.org/ pennsylvania/2013/10/24/eia-better-drillingbigger-wells-driving-marcellus-growth-despitefewer-rigs

31)

Deacon et al, Taxing Energy: Oil Severance Taxation and the Economy (New York, Holmes and Meier, 1990)

32)

“Lower 48 Natural Gas Production and Spot Prices by Supply Region, Reference Case” [data file], Energy Information Administration, accessed November 7, 2013, http:// www.eia.gov/oiaf/aeo/tablebrowser/ #release=AEO2013&subject=0AEO2013&table=72-AEO2013&region=00&cases=ref2013-d102312a

33)

“Oil and Gas End-of-Year Reserves and Annual Reserve Additions, Reference Case” [data file], Energy Information Administration, accessed November 7, 2013, http://www.eia.gov/oiaf/ aeo/tablebrowser/ #release=AEO2013&subject=0AEO2013&table=73-AEO2013&region=00&cases=ref2013-d102312a

Deacon et al, Taxing Energy: Oil Severance Taxation and the Economy (New York, Holmes and Meier, 1990) . Fan Chen and Scott C. Linn, “Oil and Natural Gas Futures Prices and Drilling Activity,” University of Oklahoma, last modified April 23, 2013, https://sites.google.com/site/ fanchenou1983/research. (This doesn’t link directly to the article but to a page containing a link to it. The actual source is super long and takes up a ton of space. Is acceptable just for sake of formatting tidiness? Timothy J. Considine, Robert Watson, and Seth Blumsack, “The Economic Impacts of the Pennsylvania Marcellus Shale Natural Gas Play: An Update,” Marcellus Shale Gas Coalition, last modified May 24, 2010, http:// marcelluscoalition.org/wp-content/ uploads/2010/05/PA-Marcellus-UpdatedEconomic-Impacts-5.24.10.3.pdf. Guro Børnes Ringlund, Knut Einar Rosendahl, and Terje Skjerpen, “Does Oilrig Activity React to Oil Price Changes? An Empirical Investigation,” Statistics Norway, last modified March 2004, http://www.ssb.no/a/ publikasjoner/pdf/DP/dp372.pdf. Matthew Berman and Bradford Tuck, “New Crude Oil Reserve Formation: Responsiveness to Changes in Real Prices and the Reserves-ToProduction Ratio,” OPEC Review 18, no. s3 (1994): 413-430.

20)

Margaret A. Walls, “Modeling and Forecasting the Supply of Oil and Gas: A Survey of Existing Approaches,” Resources and Energy 14, no. 3 (1992): 287-309.

21)

Ibid.

22)

Timothy Considine, Robert Watson, Rebecca Entler, and Jeffrey Sparks, “An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play,” Marcellus Shale Gas Committee, retrieved from http:// marcelluscoalition.org/wp-content/ uploads/2010/05/ 34) EconomicImpactsofDevelopingMarcellus.pdf, 32.

23)

Gabriel A. Lozada and Michael Hogue, “The Effect of Proposed 2009 Tax Changes on Utah’s 24) Oil and Gas Industry, University of Utah, last modified December 18, 2008, http://

“Permits Issued by Well Type – Monthly” [data file], Pennsylvania Department of Environmental Protection, accessed October 15, 2013, http:// 35) www.depreportingservices.state.pa.us/ 36) ReportServer/Pages/ReportViewer.aspx?/ Oil_Gas/ 37) Permits_Issued_Count_by_Well_Type_Monthly . “U.S. Natural Gas Prices” [data file], Energy Information Administration, accessed October 15, 2013, http://www.eia.gov/dnav/ng/

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Summer 2014

Jacquelyn Pless, “Oil and Gas Severance Taxes: States Work to Alleviate Fiscal Pressures Amid the Natural Gas Boom,” National Conference of State Legislatures, last modified February 2012, http://www.ncsl.org/research/energy/oil-andgas-severance-taxes.aspx Ibid. Ibid. Timothy Considine, Robert Watson, Rebecca Entler, and Jeffrey Sparks, “An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play,” Marcellus Shale Gas Committee, retrieved from http:// marcelluscoalition.org/wp-content/


The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania

uploads/2010/05/ EconomicImpactsofDevelopingMarcellus.pdf, 32. 38)

Mitch Kunce and William Morgan, “Taxation of Oil and Gas in the United States 1970-1997,” Natural Resources Journal 45 (2005): 88.

39)

Michael Wood, “A Look at Other States Shows Marcellus Impact Fee Shortchanges Pennsylvanians,” Pennsylvania Budget and Policy Center, last modified August 8, 2013, https://pennbpc.org/look-other-states-showsmarcellus-impact-fee-shortchangespennsylvanians

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40)

“Spot Natural Gas Prices at Marcellus Trading Point Reflect Pipeline Constraints,” Energy Information Administration, last modified July 23, 2012, http://www.eia.gov/todayinenergy/ detail.cfm?id=7210.

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The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania

APPENDIX Table 1: Estimates of the Elasticity of Oil or Gas Drilling with Respect to Price, from Selected Previous Studies Study

Resource

Drilling Measure

Estimated Elasticity of Drilling with Respect to Price

Chen and Linn (2013)

U.S. natural gas

Rig count

0.436

Considine et al (2010)

Barnett Shale (TX) natural gas

New wells drilled

2.7

Ringlund et al (2004)

U.S. oil

Rig count

1.7

Berman and Tuck (1994)

U.S. oil

New wells drilled

1.105

Pindyck (1974), reported in Walls (1992)

U.S. natural gas

Number of exploratory wells drilled

-0.03

Erickson and Spann (1971), reported in Walls (1992)

U.S. natural gas

Number of exploratory wells drilled

0.35

Table 2: Summary Statistics Variable

17

Observations

Mean

PERMITS

240

249.1083

Standard Deviation 144.4046

REALPRICE

240

2.534217

1.108595

0.9278351

6.215403

RESERVES

228

4367.526

5952.369

1482

26529

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Minimum

Maximum

24

549

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The Projected Impact of a New Severance Tax on Natural Gas Drilling in Pennsylvania

Table 3: OLS Regression Results with Ln(PERMITS) as Dependent Variable Variable

Spec. 1

Spec. 2

Spec. 3

Spec. 4

Constant

4.472833 (0.0763697) 1.005396 (0.0812897)

4.013361 (0.0463874) 0.5594573 (0.0486257) 0.0069211

5.428838 (0.4550629) 0.2404221 (0.0749887) 0.0102879

4.048975 (0.044218) 0.4032169 (0.0538818) 0.0079395

Ln(REALPRICE) TIME Ln(RESERVES)

-0.1892969

IMPACTFEE

-0.5913758

Observations

240

240

228

240

F statistic

152.97

526.75

427.56

405.04

R-Squared

0.3913

0.8164

0.8513

0.8374

Adj. R-Squared

0.3887

0.8148

0.8493

0.8353

Standard errors are reported in parentheses. All coefficients are statistically significant at the .01 level. Sources: Pennsylvania Department of Environmental Protection for PERMITS, U.S. Energy Information Administration and U.S. Bureau of Labor Statistics for REALPRICE, U.S. Energy Information Administration for RESERVES, Pennsylvania Public Utility Commission for IMPACTFEE.

Table 4: OLS Regression Results with Ln(PERMITS) as Dependent Variable, Specification 3a Constant

-5.13874

Ln(REALPRICE)

0.2291754

TIME Ln(RESERVES)

0.008817 (.0009286) 2.242269

[Ln(RESERVES)]2

-0.1346846

Observations

228

F statistic

333.17

R-Squared

0.8567

Adj. R-Squared

0.8541

Standard errors are reported in parentheses. All coefficients, with the exception of the constant, are statistically significant at the .01 level.

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18


THE HEINZ JOURNAL

Healing U.S.-Russia Relations Through Mutually Beneficial Space Cooperation Kathleen Karika

ABSTRACT The United States and Russia have a history of space cooperation dating back to 1962, a year when relations could not get much worse owing to the Cuban Missile Crisis. However, the two countries forged ahead and progressively improved relations during and after the Cold War through mutually beneficial space cooperation. They can do so again through enhanced space relations. The U.S.-Russia relationship is in a decaying state and experts believe that space is set to be the next area where this cooperation is about to cease . Rather than end space cooperation, the Obama administration should pursue increased space cooperation with Russia in both government and commercial sectors. Robust relations in space affairs have the potential to spill over into the greater U.S.-Russia relationship and begin repairing the frayed U.S.-Russian relation. Keywords: INTRODUCTION For decades, the relationship between the U.S. and Russia has ebbed and flowed. By the conclusion of the George W. Bush administration, relations had progressively deteriorated, ending bitterly with Russia invading Georgia, a U.S. ally, in 2008. Many thought President Barack Obama would be able to repair the United States’ relationship with Russia. Unfortunately, President Obama’s optimistic “reset” of U.S.-Russia relations did not take hold and now, the relationship is so tense that meetings have been canceled and there is a strong personal dislike between the two nations’ leaders. Since Vladimir Putin’s return to the presidency last year, the relationship has continued to sour. Chronologically starting in 2012: the United States punished Russian officials for human rights violations; Russia banned American parents from adopting in Russia; Russia granted sanctuary to American leaker Edward Snowden; President Obama cancelled a scheduled sit-down with President Putin; President Obama called President Putin the “bored kid in the back of the classroom”; President Putin resolved the spiraling problems in Syria and flaunted it in a New York Times op-ed; and Forbes named President Putin the most powerful person in the world instead of acknowledging the leader of the free world, Barack Obama.2 Today, the drama continues with negotiations over Iran’s nuclear program and Russia’s annexation of Crimea..

19

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Fortunately, all has not been lost in the recent dust-ups. The mutually beneficial cooperation between the United States and Russia in the space industry endures. The history of this cooperation goes back to the first U.S. orbital spaceflight in 1962, the same year as the Cuban Missile Crisis, and continues till today.3 Soviet premier Nikita Khrushchev sent a telegram to President John F. Kennedy congratulating him and advocating for space cooperation, paving the way for the first U.S.-Soviet space cooperation agreement. Today, the U.S.-Russia partnership on the International Space Station (ISS) builds on that legacy. International space cooperation is an example to other countries of what can be accomplished through both public and private sector partnerships. Constructive engagement in space with Russia not only produces excellent opportunities for the space community, but also can spread good will to other areas of the bilateral relationship. With deteriorating U.S.-Russia relations, increased constructive engagement between the United States’ and Russia’s government and commercial space sectors can play a vital role in keeping the two countries’ relationship alive. BENEFITS OF COOPERATION IN SPACE Space exploration provides humanity with a better understanding of planet Earth and the surrounding galactic environment. The benefits of space exploration affect everyday

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Healing U.S.-Russia Relations Through Mutually Beneficial Space Cooperation

life in the form of vaccine research for the inhabitants of the ISS, navigation through global positioning systems (GPS) for satellite constellations and high accuracy weather forecasting. On a national level, countries pursue space exploration for prestige, security, and for the economic benefits of advanced technological development. On a global scale, Earth observing satellites provide unmatched information about the Earth’s atmosphere, oceans, and constantly changing environment. Most importantly, space research fulfills mankind’s insatiable need to explore the unknown. The United States’ international space cooperation initiatives serve foreign policy, security, economic, and political goals.4 For space cooperation to work, both sides must benefit, thus the cooperation must also fulfill the needs of its partner countries. The Center for Strategic and International Studies (CSIS) has deftly laid out the four main reasons why countries engage in space cooperation which are briefly described as follows. 5 First, international cooperation saves money for both countries involved. This is certainly the case for the United States using the Russian Soyuz spacecraft to carry astronauts to the ISS while it works on a replacement for the retired Space Shuttle program. Although the National Aeronautics and Space Administration (NASA) claims the Space Shuttle cost $450 million per flight for seven astronauts, other reports indicate it cost closer to $1.5 billion per launch.6 NASA has not released per seat costs for the Space Shuttle, but since it carried seven astronauts, it can be estimated the Shuttle cost about $214 million per seat.7 On the other hand, the Russians charge the United States $70 million per seat on Soyuz.8 This interim arrangement is clearly mutually beneficial. Since 2011 and until at least 2017, the Russians have secured a steady income flow and the United States saves money to be used for developing its new space transportation system. 9 Second, international cooperation increases diplomatic prestige. For example, if the United States and Russia were to jointly recommend India become a partner on the ISS, it would bolster the reputation of all three countries. This would give the U.S. and Russia the opportunity to reaffirm their leadership status on the ISS and the global diplomatic stage by offering to increase the prestige of a fellow spacefaring nation through ISS membership.10 Third, international cooperation increases political sustainability of space programs. When a space program has a substantial following resulting from increased public support or international partnerships, it is more difficult for the program to be terminated because of budget cuts. . Discontinuing international programs is more challenging because of the potentially negative diplomatic impacts. Finally, international projects lead to workforce stabilization. These international programs create stable jobs, which is always beneficial to the politicians who decide whether a program survives.11 Cooperation among the leaders in space is essential because it allows peer space agencies to help each other to stay ahead of the competition.12 Despite many countries increasing their space budgets as of late, for the near future, the ranking of space powers does not seem likely to change.13 However, continued engagement with the space community and investments in space

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are required to keep it that way. Unfortunately, one of the countries not increasing its space budget is the United States with a budget of only $16.9 billion for 2013, which is roughly what it spent in 1986, once adjusted for inflation.14 A renewed emphasis on international space cooperation through actionable funded plans, rather than just releasing joint statements, can revive U.S.-Russia relations and increase budgetary support for space missions. President Obama has chosen to selectively engage Russia over specific issues, rather than adopt one overarching strategy. Unlike Syria and Iran, a much more achievable area for his selective engagement is space programs. President Obama’s National Space Policy centers on international collaboration, so Russian space cooperation would support his outlined objectives.15 There are many precedents for the United States to further its efforts to constructively engage with Russia in space programs. For example, President Bill Clinton used space as he prepared for his first summit with Russian President Boris Yeltsin in 1993. He needed a dramatic initiative to symbolize the Clinton administration’s new strategy toward Russia – much like the Obama administration needs now – and settled on combining the separate U.S. and Russian space station programs into one. Additionally, a signature space program could galvanize the public around a goal or mission. The Mars Curiosity Rover did just that in 2012, increasing Congressional support and, potentially, future funding.16 Any of the programs outlined later in this paper fit the goal of increased international cooperation to bring the United States and Russia closer together. These areas all have the potential to become a shining example to the public and politicians, of the benefits of strengthening the U.S.-Russia relationship through space cooperation. HISTORY The United States and Russia have a long history of space cooperation. NASA and the USSR Academy of Sciences signed the first U.S.-Soviet space cooperation agreement on June 8, 1962, during the Cuban Missile Crisis. As a testament to its importance, President Kennedy did not break this space agreement despite being on the verge of nuclear war with his new partner.17 After the break-up of the Soviet Union, the first U.S.-Russia space cooperation agreement was signed between NASA and the Russian Space Agency, Roscosmos, on June 17, 1992. Most recently, Russian President Dmitry Medvedev and President Obama signed the current space cooperation agreement in 2013, which fits both countries’ plans for further exploration of the Moon and Mars.18 With diplomatic agreements stretching across decades, it is easy to assume they are a given in a global world. However, these agreements should not be taken for granted. A prime example of their importance is when President Ronald Reagan did not renew the U.S.-Soviet space cooperation agreement in 1982. President Reagan was retaliating for the Soviet Union’s institution of martial law in Poland in response to the rise of the Solidarity movement. While it certainly sent a strong message to the USSR, American and Soviet scientists learned that despite a

Summer 2014

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Healing U.S.-Russia Relations Through Mutually Beneficial Space Cooperation

desire to work together, there was little collaboration they could do without a formal framework.19 Another agreement was not signed until after the Soviet Union collapsed in 1992. The 1970s was the peak of international space cooperation in the twentieth century and culminated in the Apollo-Soyuz mission. On July 17, 1975, the Russian Soyuz 19 spacecraft docked with the American Apollo-ASTP spacecraft for a “space handshake”.20 The ability to connect these two countries and vehicles in space during the Cold War paved the way for the many handshakes in the ISS. The ISS is perhaps the most visible example of U.S.-Russia space cooperation. The United States initially intended to develop its own space station, Space Station Freedom, in the 1980s. However, in the early nineties, the plan was losing momentum so the Clinton administration converted it into today’s ISS. In December 1993, the United States and its international partners invited Russia to become a full partner in the ISS design, operation, and utilization. 21 Russia was extended this invitation for a number of reasons, such as to employ out of work Russian scientists in positive pursuits, but most notably because it would begin a new era of improving U.S.-Russia relations. While the goal of making space station construction faster and cheaper through the Russian partnership was not realized, the ISS still enjoys widespread support today. 22 The current status and future for U.S.-Russia cooperation on the ISS is summed up in the Space Exploration Sustainability Act signed January 14, 2013. It enjoyed bipartisan support, which is a significant statement and accomplishment in today’s highly polarized United States Congress.23 As it stands now, the U.S. government will pay Russia for services rendered relating to the ISS through December 31, 2020.24 In addition to using the Soyuz for transportation to and from the ISS, the United States and Russia conduct joint training of the ISS crew members, while sharing scientific discoveries and data with the other ISS partners. 25 Unfortunately, some people focus on the problems in the development of the ISS as a reason for avoiding international space cooperation. Construction of the ISS ran far over budget and past its deadline. Although making Russia a partner in the ISS did not initially decrease cost as believed, Russia has proven to be an invaluable partner. After the Columbia Space Shuttle exploded in 2003, the U.S. Shuttle program was temporarily grounded with no way to send astronauts or supplies up to the space station. The Russian Soyuz and Progress rockets were the only options and allowed the program to continue.26 This is an excellent example of the importance of programmatic redundancy in international space cooperation and how important it is to encourage other space agencies to build complementary programs that can be used in emergencies.27 GOVERNMENT POLICY RECOMMENDATIONS When Russia seized control of the Ukrainian region Crimea in March 2014, the Obama Administration was swift to cut bilateral interaction between the U.S. and Russia. 28 The first declaration to cease cooperation came from the Secretary of Defense and

