Fall 2011 Issue by Virginia Policy Review

Virginia Policy Review EDITOR’S NOTE “Never has there been a greater need for the University’s most important product: enlightened and ethical leaders who leave the Grounds prepared for public life – in their communities, in their professions, in the world at large.” - Frank Batten, Sr. Dear Reader, The printing of the Fall 2011 edition of the Virginia Policy Review occurs at a historic and exciting time in the history and life of the Frank Batten School of Leadership and Public Policy. With its first class of accelerated Master of Public Policy students having graduated in the Spring of 2009, the end of this semester marks the middle of the Batten School’s fourth year of existence at the University of Virginia. The existence and operation of this journal has always been very closely linked with the Batten School, so we were excited to commemorate the reopening of Garrett Hall as the new home of the Frank Batten School of Leadership and Public Policy with this edition. In our mid-October commemoration of this momentous occasion, our esteemed faculty hosted and moderated panel discussions that explored distinct topics of the leadership arena including transformative leadership in the policy-making arena and the new and growing science of leadership informed by the study of social psychology. VPR is pleased to offer you the perspectives of Eric Patashnik, Christine Mahoney, and Benjamin Converse, three members of our school’s faculty who have agreed to share their thoughts and perspectives on leadership and the panels they hosted. A key feature that distinguishes the Batten School from most other MPP programs is that it stresses with rigor and importance the understanding and application of the scientific method to solve public policy problems. We are also very pleased to present three research reports and one op-ed piece that students have authored on different policy areas. From education in Israel, to U.S. political institutional design, economic prosperity and energy security, we are proud to show the power of analysis and reason in public policy discourse. However, in recent years, it has become increasingly clear that reason and analysis alone are not sufficient for successful policy interventions. Three years ago, the first Editor-in-Chief of this publication expressed concern over the degeneration of our public discourse about policy. While the public discourse about our country’s policy problems has continued its downward spiral, I am very optimistic and hopeful about the future. It is my sincere hope that the readers of this publication will see the value of combining the power of analytical policy analysis and the insights of social psychology and social science in a professional program aimed at forming “enlightened and ethical leaders.” On behalf of our entire editorial staff, I sincerely that hope you enjoy reading this special Commemorative Edition. Sincerely,

Borna Kazerooni Editor-in-Chief

Staff Acknowledgments: Editor-in-Chief:

Borna Kazerooni

Layout Manager: Business Manager: Publicity Manager:

Sarah Williamson Susan Sainz Vanessa Orco-Zerpa

Senior Editors:

Michael Karlik Anna Mohan Mackenzie Porter

Associate Editors:

Adelina Bryant Ammy George Vanessa Orco-Zerpa Melissa Rickman Susan Sainz Melina Schoppa Evan Vahouny

We welcome your thoughts. Please forward any comments, questions, or concerns to virginiapolicyreview@gmail.com or visit us online at www.virginiapolicyreview.com.

VOLUME V, ISSUE 1 FALL 2011 SPECIAL EDITION

Virginia Policy Review

CONTENTS Faculty Feature: Topics on Leadership in the 21st Century

6 Why Leadership is in Our Name: The Distinctive Mission of the Batten School Eric Patashnik 10 Partnering for the Future: How Innovative Leadership can Bring about Transformational Change in Global Development Christine Mahoney 12 How Social Psychology is Liberating Leadership from the Great-Person Mold Benjamin Converse Policy & Research

18 The Economic Effects of Israelâ&#x20AC;&#x2122;s Separate Education System Elena Weissmann 25 An Economic Approach to Preventing Legislative Inefficiency Scott Masselli 34 Military Energy Assurance Daniel Sater Op-Eds 47 New Startups: Are Entrepreneurs the Answer to Job Creation Mary Drach 52 Acknowledgments

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aculty eature

TOPICS ON LEADERSHIP IN THE 21ST CENTURY

Why Leadership is in Our Name: The Distinctive Mission of the Batten School by Eric Patashnik

ne question people often ask about the Batten School is why “leadership” is in our name. In a nutshell, the answer is that key people involved in the school’s creation including UVa faculty and senior administrators, former Board of Visitors member and Rector John Wynne, and most importantly our benefactor, the late Frank Batten Sr., were intent on creating a school that would forge a new path in American higher education by preparing leaders who possess the passion, desire and skill to bring about significant, even transformational, change. The aim was to fashion a school where students would learn not only how to analyze problems and develop creative solutions but also how to motivate, persuade, inspire, communicate, advocate, strategize, implement and deliver results. The bedrock assumption of the Batten School is that rigorous analysis is both indispensible and insufficient. We seek to train students who know not only what to do, but how to get things done.

were being developed in 2006-7, it was evident that the United States and the global community would face daunting economic, fiscal, technological, developmental and transnational security challenges in the 21st century (and this was before the Great Recession hit). It was also apparent that without effective leaders who can mobilize energy and resources to produce desired outcomes, these vast challenges could not be met. According to a 2006 U.S. News/ Harvard University study, two thirds of the American public believed that the nation faced a leadership crisis.1 The only types of leaderships in which Americans expressed more than a moderate amount of confidence were military and medical leadership. All other sectors failed to win even a moderate amount of confidence and trust.

As part of research for development of the Batten School, I had the opportunity to join a delegation from UVa that conducted site visits to several leading public policy schools. At one distinguished school, a number of stuDeveloping the Batten School dents who described themselves as “change When initial plans for the Batten School agents” told us that while they thought they

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had received a rigorous and valuable analytic education, they had been given too few opportunities to develop their leadership skills and potential. A prominent faculty member who taught a leadership class told us that it had been difficult to weave leadership into the culture of this school. His class was an elective rather than a required class, and its lessons were not integrated into other parts of the curriculum. At another top public policy school, a professor who wrote one of the most penetrating books on executive leadership in the public sector told us that his sense of intellectual marginalization led him to move his primary faculty appointment to the business school. Our interviews with students and faculty confirmed that if we could build leadership into the DNA of the Batten School from the start, and hire faculty with a genuine interest in interdisciplinary scholarship, we could create a school of leadership and public policy that would be truly distinctive and special.

in society. A public-spirited leader is not just a politician or a civil servant who holds a public office but can also be a corporate executive who serves on civic associations or hospital boards (and uses her knowledge of health economics, strategic planning, and public communication to build support for a new women’s community health program). A leader could be the head of an NGO who designs a more cost-effective way of delivering clean water to a village in Africa—and then creates the organizational capacity to implement it. It could be an engineer cum policy entrepreneur who develops new ways for businesses and households to conserve energy and reduce carbon emissions.