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NASA soon followed. The NASA Administrator ordered all government-to-government relations stop immediately except for those relating to the ISS.29 Unfortunately, this response is the opposite of what should happen to space relations in during crises, as President Kennedy’s actions during the Cuban Missile Crisis demonstrate. Brian Fung summarizes NASA’s typical role in a situation such as this best: “America’s space agency has always been a key player in diplomacy.” Tensions over Crimea are simply another opportunity for NASA’s capabilities to be exercised as a tool of diplomacy. Space is only one of many facets of the U.S.-Russia relationship, but it perhaps has the greatest potential to get traction on repairing this relationship. Outlined below are some of the many opportunities available to the U.S. to enhance cooperation with Russia. There are many ways the U.S. government could encourage more cooperation in space with the Russian government and Russian companies. Some of the most actionable possibilities are outlined below. Other suggestions posed by various members of the space community include an international anti-asteroid security system, mitigating space debris, and combating satellite collisions.30 There have been a number of organizational improvements made over the years to enhance communication between Russia and the United States. One such example is Russian President Boris Yeltsin’s creation of the Russian Space Agency, Roscosmos, to provide NASA with an equivalent counterpart for missions rather than dealing with a mixture of Russian agencies.31 In the same spirit of facilitating direct communication, President Obama and President Medvedev created the Bilateral Presidential Commission (BPC) with a space cooperation working group. Unfortunately, this effort has yet to produce anything beyond meetings and promises to continue the now routine information sharing resulting from science missions.32 A potential issue the BPC working group could embrace and champion is a topic it has touched on, but not concretely addressed: the future of the ISS. President Obama recently officially extended the United States’ participation in the ISS past 2015 to 2020 and would like to extend it to 2024.33 However, studies indicate the ISS could last until 2028.34 Since Russia and the United States are the key contributors to the ISS partnership and reap numerous benefits from the program, they could jointly lead an effort to extend the program. Also in relation to the ISS, the United States and Russia could bring India in as a partner. This would fulfill the second motivation for international space cooperation outlined by CSIS by generating diplomatic prestige for all three countries.35 Generally speaking, both the U.S. and Russian governments have indicated exploration past the moon, especially manned, could soon become financially feasible only through international partnerships. Although no specific plans have been made, Russia and the United States could very likely partner in the future for deeper space exploration, certainly past the ISS’s low-earth orbit and possibly to Mars. 36 Additionally, there is a general feeling that the scientific data collected from these deep

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Healing U.S.-Russia Relations Through Mutually Beneficial Space Cooperation

space missions benefit all peoples and therefore should be shared globally, not horded by one country. 37 One area of improvement toward increased international collaboration is already underway: U.S. export control revision. Since the end of the Cold War, critics claim U.S. export restrictions inhibit investment and innovation in a more globalized economy. During the Cold War, strict export controls constrained the sharing of sensitive scientific and technical information with foreign entities, especially with the Soviet Union and Warsaw Pact countries, in an effort to keep them from stealing secrets about the United States’ superior technology systems. This strategy effectively allowed the United States and its allies to balance against the Soviet Union’s massive troop strength through a strategic and tactical advantage from these technologies. Unfortunately, these policies were not revised after the Cold War’s end and became a massive inhibitor to international space cooperation and foreign investment in critical industries, such as aerospace and satellites. Foreign companies, especially in Europe, began to market themselves as “ITAR-free” to attract customers put off by the hassle of U.S. export restrictions.38 Fortunately, the Obama administration is reviewing export controls, with a recent success being the initial approvals to remove satellites and related equipment from the U.S. State Department’s Munitions List.39 According to the Aerospace Industries Association, U.S. companies lost $21 billion in satellite revenue from 1999 to 2009, which cost 9,000 jobs each year. Now, instead of losing investors and customers to competitors such as China and the European nations, the United States can better compete in the global satellite market and forge new private and public sector satellite partnerships. 40 As the United States opens up its satellite and aerospace market, Russia needs to continue to keep its markets open for the same reasons. Currently there are talks of Russia’s Security Council banning the sale of RD-180s to the U.S. space industry for use in U.S. launch vehicles. Reports claim Russia would rather focus on its own new space launch center, Vostochny, set to open in 2015.41 A ban would undoubtedly damage NPO Energomash because, at the present, ULA is its only market for the engine. Conversely, the impact on the United States is not as clear. It could be serious because the Atlas V launches essential national security satellites, or minimal because ULA assured its customers it has a large stockpile of engines and can use its Delta IV rocket as a back-up. More serious, however, is speculation that this threat to ban RD-180 sales is in direct response to deteriorating U.S.-Russia relations over issues such as Syria and Edward Snowden.42 Russia’s recent annexation of Crimea will likely further complicate the situation. That makes continued engagement on this issue even more vital and a perfect opportunity to use beneficial space cooperation to mend disintegrating U.S.-Russia relations. COMMERCIAL POLICY RECOMMENDATIONS The commercial space sector is rapidly expanding as national governments relinquish the more minor or routine space tasks to private companies. Already this field has numerous examples of international cooperation and, with the potential for foreign

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buyers, the international aspects of these companies are likely to grow. Two prime examples are Virgin Galactic and Dauria Aerospace. Virgin Galactic is owned by British entrepreneur Sir Richard Branson, but is based in the United States. Although the company is pursuing several ventures in space, it is perhaps best known for its plans to revolutionize the space tourism industry, which the Russians started when it flew American multimillionaire Dennis Tito to the ISS in 2001.43 Dauria Aerospace is the first Russian private space company, but it is registered in the European Union. It will deal in developing and launching smaller and cheaper satellites mostly for monitoring from space.44 These companies are developing industries their home governments decided not to pursue and thus embody the need and demand for a commercial space industry. Without financial and legislative assistance from national governments to facilitate their development, these commercial ventures will struggle to survive. Therefore, both countries should jointly encourage the commercial space industry to develop and thus grow the industrial space base in their respective country. Building on the importance of redundancy, the United States’ moves to reestablish its own means for transportation to the ISS should not be seen negatively by the Russians. The Columbia disaster in 2003 is a prime example of the importance of having multiple means for both people and cargo to reach the ISS. Therefore, the announcement the United States will cease using Roscosmos for transportation to the ISS by mid-2017 is a sign of progress, not waning cooperation between the two countries.45 Additionally, by opening the more routine task of transportation to and from the ISS to the commercial space sector, both the United States and Russia are free to commit resources to other areas of space cooperation. The elimination of the United States’ dependence on Russia for rides to the ISS might see concrete plans finally come together for specific deeper space missions. One concern about international cooperation is the threat of unintentional technology transfer. However, with the proper safeguards in place, this can be overcome. The best example of space cooperation overcoming concerns of technology transfer is Lockheed Martin, now ULA’s, use of NPO Energomesh’s Russian RD-180 rocket engine on its Atlas V rockets. As one of two launch vehicles used for high value national security satellites, the Atlas V and thus the RD-180 are essential to the United States maintaining superpower status and command of common space.46 In the 1990s, NPO Energomash of Moscow built the RD-180 from the Soviet-era RD-170. It is equivalent to half the Soviet-era Energia booster engine, which is the most powerful engine ever made.47 The U.S. government allowed the sale under a specially created joint venture, RD-AMROSS, which outlined that Russia would give a U.S. company the plans for the engine so a domestic U.S. production line could be established within a couple years if needed.48 Last year the head of Roscosmos, Vladimir Popovkin, acknowledged the arrangement is mutually beneficial. For the United States, it is cheaper to buy the RD-180 rocket engines, unquestionably the best liquid-fueled rocket engines in the world, rather than develop them domestically.49 For Russia, there is a steady investment flow into the NPO Energomash enterprise. 50,51

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Healing U.S.-Russia Relations Through Mutually Beneficial Space Cooperation

This model has already been repeated by the commercial space sector. Orbital Sciences uses a Russian NK-33 rocket engine on its Antares launch vehicle.52 Originally intended to be used with the Atlas V, the NK-33 engines sat unused when Lockheed Martin decided to go with the RD-180. However, in 2007, Orbital proposed to use two NK-33 engines for NASA missions to the ISS. Orbital bought twenty engines for ten missions. For Orbital, buying the engines rather than developing them from scratch was more economical and the engines are now in high demand.53 With its first successful Antares test launch on April 21, 2013, Orbital is now looking for ways to get more of the outof-production engines or equivalent substitutes.54 These discussions, although contentious, show that industry partners hope the United States and Russia will be collaborating on rocket engines for years to come.55 CAUTIONS Just as it can build credibility and trust between two countries when there is a successful cooperative space mission, when a planned mission fails to materialize, it hurts a country’s reputation and reliability in the eyes of future partners. The United States should only engage in programs it has a reasonable expectation of delivering. This burden lies with the executive and legislative branches to establish consistent funding and vision. A joint NASA and European Space Agency (ESA) rover mission to Mars, ExoMars, has now become a joint Roscosmos and ESA mission after funding was cut in the 2013 NASA budget. Instead of strengthening NASA’s relationship with the Europeans, it left them struggling to find replacement funding and logistical support.56 Hopefully a planned Russian mission to land a space vehicle on Jupiter’s moon Ganymede with assistance from Europe, the United States, and Japan will not suffer the same fate.57 A specific example of a cooperative program the United States should not join in is the Russian request to establish Global Positioning System (GPS) monitoring stations within the United States. President Putin has made expanding the Russian version of GPS, Global Navigation Satellite System or Glonass, a cornerstone of his third presidential term. However, the U.S. Intelligence Community and Department of Defense believe it will be used for espionage and increasing the accuracy of Russia’s missiles. Although it would be advantageous for the

Russians diplomatically to secure these facilities and possibly help relations, as the U.S. State Department claims, the risks to national security are far too great.58 Therefore, since this program is not clearly mutually beneficial to both countries involved, the United States should not agree to this type of international space cooperation effort. CONCLUSION Diplomatic relations between the United States and Russia are damaged and must be repaired. As one of the only remaining arenas where the countries are continuing to effectively work alongside one another, the space industry provides an ideal starting point for fixing the relationship. U.S.-Russia space relations, starting with President Kennedy, have consistently shown their ability to overcome political tensions and serve as a positive diplomatic healing force. As the relationship currently stands, the U.S. and Russia have many opportunities to collaborate, such as increasing engagement in the BPC space cooperation working group, coordinate future plans for the ISS, develop new partnerships between industry and the government,such as the RD-180 project, and encourage the development of the commercial space industry. Additionally, the space industry is rapidly growing beyond government-run programs. The forthcoming decades will hopefully see the growth of the space tourism industry, with companies marketing trips to the ISS, hotels in space, and sub-orbital flights. Space tourism may also lead to increased educational opportunities in space. The possibilities are endless as this industry takes off, but with each new development, there will be more attention brought to the space industry as a whole. These new industries will require increased intergovernmental coordination for smooth interoperability. As the two greatest space powers, the U.S. and Russia will inevitably meet in forums to determine the space industry’s future,it will be best if strong relationships exist, not just in space, but in other areas as well . Space can serve as an example for other components of the bilateral relationship on how to find and exploit common ground. The U.S. and Russia must have a durable relationship in space affairs along with a strong overall relationship if the two countries that founded the space industry want to stay in the lead in today’s competitive globalized world. For sustainable U.S.-Russia relations, space cooperation must be the first not the final frontier.

Kathleen Karika MIA ‘14

Bush School of Government and Public Service, Texas A&M University Kathleen is a second year MPIA candidate at the George H. W. Bush School of Government and Public Service at Texas A&M University. She earned her Bachelor of Science in Applied Mathematical Sciences at Texas A&M University. While at the Bush School, Kathleen has focused her elective selections on courses related to U.S. military policy and intelligence and focused her research in these courses on space policy.

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SOURCES 1)

David Pratt, The Impossible Takes Longer: The 1,000 Wisest Things Ever Said by Nobel Prize Laureates, New York: Walker & Company, 2007, 39.

2)

Alan Greenblatt, "Frenemies Forever: Why Putin and Obama Can't Get Along," NPR, September 12, 2013, accessed January 16, 2014, http://www.npr.org/2013/09/12/221774010/ frenemies-forever-why-putin-and-obama-cantget-along. Caroline Howard, "The World's Most Powerful People: The 72 Who Rule the World," Forbes, October 30, 2013, http:// www.forbes.com/powerful-people/.

3)

4)

5)

6)

7)

8)

The day after American astronaut John Glenn completed the first U.S. orbital spaceflight in 1962, Soviet Premier Nikita Khrushchev sent a telegram to President John F. Kennedy. “If our countries pooled their efforts – scientific, technical, and material – to master the universe, this would be very beneficial for the advance of science and would be joyfully acclaimed by all peoples who would like to see scientific achievements benefit man and not be used for ‘cold war’ purposes and the arms race” (Logsdon 2002, 17). President Kennedy replied, “I welcome your statement that our countries should cooperate in the exploration of space. I have long held this belief and indeed put it forth strongly in my first State of the Union message…I am instructing the appropriate officers of this government to prepare new and concrete proposals for immediate projects of common action, and I hope that at a very early date our representatives may meet to discuss our ideas and yours in a spirit of practical cooperation” (Logsdon 2002, 17). This later led to the first U.S.-Soviet space cooperation agreement. John M. Logsdon and James R. Millar, “U.S.Russian Cooperation in Human Space Flight Assessing the Impacts,” Space Policy Institute and Institute for European, Russian and Eurasian Studies, Elliot School of International Affiars, The George Washington University, Washington, DC, 2001, 9-11. Vincent G. Sabathier and David Broniatowski, “The Case for Managed International Cooperation in Space Exploration,” Center for Strategic and International Studies,Washington, DC, 2006, 1-4.

1Initially, the Russians charged $55.8 million per seat, but the cost has increased with each contract renewal (Soboleva 2013). Additionally, although the cost per seat will be paid by the Americans, those seats will sometimes be used for Canadian, European or Japanese astronauts. The U.S. will be compensated for the seats through barter arrangements with the respective countries (Associated Press 2013). 9)

10)

The cost of a single seat on the Shuttle was calculated by dividing $1.5 billion by seven, since the Shuttle could carry a maximum of seven astronauts.

The only countries to be invited to join the ISS are the current members, therefore India’s addition to the ISS would instantly elevate its status in the space community. Vincent G. Sabathier and David Broniatowski, “The Case for Managed International Cooperation in Space Exploration,” Center for Strategic and International Studies,Washington, DC, 2006, 2.

12)

The U.S. and Russia currently compete in the space industry against China, Japan, Europe, and India.

13)

Maria Prikhodina, "Space: Why Cooperation is the Key to Progress," Russia Beyond The Headlines, April 12, 2013, http://rbth.ru/ science_and_tech/2013/04/12/ space_why_cooperation_is_the_key_to_progres s_24931.html.

14)

Adam Mann, "Cassini vs. Curiosity: Who Will Suffer the Space Budget Axe?," Wired, November 18, 2013, http://www.wired.com/ wiredscience/2013/11/end-of-cassini-science/.

15)

Office of the President of the United States, “National Space Policy of the United States of America,” The White House, Washington, DC, 2010, 4-12.

16)

John M. Logsdon and James R Millar, “U.S.Russian Cooperation in Human Space Flight Assessing the Impacts,” Space Policy Institute and Institute for European, Russian and Eurasian Studies, Elliot School of International Affiars, The George Washington University Washington, DC, February 2001, 5-6, 16.

18) Associated Press, "Skyrocketing Inflation: Russia Now Charging NASA $70 Million Per Seat to Fly US Astronauts," FoxNews.com, April 30, 2013, 19) http://www.foxnews.com/ science/2013/04/30/skyrocketing-inflationrussia-charging-nasa-70-million-per-seat/.

Russian International Affairs Council Editorial Staff, “Yuri Baturin: Cosmonautics Day as a Key Unifier for Russia,”Russian International Affaris Council, April 19, 2013, http:// russiancouncil.ru/en/blogs/riacmembers/? id_4=443.

21)

John M. Logsdon and James R Millar, “U.S.Russian Cooperation in Human Space Flight Assessing the Impacts,” Space Policy Institute and Institute for European, Russian and Eurasian Studies, Elliot School of International Affiars, The George Washington University Washington, DC, February 2001, 2-6.

The U.S. government plans to replace the Space Shuttle program with its Space Launch System (SLS) and Orion capsule. As with the Space Shuttle, NASA has not released official per seat costs for Orion, which will hold six astronauts, 22) but recent estimates expect it to cost $88-$368 million per seat (Strickland 2013). That would still leave Soyuz as the cheaper option. However, the commercial space company SpaceX 23) anticipates $20 million per seat aboard its Dragon capsule (Klotz 2013).

11)

Carol Pinchefsky, "5 Horrifying Facts You Didn't Know About the Space Shuttle," Forbes, April 18, 2012, http://www.forbes.com/sites/ carolpinchefsky/2012/04/18/5-horrifying-factsyou-didnt-know-about-the-space-shuttle/. John Strickland, "Revisiting SLS/Orion Launch 17) Costs," The Space Review, July 15, 2013, http:// www.thespacereview.com/article/2330/1.

20)

Nezavisimaya Gazeta, "International Cooperation in Space is Impossible," Pravda.ru, May 20, 2010, http://english.pravda.ru/science/ tech/20-05-2010/113443-space_cooperation-0/. "H.R. 6586 - Space Exploration Sustainability Act," Congress.gov United Station Legislative Information, January 14, 2013, http:// beta.congress.gov/bill/112th/house-bill/6586.

24)

Inna Soboleva, "United States Extends NASA's Cooperation with Russia," Russia Beyond The Headlines, January 22, 2013, accessed January 16, 2014, http://rbth.ru/international/2013/01/22/ united_states_extends_nasas_cooperation_with_ russia_until_2020_22091.html.

25)

Andy Pasztor, "Russia Seeks Cooperation with U.S. in Space Effort," The Wall Street Journal, May 19, 2010, http://online.wsj.com/news/articles/ SB10001424052748704912004575252842393481 092.