The Batten School thus conceives of leaders as citizens from any walk of life who inspire people to tackle collective problems—and who find a way to obtain the organizational resources needed to make tangible progress. As Dean Harry Harding has stated, “leadership is the ability to define and articulate a What Counts as Leadership? viable strategic vision for an organization, and then mobilize the various resources A key question for the Batten School is how needed to attain, or at least advance, the obto conceive of leadership in the policy arena. jectives contained in that vision.”4 What kind of activity is leadership, and who “counts” as a leader? As noted in our 2007 Leadership Philosophy of the Batten report to the Faculty Senate on the establish- School ment of the Batten School, leadership has long been linked to the exercise of authority In our 2007 report, we indicated that the or influence.2 As Ronald A. Heifetz observes leadership development philosophy of in his provocative book Leadership Without the Batten School would rest on severEasy Answers, however, leadership is best al key premises. As we grow the Batten conceived as an activity—the mobilization of School, it will be exciting to build the orpeople to tackle tough problems.3 Progress ganizational capacity to fulfill this mission. on problems—not the formal authority to command—is thus the proper measure of First, and most importantly is the belief that leadership. This definition allows for civic leadership skills can be taught. As our releadership to emerge from multiple positions port stated, “People can learn how to create

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an organization that is greater than the sum of its individual parts; how to motivate a group toward a common goal; how to lead by example and build trust; and how to unleash creativity and avoid the trap of conventional thinking. They can learn to embrace diversity as a strength. While some people may be ‘born’ leaders, the fact is everyone can become a more effective leader. Specific leadership skills like decision-making, negotiation, public communication, crisis management, problem solving, and team building can be taught.”5 We have hired both tenure-line research faculty (trained in the nation’s top business schools and social science departments) and professors of practice (who bring the insights from decades of Washington experience into the classroom) to offer a variety of courses on leadership.

we spend—in health care, education and many other areas).6 A fourth premise is that rigorous academic research can be conducted on leadership. Much of the academic literature on leadership lacks analytical punch because it focuses on the unique (if often captivating) experiences of particular individuals with little systematic attempt to discern deeper, more enduring patterns in leadership strategies and behavior. Without the discovery of such empirical regularities, we cannot identify and teach best practices in leadership.

Yet it is possible to make the study of leadership both interesting and rigorous. Leadership is a multifaceted social phenomenon, and we need the insights of multiple disciplines. As Benjamin Converse’s essay sugThe second premise, as noted above, is gests, social psychology offers especially that leadership is not just for people at the potent insights into how people can motitop of an organization, it is for all those vate, persuade, and inspire others and how who can help organizations effect change. leaders can encourage members of a group We seek to give each student the oppor- to contribute to the larger good. This is an tunity to discover, develop and deploy exciting time for the psychological study his or her personal leadership strengths. of leadership. We are gaining powerful insights into how people make decisions, why Third, leaders are innovators and social en- people lend their support to particular causes trepreneurs, not mere and reject oth“While some people may be ‘born’ incremental thinkers. ers, how emoWhile incremental leaders, the fact is everyone can be- tional states progress is somesuch as ancome a more effective leader.” times the best we can ger and fear do (and small increshape leaderments can add up to large-scale change over follower interactions, and how social ditime), often we can aim for more rapid prog- versity affects organizational dynamics. ress, especially in domains where market We are learning more about the differences or government failures are causing society (and similarities) between women and men to operate dramatically below its potential. as leaders and the ways in which seemingly (A strong case be made that the nation is se- small shifts in the framing of leadership apverely under-performing—given how much peals and the “architecture” of choice sets

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can have huge impacts on the ground. These insights provide the intellectual building blocks for the development of a true “science” of leadership. Batten faculty are at the forefront of efforts to generate powerful, evidence-based insights into what leadership strategies work best under different conditions. A final premise is that context matters in leadership. While human nature is a constant, the substantive messages and visions that resonate for one group may fail to resonate for another. One leadership size doesn’t fit all, and successful leaders know how to tailor their leadership strategies to the incentives of their structural environments. The macropolitical context of leadership in the 21st century is strikingly different from that of thirty years ago. Fiscal constraints are much tighter, citizens are more cynical about government, the nation’s relative power has arguably declined, globalization has accelerated, partisan polarization has increased, and the demands of democratic accountability and legitimacy have intensified. Leaders who seek to be change agents need to understand this context and to find ways either to reconfigure or work within it. As Yale political scientist Stephen Skowronek persuasively argues, the most transformational political leaders are those who manage to break with the outmoded standards of the past and meet the imperatives of the moment by altering the terms of the debate and building coalitions that supersede old conflicts.7 Thanks to the generosity of Mr. Batten, the University of Virginia has a remarkable opportunity to significantly advance the teaching, study and practice of leadership. It is fitting that we celebrate the opening of the

Batten School’s permanent home in Garrett Hall with a series of conversations about leadership in all its manifestations. Endnotes See Todd Pitinsky, S. A. Rosenthal, et al., National Leadership Index 2006: A National Study of Confidence in Leadership. Center for Public Leadership, John F. Kennedy School of Government, Harvard University, 2006. 1

David Breneman and Eric Patashnik, Report to the Faculty Senate on the Establishment of the Batten School of Leadership and Public Policy, October 1, 2007 2

Ronald A. Heifetz, Leadership Without Easy Answers (Harvard University Press, 1994). 3

“Catching up with Harry Harding” Cville Weekly, Issue #21: February 10, 2009, http:// www.c-ville.com/index.php?cat=14140406443 2695&ShowArticle_ID=11800902090803723 4

Report to the Faculty Senate on the Establishment of the Batten School. 5

On the possibility of non-incremental improvements in government performance, see Alan S. Gerber and Eric M. Patashnik, Promoting the General Welfare: New Perspectives on Government Performance (Washington: Brookings Institution Press, 2006). 6

Stephen Skowronek, The Politics Presidents Make: Leadership from John Adams to Bill Clinton, Belknap Press (Cambridge: Harvard University Press, 1997). 7

Eric Patashnik is Associate Dean and Professor of Public Policy and Politics at the Frank Batten School of Leadership and Public Policy at the University of Virginia.