26)

Nezavisimaya Gazeta,"International Cooperation in Space is Impossible," Pravda.ru, May 20, 2010, http://english.pravda.ru/science/ tech/20-05-2010/113443-space_cooperation-0/. "H.R. 6586 - Space Exploration Sustainability Act," Congress.gov United Station Legislative Information, January 14, 2013, http:// beta.congress.gov/bill/112th/house-bill/6586.

27)

Vincent G. Sabathier and David Broniatowski, “The Case for Managed International Cooperation in Space Exploration,” Center for Strategic and International Studies,Washington, DC, 2006, 5.

28)

Arron Merat and Hayley Dixon, “Ukraine crisis as it happened: US puts military cooperation with Russia on hold,” The Telegraph, March 4, 2014, http://www.telegraph.co.uk/news/ worldnews/europe/ukraine/10672417/Ukrainecrisis-as-it-happened-US-puts-militarycooperation-with-Russia-on-hold.html accessed April 11, 2014

Russian International Affairs Council Editorial 29) Staff, “Yuri Baturin: Cosmonautics Day as a Key Unifier for Russia,” Russian International Affaris Council, April 19, 2013, http:// russiancouncil.ru/en/blogs/riacmembers/? id_4=443.

Brian Fung. “NASA orders its staff to stop talking to Russia, because of Crimea.” The Washington Post. April 2, 2014, http:// www.washingtonpost.com/blogs/the-switch/ wp/2014/04/02/nasa-orders-its-staff-to-stoptalking-to-russia-because-crimea/

"Russia Extends Space Cooperation with US," RIA Novosti, March 23, 2013, http://en.ria.ru/ russia/20130323/180201521.html.

Frank A. Rose, "Leading with Diplomacy to Strengthen Stability in Space," State.gov, November 17, 2011, http://www.state.gov/t/ avc/rls/177306.htm. "Confronting Common Security Threats to Bring Russia and US Together," PenzaNews, March 18, 2013, http:// penzanews.ru/en/opinion/53198-2013. Despite

M. Mitchell Waldrop, “OTA Studies U.S.--Soviet Space Cooperation,” Science, September 1984, 1374-1375.

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the meteorite explosion over Russia in February 2013, the U.S. is not yet seriously considering a joint asteroid defense system at the moment because there is no funding from either country (Fomichev 2013). 31)

32)

33)

34)

35)

36)

40)

Bureau of European and Eurasian Affairs, “U.S.-Russia Bilateral Presidential Commission: Spring 2012 Joint Report,” U.S.-Russian 41) Bilateral Presidential Commission, Washington, DC, 2012, 34-35. Brad Plumer, "NASA Wants to Keep the International Space Station Going Until 2024. Is That a Good Idea?," The Washington Post, January 9, 2014, http:// www.washingtonpost.com/blogs/wonkblog/ wp/2014/01/09/nasa-plans-to-keep-theinternational-space-station-going-until-2024-isthat-a-good-idea/ .

42)

Stephen Clark, "What is the International Space 43) Station's Weakest Link?," SpaceFlight Now, February 29, 2012, http:// spaceflightnow.com/news/n1202/29station/. Vincent G. Sabathier and David Broniatowski, “The Case for Managed International Cooperation in Space Exploration,” Center for Strategic and International Studies,Washington, DC, 2006, 2. Andy Pasztor, "Russia Seeks Cooperation with 44) U.S. in Space Effort," The Wall Street Journal, May 19, 2010, http://online.wsj.com/news/ articles/ SB1000142405274870491200457525284239348 1092.

37)

Maria Prikhodina, "Space: Why Cooperation is the Key to Progress," Russia Beyond The Headlines, April 12, 2013, 1.

38)

Mitchel B. Wallerstein, “Losing Controls: How U.S. Export Restrictions Jeopardize National Security and Harm Competitiveness,” Foreign Affairs 88, no 6, 2009, 209. ITAR stands for the International Traffic in Arms Regulations, which is under the U.S. Arms Export Control Act. ITAR restrictions are considered inhibitive because “arms trade regulations required extensive paperwork and approvals each time 46) U.S. companies wished to transfer satellite hardware or technical knowledge to an entity from another country” (Clark, Obama Signs Law Easing Satellite Export Controls 2013). 47) On January 2, 2013, President Obama signed

39)

25

Kevin Ryan and Simon Saradzhyan, "U.S.Russian Space Cooperation as an Example for Cooperating on Missile Defense," Russia in Global Affairs, June 24, 2012, http:// eng.globalaffairs.ru/number/VitalInterdependence-15579.

Act for Fiscal Year 2013, which included the 48) satellite reclassification provisions (H.R. 4310 National Defense Authorization Act for Fiscal 49) Year 2013 2013). The most recent step taken in the reclassification process was on October 25, 2013 when President Obama issued a Presidential Determination to Facilitate Satellite Reclassification. These actions are all part of his 50) Export Control Reform Initiative (ECR Blog 2013).

H.R. 4310 – National Defense Authorization

45)

Restrictions still remain on launching U.S. satellite exports from China, North Korea, Iran, Cuba, Syria, and Sudan. Russia Today, "Russia Rocket Engine Export Ban Could Half US Space Program," RT.com, August 28, 2013, http://rt.com/news/russianrocket-engine-ban-039/. Warren Ferster, "SpaceNews Blog: Report of Possible RD-180 Ban Could Mean Many Things, Including Nothing," SpaceNews, August 30, 2013, http://www.spacenews.com/article/ opinion/37019sn-blog-report-of-possible-rd180-ban-could-mean-many-things-includingnothing. “Overview: Space Tickets,” Virgin Galactic, accessed January 16, 2014, http:// www.virgingalactic.com/overview/spacetickets/. The Russian company Space Adventures, Ltd. is currently the only company offering space tourism flights to the ISS. Their only repeat customer is Hungarian-American former Microsoft executive Charles Simonyi who flew to the ISS is 2007 and 2009 (Space Adventures, Ltd. 2012).

journal.heinz.cmu.edu

Summer 2014

Warren Ferster, "SpaceNews Blog: Report of Possible RD-180 Ban Could Mean Many Things, Including Nothing," SpaceNews, August 30, 2013, http://www.spacenews.com/article/ opinion/37019sn-blog-report-of-possible-rd180-ban-could-mean-many-things-includingnothing. Despite recent increases in the price of RD180s, the President and Chief Executive of ULA feels it is still competitively priced for the engine performance and quality. ULA has also slowed production so as to not have too large a standing inventory (Selding, Michael Gass, President and Chief Executive, United Launch Alliance 2011).

52)

"Russia Rocket Engine Export Ban Could Half US Space Program," Russia Today, 5. For more information, see “Fact Sheet: Russian Rocket Engines used by the United States” by the Space Foundation.

53)

Kevin Ryan and Simon Saradzhyan,"U.S.Russian Space Cooperation as an Example for Cooperating on Missile Defense," Russia in Global Affairs, June 24, 2012, 5.

54)

Stephen Clark, "Antares Rocket Engines Lean on Russian Moon Legacy," SpaceFlight Now, April 16, 2013, http://spaceflightnow.com/ antares/demo/130416aj26/#.Upy_FeLOTzd.

Andrei Kislyakov, "No Longer United by the Soyuz," Russia Beyond The Headlines, November 2013, 2013, http://rbth.ru/ science_and_tech/2013/11/25/ 57) no_longer_united_by_the_soyuz_31993.html On November 19, 2013, NASA officially began accepting applications from commercial space 58) companies to develop and operate manned spacecraft to run to and from the ISS. So far, SpaceX, Orbital Sciences, Boeing, and Sierra Nevada Corporation have all applied.

http://eng.globalaffairs.ru/number/VitalInterdependence-15579.

It was sold to Lockheed Martin for its Atlas III rocket. The Atlas III later became the Atlas V under the United States Air Force’s Evolved Expendable Launch Vehicle (EELV) program.

51)

Ilya Dashkovsky, "Russia's First Private Space 55) Company Set to Launch," Russia Beyond the Headlines, October 19, 2013, http://rbth.ru/ business/2013/10/19/ russias_first_private_space_company_set_to_la 56) unch_30969.html.

Kevin Ryan and Simon Saradzhyan, "U.S.Russian Space Cooperation as an Example for Cooperating on Missile Defense," Russia in Global Affairs, June 24, 2012,

"Russia Rocket Engine Export Ban Could Half US Space Program," Russia Today, 4.

Stephen Clark, “Mission Status Center,” April 23, 2013, http://spaceflightnow.com/antares/ demo/status.html. Peter B. de Selding, "Europe to Press Ahead with ExoMars Plans Without NASA," SpaceNews, February 13, 2012, http:// www.spacenews.com/article/europe-pressahead-exomars-plans-without-nasa. Maria Prinkhodina, "Space: Why Cooperation is the Key to Progress," Russia Beyond The Headlines, April 12, 2013, 2. Michael S. Schmidt and Eric Schmitt, "A Russian GPS Using U.S. Soil Stirs Spy Fears," The New York Times, November 16, 2013, http://www.nytimes.com/2013/11/17/world/ europe/a-russian-gps-using-us-soil-stirs-spyfears.html?pagewanted=1&_r=0.


THE HEINZ JOURNAL

Addressing the Non-Disclosure of 501(c) 4 Organizations’ Political Donors Stephanie Mabrey

ABSTRACT The recent Citizens United v. Federal Election Commission Supreme Court decision brought tremendous attention to third-party organizations involved in elections, highlighting the vast amounts of money being anonymously contributed and spent on electioneering. One type of organization classified as 501(c) 4 is a social welfare advocacy organization with the primary purpose of issue advocacy that may engage in political activity as a secondary purpose. These organizations are not required to disclose their political donors and are subject to very little regulation. Reforms that require the disclosure of contributions to 501(c) 4 organizations or prohibit electioneering by these groups offer potential improvements over current policy. To evaluate these alternatives, goals to be considered include political feasibility, promotion of transparency, promotion of free speech, and the minimization of implementation costs. While requiring disclosure of contributions to 501(c) 4 organizations contributes greatly to the promotion of transparency and moderately promotes individual free speech, it does little to equalize access to free speech. Prohibiting electioneering by 501(c) 4 organizations, on the other hand, contributes greatly to equalizing access to free speech, but has low political feasibility in terms of likelihood of passage. Based on the analysis, this paper suggests requiring the disclosure of political donors because of this alternative’s moderate level of politically feasibility, high level of promotion of transparency, and moderate level of promotion of individual free speech.

INTRODUCTION The recent Supreme Court decision Citizens United v. Federal Election Commission drew tremendous attention to organizations for their involvement in election-related activities. One type of non-profit organization, a 501(c) 4 organization, is a social welfare group aimed at issue advocacy that can engage in political activity as a secondary purpose.1 Unlike more politically overt organizations, 501(c) 4 organizations can engage in political activity largely without disclosing political donors.2 The lack of disclosure requirements in the current laws governing these organizations creates an information asymmetry problem. This paper first examines the implications of 501(c) 4 involvement in electioneering, which entails advocating for or against candidates for political office within a specified time period prior to an election.3 It considers three policy alternatives to correct this information asymmetry problem, assessing them on the basis of four goals that the policy should seek to achieve. Policy alternatives include current policy, which allows 501(c) 4 organizations’ continued involvement in electioneering and anonymity of donors, requiring the disclosure of political donors, and prohibiting electioneering by 501(c) 4 organizations. This paper evaluates policy alternatives on the basis of political feasibility, promotion of transparency, promotion of free speech, and minimization of implementation costs. Based on the analysis, this paper recommends implementing stricter disclosure requirements for 501(c) 4 organizations because of its moderate journal.heinz.cmu.edu

level of political feasibility, high level of promotion of transparency, and moderate level of promotion of individual free speech. THEORETICAL FRAMEWORK CONTROVERSY SURROUNDING 501(C) 4 ORGANIZATIONS The tax status of 501(c) 4 was added to the Internal Revenue Code (IRC) in 1913 with the intention of allowing organizations that advocate on behalf of a particular social welfare issue to have non-profit status.4 While the tax code designates these organizations as issue advocacy groups, they have been permitted to engage in political activity as long as it remains a secondary purpose. Organizations classified as 501(c) 4 are restricted from donating directly to campaigns, but they are able to spend on issue advertisements.5 These advertisements may support or oppose a specific candidate on the basis of the candidate’s support or opposition to a particular social welfare issue.6 By avoiding the use of certain key terms such as “vote for,” “vote against,” “elect,” or “defeat,” these organizations are able to stay within the purview of the laws governing issue advocacy while simultaneously having tremendous levels of involvement in elections.7 For example, a 501(c) 4 organization known as Crossroads Grass Roots Political Strategy promotes a mission of Summer 2014

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Addressing the Non-Disclosure of 501(c) 4 Organizations’ Political Donors

“holding Washington’s feet to the fire on the practical issues that will actually improve our country and our lives.”8 This organization poured millions of dollars into high-profile Senate and Congressional races in an effort to defeat Democratic candidates, with Republican candidates claiming victory in 28 of the 43 races in which this organization became involved.9 Organizations classified as 501(c) 4 are highly involved in electioneering, but are subject to very little regulation. These organizations are only subject to Internal Revenue Service (IRS) regulation as non-profit organizations and not as political organizations.10 Further, they largely circumvent regulation by the Federal Election Commission (FEC) unless they engage in “express advocacy,” which involves explicitly advocating for or against the election of a specific candidate.11 In addition, the 1958 Supreme Court decision NAACP v. Alabama ruled that these organizations do not have to disclose the names of members or donors to avoid the harassment of these individuals.12 Because they are not required to disclose their political donors and are subject to limited regulations, their election-related activity is increasingly controversial. The 2010 Citizens United v. Federal Election Commission decision advanced the involvement of 501(c) 4 organizations in elections by removing independent election-related spending restrictions.13 This ruling struck down provisions of the Federal Election Campaign Act that prohibited corporations from making independent political expenditures, arguing that political speech in a democracy is necessary in decision-making regardless of who funds the speech.14 The elimination of independent expenditure limits and the anonymity of donors make 501(c) 4 organizations an attractive option for those wishing to make significant anonymous contributions, increasing 501(c) 4’s election-related spending. Today, 501(c) 4 organizations are some of the biggest electionrelated spenders, but the legal protection against disclosing the names of donors leads many to refer to their expenditures as dark money.15 It is estimated that organizations that do not disclose information regarding donors spent approximately $138 million in the 2010 election cycle16 and approximately $200 million in the 2012 election cycle.17 Many legal scholars question whether the IRS even investigates if their political activity is truly secondary. 18 INFORMATION ASYMMETRY AS A RATIONALE FOR GOVERNMENT INTERVENTION The key justification behind government intervention in the activities of 501(c) 4 organizations lies in the information asymmetry created by the non-disclosure of donors. An information asymmetry occurs when a supplier of a good does not provide enough information regarding the good for a consumer to make the best possible decision on how much to consume.19 Individuals viewing the political advertisements of 501(c) 4 organizations do not have sufficient information regarding those who fund the advertisements, making it difficult for viewers to assess their overall quality.

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This information asymmetry has been recognized by former Supreme Court decisions, which have argued in support of disclosing political donors in election-related activities as a means to control corruption. For instance, in the 1975 Supreme Court case Buckley v. Valeo, the majority opinion argued that citizens should have information about the identity of political donors to assist them in making election-related decisions.20 The Court argued for this disclosure to both improve the electorate’s understanding of who is funding political advertisements as well as to prevent undue influence by certain parties and potential corruption in elections.21 This viewpoint was reinforced in the Citizens United v. Federal Election Commission decision, in which the majority opinion held that “disclosure permits citizens and shareholders to react to the speech of corporate entities in the proper way.”22 Therefore, government intervention is necessary to correct the information asymmetry created by the nondisclosure of donors. METHODOLOGY This paper utilizes legal and public policy journal articles, news sources, and government and policy organization publications to develop policy alternatives and to provide an assessment of those alternatives in the context of relevant goals. Alternatives are assessed on a ranking scale of “low,” “moderate,” or “high” based on the alternative’s ability to satisfy a particular goal with respect to the other policy alternatives. POLICY ALTERNATIVES This paper compares current policy with two alternative policies: requiring disclosure of 501(c) 4 organizations’ political donors and prohibiting electioneering by 501(c) 4 organizations. CURRENT POLICY Under current policy, 501(c) 4 organizations are permitted to engage in political activity as a secondary purpose, a regulatory requirement dictated by the IRC.23 The IRS enforces this policy through annual information returns filed by 501(c) 4 organizations.24 The FEC is only involved in regulating the activities of 501(c) 4 organizations if these organizations engage directly in electioneering.25 The FEC has interpreted this code governing 501(c) 4 organizations to require disclosure only when funds are contributed for the purpose of creating and dispersing a specific advertisement, rendering these regulations ineffective at policing the activities of 501(c) 4 organizations. 26 Organizations classified as 501(c) 4 evade this requirement by referring to most political donations as “unrestricted donations” or “member dues,” which allows them to leave the identities of political donors undisclosed and avoid FEC regulation. 27 REQUIRING THE DISCLOSURE OF POLITICAL DONORS Stricter disclosure requirements were proposed in the “Democracy is Strengthened by Casting Light on Spending in Elections Act” (DISCLOSE Act) in 2010. The DISCLOSE Act

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would require disclosure of all donations greater than $10,000 for organizations spending more than $10,000 on electioneering.28 It would also expand the period in which political advertisements are considered electioneering.29 Key provisions of this legislation are invoked in this alternative. To mandate stricter disclosure requirements, a change in the current tax code governing 501(c) 4 organizations would pass legislation requiring the disclosure of political donors contributing more than $10,000 to 501(c) 4 organizations. 30 Upon passage, the FEC would enforce these provisions by applying the policies used to regulate the disclosure of 527 organizations’ political donors.31 Specifically, 501(c) 4 organizations would be required to file monthly disclosure reports with the FEC naming donors contributing more than $10,000. The information from these reports would be made public on the FEC’s website within one month of the report being filed.32 Organizations failing to comply with the disclosure requirements would be subject to the same regulatory consequences affecting 527 organizations that fail to disclose political donors, which include taxing any contribution that these organizations fail to disclose.33 Additionally, the IRS has the power to revoke an organization’s tax-exempt status if it fails to comply with the IRC, an enforcement mechanism that could be utilized to enforce disclosure requirements.34 PROHIBITING ELECTIONEERING BY 501(C) 4 ORGANIZATIONS Prohibiting electioneering by 501(c) 4 organizations would ban these organizations from engaging in political activity under any circumstances, a stark contrast to current policy, which allows 501(c) 4 organizations to engage in political activity as a secondary purpose.35 Similar to requiring disclosure, Congress would pass legislation amending the IRC to prohibit 501(c) 4 organizations from engaging in any political activity. Following this change to the IRC, the IRS would reclassify organizations classified under the 501(c) 4 status but engaging in any political activity as 527 organizations. Conducting this reclassification would require an investigation by the IRS, which would examine all activities of 501(c) 4 organizations through the organizations’ financial records to determine if any of their activities are political. Because these organizations already file annual reports with the IRS regarding their fundraising and expenditures, these records would be utilized to determine if any organizations are participating in illegal political activity.36 This alternative would then bring 501(c) 4 organizations that are reclassified as 527 organizations under the regulatory power of the FEC. The former 501(c) 4 organizations that are reclassified as 527 organizations would be subject to the same regulatory requirements that 527 organizations are under current policy. These regulations include filing regular disclosure reports as well as reports regarding the organization’s purpose, officers, and activities with the FEC.37 ANALYSIS AND DISCUSSION

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In the following section, this paper evaluates each previously described alternative on the basis of its political feasibility, promotion of transparency, promotion of free speech, and minimization of implementation costs. First, alternatives are assessed based on two components of political feasibility: the probability of adoption and the likelihood of being evaluated as constitutional under the current Supreme Court. This paper considers the likelihood of being evaluated as constitutional assuming that the current membership of the Supreme Court does not change. This assumption is based on an evaluation of the longevity of the five justices who supported the initial Citizens United v. Federal Election Commission decision, none of which appear to have reason to leave the Supreme Court in the near future.38 These two categories assess both the likelihood of the adoption of the policy in the short-run as well as the likelihood that it would be upheld if it were challenged on constitutional grounds. Additionally, alternatives are assessed based on their contribution to transparency. Prior Supreme Court decisions regarding campaign finance have stressed the importance of the transparency of political donors to allow individuals to assess the merit of election-related communications.39 As such, this paper estimates the level of transparency associated with each policy alternative based on how well each alternative contributes to enhancing the electorate’s understanding of who is funding political activity and the intent behind their particular advertisements. This paper also assesses each policy alternative’s promotion of free speech in two ways. First, this paper analyzes how well the alternative promotes individual liberty or the right to free speech in accordance with the First Amendment.40 This impact is best understood in the context of the Citizens United v. Federal Election Commission decision, which argued that campaign finance restrictions were unconstitutional because they inhibited free speech on the basis of identity.41 As such, this paper analyzes alternatives in terms of how well they promote individual First Amendment rights. Second, this paper analyzes alternatives in terms of how well they promote equalizing access to free speech. In particular, legal scholars have expressed concern that the money involved in elections allows certain parties to have more access to free speech than others.42 Therefore, this paper assesses alternatives in terms of how well they contribute to equalizing access to political speech that allows individuals to affect the outcome of elections. Finally, this paper assesses the costs of implementation associated with each alternative. Two relevant parties are likely to incur costs given a change to current policy. The first relevant party is the United States government, including the IRS and FEC, both of which are likely to incur costs if current policy is changed. Other relevant parties that may incur costs are private entities donating to 501(c) 4 organizations and 501(c) 4 organizations themselves, which may incur compliance or evasion costs associated with a policy change. Therefore, this

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paper evaluates alternatives in terms of the costs incurred by each of these entities. CURRENT POLICY POLITICAL FEASIBILITY. Current policy exhibits high political feasibility because it requires no new legislation, but only moderate political feasibility in terms of the likelihood of being evaluated as constitutional. As current policy would require no legislative action, political feasibility is not a concern in regards to the likelihood of passage of legislation. In terms of constitutionality, all five members of the Supreme Court who supported the majority opinion in Citizens United v. Federal Election Commission are still sitting on the Court. However, recent news coverage highlighted the Court’s consideration of re-hearing Citizens United v. Federal Election Commission, leading one to believe that the Court’s views may have shifted since the 2010 case. Therefore, this paper assesses this alternative as moderately politically feasible in terms of constitutionality. PROMOTE TRANSPARENCY Current policy does little to promote transparency. Because it only requires the disclosure of political donors for 501(c) 4 organizations that expressly advocate for or against candidates within a specific timeframe, current policy creates a large information disparity in regards to the advertisements that these organizations disperse. As such, this paper evaluates current policy as low for its promotion of transparency. PROMOTE FREE SPEECH. While current policy promotes individual free speech, it does little to promote equalizing access to free speech. Current policy imposes no restrictions on individual speech and even encourages it due to the anonymity allowed for those contributing to 501(c) 4 organizations. For this reason, this paper evaluates current policy as high in terms of its promotion of individual free speech. However, current policy creates a large disparity between those who are able to afford to have their voices heard in elections and those who are not. Therefore, this paper evaluates current policy as low in terms of its promotion of equalizing access to free speech. MINIMIZE IMPLEMENTATION COSTS. Given that maintaining current policy would require no change in government or private entity behavior, neither the government nor private entities would bear any additional costs in implementing or complying with this policy. As such, this paper assesses current policy as high in terms of minimizing implementation costs. REQUIRING DISCLOSURE OF POLITICAL DONORS

likelihood of passage, but offers strong prospects for being evaluated as constitutional. Disclosure requirements are recognized as a campaign finance reform proposal that generally receives bipartisan support. However, previous efforts at similar legislation failed in the Senate. Therefore, this paper estimates the likelihood of passage for this alternative as moderate. In terms of constitutionality, multiple Supreme Court majority opinions have offered their support for the disclosure of political donors as an important factor in maintaining transparency in elections. As such, requiring disclosure of political donors exhibits a high likelihood of being evaluated as constitutional. PROMOTE TRANSPARENCY. Requiring the disclosure of political donors would contribute greatly to mitigating the transparency concerns associated with current policy. Because the identities of additional contributors would be disclosed, citizens could better evaluate the intent behind and quality of 501(c) 4 organizations’ advertisements, leading this proposal to be assessed as high in terms of promoting transparency. PROMOTE FREE SPEECH. This alternative would have a moderate impact on individual free speech and a low impact on equalizing access to free speech. In particular, individuals would still be permitted to make unlimited donations to 501(c) 4 organizations. However, the lack of anonymity in these transactions could de-incentivize this type of individual free speech, leading this proposal to be assessed as moderate in terms of its effect on individual free speech. Additionally, the disparity in election-related free speech between those who can afford to contribute and those who are unable to do so would remain. Therefore, this paper evaluates this proposal as low in terms of its effect on equalizing access to free speech. MINIMIZE IMPLEMENTATION COSTS. This alternative poses high costs to both the government and private entities. According to the Congressional Budget Office (CBO), the government and private entities would both incur substantial costs in implementing a proposal such as the DISCLOSE ACT. In particular, the CBO estimates that implementing this legislation would cost the government $3 million dollars in the first year and $2 million dollars in subsequent years. These costs include modifying information systems and regulations, providing necessary training, and costs associated with enforcement. Additionally, according to CBO estimates, private entities including 501(c) 4 organizations, corporations, and individuals would incur costs of approximately $141 million annually to comply with this alternative.

POLITICAL FEASIBILITY.

PROHIBITING ELECTIONEERING ORGANIZATIONS

Requiring the disclosure of political donors has only a moderate

POLITICAL FEASIBILITY

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501(C)

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Addressing the Non-Disclosure of 501(c) 4 Organizations’ Political Donors

This alternative is moderately politically feasible because of its low probability of passage but high probability of being evaluated as constitutional. In light of the tremendous power of 501(c) 4 organizations within the political arena, it is likely that they would apply pressure on legislators to prevent legislation prohibiting their political activity. As such, this paper evaluates this alternative as low in terms of its likelihood of passage. In terms of constitutionality, however, this proposal is very politically feasible. Assuming that Congress passes appropriate legislation modifying the IRC governing 501(c) 4 organizations, there is no likely constitutional question that would be brought up regarding this alternative. PROMOTE TRANSPARENCY This policy would eliminate transparency concerns associated with 501(c) 4 organizations, given that it would prohibit them from engaging in election-related activities. However, there would likely be some sort of spillover effect in terms of the behavior of private entities. These entities would seek new ways to engage in political activity anonymously, possibly creating a new transparency problem within organizations similar to 501(c) 4s. As such, this paper evaluates this proposal as moderate for its promotion of transparency. PROMOTE FREE SPEECH While this policy would decrease individual liberty to engage in free speech by eliminating an outlet, it would have a positive effect in equalizing access to free speech. This alternative would decrease individual liberty to engage in free speech because 501 (c) 4 organizations would no longer serve as a mechanism through which individuals could engage in free speech. However, this alternative would promote equalizing access to free speech by eliminating an outlet that creates a disparity in free speech under current policy. Therefore, this proposal is moderately effective at promoting free speech. MINIMIZE IMPLEMENTATION COSTS The implementation costs of this alternative for government are moderate, in that they would be lower than mandating disclosure requirements but higher than under current policy. Based on the CBO’s estimate for the cost of the DISCLOSE Act, this paper estimates that this alternative would cost the government approximately $1 million in the year of implementation. This cost would be comprised of updates to the information systems by the FEC to allow it to respond to an increased number of organizations subject to the 527 organization regulations. These costs are lower than mandating disclosure requirements because this alternative would not necessitate large changes in employee training and outreach. Additionally, the costs associated with implementing this alternative would be up-front costs, as opposed to the long-term costs associated with requiring the disclosure of political donors. Private entities would also incur costs both because 501(c) 4 organizations would have to restructure their missions and

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activities to comply with the new policy and because private entities would incur transaction costs in seeking out new entities through which to make anonymous political contributions. Therefore, this paper assesses this policy as moderate in its ability to minimize implementation costs. CONCLUSION AND RECOMMENDATION CONCLUSION The increasing role of 501(c) 4 organizations in electioneering and the lack of disclosure of these organizations’ political donors creates an information asymmetry problem that necessitates government information. Alternatives to current policy that may be effective at addressing this information asymmetry problem include requiring the disclosure of political donors and prohibiting electioneering by 501(c) 4 organizations. Requiring the disclosure of political donors would compel 501 (c) 4 organizations to disclose the identities of individuals donating more than $10,000. This policy is assessed as having a high level of promotion of transparency and a moderate level of promotion of individual free speech, but does little to equalize access to free speech. Another alternative that could combat the information asymmetry caused by current policy would be prohibiting electioneering by 501(c) 4 organizations. While this alternative has a significant impact on equalizing access to free speech, it is the least politically feasible in terms of likelihood of passage. RECOMMENDATION Recognizing the crucial goal of political feasibility and with due deference to the importance of correcting the information asymmetry created by current policy governing 501(c) 4 organizations, this paper recommends requiring the disclosure of 501(c) 4 organizations’ political donors. While this alternative poses the highest costs, this paper estimates these costs in terms of the IRS’s and FEC’s budgets, which would both be affected by this policy alternative. The IRS’s fiscal year 2013 budget requests $12.8 billion, encompassing a wide variety of activities beyond the regulation of non-profit organizations. The FEC’s 2013 fiscal budget request asks for $66.4 million, noting the importance of updating information systems to meet increased demand for regulation. Therefore, in the context of both the IRS and FEC budgets, this increased cost is relatively minor and largely composed of improvements in information systems and an increased number of employees to enforce the new policy. Furthermore, this change would provide a tremendous improvement over current policy in promoting transparency, while also providing a moderate level of political feasibility. To improve the legislation’s likelihood of passage, this paper recommends that legislators refrain from amending any specific 501(c) 4 organizations that would be exempt from disclosure requirements into the legislation, as this was the primary cause of previous Republican opposition to similar

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Addressing the Non-Disclosure of 501(c) 4 Organizations’ Political Donors

Stephanie L. Mabrey MPA ‘14

Robert M. La Follette School of Public Affairs, University of Wisconsin - Madison Stephanie Mabrey is a second year MPA at the Robert M. La Follette School of Public Affairs at the University of Wisconsin - Madison. Her primary focus areas are policy analysis, public budgeting, and analytical methods for conducting policy analysis. She is also an active member of the La Follette School Student Association as well as a Project Assistant for a La Follette School professor. Prior to studying at the La Follette School of Public Affairs, Stephanie completed a Bachelor of Arts in Economics at the University of Wisconsin - Eau Claire.

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SOURCES 1)

“A Guide to the Current Rules for Federal Elections,” The Campaign Legal Center, accessed April 14, 2013, <http:// www.campaignlegalcenter.org/index.php? option=com_content&id=1187%3Aa-guide-tothe-current-rules-for-federal-elections>.

2)

Ibid.

3)

Ibid.

4)

Cory G. Kalanick, "Blowing Up the Pipes: The Use of (c)(4) to Dismantle Campaign Finance Reform," Minnesota Law Review 95, no. 6 (2011): 2260.

14, 2013 <http://www.brennancenter.org/ analysis/donors-and-charities-need-protectionsecret-political-spending-grows>. 18)

Andrew C. Byrnes and Cortlin H. Lannin, "I Went Down to the Crossroads: Lifting the Blindfold About the Origin of 501(c) 4 Political Advertisements." University of San Francisco Law Review 46, no. 2 (2011): 503-504.

19)

David L. Weimer and Aidan R. Vining, Policy Analysis: Concepts and Practice. (Boston: Pearson Education, Inc., 2011), 104-111.

20)

5)

Kalanick, “Blowing Up the Pipes: The Use of (c) (4) to Dismantle Campaign Finance Reform,” 21) 2264.

6)

Emma Schwartz (2012). "The Rules That Govern 501(c) 4s," Public Broadcasting Service, accessed February 12, 2013, <http:// www.pbs.org/wgbh/pages/frontline/big-skybig-money/>.

7)

8)

9)

10)

17)

Yasmin Dawood, "Democracy, power, and the Supreme Court: Campaign finance reform in comparative context." International Journal of Constitutional Law 4, no. 2 (2006): 271.

Kalanick, "Blowing Up the Pipes: The Use of (c) 41) (4) to Dismantle Campaign Finance Reform," 2282. 42) Daniel Winik, “Citizens Informed: Broader Disclosure and Disclaimer for Corporate Electoral Advocacy in the Wake of Citizens United.” 43) The Yale Law Journal 120, no. 3 (2010): 648.

Kahl, "Citizens United, Super PACs, and Corporate Spending on Political Campaigns,” 40.

Kahl, "Citizens United, Super PACs, and Corporate Spending on Political Campaigns,” 41.

27)

Ibid.

28)

“H.R. 5175 (111th): Democracy is Strengthened by Casting Light on Spending in Elections Act,” govtrack.us, accessed April 14, 2013, <https:// www.govtrack.us/congress/bills/111/ hr5175#summary/libraryofcongress>.

29)

Ibid.

30)

Ibid.

31)

"NAACP v. ALABAMA," The Oyez Project, accessed February 18, 2013, <http:// www.oyez.org/cases/19501959/1957/1957_91/>.

16)

40)

“A Guide to the Current Rules for Federal Elections,” The Campaign Legal Center.

12)

15)

Kalanick, "Blowing Up the Pipes: The Use of (c) (4) to Dismantle Campaign Finance Reform," 2282.

Kalanick, "Blowing Up the Pipes: The Use of (c) 44) (4) to Dismantle Campaign Finance Reform," 2261.

Kalanick, "Blowing Up the Pipes: The Use of (c) (4) to Dismantle Campaign Finance Reform," 2273-2275.

14)

39)

Kalanick, “Blowing Up the Pipes: The Use of (c) 23) (4) to Dismantle Campaign Finance Reform,” 2274. 24) “Crossroads Grassroots Political Strategies (GPS),” Crossroads GPS, accessed April 19, 2013, <http://www.crossroadsgps.org/about/ 25) >. 26) Kalanick, "Blowing Up the Pipes: The Use of (c) (4) to Dismantle Campaign Finance Reform," 2265-2266.

11)

13)

22)

Court,” Supreme Court of the United States, accessed April 14, 2013, <http:// www.supremecourt.gov/about/ biographies.aspx>.

Andrew C. Byrnes and Cortlin H. Lannin, "I Went Down to the Crossroads: Lifting the Blindfold About the Origin of 501(c) 4 Political Advertisements." University of San Francisco Law Review 46, no. 2 (2011): 482-483.

32) James A. Kahl, "Citizens United, Super PACs, and Corporate Spending on Political Campaigns: 33) How Did We Get Here and Where Are We Going?" The Federal Lawyer 59, no. 5 (2012): 34) 40. Paul Blumenthal (2014) “Figured Out Dark Money Groups, Super PACs? Thanks To The Supreme Court, You’ll Have To Learn About This, Too,” Huffington Post, accessed April 5, 2014, <http:// www.huffingtonpost.com/2014/04/02/ mccutcheon-ruling_n_5078392.html>.

35)

36) Kalanick, "Blowing Up the Pipes: The Use of (c) (4) to Dismantle Campaign Finance Reform," 37) 2264. David Earley (2013) “Donors and Charities Need Protection as Secret Political Spending Grows.” The Brennan Center for Justice at New York University School of Law, accessed April 38)

“A Guide to the Current Rules for Federal Elections,” The Campaign Legal Center. Ibid.

Dawood, "Democracy, power, and the Supreme Court: Campaign finance reform in comparative context," 271. "Citizens United v. Federal Election Commission," The Oyez Project, accessed April 14, 2013, <http://www.oyez.org/cases/20002009/2008/2008_08_205>. Adam Liptak, “Ruling’s Breadth Hints That More Campaign Finance Dominoes May Fall,” The New York Times, accessed April 6, 2014, <http://www.nytimes.com/2014/04/04/us/ politics/ruling-hints-more-campaign-financedominoes-may-fall.html?_r=0>.