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Partnering for the Future:

How Innovative Leadership can Bring about Transformational Change in Global Development by Christine Mahoney

early every weary NGO staffer I’ve interviewed in the field has had the same answer to the question: “What is the biggest obstacle to fulfilling your mission?” Funding. Not war. Not famine. Not corrupt local authorities. Not cholera outbreaks. But funding. “We need longer-term, more consistent funding streams. We get contracts for six months. How can we plan for projects with only six months of funding?”

the globe, observers, critics and academics have questioned their accountability. To whom are these organizations accountable? How can we hold them accountable? Although they do the work of governments, they are not subject to elections. In many cases they have budgets in the hundreds of millions but have none of the accountability mechanisms that governments have developed and put in place.

NGOs and foundations play a critical role in solving today’s most pressing social problems, especially in realms of non-governmental response like humanitarian aid and global development. For example, NGOs are the primary actors when it comes to responding to massive forced displacement crises – the object of my research. When ethnic and political violence forces people to flee from their homes, non-governmental organizations and the agencies of international organizations provide life-saving food, medicine and shelter.

How do we make sure they are achieving their goals? How do we know they are spending their funds – donated by governments, philanthropists, and concerned global citizens – appropriately?

When it comes to developing health care systems, improving access to clean water and sanitation, improving education outcomes, and responding to HIV/AIDS epidemics and chronic malnutrition, in some of the poorest places on earth, it is non-governmental organization carrying out the work.

The millennium development goals (MDGs), for example, sought to provide a roadmap of quantifiable indicators that would ultimately lead to universal primary education, gender equity, access to basic health care, clean water and sanitation, among others goals.

In response to these questions, there has been a shift by foundations, bi-lateral funding agencies (that is, governments), multilateral funding agencies (like the European Union) and NGOs to get serious about accountability and to focus on quantifiable deliverables, log frames, or “measurables”.

As the NGO sector has grown, and NGOs In many ways this shift is an incredibly have taken on more responsibility around positive development. NGOs are thinking

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critically about their missions, developing theories of change to systematically map out how to get from where they are to where they are trying to go, and putting in place systems to measure their progress along the way.

Has this single-minded focus on accountability erected barriers to creating longterm, game-changing programs that seek to address core, underlying problems of global development? Is there a tension between accountability and effectiveness?

With the deadline for the MDGs fast approaching, however, the development sector has also been under fire from critics suggesting that current approaches aren’t working.

The Batten School of Leadership & Public Policy would like to foster a dialogue to answer these questions and to begin moving toward more long-term and transformative funding partnerships.

Some argue there are drawbacks associated with this new world of accountability. In order to demonstrate their “effectiveness” to funding agencies, members and contributors, NGOs might be scaling back their goals to show they’ve attained them. The pressure to show “quantifiable deliverables” has led NGOs to shift their focus from more abstract goals like promoting “dignity” or “empowerment” to measurable and concrete ones like handing out bed nets and building schools. NGOs often identify this need to alter missions to secure grants and the short-term nature of funding streams as major problems. Funding organizations have a number of reasons for short-term contracts, some of which have to do with ever-diminishing resources during this global economic downturn, but others that have to do with accountability. If an NGO does not deliver on its goals, a funding organization can terminate its funding and go with an alternative organization that might better meet its mission. The ever-tenuous funding environment leads NGOs to search constantly for new grants and to reshape their mission to fit with the Call for Proposals (CFP).

This October we hosted two of the most significant players in the world of foundations and NGOs working in global development and humanitarian aid: Sam Worthington, President and CEO of InterAction, the largest coalition of humanitarian aid and development NGOs in the US; and Dr. Nicole Bates, Senior Program Officer, Global Health Policy and Advocacy, at the Bill and Melinda Gates Foundation. InterAction consists of 190 members whose work targets the poorest and most vulnerable populations in developing countries around the world. InterAction seeks to eliminate extreme poverty, to protect human rights, and to promote a sustainable environment. The Bill and Melinda Gates Foundation is also committed to ensuring each life is of equal value, and as such, the Gates Foundation works to improve health outcomes for individuals in developing countries. Through its Global Health Program, the Gates Foundation concentrates on improving delivery of known interventions and on investing in research and development to discover additional tools for combating health problems.

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These two visionaries discussed how we can move toward longer term strategic planning and partnerships between foundations and NGOs. During the panel, our speakers addressed the following questions: How can longer-term funding be promoted? Which foundations are using longer time horizons? How can they lead other foundations to follow? How can foundations hold NGOs accountable over longer time horizons? Which NGOs have been focusing on

longer-term projects and transformational change? What innovative fundraising approaches have they pursued? How can they lead other NGOs to follow? Christine Mahoney is an Assistant Professor of Politics and Public Policy in the Frank Batten School of Leadership and Public Policy at the University of Virginia. Her research focuses on global advocacy.

How Social Psychology is Liberating Leadership from the Great-Person Mold by Benjamin Converse

he Great Person Theory is holding back leadership. Not the popular 19th-century Great Man theory of human history. I will leave that one to the sociologists and historians. I am talking about the assumptions many 21st-century citizens make about personality, behavior, and leadership. I am talking about an implicit behavioral theory that many of us hold without recognizing it. This theory can deceive us. It can make us think that leadership requires “naturally” exceptional persons who are “inherently” blessed with some specific set of traditional skills, such as problem-solving, persuading others, and exercising judgment. It shapes who we think can lead and what we think leaders should do. This implicit theory creates what I will call the Great-Person mold. The mold con-

strains thinking and constricts leadership in two critical ways: It limits who we consider as potential leaders; and it encourages omissions, inefficiencies, and outright misconceptions when we think about what makes for effective leadership. By invoking knowledge from psychological science—about how we think about other people and how we can influence others’ behavior—we stand poised to smash the Great-Person mold. This does not mean there is no room for greatness in leadership. Rather, this widens the pool from which great leadership can be drawn. Moreover, it encourages “ordinary” individuals to cultivate proven skills that can make anyone a more effective leader; and allows for leadership from anywhere, not just from on high. Social psychology, by emphasizing

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the power of situations to determine individuals’ behavior, shows that individuals can lead by thoughtfully engineering other people’s situations.

play. The cycle starts with the stereotype.1 When people think leader, they tend to think male.2 They also think of agentic qualities rather than communal qualities.3 And, in most Western cultures, they tend to think of We can liberate leadership from the con- people at the front or top of organizations, strictive Great-Person view in theory and in rather than at the back or bottom.4 practice. I first draw from social psychology to explain why the Great-Person mold Based on preconceived notions of what has so heavily constrained leadership. I will makes a leader, certain individuals (or cersuggest that a number of classic decision- tain kinds of individuals) come to mind making and social judgment biases are re- more readily when leadership is needed. sponsible and that these biases have influ- From the citizen’s perspective, this could be enced both the scientists who study leaders when it is time to formally appoint a leader and the societies that choose them. I then or just when one is looking around inforcall for a focus on leadership skills rather mally for guidance. For researchers, this than leadership traits and finally offer a few would be when they are deciding whom to examples for how psychological science study to learn about leadership. can make (all) leaders more effective. The consequence is that we do not look to Making the Mold: How Psychological others outside of the stereotype for leaderBiases Contribute to Great-Person ship. We neglect people who do not fit the Thinking demographics, the personality mold, or the traditional skill-set and miss the potential To understand the Great-Person mold, first leadership of individuals from countless unconsider what most Westerners think when derrepresented groups. We overlook people asked to close their eyes and imagine a lead- with great potential to affect positive social er. Usually, what comes to mind is a single, change. We also overlook non-traditional outgoing, powerful individual. (Not inci- ways of accomplishing this change, such dentally, that individual is more likely than as those I will discuss in the next section. not to be male, white, and probably tall.) The By not thinking about the potential leaders backstory of that hypothetical leader prob- who did not get a chance to lead, we commit ably involves a rise to power based on some omission neglect—that is, we fail to think inherent greatness and natural or preternatu- about what did not happen or what informaral ability to influence followers. This is the tion is not available.5 We often do not conGreat-Person mold, or stereotype. sider potential leaders who are not already in the usual choice set. To understand how the mold persists in people’s minds and how it unduly influences the When leaders emerge, further biases can selection of new leaders, which then perpet- affect the evaluation of their performance. uates the mold, you have to further consider Confirmation bias refers to our (often unthe cycle of systematic, cognitive biases at intentional) natural tendency to seek infor-

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mation that will confirm our working hypotheses at the expense of information that might disconfirm them.6 If we think that certain people are leadership material, we give them a chance to lead. We often mentally assimilate them to our view of the ideal leader and we enable them to influence the group. Often, the very act of looking to others for guidance brings out their leadership skills. When we look at leaders, our minds are often able to “find” leadership and our behavior towards them often elicits actual leadership. We give them the autonomy, resources, and deference that should enable them to succeed. When this happens, we neglect to even test the hypothesis that other, possibly better, leaders could come from other places. Then, finally, we observe outcomes – earnings sheets, win-loss records, lives saved, legislation passed – and attribute those outcomes disproportionally to inherent characteristics of the people, while neglecting often powerful situational influences that also

contributed. We commit this fundamental attribution error because presidents are often more visible than the economic conditions they inherited; because head coaches are often more visible than the general managers and salary limitations that determine their lineups; because CEOs are often more visible than organizational culture and innovation.7,8 Because we see leaders more clearly than the situations that facilitate or inhibit their success, we often over-attribute an organization’s outcomes to some qualities of the leader. We tend to give them too much credit for successes and too much blame for failures. When things go well, we look for more leaders just like them. But when things go poorly, we rarely realize that the leadership mold is flawed. Instead of looking outside the mold, we refine our search within it. We continue looking for one inherent personality trait that brings about success. If we would just consider the circumstances afforded many great leaders – the opportunities they had, the formal or

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informal training they received, the conditions they inherited – then we could focus on providing similar opportunities for future leaders. We could stop trying to find leaders and start trying to cultivate them. Breaking the Mold: Moving from Who Leaders Are to What Leaders Do

they would be most swayed by good arguments about environmental protection. The residents said they were least influenced by “other people doing it.” Like most of us, they thought that arguments were the most important factor and social norms the least important factor.

In an experiment that followed, however, Goldstein’s research team found the exact opposite pattern for actual behavior. Changing social norms by telling individuals that “most people in your community are finding ways to conserve energy at home” was the most successful factor in reducing their actual energy consumption. This trumped informational campaigns alone. In addition to providing a nifty trick for energy-saving campaigns, this study, in concert with countThe “classic skills”: Doing what leaders less others, reveals a more general principle: are supposed to do … but doing it better people are quite often blatantly wrong about what influences their own and others’ beThe “classic skills” are those that we tradi- havior.10 Leaders who go by their gut will tionally associate with leadership: arguing, commit exactly these same mistakes. motivating, organizing, planning, deciding, and negotiating. An understanding of Leaders who understand psychology, howhow people process information and pursue ever, will have a valuable guide for influgoals can help leaders to be more effective encing others’ behavior. Similar bodies of and more efficient in these standard skills. work inform many of the other classic skills Take persuasion as an example. It is a cen- as well. Thus, the scientifically-informed tral, “classic” leadership skill. Imagine that leader will be a more effective motivator, you want to urge fellow citizens to conserve decision maker, evaluator, and negotiaenergy. Going solely on intuition, most tor. leaders would begin mounting arguments immediately. They think, “If we just pres- The “new skills”: Leaders as situational deent the right information and rely on reason, signers people will see the light.” Professor Noah Goldstein, one of the speakers in our New Where social psychology can really exploit Science of Leadership symposium, and his the leadership market, so to speak, is by colleagues tested people’s intuitions about highlighting a set of otherwise overlooked exactly this question.9 A survey of over 800 “new leadership skills.” If we acknowledge Californians found that residents believed the profound power of the situation to shape The other major setback of Great-Person thinking is that this mindset fuels the idea that leaders are born. Perhaps some are. But if you hold too rigidly to this thinking, then you miss the possibility that leaders can also be made. Through an understanding of how people think, behave, and interact, anyone can improve on the skills that make for effective leadership.

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behavior, then the psychologically-savvy Conclusion leader can change people’s internal, subjective interpretations of their circumstances11 Social psychology is often defined as “the or their external, objective environments.12,13 scientific study of how people’s thoughts, feelings, and behaviors are influenced by Consider a community leader who is trying the real, imagined, or implied presence of to improve health in local schools. If we others.” With only a slight re-ordering and fall victim to Great-Person thinking, then barely a change of words, one could use we are stuck imagining this person pursuing this as a suitable definition of leadership change through a constrained set of means. too: “the strategic influence of people’s We see her giving a rousing speech at the thoughts, feelings, and behaviors by the school board meeting. We see her argu- real, imagined, or implied presence of othing with the superintendent about calories, ers.” If leadership is, nearly by definition, costs, and coronaries. We see her cajoling a strategic application of the principles of fellow community members into joining her social psychology, then it is time to import organization. And these tactics may indeed social psychology’s fundamental insights. help accomplish her goal. But social psy- These insights will help free our minds from chology shows that these are not the only artificial restrictions about who can lead and paths for change. They may not even be will provide insight for how anyone can the most effective. The key to fewer calo- lead more effectively. ries may be through something as simple as getting smaller plates into the cafeteria14 or Endnotes redesigning the lunch-line in a wise way. Both are features of the external environ- 1 Eagly, A. H., & Carli, L. L. (2007). Through ment, and neither relies on a personal plea. the labrynth: The truth about how women beIn the end, the potential tactics a leader might use to shape the situation are countless. Underlying these levers for influence is the basic notion that behavioral change does not have to start with attitude change. In fact, changing behavior first is often a path to durable attitude change as a consequence.15 Recognizing that leaders can exert profound influence by shaping an individual’s situation changes the playing field drastically. It means that leaders need not be the imposing, assertive figures sitting atop an organizational hierarchy. Leaders can also be the situational designers and decision architects who set the context.

come leaders. Boston, MA: Harvard Business School Press.