45)

Kalanick, "Blowing Up the Pipes: The Use of (c) (4) to Dismantle Campaign Finance Reform," 2277-2278.

46)

Kalanick, “Blowing Up the Pipes: The Use of (c) (4) to Dismantle Campaign Finance Reform,” 2268.

47)

Matthew Pickford, Elizabeth Cove Delisle, and Paige Piper/Bach, “Congressional Budget Office Cost Estimate: H.R. 5175,” Congressional Budget Office, May 25, 2010, <http://cbo.gov/ sites/default/files/cbofiles/ftpdocs/115xx/ doc11533/hr5175.pdf>.

48)

Ibid.

“527s-Frequently Asked Questions,” The Center 49) for Public Integrity, accessed April 21, 2013, 50) <http:// www.publicintegrity.org/2005/11/21/5541/527 51) s-frequently-asked-questions>.

Ibid.

“Disclosure Chart,” The Campaign Legal Center, accessed April 14, 2013, <http:// www.campaignlegalcenter.org/attachments/ CLC_501c_disclosure_chart.pdf>.

Ibid. Ibid.

Ibid. “A Guide to the Current Rules for Federal Elections,” The Campaign Legal Center. “Revoked? Reinstated? Learn More,” Internal Revenue Service, November 13, 2013, <http:// www.irs.gov/Charities-&-Non-Profits/ Automatic-Revocation-of-Exemption>. Kalanick, "Blowing Up the Pipes: The Use of (c) (4) to Dismantle Campaign Finance Reform," 2261. “Disclosure Chart,” The Campaign Legal Center. “527s-Frequently Asked Questions,” The Center for Public Integrity, accessed April 21, 2013, <http:// www.publicintegrity.org/2005/11/21/5541/527 s-frequently-asked-questions>. “Biographies of Current Justices of the Supreme

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THE HEINZ JOURNAL

Measuring and Understanding Economic Growth Outbreaks Samuel Malone Carlos Patino Luis Quintero

ABSTRACT Extraordinary regional economic growth is rarely confined to a single country, and growth contagion between countries is an essential feature of globalized markets. This paper studies growth outbreaks across countries; in particular, can membership in mplicit trade communities predict growth contagion? We use different machine learning methods for grouping countries and then compare the results. First, we use network visualization algorithms based on force and connectedness to map out trade networks. Using these trade networks, we use community-based clustering algorithms to form trade-based clusters of countries. Alternatively, we use k-means clustering to group countries based on GDP growth. We compare the results of these two methods, looking o see if they put countries into the same groups. The results yield interesting patterns in he global trade network from 1970 to 2006, as well as consistent trade communities along the period of analysis. We find evidence of correlation between trade clusters and growth outbreaks, a dynamic important to policy makers interested in selecting trade partners strategically.

INTRODUCTION The primary question of concern is “do a country’s trade relationships link it to the economic growth of its trading partners?” To study this, we group countries once by trade links and again by economic growth, and then compare the results. If membership in growth clubs and trade clusters are overlapping, this suggests a relation between a country’s selection of trading partners and its potential for benefiting (or suffering) from contagious growth (or shrinkage). Machine learning methods offer certain advantages over traditional economic methods to explore phenomenon in international trade and growth. These allow us to identify strong relationships without exogenously imposing a rigid (i.e. linear) relationship between the variables. This approach involves using two different methods to analyze the data, and then comparing their results. The first method is to map existing trade relationships (“trade networks”). Using those trade networks as if a map, we use that information to group countries into identify “trade clusters,” defined as a group of countries with high levels of trade interdependence. The second method is to identify economic “growth clubs,” characterized by a group of countries that experience

33

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simultaneous growth in the same direction. We assume that, to some extent, these growth “outbreaks” are due to growth spilling over from some countries to the rest of the club. We calculate the growth clubs using k-means clustering. Lastly, we seek to understand the overlap between “growth clubs” and “trade clusters.” We will investigate the similarity of those methods and measure the extent to which they can predict a country’s economic future GROWTH AND TRADE It is conventional wisdom that international trading partners might have correlations in their growth patterns. There are different channels by which this can arise. Innovation is an example. Innovations in Country A may affect the quality or nature of exports that travel from Country A to Country B. Particularly where exports from Country A are used as manufacturing inputs in Country B, the spillover effects can be measured in positive or negative pressures on domestic productivity, with gradual impacts radiating across a variety of industries. This will tend to cause positive growth in the receiving country when the exporting country is experiencing positive growth as well. This channel has been explored by Coe & Helpman (1995), Engelbrecht (1997), and Lichtenberg & Pottelsberghe (1998). I II III

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Measuring and Understanding Economic Growth Outbreaks

Direct demand effects are another important channel. Growth in Country A can raise its demand for imports from Country B, as well as Country B’s incentives to produce for export. This channel has been subject to controversy in the literature. Supplyside economists argue that such an increase in demand could cause a corresponding increase in prices, leaving the real product growth unaffected. The final result depends on the market structure in both countries, but this channel remains important both in the literature and in the logic behind policy in most countries. Studies of the connection between international trade and income growth have had difficult determining direction of causation, but have found definite correlation.vi vii In order to overcome the difficulties of measuring causation, Frankel & Romer viii uses geographic characteristics to build indices of international trade. Their work uses these indices as instrumental variables to estimate the causal effect of trade on income. Results show trade has a large and robust positive effect on income. These findings drive our intuition that countries exhibiting similar growth patterns are likely to be connected by trade. Since trade affects income positively (and visa versa) the income growth in one country could be affecting the growth in another through trade. Our approach seeks to test the level of international trade as a possible explanation for our observed growth clubs. We present novel contributions in determining which countries belong to the same growth clubs and trade networks, and we quantify how much trade networks predict the classification in each of these clusters. DATA The dataset we used is obtained from Cáceres & Malone (2013) viiiii and consists of political and economic attributes for 175 countries, measured annually between 1970 and 2006. The dataset includes economic growth and a series of variables with institutional and economic characteristics of the countries. Economic growth in this dataset maps exactly the data obtained from World Bank viiii datasets. We also use a dataset containing annual bilateral trade for each pair of countries to determine each country’s major trading partners from Cáceres & Malone (2013). ix We use this information to quantify the connection between two countries as determined by their trade (exports as a percentage of the exporting country’s total exports). NETWORK ANALYSIS Recall that our main objective is to identify growth clubs and assess whether trade between two countries is an important determinant of shared membership. To do so, first we analyze the trade networks between the countries; later, we analyze the growth of countries within these networks and test whether they belong to the same growth club. To perform the network analysis with the data on bilateral trade, we build the edges (connecting lines between each pair of countries) using bilateral trade as follows:

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where Xij is the share of country i’s exports that go to country j. The value for each edge gives the share of exports relative to the total level of exports Country i has during a given year. We have set a threshold value of 10%, such that in order to be considered a member of the same trading network, imports from country j have to represent at least 10% of country i’s exports. We built trade networks for 1970, 1980, 1990, 2000, and 2006 shown in Figures 1-5, using the Organic Layout algorithm. 4 In these graphics, size of node and color of connection are used to denote information about each country and its trade connections. Larger nodes represent countries with larger “degree,” a measure indicating a greater number of connections . The color of the edge represents the strength of the trade link. Light colors stand for edges that represent a low portion of the total exports for a given country; dark colors indicate a large portion of the total exports of one of the countries. For example, for the 1970 trade network, U.S., U.K., Germany (Federal Republic), France, and Japan are the countries with the largest degrees. These visualized trade networks corroborate the patterns observed elsewhere in contemporary trade scholarship, such as the increasing importance of China and India in global trade. While China was a small node (low degree) in the 1970, for 2006 China is situated next to the U.S. in degree level .x Notice also that across all years the high dependency of many countries to the U.S. economy is consistent. For both networks, 1970 and 2006, the color of the edges for the U.S shows larger strength than those of other central economies such as Germany, Japan, and more recently, China. This result indicates a closer tie between the countries that belong to the US network. In other words, the countries exports in the network are highly dependent on the state and health of the U.S. economy. Analyzing the distribution of degree informs us about the general level of interconnectedness of economies. In general, country degree increased. While for 1970 the largest degree was roughly below 60, by 2006 the largest degree is above 70. This result suggests an increased level of interconnectedness between countries. More countries have intensified their trade ties, and consequently their level of interdependence within the global marketplace. This is an interesting result on its own, with important consequences for trade dynamics and relative power in a progressively more globalized world economy. This trend is demonstrated by Figure 6, which shows the degree distribution for the 1970 and 2006 networks. As can be seen there, the blue dots rise above the red dots on the left side of the chart, indicating an increased number of countries with very high degree (i.e., interconnectedness).

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Figure 1 - Trade Network 1970. Data source: Correlates of War Project; Authorsâ&#x20AC;&#x2122; Calculations.

35

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Figure 2 - Trade Network 1980

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Measuring and Understanding Economic Growth Outbreaks

Figure 3 - Trade Network 1990

37

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Measuring and Understanding Economic Growth Outbreaks

Figure 4 - Trade Network 2000

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Measuring and Understanding Economic Growth Outbreaks

Figure 5 - Trade Network 2006.

39

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Measuring and Understanding Economic Growth Outbreaks

Figure 6 - Degree Distribution for 1970 and 2006 Trade Networks. Source: Authorsâ&#x20AC;&#x2122; Calculations.

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Measuring and Understanding Economic Growth Outbreaks

CLUSTER ANALYSIS OF TRADE-BASED COMMUNITIES Cluster analysis allows us to identify discrete groups of countries based on trade relationships, using the information displayed in the above trade network diagrams. We call these groups trade clusters. To obtain clusters, we use the Community Clustering algorithm (GLay), which seeks to maximize the similarities within clusters and to maximize differences across clusters. The algorithm begins by treating all countries as if they were a single cluster, and then uses information about trade volumes to cut away at the weakest links, until eventually the algorithm is satisfied. In this case, weakness is measured with “betweenness” – higher levels of betweenness indicate lower levels of county-to-county trade, and so weaker ties. The methodology is as follows. The algorithm’s first step is to calculate a betweenness value for all edges connecting one country to another. Next, the algorithm identifies the edge with the highest betweenness and removes it. The algorithm then recalculates the betweenness for all edges that were affected by the removal of the edge in the previous step. These three steps are repeated until no edges between communities remain.

41

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Table 1 and Table 2 summarize GDP growth for each trade cluster. As seen below, each year features between 6 and 8 trade clusters, each with varying numbers of countries that change by year. In addition, some countries consistently belong to the same cluster throughout the period of analysis. In the tables, stars represent five-year average growth rates that are significantly (at 90% confidence level) above or below the critical values simulated using a Monte Carlo approach. The idea here is to check whether the growth of these clusters is significantly different from what one could get by simply rearranging the countries randomly. Significance in growth for a certain cluster suggests then that there is a particular growth level that is unique to countries that are at the same time strongly related by trade (and hence in the same cluster). 5

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Figure 7 â&#x20AC;&#x201C; Trade Clusters 1970.

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Measuring and Understanding Economic Growth Outbreaks

Figure 8 â&#x20AC;&#x201C; Trade Clusters 2006.

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Measuring and Understanding Economic Growth Outbreaks

Figure 9- Product Growth Clusters. Source: Cรกceres et al. (2013) Data;

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Measuring and Understanding Economic Growth Outbreaks

Figure 10 - Product Growth Decision Tree. Data Source: Correlates of War Project, Cรกceres et al (2013); Authors Calculations.

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ASSOCIATIONS BETWEEN TRADE CLUSTERS AND GROWTH CLUBS. CAN WE CONFIRM A CONNECTION FROM THE MONTE CARLO COMPARISON? If our hypothesis (trade relationships affect opportunities for mutual economic growth) is correct, then countries in the same trade cluster will have growth rates that are significantly different from other countries. This is tested with a Monte Carlo procedure, which takes random groups of countries, looks at their collective growth rates, and compares them to each trade cluster. The results are mixed. For the 1970 data set, 3 out of 8 clusters show growth rates significantly above or below the average growth for the full set during that period. For the 1980 data set, 2 out of 6 clusters show growth rates that differ from the average, one of which represents those countries not classified in any cluster due to their lack of significant trade ties. For the 1990 data set, 3 clusters show above/below normal growth rates. Of those 3 cases, one is identified as an unclassified cluster, while another with unusually high growth rates has only a single member. For 1970, two growth clubs present growth rates significantly outside the critical values 90% confidence level). The first club contains the U.K.6, Russia, Sweden, Finland, India, Chile, Norway, and Denmark, among several others (22 in total). This cluster reported an average growth rate of 1.10% during the fiveyear period following to 1970. The next interesting cluster is contains six countries: Albania, Bulgaria, Hungary, Mongolia, Poland, and Romania. This cluster reported an average growth rate of 5.44% during the period between 1971-75, above the critical level simulated for this period. This is the first evidence in the period of analysis of a growth club based on trade linkages. For 1980, only one trade cluster presents growth rates significantly different from the critical values. The cluster includes 13 countries: Austria, Djibouti, Egypt, Ethiopia, Greece, Italy, Libya, Mauritania, Somalia, South Africa, Sudan, Tunisia, and Zambia. According to the clustering algorithm, the central country in this case is Italy. The average growth rates for the five-year periods before and following the definition of the cluster (1980, arbitrary selection) were 1.18% and −0.77%, below the simulated critical values (lower bounds) for either period (see Table 3). In this case, trade linkages influenced underperformance relative to global averages for all members of the cluster. For 1990, we find two interesting clusters, both growing above the critical threshold. The first one includes 23 countries, mostly Southeast Asian economies such as Korea, Malaysia, Singapore, and Thailand, with Japan as the central-main country (the country one with the largest degree), and also China. This cluster reported a growth rate of 3.32% during the five years from 1991 to 1995, a rate that exceeds the simulated critical upper value. The second cluster reported average growth rates above the critical upper bound during both periods of analysis, from 1985-89 and 1991-95. This cluster contains 19 countries from which the U.K. and the Netherlands appear to be the main central countries, based on degree. The trade links for 2000 and 2006 also show interesting patterns. In the 2000 trade network case, cluster #6 (11 members) reports a

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growth rate of 4.90% on average during the 1995-1999 period (five previous years). This cluster includes Belgium as the central country surrounded by its former colony, the Democratic Republic of the Congo, among other small countries such as Liberia, Luxembourg, Afghanistan, and Pakistan. The second cluster contains nine countries and shows an interesting pattern during the ten years around its definition (2000). In this case, the cluster showed a growth rate below the critical average during the five years prior to 2000 (−0.37%) and a growth rate substantially above the critical average value during the five years after 2000 (6.35%). The countries in this cluster are: Russia (as the central economy in the trade network), Barbados, Belarus, Kazakhstan, Kyrgyz Republic, Moldova, Tajikistan, Turkmenistan, and Ukraine. As with the Asian Tigers case, this cluster makes a lot of sense given the high degree of dependency among these economies on global oil and gas prices (US Energy Information Administration International Energy Outlook, 2013) xi. This suggests further exploration of specific economic activities or attributes that might explain the strong connections between country groups. The trade clusters in 2006 did not show a strong support for our hypothesis of trade clusters driving growth rates. However, the cluster for which the U.S. is the central economy exhibits a special behavior. In this case, the average growth rate for the five years prior to 2006 is significantly lower than the average for the full set of countries (1.71%). The next section presents further tests of the connection between belonging to a trade network and belonging to the same growth club. Rather than use the Community Clustering algorithm to make trade clusters, an alternative approach is to build clusters based on the growth levels, using k-means clustering. K-means clustering is a standard method in data mining, originally from signal processing. The method partitions the points in a multidimensional data matrix into k clusters. An iterative partitioning minimizes the sum, over all clusters, of the withincluster sums of point-to-cluster-centroid distances. Neill (2006)xii provides a clear treatment of this topic. Nath (2007)xiii shows an interesting application of this method to detection of crime hot spots. Table 4 shows the results of K-means clustering. Figure 9 shows the clusters graphically, which also gives a better idea of how far away the different clusters are from each other in the space of product growth. The horizontal axis represents growth in the decade of the 2000’s, while the vertical axis represents the growth in GDP in the decade of the 1990’s. For example, the red dot that has the lowest value on the vertical axis corresponds to a country that had nearly no growth in the 2000’s and -6% growth in the 1900s. We can contrast these clusters with the trade-based clusters made in the previous section. A comparison finds overlap between the two groupings ranging between from 55% and 83%, depending on the year and cluster considered. Overall, k-means clustering gives groupings that suggest a stronger connection between growth in countries within each cluster and the probability of belonging to the same growth club.

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Measuring and Understanding Economic Growth Outbreaks

This is important for trade and growth policy because it implies that having a significant volume of trade with a country that is having positive (negative) growth will most likely result in positive (negative) for the countries that accompany it in the growth club. HOW MUCH DO WE NEED TO TRADE TO INCREASE THE PROBABILITY TO BELONG TO SOME GROWTH CLUB? CLASSIFICATION MODEL. These findings identify a problem with our trade-based approach to predicting shared economic growth. Clearly, there are other factors at hand, and the problem requires a more complex model. Accordingly, we have applied a decision tree classification algorithm to specify under which conditions trade most increases likelihood of membership in a common growth club. In layman’s terms, the algorithm looks for a threshold value of trade connectedness and chooses the most meaningful value. Our model suggests this threshold is 30%, so that if country i’s exports to country j are more than 30% of country i’s exports, then there is a 60% likelihood that those countries are in the same growth cluster with country j is 60%. Figure 10 shows the decision tree model. CONCLUDING REMARKS

could shed light on the growth transmission mechanism between trading partners. The analysis of growth clubs is important to policy makers. Given that growth clubs and trade networks are correlated, policymakers looking to foster economic growth should attempt to selectively choose trading partners likely to grow, as well as to nurture growth among their current trading partners. It might be good strategy for a country to strengthen trading ties during a partner’s period of growth, and to implement countercyclical policies to mitigate the transmission of negative growth during recession. This suggests a holistic trade policy that considers these dynamics, rather than only seeking to maximize GDP and export levels. These considerations may be especially important for those countries in strong growth clubs, such as the identified Asian and Russian clusters. Knowledge of this dynamic may be useful for economic projections and growth forecasting. We insist in the caveat that our findings suggest only correlation. The proof of causality remains elusive. The key question for further research would be then to analyze whether trade communities cause growth clubs or visa versa, or if a third factor determines both. Further research involves not only the concept of causality but also exploring additional ways countries can be linked – by language, borders, legal agreements, and other factors.