Koenig, A. M., Eagly, A. H., Mitchell, A. A., & Ristikari, T. (2011). Are leader stereotypes masculine? A meta-analysis of three research paradigms. Psychological Bulletin, 137, 616642. 2

Spence, J. T., & Buckner, C. E. (2000). Instrumental and expressive traits, trait stereotypes, and sexist attitudes. Psychology of Women Quarterly, 24, 44–62. 3

Menon, T., Sim, J., Fu, J. H.-Y, Chiu, C.-Y., & Hong, Y.-Y. (2010). Blazing the trail versus trailing the group: Culture and perceptions of the leader’s position. Organizational Behavior and Human Decision Processes, 113 (1), 51— 61. 4

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Sanbonmatsu, D. M., Kardes, F. R., & Herr, P. M. (1992). The role of prior knowledge and missing information in multiattribute evaluation. Organizational Behavior and Human Decision Processes, 51, 76-91.

Klayman, J. & Ha, Y. W. (1987). Confirmation, disconfirmation, and information in hypothesis-testing. Psychological Review, 94, 211-228.

Jones, E. E. (1979). The rocky road from acts to dispositions. American Psychologist, 34, 107-117. 7

Gilbert, D. T., & Malone, P. S. (1995). The correspondence bias. Psychological Bulletin, 117, 21-38. 8

Nolan, J. M., Schultz, P. W., Cialdini, R. B., Goldstein, N. J., & Griskevicious, V. (2008). Normative social influence is underdetected. Personality and Social Psychology Bulletin, 34, 913-923. 9

Nisbett, R. E. & Wilson, T. D. (1977). Telling more than we can know: Verbal reports on mental processes. Psychological Review, 84, 231-256. 10

Wilson, T. D. (2011). Redirect: The surprising new science of psychological change. New York: Little, Brown, and Company. 11

See Thaler and Sunstein’s idea of “nudging” with “choice architecture”: Thaler, R. H. & Sunstein, C. R. (2008). Nudge: Improving decisions about health, wealth, and happiness. New Haven: Yale University Press. Heath, Larrick, and Klayman call them “organizational repairs”: Heath, C., Larrick, R. P., & Klayman, J. (1998). Cognitive repairs: How organizational practices can compensate for individual shortcomings. Research in Organizational Behavior, 20, 1-37. See, e.g., Wansink, B. (1996). Can package size accelerate usage volume? Journal of Marketing, 60, 114

Bem. D. J. (1972). Self-perception theory. In L. Berkowitz (Ed.), Advances in Experimental Social Psychology, 6. New York: Academic Press. 15

Benjamin Converse is an Assistant Professor of Public Policy and Psychology with appointments in the University of Virginia’s Department of Psychology and the Frank Batten School of Leadership and Public Policy.

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The Economic Effects of Israel’s Separate Education System by Elena Weissmann

n a country plagued by more internal and external conflicts than its size reckons, the expectation would be for its society to be too war-ravaged to pay any attention to the economy. However, Israel boasts an incredibly diverse and developed economy that ranks as the world’s twenty-fourth largest. It has the most NASDAQ listings in the world and is a global leader in the high-tech sector. Despite defying countless expectations, Israel’s economy could reach new heights if its entire population were to maximize their utility. For the most part, Israel’s sizeable Arab minority does not participate in the lucrative sectors of the nation’s economy. According to a recent article, “Israel’s economic—and even political—future hinges on the full integration of the Arab minority into Israeli life: Fifty percent of Arabs now live below the poverty line and unemployment rates are high.”1 This paper will examine what can arguably be seen as the root of this problem: Israel’s separate education systems. With a policy reform concentrated on language, social, and cultural integration, the problems stemming from a historically disparate education system can be reversed. Since the end of the British Mandate and the inception of the modern state of Israel, Jews and Arabs have attended both public and private schools separately. The 1949 Compulsory Education Law made education mandatory for both Jews and Arabs. After the 1948 War for Independence, Israelis had debilitating commodity, housing, and manpower scarcities, but this law made it obligatory for the state to provide free schooling to

all students. The law mandates that parents may not decide where their child attends school, but rather the local school board chooses, so as to facilitate social integration. The law is indicative of the importance of education to the Israeli persona; education is viewed as a basic necessity based on the idea that a student’s future (in terms of public reception) hinges on his education. In their formative years, both Israeli and Arab schools faced obstacles to their success. In Jewish schools, at the end of the British Mandate, most of Palestine’s schools belonged to political parties. The schools were funded by the World Zionist Organization and were free to pursue their own curricula and hire their own staff. Primarily, students were expected to be well-versed and personally acquainted with the Jewish tradition. There were three main types of ideological schools within the education sector, and all three competed through “the ideological molding of students…in youth movements.”2 This implies that students’ lives were inextricably bound to ideological and political motives with the exception of Arab students who were not exposed. It is possible that this separation contributed to a lack of knowledge among the Arabs, estranging them from Jews who were so much more involved with Israel’s political and social systems. A more specific problem in Arab schools is that by the end of the Mandate, only 30 percent of eligible Arab students were enrolled in school at all, and it was even more rare for girls to be educated. There were only ten Arab high schools (and

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only two for girls), three teacher-training schools, and no higher education institutes.3

Jewish educational system, Arab schools lack many services and even suitable classrooms.9 Unequipped classrooms bode badly for educational success; without proper resources such as textbooks, desks, and workbooks, students must rely solely on the abilities of teachers to command attention for the entire day – which is hard enough even in a classroom with a serious learning atmosphere. Not only must the teachers maintain the attentiveness of their pupils, but without proper secondary resources they are also responsible for providing completely comprehensive lessons. Unfortunately, teacher schools are not common or well-maintained within the Arab-Israeli school system.

After the War of Independence, Israel took on the mission of regenerating the Arab school system. The Compulsory Education Law was extended to Arab students, lessons could be taught in Arabic, and the school system would be “completely parallel” to the Jewish one.4 New subjects were taught, gender separation disappeared, and the Arab custom of forbidding married women to serve as teachers was abolished. But by 1949 there were still only sixty nine Arab schools, with most of the teachers being non-Arab because the Israeli government hired new educators out of fear of anti-Israel sentiment by Arab teachers in schools.5 Fur- These discrepancies and resource disparithermore, the natural growth of the Arab- ties likely stem from unequal state funding. Israeli population led to a rapid expansion In 2010, the Israel government began alloof the education system to accommodate all cating one-third less funds per Arab student the students. Such immense growth is like- than Jewish student.10 The asymmetrical ly to leave attention pockets of g i v e n “The absence of the Arabic language in Hebrew need, void schools creates a shammed integration, with the mito state of funding students nority being forced to assimilate with the majority or other creates a rather than a mutual adaptation.” support. population lag Arab schools today continue to face prob- among Israeli-Arabs, denying them the lems. The tradition of segregated schools left same post-educational opportunities as by the British Mandate resulted in a strong Jews. Furthermore, if students feel that the and united national identity among the Jews state and administration do not value their and not the Arabs.6 Historian Tom Segev educational pursuits enough to equip their even asserts that this neglect of education classrooms, a sense of apathy is bred rewas one reason the Arabs lost the 1948 war.7 garding schoolwork. There is also the problem of teaching quality: educational staff has trouble changing Another more specific issue is that “while occupations even after several decades be- Arab children learn Hebrew from [third] cause of clan ties, political ties, and no work grade on, Arabic is only compulsory for alternatives for their education level.8 Jewish students in secular schools from [seventh] to [ninth] grades.”11 Israeli stuArab schools also suffer from a lack of re- dents are required to study Arabic in midsources; especially in comparison to the dle school, and it becomes optional in high

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school, when the majority of students opt out. Conversely, Arab students are all required to learn Hebrew. Technically, both Hebrew and Arabic are national languages of the state.12 However, the absence of the Arabic language in Hebrew schools creates a shammed integration, with the minority being forced to assimilate with the majority rather than a mutual adaptation. Additionally, Arabs cannot elect to attend these highperforming Hebrew schools, so they must enroll in either a low-performance Arab public school or an expensive private one.13

not be so inclined to seek education abroad and Israel’s economy would not lose out on their physical and intellectual presences.

Another intermediate effect relates to the value of education. If Arab parents understand that statistically speaking, their children are not likely to succeed notably in school, they are less likely to hire tutors, buy new school supplies, or even new school clothes. In spending as much on Arab students as on Jewish students, the Israeli government might avoid this sizeable opportunity cost for the economy (in 2000-2001, a Such results of personal choice can be seen disparity of 534 to 1,779 NIS).17 in the ultimate results of the school system. Arab students have a dropout rate several The demographics of the Israeli worktimes higher than their Israeli counterparts, force are also illustrative in analyzing the and exhibit exceptionally low achievement: outcomes of a separate education system. 80 percent do not receive matriculation In 1990, Arabs experienced an unemploycertificates, and three-fourths of those who ment rate twice that of Ashkenazi Jews but do receive them do not attend university.14 one-third that of Mizrachi Jews. Both Jew“Barely 32 percent of Arab students pass ish rates decreased steadily throughout the the university matriculation exam, called 1990s and early 2000s, whereas the Arab the bagrut in Hebrew, compared to nearly rate maintained an upward growth trajec60 percent of their Jewish counterparts.”15 tory.18 These trends indicate there is something more at play than just standard social This educational disparity causes a number deflation, as not all demographic groups of intermediate effects in addition to long- were affected equally. Through the 1990s term outcomes. Namely, because of the and early 2000s, Israel’s population growth educational gap, approximately one-third of rate decreased from 5.7 percent to 1.6 perArab-Israeli students opt to earn their uni- cent. A reduction in population growth versity degrees abroad in Jordan.16 This not should imply a corresponding reduction in only harms the Israeli economy in an imme- poverty rate; when there are less people bediate sense by transferring possible tuition ing added to the population, there should be money to the Jordanians, but it also raises more to go around. However, the poverty the likelihood that the graduates will remain rates during this period increased from 14.3 abroad for work, harming Israel’s economic to 20.2 percent per family, and from 16.9 to well-being in the long run. Israel already 24.4 percent per person. Higher percentages hosts a large number of unemployed Ar- of both individual people and family units abs, and this recent university phenomenon found themselves living below the poverty transfers the already limited available man- line even while the population growth rate power abroad. If Arab students were given was dissipating.19 This phenomenon can be the same resources as Israelis, they might attributed to the large number of Arabs who

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do not participate in the workforce. Their educational disadvantages undermine their job searches, hampering the Israeli economy; an impoverished and nonproductive society contributes far less to the economy and social health than an employed society. Furthermore, a growth in the poverty rate accompanied by a decline in the population growth rate led to a widening of the economic gap and an increase in income inequality: the top quintile began earning a larger share of income while the bottom quintile lost. One notable result of this type of income distribution is social disunity. Research has shown that higher rates of social inequality correlate with higher homicide incidences and overall mistrust.20 Following this model, the unrest between Arab and Jewish Israelis can partially be attributed to the social equality gap. Therefore, the disadvantages posed to Arabs educated in their own school systems are exacerbated by the social mistrust harvested by their low unemployment rates. The phenomenon can be traced back to either the school system or to external factors causing their unemployment, but in either case a vicious circle of mistrust and inequality results. In particular, Arab women have far less employment success than their Jewish counterparts. Whereas 71 percent of Israeli-Jewish women participate in the workforce, only 22 percent of Arab women do so.21 The Ministry of Trade, Industry, and Employment also announced that Arab women who do work earn salaries averaging 47 percent of Jewish women’s salaries, and that 51 percent of them make minimum wage or below (Sinai). “The research also indicated unemployment among Arab women stood at 17 percent, compared to 8 percent among Jewish women. Eighteen percent of Arab women in part-time employment seek to in-

crease the scope of their jobs, compared to 7.5 percent of Jewish women” (Sinai). Not only are fewer Arab women employed than Jewish women, but more of them are seeking jobs, suggesting that the unemployment dichotomy is not necessarily a result of lack of will or skill, but rather due to external agents such as wage discrimination. Discrimination would not be so rampant if Arabs and Jews were exposed to one another from a young age. Fear and mistrust are bred by ignorance, which comes as a result of a lack of real relationships and exposure. The issue of lower salaries and employment rates among Arab women is not just a point of concern culturally or in terms of population treatment. It is also a severe economic setback because it removes an entire population segment from the workforce, resulting in a less productive society that must support unemployed individuals. During a 2010 research conference, Israeli Minister of Finance Yuval Steinitz said that the integration of Arabs into the Israeli workforce is critical for Israel’s economic future.22 Research presented at the symposium revealed that “59 [percent] of Jews and 42 [percent] of Israeli Arabs participate in the workforce, and only [one percent] of the employees in the hi-tech industry are Arab.”23 Although the employment differences are not as drastic as for female-only demographics, a clear distinction is present between Jewish and Arab productivity, specifically in the high-tech sector. While some 75,000 Jewish Israelis are employed in high-tech, there are only a few hundred from the Arab community,24 and only three to four percent of Arab-Israelis with relevant university degrees are hired by hightech companies.