Our results suggest evidence of a relationship between trade communities and growth patterns. Countries linked to a trading partner by more than 30% of their export volumes are more likely to experience similar growth rates. In recent years, our model detected such trade-based growth clusters in Asia and Russia. This does not mean trade is the only factor in explaining growth clubs; instead, our model suggests it explains up to 83% of the probability of being in the same growth club in the best cases. We encourage a deeper analysis of growth clubs, which

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APPENDIX Selected Trade Clusters We present individual figures for selected identified trade clusters that can be of interest. These individual figures present the details of these trade clusters more clearly. Figure 11 - Trade Clusters 1990. Cluster 4. Source: Correlates of War Project; Authors Calculations

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Figure 12 - Trade Clusters 1990. Cluster 7. Source: Correlates of W ar Project; Authors Calculations.

Figure 13 - Trade Clusters 1990. Cluster 3. Source: Correlates of War Project; Authors Calculations

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Figure 14 - Trade Clusters 1990. Cluster 2. Source: Correlates of War Project; Authorsâ&#x20AC;&#x2122; Calculations.

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Measuring and Understanding Economic Growth Outbreaks

Table 1 - Trade Clusters: Key Statistics. Source: Correlates for War Project Data; Authors Calculations. Year

Cluster

# of member countries

Annual growth rate, previous 5 years

Annual growth rate, next 5

1970

Cluster 1

22

NA

3.81

Cluster 2

22

NA

2.00

Cluster 3

21

NA

3.37

Cluster 4

22

NA

1.10*

Cluster 5

15

NA

2.65

Cluster 6

11

NA

2.14

Cluster 7

6

NA

5.44*

Cluster 8

2

NA

7.33*

No Cluster

49

NA

3.27

Full Set

170

NA

2.86

Cluster 1

31

1.62

0.95

Cluster 2

29

2.91

0.54

Cluster 3

30

2.62

-0.22

Cluster 4

26

2.17

0.72

Cluster 5

11

3.27

1.24

Cluster 6

13

1.18*

-0.77*

No Cluster

28

0.88*

3.06*

Full Set

170

2.21

0.54

Cluster 1

30

1.55

2.08

Cluster 2

26

1.13

-1.13

Cluster 3

23

2.06

3.32*

Cluster 4

24

1.31

-0.79

Cluster 5

19

2.98*

2.72*

Cluster 6

20

-0.15*

0.63

Cluster 7

6

0.83

-0.70

Cluster 8

1

3.50*

1.06

No Cluster

21

0.72

-6.31*

Full Set

170

1.45

0.11

1980

1990

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Table 2 - Trade Clusters: Key Statistics.

Year 2000

2006

Cluster

# of member countries

Annual growth rate, previous 5 years

Annual growth rate, next 5

Cluster 1

39

2.04

2.25

Cluster 2

29

2.41

2.10

Cluster 3

29

2.11

3.14

Cluster 4

28

3.17

3.10

Cluster 5

23

3.50

3.04

Cluster 6

11

4.90*

3.74

Cluster 7

9

-0.37*

6.35*

Cluster 8

2

-1.37*

1.17*

No Cluster

0

Full Set

170

2.52

2.92

Cluster 1

41

2.81

NA

Cluster 2

32

1.71*

NA

Cluster 3

26

3.58

NA

Cluster 4

20

2.13

NA

Cluster 5

17

2.80

NA

Cluster 6

15

3.71

NA

Cluster 7

12

4.22

NA

Cluster 8

2

13.10*

NA

Cluster 9

4

1.85*

NA

No Cluster

1

3.76

NA

Full Set

170

2.92

NA

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Measuring and Understanding Economic Growth Outbreaks

Table 3 – Clusters detected by k-means clustering. Source: Cáceres et al. (2013) Data; Authors Calculations.

Cluster 1: The Bahamas, Burundi, Cameroon, Central African Republic, Comoros, Congo Dem. Rep., Congo Rep., Cote d’Ivoire, Djibouti, Gabon, Gambia, GuineaBissau, Haiti, Kenya, Kyrgyz Republic, Liberia, Libya, Macedonia, Madagascar, Niger, Paraguay, Solomon Islands, Somalia, Togo, Turkmenistan, Zambia, Zimbabwe. Cluster 2: Argentina, Australia, Austria, Barbados, Belgium, Benin, Bolivia, Brazil, Burkina Faso, Canada, Cape Verde, Chile, Colombia, Costa Rica, Cyprus, Denmark Dominica, Dominican Republic, Egypt, Arab Rep. El Salvador, Eritrea, Fiji, France, Germany, Ghana, Grenada, Guatemala, Guinea, Guyana, Indonesia, Iran, Islamic Rep., Iraq, Israel, Italy, Jamaica, Japan, Kiribati, Lebanon, Lesotho, Malawi, Malaysia, Mali, Malta, Mauritania, Mauritius, Mexico, Nepal, Netherlands, New Zealand, Nicaragua, Norway, Panama, Papua New Guinea, Portugal, Rwanda, Saudi Arabia, Senegal, Seychelles, Singapore, Spain, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Swaziland, Sweden, Switzerland, Syrian Arab Republic, Thailand, Tonga, Tunisia, Uganda, United Kingdom, United States, Uruguay, Vanuatu, Yemen Rep. Cluster 3: Afghanistan, Armenia, Azerbaijan, Georgia, Kazakhstan, Lithuania, Moldova, Russian Federation, Sierra Leone, Tajikistan, Ukraine. Cluster 4: Bhutan, Bosnia and Herzegovina, China, Equatorial Guinea, Ireland, Korea, Rep., Kuwait, Maldives, Myanmar, Vietnam. Cluster 5: Botswana, Bulgaria, Cambodia, Chad, Croatia, Czech Republic, Ecuador, Ethiopia, Finland, Greece, Honduras, Hungary, Iceland, India, Jordan, Lao PDR, Mongolia, Morocco, Mozambique, Namibia, Nigeria, Oman, Pakistan, Peru, Philippines, Poland, Romania, Samoa, Sao Tome and Principe, Slovak Republic, Slovenia, South Africa, Sudan, Suriname, Tanzania, Trinidad and Tobago, Turkey, United Arab

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SOURCES 1)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 290292.

19)

2)

Ibid., 290-292.

20)

3)

Kermit Roosevelt. Countercoup: The Struggle for the Control of Iran. New York: McGrawHill Book Company, 1979, 100-101.

Dexter Filkins. "The Shadow Commander." The New Yorker, September 30, 2013, 2.

21)

Ibid., 10.

22)

Ruth Sherlock. “Iran boosts support to Syria.” The Telegraph, February 21, 2014, accessed April 8, 2014, http://www.telegraph.co.uk/ news/worldnews/middleeast/iran/10654144/ Iran-boosts-support-to-Syria.html

4)

Torey L. McMurdo. "The Economics of Overthrow: The United States, Britain, and the Hidden Justification of Operation TPAJAX." Studies in Intelligence Vol. 56 No. 2, 2012: 1526.

5)

Stephen Kinzer. All the Shah's Men. New York: Wiley, 2003, 3.

6)

Kermit Roosevelt. Countercoup: The Struggle for the Control of Iran. New York: McGrawHill Book Company, 1979, 56.

7)

8)

9)

GlobalSecurity.org. Qods (Jerusalem) Force, Iranian Revolutionary Guard Corps (IRGC Pasdaran-e Inqilab). July 28, 2011, accessed September 30, 2013, http:// www.globalsecurity.org/intell/world/iran/ qods.htm. The Telegraph. Iran's Revolutionary Guards: Quds force, October 4, 2007, accessed September 30, 2013, http:// www.telegraph.co.uk/news/ worldnews/1565107/Irans-RevolutionaryGuards-Quds-force.html. The Israeli Intelligence & Heritage Commemoration Center. The Qods Force, an elite unit of the Iran's Islamic Revolutionary Guards Corps, spearheads Iran's global terrorist campaign. Ramat Hasharon: The Meir Amit Intelligence and Terrorism Information Center, 2012: 1-31.

10)

Ibid., 20.

11)

Dexter Filkins. "The Shadow Commander." The New Yorker, September 30, 2013, 5.

12)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 292

14)

Christopher M. Blanchard. Islam: Sunnis and Shias. Washington, DC: Congressional Research Service, 2009: 2, http://www.fas.org/ irp/crs/RS21745.pdf

15)

16)

17)

18)

23)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 305.

24)

Ibid., 292.

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 3-20.

Robert Baer. The Devil We Know: Dealing with the New Iranian Superpower. New York: Crown Publishers, 2008, 35.

42)

Robert M. Gates. From the Shadows: The Ultimate Insider's Story of Five Presidents and How They Won the Cold War. New York: Simon & Schuster, 1996, 194-197.

43)

Steve Coll. Ghost Wars: The Secret History of the CIA, Afghanistan, and bin Laden, From the Soviet Invasion to September 10, 2001. Penguin: New York, 2004, 148-149.

44)

Louise Richardson. What Terrorists Want. New York: Random House, 2006,6.

Robert Baer. The Devil We Know: Dealing with 45) the New Iranian Superpower. New York: Crown 46) Publishers, 2008, 66.

26)

Michael R. Gordon. "Deadliest Bomb in Iraq Is Made by Iran, U.S. Says." The New York Times, February 10, 2007, accessed October 16, 2013, http://www.nytimes.com/2007/02/10/world/ middleeast/10weapons.html?pagewanted=all.

48)

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 71-103.

28)

Paul Richter. "Iran agrees to nuclear limits." Los 49) Angeles Times, November 24, 2013.

29)

Frederick P. Hitz. The Great Game: The Myth and Reality of Espionage. New York: Random House, 2004: 126-130.

30)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 287310.

50) Kim Zetter. New Clues Point to Israel as Author of Blockbuster Worm, Or Not. October 1, 2010, accessed November 4, 2013, http:// 51) www.wired.com/threatlevel/2010/10/stuxnet52) deconstructed/. Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 290291. Barack Obama. The President's Message to the Iranian People. Washington, DC, March 19, 2009.

Rohan Gunaratna. "The Arab Spring: Is Al Qaeda on the Wrong Side of History?" Counterterrorist Trends & Analysis Journal, Vol 3, Issue 9, 2011: 1-4. Brian Michael Jenkins. Al Qaeda in its Third Decade: Irreversible Decline or Imminent Victory?, Santa Monica: RAND Corporation, 2012: 5.

Dexter Filkins. "The Shadow Commander." The New Yorker, September 30, 2013, 9.

31)

Ibid., 6.

47)

27)

The Israeli Intelligence & Heritage Commemoration Center. The Qods Force, an elite unit of the Iran's Islamic Revolutionary Guards Corps, spearheads Iran's global terrorist campaign. Ramat Hasharon: The Meir Amit Intelligence and Terrorism Information Center, 2012, 20 Robert Baer. The Devil We Know: Dealing with the New Iranian Superpower. New York: Crown Publishers, 2008, 228. Ibid., 165. Tony Parkinson. “'Bin Laden' voices new threat to Australia,” The Age, November 14, 2002, accessed October 25, 2013, http:// www.theage.com.au/ articles/2002/11/13/1037080786315.html.

53)

Charles A. Lieberman and Serguei Cheloukhine. "2005 London Bombings." A New Understanding of Terrorism, 2009: 241.

54)

Matthew Levitt. Policy Focus 123: Hizbollah and the Qods Force in Iran's War on the West. Washington, D.C.: The Washington Institute for Near East Policy, 2013: , 3

Robert Baer. The Devil We Know: Dealing with 55) the New Iranian Superpower. New York: Crown Publishers, 2008, 68. 56) Louise Richardson. What Terrorists Want. New York: Random House, 2006, 4.

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 3-20.

Michael Ross. "Hijackers Seize Kuwait Jet, Threaten Emir's Relatives." The Los Angeles Times, April 6, 1988, accessed November 26, 2013, http://articles.latimes.com/1988-04-06/ news/mn-495_1_kuwait-airways.

57)

Ibid., 243.

58)

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 41-42.

34)

Gus Martin. Terrorism and Homeland Security. Thousand Oaks: Sage Publications, 2011: 290.

35)

Louise Richardson. What Terrorists Want. New York: Random House, 2006, 3-20.

36) Karen DeYoung. "Iran Cited in Iraq's Decline in Violence." The Washington Post, December 23, 2007, accessed October 16, 2013, http:// 37) www.washingtonpost.com/wp-dyn/content/ article/2007/12/22/AR2007122201847.html. M.J. Kirdar. Al Qaeda In Iraq. Washington, DC: 38) Center for Strategic and International Studies, 2011: 9. Charles A. Lieberman and Serguei Cheloukhine. "2005 London Bombings." A New Understanding of Terrorism, 2009: 233-248.

York: Random House, 2006, 4-5. 41)

25)

32) Matthew Levitt. Policy Focus 123: Hizbollah and the Qods Force in Iran's War on the West. Washington, D.C.: The Washington Institute for 33) Near East Policy, 2013: 1-15.

13)

Erik Mohns and André Bank. "Syrian Revolt Fallout: End of the Resistance Axis?” Middle East Policy 19, no. 3 2013: 25.

39)

Robert Baer. The Devil We Know: Dealing with the New Iranian Superpower. New York: Crown Publishers, 2008, 80-81.

40)

Louise Richardson. What Terrorists Want. New

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Charles A. Lieberman and Serguei Cheloukhine. "2005 London Bombings." A New Understanding of Terrorism, 2009: 235.

54


THE HEINZ JOURNAL

Multiple Dimensions of Children’s Health: A replica study of “The Impact of Special Supplemental Nutrition Program for Women, Infants, and Children on Child Health By Marina Manganaris and Monika Sklad

ABSTRACT In 2003, Andrea Carlson and Ben Senauer published an article titled “The Impact of Special Supplemental Nutrition Program for Women, Infants, and Children on Child Health” which investigated the impact of Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) on overall health of children who receive WIC benefits. We replicated the study using different measures of health in children. The three indicators we used are childhood asthma, body mass index (BMI) and if the child had to limit activities due to health problems. Our results showed that participation in the WIC program had no impact on any of our health indicators. However, this may be due to several limitations of the tests. We conclude with a discussion of the limitations and policy implications of these test results as well as recommendations for the WIC program moving forward. Key words: over-education, under-education, labor policy, formal sector, logit model, Tanzania

INTRODUCTION A topic often discussed in politics is the extent of government involvement in society. This has been one of the biggest debates going on in the most recent elections. An example of this can be found in social welfare programs, which perhaps explains why government benefits vary largely across states in many programs and why there is a constant debate about benefits. Some of these different programs include social security, unemployment benefits, and Temporary Assistance to Needy Families (TANF). One particular social welfare program, the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), focuses specifically on infants and children. WIC is a program worth researching because much of the research on early childhood nutrition does not specifically focus on WIC’s impact on child outcomes and, therefore, there is still room to explore this policy area.

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In 2003, Andrea Carlson and Ben Senauer published an article in the American Journal of Agricultural Economics titled, “The Impact of Special Supplemental Nutrition Program for Women, Infants, and Children on Child Health.” This article investigated the impact of WIC on overall health of children who receive benefits from the program. They conducted this study using an ordered probit model with the dependent variable being children’s health on a four level scale (excellent, very good, good, and fair) as rated by a physician. We used the same explanatory variables, but altered the measure of children’s health to see if the study’s results remain statistically and practically significant. Specifically, we examined if WIC has an impact on whether a child has asthma, a child’s BMI, and a child’s limited activities by health problems. The current political climate has been focusing on fiscal policy. This means that efficiently spending money on programs is essential. The article “The Impact of Special Supplemental Nutrition Program for

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Women, Infants, and Children on Child Health” 1 shows reason to continue to fund, or even to increase funding for WIC. Carlson and Senauer’s article was very thorough in showing that WIC was linked to positive health outcomes; however, there are many ways to measure health outcomes and countless more ways to interpret the data collected.2 We conduct a replica study for two purposes: first, to test the reliability and validity of Carlson and Senauer’s research and second, to explore the strength of the positive correlation between WIC and child health outcomes. Substituting various dependent health outcomes in place of the authors’ original child health outcome provides a sensitivity analysis to Carlson and Senauer’s research. If multiple measurements of health outcomes all show positive results, a stronger case for funding the WIC program can be built. POLICY OVERVIEW The Special Supplemental Nutrition Program for Women, Infants, and Children Program, most commonly known as WIC, was established in 1972.3 The WIC program is not an entitlement program in that Congress does not set aside funds for every individual who is eligible to participate, but rather a federal grant program. 4 A federal grant program is funded by the federal government with a specific amount of money, regardless of the number of persons eligible for the program. WIC is administered by the Food and Nutrition Service (FNS) at the national level and by 90 state agencies.5 The program is designed to increase the overall health and well being of children. Pregnant women and children up to 5 years old are eligible to receive benefits. The WIC program helps families alleviate some financial stress by providing assistance in the form of food. Assistance is provided through coupons that are redeemed at food stores for WIC approved food. WIC is not a cash assistance program.6 In 1999 the amount of food received each month was worth approximately 40 dollars, and families with nonbreastfeeding infants received coupons for formula worth approximately 90 dollars.7 With nearly 9 million participants on a monthly average in 2011, the program has grown significantly from an enrollment of just 88,000 participants in 1972.8 In addition to food assistance, there are health care and educational aspects to WIC. Health screenings and prenatal care are provided, and classes and nutrition advice are available. WIC also offers support and education about breastfeeding. 9 In addition, WIC provides referrals to and information about other health programs, social services, and welfare programs.10 WIC has been linked to positive outcomes. Specifically, benefits of the prenatal care to better birth outcomes have been shown. 11 However, there has also been some criticism of studies arguing selection bias; the Kowaleski-Jones study corrects for such bias by using a national rather than local sample and using fixed-effects for siblings to adjust for unmeasured heterogeneity among the mothers of the siblings and shows a positive correlation with birthweight.12 According to FNS, WIC is one of the most successful programs for nutrition and one of the most costefficient as well. 13 Understanding the effect of WIC on child outcomes is important in an era of limited government resources and mounting criticism regarding the magnitude of government intervention. Carlson and Senauer showed that WIC is worth funding because of its positive impact on children’s overall health.14 We contribute to the understanding of the WIC program by examining whether it has a positive impact on specific health indicators. LITERATURE REVIEW In their original study on the impact of WIC on children’s overall health status, Carlson and Senauer examined previous studies on WIC as