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This differential hiring may be due to the companies’ lack of understanding and acceptance of Arab-Israelis, stemming from a deficiency of community exposure. The offices of Shimon Peres researched the issue, concluding that discrimination definitely exists in the high-tech industry. They found Arabs lack the “social connections to Jews and others who work in high-tech” that would allow them to enter the sector.25 The research credited this negative phenomenon to the fact that Arabs attend other schools and live in other towns, preventing exposure among both groups and the mutual understanding that comes with growing up together. Peres said that integrating the Arab population into the high-tech industry would not only bring more talent to the production (and therefore more money in result), but it would also bridge the economic gaps which have long existed in Israel.26 Other reasons for Arab exclusion from the high-tech sector can be traced back to the schools as well. First, the language of the industry is predominantly Hebrew. Improper schooling prevents many Arabs from fully grasping Hebrew to the point of workplace competency.27 Further, there has been a recent push toward the study of robotics and other high-tech concepts in Israeli schools. With this educational advantage, Israelis are given an additional advantage over Arabs who do not have similar opportunities in schools. If Arabs were in school with these Israelis or even had similar funding and opportunities in their own schools, they might be better suited for the high-tech industry and could help contribute positively to Israel’s economy in this way.28 In 2010, the Organization for Economic Cooperation and Development—an international group which strives to increase world

trade and economic productivity—joined Israel and determined that if the nation wishes to sustain its economic growth, it must “increase the labor force participation rate among its minorities.”29 Specifically, they said that “lower rates of labor force participation among Arabs, and a higher incidence of poverty, prevents Israel’s overall economy from reaching its potential.”30 Separate school systems lead not only to the immediate effect of wildly differing success rates, but the accompanying lack of personal connections extends its reach into the job market too. All of these causes can be framed in a frustratingly cyclical model. The current education system is faced with problems stemming from the Mandate and post-1948 system; these issues serve as setbacks for community integration; this disassociation intensifies the difficulties Arabs face in employment caused by educational setbacks; rampant unemployment devalues education; and the cycle begins again. Policy reform, however, can ensure the cycle is not infinitely bound. The Yad B’Yad school system serves as a source of newfound optimism for the nation’s people and for global spectators. The system’s revolutionary schools educate Jewish and Arab neighbors in a bilingual, multicultural environment. Rather than striving towards an abstract goal of universal accord and dual-party agreement, the administrators and educators at Yad B’Yad favor the objectives of respect and knowledge between these two neighboring groups as a means of understanding. Students learn customs, values, and beliefs of their Arab or Jewish counterparts, breaking down racial barriers and exposing “The Other” as simply neighbors, friends, and classmates.

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The Israeli school system is traditionally segregated, causing the childhoods of Arabs and Israelis to be led in isolation, without knowledge of their cultural counterparts. The Yad B’Yad schools avoid the inevitable problem of irreconcilable rival viewpoints that arise from segregated schools. When children spend their days in an environment of diversity and understanding, a true path to peace can be forged through the entire society rather than just skimming its surface. The schools are a living example that Jews and Arabs can live and work in peace with mutual respect and understanding. Thus, the Yad B’Yad schools confront the issue of population dichotomy at its root, avoiding economic and social manifestations of the separate systems. The schools have exhibited measurable prowess on both social and cultural scales. Academically, the Israeli Ministry of Education has recognized them and has implemented the Excellence in Education Campaign in 75 percent of the system’s schools. Numerous accounts have shown Yad B’Yad to be effective in both an educational and socio-cultural sense, and demonstrate a valuable model. With proper funding, this model could expand its success throughout a nation riddled by war and distrust. With models such as these at the forefront of the Israeli education system, the cycle can be halted. Without support for them, however, Israel’s economy cannot reach its potential. The entire population needs to be integrated through language, general education, and community acceptance. Only then can the economy maximize its productivity and come to represent Israel’s complete populace.

Endnotes Craft, Dina. “Separate But Not Equal.” MOMENT MAGAZINE. Sept.-Oct. 2010. Web. 9 Mar. 2011. <http://www.momentmag.com/Exclusive/2010/10/Feature-Arab_Israel.html>. 1

Zamaret, Dr. Zvi. “Fifty Years of Education in the State of Israel.” Www.mfa.gov.co.il. Israel Ministry of Foreign Affairs, 14 July 1998. Web. 12 Mar. 2011. 2

Ibid.

Craft, Dina. “Separate But Not Equal.” MOMENT MAGAZINE. Sept.-Oct. 2010. Web. 9 Mar. 2011. 6

< h t t p : / / w w w. m o m e n t m a g . c o m / E x c l u sive/2010/10/Feature-Arab_Israel.html 7

Ibid.

Zamaret, Dr. Zvi. “Fifty Years of Education in the State of Israel.” Www.mfa.gov.co.il. Israel Ministry of Foreign Affairs, 14 July 1998. Web. 12 Mar. 2011. 8

Ibid.

Craft, Dina. “Separate But Not Equal.” MOMENT MAGAZINE. Sept.-Oct. 2010. Web. 9 Mar. 2011. 10

< h t t p : / / w w w. m o m e n t m a g . c o m / E x c l u sive/2010/10/Feature-Arab_Israel.html>. 11

Ibid.