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support for their argument. 15 We briefly discuss the studies cited in the original paper, as well as more recent research on WIC. Most studies examined the impact of WIC on either nutritional outcomes or medical outcomes for participants. WIC was generally found to have a positive impact on both outcomes. Carlson sand Senauer used National Health and Nutrition Examination Survey (NHANES) III data from 1996 to find how WIC impacts preschool children’s overall health status. Administered by the Centers for Disease Control, the NHANES III data is comprised of various studies and a medical exam that measures the nutritional status and health of Americans. Using an ordered probit model for their ordinal outcome variable, the authors found that the WIC program has a significant positive impact on the overall health of children.16 Arcia, Crouch and Kulka found that WIC participants buy more nutritious food than nonparticipants and have a more efficient household food budget.17 WIC also has a positive impact on the components of the USDA Health Eating Index, excluding saturated fats. 18 A low iron intake is less likely for children on WIC than for children that were not on WIC and had comparable household incomes.19 Carlson and Senauer additionally report that WIC participants had higher intakes of Vitamins C, A, B-6, and folate20 and grains, fruit, dairy, and meat.21 WIC participants had a lower intake of added sugars22 total fat, cholesterol, and sodium.23 Rose, Habicht, and Devaney also found that WIC participation increased the consumption of ten nutrients. 24 25 More recent studies confirmed many of the older studies’ findings on the impact of WIC on nutrition. Lee and Mackey-Bilaver examined the impact of WIC and Supplemental Nutrition Assistance Program (SNAP) on various child outcomes.26 They used the Integrated Database on Children's Services in Illinois (IDB), which is a database that compiles administrative data collected by public service agencies in Illinois.27 Their sample population (n= 252,246) came from children in Illinois who were born between 1990 and 1996 that entered Medicaid within a month of their birth. Medicaid was used so that the authors could examine health-related outcome effects. The authors used Ordinary Least Squares and Fixed Effects techniques. They found that participation in either WIC, both WIC and food stamps, or a food stamp program alone was associated with a lower risk of anemia and nutritional deficiency for children.28 Yen also examined the impact of WIC and SNAP programs on children’s nutrient intake.29 Using Maximum Likelihood estimates in a probit model, Yen found that WIC increases the intakes of iron, potassium, and fiber for children participating in WIC.30 Researchers have routinely found that WIC, in addition to nutritional impact, has been found to improve specific medical conditions for WIC recipients. Carlson and Senauer describe previous research. In terms of medical outcomes, infants born to mothers who participate in WIC have higher birthweights and the prevalence of low and very low birthweight is lower than for eligible nonparticipants.... 31 32 Another study found that the mother's participation in WIC before and after birth reduced neonatal mortality. 33 A report in the CDC's Morbidity and Mortality Weekly Report finds that while obesity remains a severe public health problem, WIC participating children are no more likely to be overweight than other low-income children.34 35 Current research confirmed that WIC has a positive impact on child birthweight. Hoynes,Page, and Stevens constructed an analysis that compared how WIC impacted different counties as it was implemented, rather than comparing participants to non-participants.36 The former method is stronger than the latter because the participant to nonparticipant group selection may have been non-random. The authors performed a differences-in-differences analysis. Similar to previous

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authors, Hoynes et al. included food stamps in their equation to control for its impact.37 The analysis included county control variables and other characteristics of participants. The dependent variables were mean birthweight and low birthweight. The authors found that WIC led to an increase in average birthweight and a decrease in low birthweight births.38 Bitler and Currie also addressed the possible selection problem in previous studies that examined birth outcomes for WIC participants.39 They used data from the national Pregnancy Risk Assessment Monitoring System.40 The authors ran logistic models to control for mother and infant characteristics. They then employed two-stage least squares using state-level characteristics of WIC programs as instruments. The authors found that, “WIC participants are negatively selected on a wide array of observable dimensions, and yet WIC participation is associated with improved birth outcomes, even after controlling for observables and for a full set of state-year interactions intended to capture unobservables that vary at the state-year level”.41 Bitler and Currie noted that WIC has an even bigger impact on disadvantaged groups.42 In another study, Khanani, Elam, Hearn, Jones, and Maseru looked at the impact of WIC on infant mortality rate (IMR).43 They found that IMR is lower for participants than for nonparticipants, and that African-Americans see an even greater impact of WIC on IMR than Caucasians.44 Though many studies found a significant and substantial positive impact of WIC on birth outcomes, one study found that after using propensity score matching to control for confounding variables, WIC had no statistically significant impact on six birth outcomes. However, when the authors used fixed effects, pre-term birth and birthweight were statistically significant and substantial.45 As stated previously, WIC is generally found to have a positive impact on nutritional and medical outcomes for children. The literature shows that WIC participants are more likely to buy nutritious food than nonparticipants. In addition, children participating in WIC have higher intakes of essential vitamins, iron, potassium, and fiber, leading to lower nutritional deficiency for participating children. Medical outcomes are also shown to improve because of WIC. Specifically, birthweights are higher for children born to mothers participating in WIC, neonatal mortality is reduced for mothers who participate in WIC before and after birth. Additionally, children participating in WIC are no more likely to be overweight than other low-income children. Our study contributes to the research by testing whether WIC continues to have a significant impact on children’s health when the overall health indicator used by Carlson and Senauer is decomposed into specific health indicators, including asthma, limited activities due to health reasons, and BMI.46 Due to the previous support for WIC in the literature, we hypothesized that WIC will have a positive impact on our specific health indicators. THEORETICAL MODEL Following Carlson and Senauer, we used Becker’s household production model.47 It is assumed that a household maximizes utility in relation to family members’ health, leisure, and intake of other goods and services produced in the household.48 In addition, the health production function for the health of ith child is shown as: Hi = h(Ii, Ci, Fi, Gi) Vector Ii is a vector of consumption for health, such as medical attention and eating; vector Ci indicates the characteristics of the child; vector Fi is a vector accounting for characteristics of the household; and Gi is a vector indicating geographic characteristics.49 In the health

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production function, WIC and Food Stamp participation need to be examined for endogeneity, because WIC gives preference to children with risk of low nutrition. Parents of children with health issues or motivated parents may seek out WIC and Food Stamps as well, which could cause endogeneity problems.50 DATA DESCRIPTION As stated earlier, our replication of Carlson and Senauer’s study was not a one-to-one replication, because our main goal was to test whether WIC would be shown to improve a child’s health when “overall health” was decomposed into various dependent variables that reflect health. However, we also performed a complete replica using the original “overall health” variable to test the original study’s reliability and validity, which found that the WIC program had a significant positive impact of children’s overall health.51 It is important to note that children ages 2-5 were the participants in the survey, though parent and household information were collected as well. Two samples, the full sample and the WIC eligible sample, were used to examine the data. The full sample included children ages 24 to 60 months who participated in the survey. To account for intrafamily correlation, we chose one child at random to be included in the sample while the others were dropped, only if more than one child from a family was included in the survey. The WIC eligible sample was taken from the full sample, but only included participants who were determined to be WIC eligible because the Poverty Income Ratio was equal to or less than 185% or because someone in the household was covered by Medicaid. The number of participants in our full sample was 2,624, and the number of participants in the WIC eligible sample was 1,700. This varied slightly from the original paper that had 2,632 in the full sample and 1,816 in the WIC eligible sample. This variation could have been caused by several factors. One factor could have been how missing data was handled. We chose to remove an observation if there were any missing data points. It appears that Carlson and Senauer did this as well, however they may have done this using a different method. Another factor causing the numerical discrepancy between the sample sizes could have been recoding “don’t know” answers as no or 0 rather than dropping them . Carlson and Senauer did not indicate how they chose to recode variables.52 One variable we studied as an indicator of health was asthma, which is a dichotomous variable. If a doctor determined that a child has asthma, they would be considered less healthy than a child without diagnosed asthma. In our WIC sample, 151 out of 1,700 participants were diagnosed with asthma. In the full sample, 215 out of 2,624 participants had asthma. We also examined Body Mass Index (BMI), a continuous variable that measures body fat, because it is commonly used to predict children’s future health risk. The BMI weighted mean was 16 for both the WIC and full samples. The third variable we used as a dependent variable was “limited in activities due to [a] health problem.” This is also a dichotomous variable, where 1 indicated limitations and therefore, poorer health. In our WIC sample, 20 participants were limited in activities due to a health problem and 31 participants were limited in activities in our full sample. Although no single variable was a perfect predictor of overall health, when the results were taken together, asthma, BMI, and limitation in activity due to health substantially captured “overall health” for subjects. The explanatory variables remained unchanged from the original study. They included both information about the child and information about the household. The child’s information included gender, age, race, number of days breastfed, and an indicator of whether the child’s birth weight was below 2500 grams. The household characteristics included household participation in WIC, household participation in Food Stamps, the Poverty Income Ratio (which is defined as the household

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income divided by poverty level), years of education parent completed, use of spoken English at home, marital status of parent, whether parent was married previously, crowding in the household (determined by dividing size of house by number of inhabitants), and region of the country. The means of the explanatory variables are shown in Table 1 and given for both the WIC eligible sample and the full sample. The means in this study were very similar to the means in the original study, which was expected. There was one noticeable difference in the race/ethnicity variables. These differences occurred for the “Hispanic” and “other race” variables in both the full sample and the WIC eligible sample. In Carlson and Senauer’s study, the means for Hispanic were 0.228 for the WIC eligible and 0.163 for the full sample. Our means were 0.143 and 0.09 for the WIC eligible and full samples. The difference is made up in other races. The original study had the means as 0.046 and 0.049 for the WIC eligible and the full sample, whereas we had 0.118 and 0.101. This could be because there were several questions asking about race and ethnicity in the NHANES III data. It is possible that Carlson and Senauer used a different question, or a combination of questions, to determine race/ethnicity differently. However, they do not explicitly state in their paper what questions they used to determine the race variables. Table 1 illustrates all of the explanatory variables and describes the dummy explanatory variables. The means for WIC participation, which were the focus of both studies, were very similar between Carlson and Senauer’s study and our study. They had a mean of 0.319 for the WIC eligible sample and we had 0.315. For the full sample, they had a mean of 0.171 and our mean was 0.158. One variable that requires further explanation is the “days breastfed” variable. This variable was based on two questions: was the child breastfed and how many days was the child breastfed. If the child was never breastfed that observation was coded as a “0” for 0 days breastfed. Empirical Method Carlson and Senauer specified their health production function as Hi* = β'x +ε where Hi* is the child’s actual overall health, x is a vector of explanatory variables, β' is the vector of coefficients, and ε is the error term.53 We modified their model by changing Hi* to be asthma, limited in activities due to health problems, and BMI, instead of overall health as determined by a physician. As mentioned earlier, the vector of explanatory variables remained unchanged. We used an ordered probit model to replicate the authors’ results as a sensitivity analysis and obtained similar results for many of the statistically significant variables. Most notably, the coefficients on WIC participation in the full and WIC samples that we obtained were very similar to Carlson and Senauer’s WIC participation coefficients. Table 2 provides a full comparison of the coefficients. After completing the sensitivity analysis, we used the probit model for our two dummy outcome variables, asthma and limited activities due to health problems, and Ordinary Least Squares (OLS) for the BMI outcome variable. The advantage of using a probit model instead of OLS for dummy dependent variables is that the probit model bounds the conditional probability as a function (G) between 0 and 1 (Wooldridge, 2013). The probit model uses the standard normal cumulative distribution function and is estimated using the Maximum Likelihood Estimation (MLE). The partial effect of a probit model is a complicated non-linear function and the partial effect is not just the estimated coefficient. Instead, the average partial effect is used to explain the partial effect.54 Ordinary Least Squares was used for the

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continuous BMI variable because OLS is the best linear unbiased indicator when the Gauss-Markov assumptions are met.55 RESULTS In this section we describe the average, partial effects of the explanatory variables that were significant in our models. Interestingly, WIC was not found to have a statistically significant impact on any of the health indicators that we substituted for “overall health”. The first model we ran used asthma as the health indicator. As indicated above, we used a probit model for this health indicator. The results of this are shown in Table 3.1, and the average partial effects are shown in Table 3.2. For the WIC eligible sample, all three race variables, Hispanic, non-Hispanic black, and other race, were statistically significant at a 95% confidence level. When compared to identifying as white, participants who identified as Hispanic, non-Hispanic black, and other race were six, five, and eleven percentage points, respectively, more likely to have asthma on average, holding all other factors constant. The only other significant variable in the model was if the parent speaks English at home, at a 95% confidence level. On average, if the parent speaks English at home, the child is eight percentage points more likely to have asthma. In the full sample, with asthma as a health indicator, only the ‘other race’ was significant out of the race variables, at a 90% confidence level. When compared to identifying as white, participants who identified as another race were five percentage points more likely to have asthma on average, holding all other factors constant. The female variable was also statistically significant at a 90% confidence level. If the participant was female, on average, there was a two percentage point decrease in having asthma, holding all other factors constant. The only other statistically significant variable was days breastfed, at a 99% confidence level. However, days breastfed had no practical significance as the coefficient was virtually zero. The second model we ran used BMI as an indicator of health. This is a continuous variable, so Ordinary Least Squares was used. The results are shown in Table 4. For the WIC eligible sample, two of the race variables, Hispanic and other, were found to be statistically significant at the at a 95% and 99% confidence levels. This means that a participant identifying as Hispanic is, on average, associated with a 0.43 increase in BMI in the WIC eligible sample, holding all other variables constant, when compared with identifying as white, non-Hispanic. On average, a participant identifying as ‘other race’ is, when compared with identifying as white, non-Hispanic was associated with a 0.78 increase in BMI in the WIC eligible sample, holding all other variables constant. The age variable was also found to be significant at the 99% confidence level. For each month increase in age of the participant, there is an average decrease of BMI by 0.03 in the WIC eligible sample, holding all other variables constant. The Poverty Income Ratio (PIR) is the household income divided by the poverty level,56 and was found to be significant, but only at a 90% confidence level. On average, if the PIR increases by 1, then the BMI of the child is reduced by 0.22, holding all other factors constant. Marital status was also found to be significant at a 99% confidence level. If a participant’s parent is currently married, on average, there is a 0.51 increase in BMI in the WIC eligible sample, holding all other variables constant. The full sample results were similar to the results of the WIC sample. The Hispanic variable is significant at the 95% confidence level. On average, identifying as Hispanic, when compared with identifying as white, non-Hispanic, is associated with a 0.28 increase in BMI, holding all other variables constant. PIR, if the parent speaks English at home, and if the parent is currently married are all found to be statistically

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significant at the 95% confidence level as well. On average, if the PIR increases by 1, the BMI of the child is reduced by 0.07 in the full sample, holding all other factors constant. If a child’s parent speaks English in the home, there is, on average, a 0.32 decrease in BMI, holding all other variables constant. On average, a parent’s marital status is associated with a 0.28 increase in BMI for a participating child in the full sample, holding all other variables constant. The only other significant variable is participant’s age, which is significant at a 99% confidence level. For each month increase in age of the participant, there is an average decrease of BMI by a 0.02, holding all other variables constant. The third and final dependent variable was limited in activities by health problems. This is another dichotomous variable, so a probit model was used again. The coefficients in this model are in Table 5.1, and the margins are shown in Table 5.2. In the WIC eligible sample, the birthweight of the participant is statistically significant at a 99% confidence level. A child with a low birthweight (<2500 grams) is four percentage points more likely to be limited in activities due to a health problem compared with a child with a regular birthweight. The parent’s years of education is significant at the 90% confidence level, but it has no practical significance as the coefficient was virtually zero. Also, the Midwest regional variable is significant at the 95% confidence level. A participant that lives in the Midwest is five percentage points more likely to be limited in activities due to health problems compared with a participant in the Northeast. The variable “parent speaks English at home” was omitted in the WIC eligible sample because of the very low rate of people who responded as being limited in activities due to health. The full sample results showed that female and birthweight variables are significant at the 95% confidence level. On average, female participants are two percentage points less likely to be limited in activities due to health compared to male participants, holding all else constant. Having a low birthweight is directly opposite , with a two percentage point increase in being limited in health for low birthweight children compared to non-low birthweight children. The variables “parent speaks English at home” and “parent education” are also significant at the 95% confidence level. If the parent speaks English at home, on average and holding all other factors constant, the child is five percentage points more likely to be limited in activities compared to a parent who does not speak English at home. The parent’s years of education has no practical significance as the coefficient was effectively zero. The last section of our results examines percent correctly predicted. It is important to look at the percent correctly predicted for both probit models because the percent correctly predicted indicates how accurately the models predicted “0” responses as “0” and “1,” or affirmative responses, as “1”. Table 6 shows the results for both the WIC eligible sample and full sample for each of these models. The asthma health indicator was correctly predicted 91.8% in both the WIC eligible and full sample. The model with limited activities due to health as the outcome variable varied, with 72.9% correctly predicted for the WIC sample and 93.8% correctly predicted for the full sample. The low percent predicted in the limited activity WIC eligible sample could be due to small number of participants who were limited in activity due to health problems. Conclusion The replica results of the original study confirm WIC’s positive impact on children’s overall health. This is important, as a major reason to replicate a study is to add reliability and validity. However, our results for the three health indicators show that different explanatory variables are statistically significant for different health indicators. Asthma, sex,

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race and a parent’s use of English in the home were the only practically significant variables. Race could be significant because it is often correlated with income. Language spoken at home could also be correlated with race. As for sex of the child, this could be because health problems are found more often in one sex than the other. For BMI, two race variables, Hispanic and other, and whether English was spoken at home were again significant. Another variable that was significant was age. This might be because children are growing quickly in the two to five year age range. The two other significant variables were PIR and if the parent is currently married. Lastly, limited activities due to health reasons had, if the child was female, and if the parent speaks English at home are again significant predictors. The regression also had two new variables that are significant, low birthweight and if the child is from the Midwest. Birthweight is a good indicator of health in a child57 so it makes sense that this would be significant. As for Midwest, regions are often very significant. One reason that region is a significant variable is because the WIC program is locally administrated. The differences in the program could be coming through in the region variable. Based on our findings, we cannot reject the null hypothesis that WIC does not have a positive impact on children’s health. There are several possible reasons why our study could not confirm a positive association of WIC on child health outcomes. The first of these would be because of the health indicators used in this study. The original study looked at overall health and we intended to look at specific health indicators that would decompose the overall health indicator. While they might be good health indicators, asthma and limited activities may not occur very often with a group in this age range or these indicators may be time invariant. This is a challenge when dealing with such a young population. These specific indicators might be better off in a study of long-term health effects of WIC. There are several limitations in our study. First off, the sample we used was different in some regards to that of study we replicated in the present paper. For instance, we used different sample sizes. However, as the means show, other than the race identifying variables, our sample was only nominally different than Carlson and Senauer’s. Our sample size being different than the original study should not impact our results as long as our sample size was large enough. However, the sample size of affirmative responses for our specific health indicators of asthma and limited activities seem to be too small. This is most likely why a few variables were dropped in the limited activity model. These variables were “other race” and in the WIC eligible sample, the variable parent speaks English at home was also dropped. The purpose of this study was to examine the WIC program and to compare our decomposed health outcome results to the results of previous studies. In this regard, the results of this study show that WIC does not have a positive impact on all health indicators. However, this does not contradict “The Impact of Special Supplemental Nutrition Program for Women, Infants, and Children on Child Health,” which finds the positive health benefits of the WIC program because when we used same indicator, “child’s overall health”, we reaffirmed Carlson and Senauer’s results. It is also possible that our results are correct and that WIC may only affect some types of health and not others. According to our analysis, the WIC program should not be used to solve every type of health problem. Additional programs could be added for specific health issues, such as educational programs on chronic conditions like asthma. Based on previous research our policy recommendations would be that the WIC program is an important program because it is effective at improving overall health of a child. However, policymakers should not expect this program to solve all health problems as WIC aims to improve nutrition and may not fully address other health concerns.

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SOURCES 1) Kenneth J. Arrow and William M. Capron, “Dynamic Shortages and Price Rises: the Engineer Scientific Case,” Quarterly Journal of Economics 73, no. 2 (1959): 292-308. 2) Ingrid Linsley, Overeducation in the Australia Labor Market: Its Incidence and Effects (Melbourne: University of Melbourne, Australia, 2005).

tion in Sweden, 1974 – 2000,” Working Paper 10/2007 (Stockholm: Swedish Institute for Social Research, 2006). 20) Linsley, “Overeducation in the Australian Labour Market.” 21) Ibid.

3) Giorgio Di Pietro and Peter Urwin, “Education and 22) Bárcena-Martín, Budría and Moro-Egido, “Skill Mismatches and Wages.” Skills Mismatch in the Italian Graduate Labor Market,” Applied Economics 38, no. 1 (2006): 79-93. 23) Robert H. Frank, “Why Women Earn Less: The Theory and Estimation of Differential Overquali4) Elena Bárcena-Martín, Santiago Budría and Ana fication,” American Economic Review 68, no. 3 Isabel Moro-Egido, “Skill Mismatches and Wages (1978): 360-373. among European University Graduates,” Working Paper 33673 (MPRA, 2011). 24) Linsley, “Overeducation in the Australian Labour Market.” 5) Ingrid Linsley, “Overeducation in the Australian Labour Market: its Incidence and Effects,” Depart25) H. Deville, “Unemployment in Brussels: Between ment of Economics Working Paper Series 939 Skills Mismatch and Job Competition,” Brussels (University of Melbourne, 2005). Studies 14 (2008). 6) Ibid. 26) Martin Nordin, Inga Persson, and Dan-Olof Rooth, “Education-Occupation Mismatch: Is 7) European Centre for the Development of Vocathere an Income Penalty?” Discussion Paper tional Training (CEDEFOP), Skills Supply and No.3806 (IZA, 2008). Demand in Europe Medium-term Forecast up to 2020 (Luxembourg: Publications Office of the Europe27) Deville, “Unemployment in Brussels." an), 2010.

122. 42) Olivier Jean Blanchard, Macroeconomics, 4th ed (Upper Saddle River, NJ: Prentice Hall, 2006). 43) George J. Borjas, Labor Economics, 2nd ed (New York City, NY: McGraw-Hill Education, 2006). 44) Ibid. 45) E. Walterskitchen, “The Relationship Between Growth, Employment and Unemployment in the EU,” Austrian Institute of Economic Research Workshop in Barcelona, September 16-18, 1999. 46) Linsley, “Overeducation in the Australian Labour Market.” 47) Gary S. Becker, Human Capital: a Theoretical and Empirical Analysis with Special Reference to Education (New York: National Bureau of Economic Research, 1964). 48) Jacob Mincer, Schooling, Experience and Earnings (New York: Columbia University Press, 1974). 49) David Umoru and Olohitare P. Odjegba, “Human Capital Development and the Nigerian Economy: A Dynamic Specification,” Developing Country Studies 3, No. 12 (2013).

8) Linsley, “Overeducation in the Australian Labour Market.”

28) Nordin, Persson and Rooth, “EducationOccupation Mismatch.”

50) Linsley, “Overeducation in the Australian Labour Market.”

9) Di Pietro and Urwin, “Education and Skills Mismatch.”

29) United Republic of Tanzania (URT), Integrated Labor Force Survey 2005/2006 (Dar es Salaam: NBS, 2006).

51) Ibid.

10)Linsley, “Overeducation in the Australian Labour Market.”

30) Ibid.

11)CEDEFOP, Skills Supply and Demand.

31) Ibid.

53) Nordin, Persson and Rooth, “EducationOccupation Mismatch.”

12)Viktor Andreas Venhorst, Jouke Van Dijk, and Leo 32) United Republic of Tanzania (URT), Employment and Earning Survey (Dar es Salaam: NBS, 2012). Van Wissen, “Do the Best Graduates Leave the Peripheral Areas in The Netherlands?” Journal of 33) URT, Integrated Labor Force Survey. Economic and Social Geography 101, no. 5 (2010). 13) Linsley, “Overeducation in the Australian Labour Market.”

34) Ibid.

35) 14) Peter John Dolton and Anna Vignoles, “The Incidence and the Effects of Overeducation in the UK Graduate Labor Market,” Economics of Educa36) tion Review 19, no. 2 (2000): 179.

LO/FTF Council, Profile of the Labour Market and Trade Unions in Tanzania. Project No. 036/002/01 (Copenhagen: LO/FTF, 2003). URT, National Employment Policy (Dar es Salaam: NBS, 2008).

15) Ying Chu Ng, “Overeducation and Undereducation and their Effects on Earnings: Evidence from 37) URT, Tanzania Long Term Plan Perspective (20102025) (Dar es Salaam: NBS, 2010). Hong Kong 1986-1996,” Pacific Economic Review 6, no. 3 (2001): 401-418. 38) Ibid. 16) CEDEFOP, Skills Supply and Demand. 39) URT, Tanzania Employment Law and Labor Relations Act of 2004. 17) Ibid. 18) Jack Keating, Matching Supply and Demand for Skills, International Perspectives (Adelaide: National Centre for Vocational Education Research (NCVER) ), 2008.

40) URT, President’s Office Planning Commission. The Study on Skills Development to Facilitate Tanzania Becoming a Strong Competitive Economy by 2025 (Dar es Salaam: NBS, 2012).

41) Nachum Sicherman, “Overeducation in the Labor 19) Tomas Korpi and Michael Tåhlin, “Educational Market,” Journal of Labor Economics 9 (1991): 101Mismatch, Wages, and Wage Growth: Overeduca-

journal.heinz.cmu.edu

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52) Deville, “Unemployment in Brussels.”

54) Linsley, “Overeducation in the Australian Labour Market.” 55) Frank, “Why Women Earn Less.” 56) Felix Büchel and Maarten van Ham, “Overeducation, Regional Labor Markets, and Spatial Flexibility,” Journal of Urban Economics 53 (2003): 482-493. 57) Heather Hofmeister, “Literature on Job Mobility in the United States,” Chapter 9 in “State-of-theArt of Mobility Research,” Job Mobilities Working Paper No. 06-01 (European Commission, 2006). 58) Michael Spence, “Job Market Signalling,” Quarterly Journal of Economics (1973): 355-374. 59) Linsley, “Overeducation in the Australian Labour Market.” 60) Aleksander Kucel and Montserrat Vilalta-Bufí, Graduate Job Satisfaction: Comparing Spain, the Netherlands and Norway (Barcelona: Universitat Pompeu Fabra, 2011). 61) Dolton and Vignoles, “Overeducation in the UK Graduate Labor Market.”

60


Multiple Dimensions of Children’s Health

62) Linsley, “Overeducation in the Australian Labour Market.”

72) C. R. Kothari, Research Methodology, Methods and 83) Linsley, “Overeducation in the Australian LaTechniques (Wishwa Prakashan: New Delhi, 2007). bour Market.”

63) Richard Desjardins and Kjell Rubenson, “An Analysis of Skill Mismatch Using Direct Measures of Skills,” Education Working Paper No. 63 (OECD, 2011).

73) Ibid.

64) Arne L. Kalleberg, The Mismatched Worker (New York: Norton, 2006). 65) URT, Employment and Earning Survey. 66) Ibid. 67) Linsley, “Overeducation in the Australian Labour Market.” 68) Sicherman, “Overeducation in the labor market.” 69) John Robst, “Career mobility, Job Match, and Overeducation,” Eastern Economic Journal (1995): 539-550. 70) Joop Hartog, “Overeducation and Earnings: Where are we, where should we go?” Economics of Education Review (2002): 131-147. 71) S. J. Schmidt, Econometrics (New York: McGrawHill, 2007).

61

84) Linsley, “Overeducation in the Australian Labour Market.”

74) Schmidt, Econometrics. 75) Linsley, “Overeducation in the Australian Labour Market.” 76) Harminder Battu and Peter James Sloane, “How well can we measure graduate over-education and its effects?’” National Institute Economic Review 171 no. 1 (2000): 82-93. 77) Ibid.

85) Battu and Sloane, “How well can we measure graduate over-education?” 86) Maite Blazquez and Miguel A. Malo, “Educational Mismatch and Labor Mobility of People with Disabilities: The Spanish Case,” Revista de Econo Economía Laboral 2 (2005): 31-55. 87) Linsley, “Overeducation in the Australian Labour Market.”

78) Terry Sincich, P. George Benson and James T. McClave, Statistics for Business and Economics (Upper Saddle River: Pearson Prentice Hall, 2005).

88) Blazquez and Malo, “The Spanish Case.”

79) Ibid.

90) Nordin, Persson and Rooth, “EducationOccupation Mismatch.”

80) Schmidt, Econometrics.

91) Korpi and Tåhlin, “Overeducation in Sweden.”

81) Linsley, “Overeducation in the Australian Labour Market.” 82) Frank, “Why Women Earn Less.”

journal.heinz.cmu.edu

89) Linsley, “Overeducation in the Australian Labour Market.”

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92) Robst, “Career Mobility, Job Match, and Overeducation.”


Multiple Dimensions of Childrenâ&#x20AC;&#x2122;s Health

APPENDIX Table 1: Definitions and Means for Explanatory Variables Variable

WIC Eligible Sample

Full Sample

Child is female (=1; 0 otherwise)

0.496

0.486

Child is non-Hispanic, white (=1; 0 otherwise)

0.498

0.653

Child is Hispanic (=1; 0 otherwise)

0.143

0.09

Child is non-Hispanic, black (=1; 0 otherwise)

0.24

0.156

Child is other race (=1; 0 otherwise)

0.118

0.101

Age at the MEC exam (in months)

41.606

41.557

Number of days breastfed

72.867

100.367

Low birthweight <2500g (=1; 0 otherwise)

0.093

0.077

Household participation in WIC (=1; 0 otherwise)

0.315

0.158

Household participation in Food Stamp Program (=1; 0 otherwise) Poverty Income Ratio

0.469

0.23

1.006

2.205

Years of education of parent

11.181

12.584

Parent speaks English at home (=1; 0 otherwise)

0.805

0.868

Parent married now (=1; 0 otherwise)

0.572

0.741

Parent married before but not now (=1; 0 otherwise) Crowding (number of people divided by number of rooms) Midwest

0.21

0.133

0.966

0.8

0.219

0.229

South

0.383

0.363

West

0.23

0.23

Northeast (reference category)

0.168

0.178

Sample Size

1700

2624

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Multiple Dimensions of Children’s Health

Table 2: Comparison of Coefficients between Carlson & Senauer’s Model Variable

C&S WIC Eligible

Our WIC Eligible

C&S Full Sample

Our Full Sample

Female

-0.07

-0.06

-0.16

-0.10

(0.70)

(0.10)

(2.03)**

(0.08)

0.16

0.36

0.00

0.29

(0.83)

(0.15)**

(0.00)

(0.14)**

-0.28

-0.24

-0.08

-0.12

(1.56)

(0.11)**

(0.50)

(0.09)

0.34

-0.05

-0.15

-0.37

(0.95)

(0.22)

(0.55)

(0.21)*

-0.00

-0.00

-0.00

-0.00

(0.27)

(0.00)

(1.64)

(0.00)

-0.00

-0.00

-0.00

-0.00

(1.05)

(0.00)

(0.60)

(0.00)

0.36

0.31

0.09

0.10

(2.54)***

(0.20)

(0.68)

(0.18)

-0.24

-0.20

-0.20

-0.24

(2.65)***

(0.10)**

(2.03)**

(0.10)**

-0.16

-0.02

-0.21

-0.08

(1.39)

(0.12)

(1.75)*

(0.11)

-0.24

-0.07

-0.18

-0.15

(1.83)*

(0.12)

(3.96)***

(0.04)***

-0.02

-0.01

-0.00

0.00

(1.41)

(0.02)

(0.20)

(0.02)

0.43

0.27

0.04

-0.04

(1.94)*

(0.16)*

(0.21)

(0.18)

-0.02

-0.12

-0.06

-0.15

(0.12)

(0.13)

(0.51)

(0.12)

-0.11

0.01

0.04

0.12

(0.68)

(0.14)

(0.30)

(0.12)

0.02

-0.09

0.03

-0.04

(0.13)

(0.11)

(0.21)

(0.10)

-0.50

-0.53

-0.68

-0.71

(1.68)*

(0.15)***

(2.38)**

(0.12)***

-0.90

-0.83

-1.09

-1.07

(3.26)***

(0.13)***

(4.17)***

(0.10)***

-1.10

-1.12

-1.18

-1.24

(3.75)***

(0.17)***

(4.66)***

(0.13)***

1,816

1,700

2,632

2,624

Hispanic Non-Hispanic, black Other Child’s age Days breastfed Birthweight <

WIC participa-

Food stamp par-

PIR Parent’s educa-

Parent speaks

Parent married

Parent married

Crowding Midwest South West Sample Size

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

63

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Multiple Dimensions of Children’s Health

Table 3.1: Asthma Probit Model Coefficients Variable Female Hispanic Non-Hispanic, black Other race Child’s age Days breastfed Birthweight < 2500g WIC participation Food stamp participation PIR Parent’s education Parent speaks English Parent married now Parent married before Crowding Midwest South West Observations Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

WIC Eligible Sample

Full Sample

-0.19 (0.12) 0.39 (0.18)** 0.36 (0.15)** 0.78 (0.27)*** -0.00 (0.01) -0.00 (0.00) 0.20 (0.20) -0.12 (0.16) 0.12 (0.16) -0.01 (0.12) -0.03 (0.02) 0.53 (0.25)** -0.00 (0.15) 0.05 (0.16) 0.01 (0.14) -0.14 (0.21) -0.02 (0.18) -0.28 (0.21) 1,700

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-0.18 (0.10)* 0.17 (0.15) 0.17 (0.11) 0.35 (0.20)*s 0.00 (0.00) -0.00 (0.00)*** -0.00 (0.18) -0.06 (0.15) 0.07 (0.14) 0.00 (0.04) 0.01 (0.02) 0.30 (0.19) -0.11 (0.14) 0.24 (0.15) 0.16 (0.13) 0.03 (0.18) 0.05 (0.16) -0.17 (0.19) 2,624

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Multiple Dimensions of Children’s Health

Table 3.2: Asthma Probit Model Margins Variable

WIC Eligible Sample

Female Hispanic Non-Hispanic, black Other race Child’s age Days breastfed Birthweight < 2500g WIC participation Food stamp participation PIR Parent’s education Parent speaks English Parent married now Parent married before Crowding Midwest South West Observations Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

65

Full Sample

-0.03 (0.02) 0.06 (0.03)** 0.05 (0.02)** 0.11 (0.04)*** -0.00 (0.00) -0.00 (0.00) 0.03 (0.03) -0.02 (0.02) 0.02 (0.02) -0.00 (0.02) -0.00 (0.00) 0.08 (0.04)** -0.00 (0.02) 0.01 (0.02) 0.00 (0.02) -0.02 (0.03) -0.00 (0.03) -0.04 (0.03) 1,700

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-0.02 (0.01)* 0.02 (0.02) 0.02 (0.01) 0.05 (0.03)* 0.00 (0.00) -0.00 (0.00)*** -0.00 (0.02) -0.01 (0.02) 0.01 (0.02) 0.00 (0.01) 0.00 (0.00) 0.04 (0.03) -0.02 (0.02) 0.03 (0.02) 0.02 (0.02) 0.00 (0.02) 0.01 (0.02) -0.02 (0.03) 2,624

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Policy. Research. Practice journal.heinz.cmu.edu

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Volume 11 | Issue 2