“BBC News - Arabic to Become Compulsory in Israeli Schools.” BBC News - Middle East. British Broadcasting Corporation, 24 Aug. 2010. Web. 3 May 2011. <http://www.bbc. co.uk/news/world-middle-east-11075326>. 12

Rubenstein, Amnon. “Why Separate Education?” Israel News - Haaretz Israeli News Source. Ha’Aretz News, 18 Sept. 2003. Web. 9 Mar. 2011. <http://www.haaretz.com/print-edition/ opinion/why-separate-education-1.100494>. 13

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Zamaret, Dr. Zvi. “Fifty Years of Education in the State of Israel.” Www.mfa.gov.co.il. Israel Ministry of Foreign Affairs, 14 July 1998. Web. 12 Mar. 2011 14

Craft, Dina. “Separate But Not Equal.” MOMENT MAGAZINE. Sept.-Oct. 2010. Web. 9 Mar. 2011. <http://www.momentmag.com/Exclusive/2010/10/Feature-Arab_Israel.html>. 15

Cook, Jonathan. “Israel’s Arab Students Are Crossing to Jordan - The National.” Thenational.ae. The National, 9 Apr. 2009. Web. 9 Apr. 2011. <http://www.thenational.ae/news/worldwide/middle-east/israels-arab-students-arecrossing-to-jordan>. 16

Adalah. “A Snapshot of the Arab Education System in Israel.” The Follow-Up Committee on Arab Education - Israel (2000). Print. 17

GPN Global Labor Market Database: Israel 2007. Publication. Tel Aviv: Adva Center, 2007. Global Policy Network. Web. 15 May 2011. <http://www.gpn.org/data/israel/israel-data. pdf>. 18

Ibid.

Krahn, H., T.F. Hartnagel, and J.W. Gartwell. “INCOME INEQUALITY AND HOMICIDE RATES: CROSS-NATIONAL DATA AND CRIMINOLOGICAL THEORIES - KRAHN 2006 - Criminology.” Criminology 24.2 (2006): 269-94. Wiley Online Library. 7 Mar. 2006. Web. 4 May 2011. <http://onlinelibrary.wiley. com/doi/10.1111/j.1745-9125.1986.tb01496.x/ abstract>. 20

Sinai, Ruth. “Arab Women - the Most Exploited Group in Israeli Workforce.” HAARETZ. com. Ha’Aretz News, 1 Feb. 2008. Web. 9 Mar. 2011. <http://www.haaretz.com/news/arabwomen-the-most-exploited-group-in-israeliworkforce-1.238492>. 21

Wrobel, Sharon. “Steinitz: We Need Haredim and Arabs in Workforce.” Jerusalem Post | Breaking News from Israel, the Middle East & the Jewish World. Jerusalem Post, 16 June 2010. Web. Mar. 2011. <http://www.jpost.com/Business/BusinessNews/Article.aspx?id=178666>. 22

Ibid.

Kloosterman, Karin. “Teaching Arab Israelis The High-Tech Code.” IsraeliConsulateLA.org. Consulate General of Israel - Los Angeles, 15 July 2009. Web. <http://www.israeliconsulatela. org/index.php?option=com_content>. 24

Stub, Sara Toth. “Peres: Israeli High-Tech Companies Must End Arab Discrimination Tech Europe - WSJ.” WSJ Blogs - WSJ. Wall Street Journal, 9 Feb. 2011. Web. <http://blogs. wsj.com/tech-europe/2011/02/09/israeli-hightech-companies-must-end-arab-discrimination/ tab/print/>. 25

Ibid.

Globes Correspondent. “Peres, High-tech Leaders to Launch Israeli Arab Jobs Project - Globes.” Globes, Israel’s Business Arena. Globes, 8 Feb. 2011. Web. <http:// www.globes.co.il/serveen/globes/docview. asp?did=1000621448>. 27

Boudreaux, Richard. “Israel Turns to Robotics to Boost Students’ Interest in High-tech Industry.” Los Angeles Times: World: Finance Sector. Los Angeles Times, 15 Apr. 2009. Web. <http:// www.latimes.com/news/nationworld/world/ la-fg-israel-robots15-2009apr15,0,6884917. story>. 28

Ibid.

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An Economic Approach to Preventing Legislative Inefficiency by Scott Masselli Abstract

to control the new powers of government and increase fiscal accountability, elected The United States’ constitutional design officials should be subject to strict depends on hopes that public-minded financial penalties and removal from statesmanship will effectively solve our office for misuse of government funds. nation’s problems. Despite the skill of the Framers, this design has proved to be an Introduction architectural shortcoming because it relies upon the public interest of politicians. This From an economic perspective, the past summer was a prime example of this uncompromising political posturing leading limitation to our country’s framework, up to the Budget Control Act of 2011 was convincing many Americans that the a result of individualistic incentives. An debt crisis was a result of politicking and example of such incentives is the apparent adversarial relationships. Although these fact that legislators had more to gain descriptions are realistic and noteworthy, from hard-line positions than genuine sound economic analysis suggests that the cooperation. The failure to compromise patterns of behavior this summer were more also indicates a “coordination problem.” an effect, not a cause, of the underlying Each individual representative stood to gain problem. more from refusing to compromise, even though Congress as a whole received scorn While we tend to associate the concept of for its perceived stubbornness.1 Although representative democracy with political the two parties eventually brokered a deal, science, economic theory holds a more Standard & Poor’s still downgraded the accurate explanation for our current United States’ crediting rating, noting that political climate. Because we, the people, “the statutory debt ceiling and the threat of deem it too costly to vote on every issue default have become political bargaining ourselves, we “hire” politicians to run our chips in the debate over fiscal policy.”2 government for us with faith that they will vote and manage our public funds, holding The Founders anticipated self-interested public interest as the top priority. We engage conflicts between elected officials and in a principal-agent relationship with our designed a system of checks and balances elected officials, just as a business owner with democratic elections to avoid these does with an accountant. The Founders shortcomings. However, in the past 200 were implicitly aware of this when they years, the role of government has expanded constructed the Constitution, but their but the institutional checks and balances safeguards have proven insufficient. In order have not. It is in the spirit of the Founders’

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vision that the current system requires supplementary incentives for individual representatives to act in the interest of the American people. In the 1930s, the American people granted the government new powers in the economy, altering the classical liberal model that the Founders established in the Constitution. The resulting welfare-state liberalism is firmly integrated into the lives of presentday America, but it is incomplete. We can better understand how to correct for the wasteful, pork-barrel spending that seems rampant in our current situation by viewing our representative democracy as a product of the “principal-agent” problem.

centric” conception that, in its ideal form, is a very appealing aspect of representative democracy. Despite the best intentions, however, statesman/citizen-centric reforms have three primary shortcomings, each of which occurs in U.S. politics. The first limitation of this democratic solution is that it ignores the influence of well-established party politics. Party leadership, whose main task is to protect the seats of party members, easily trumps individual choice. And, of course, an easy way to appease an angry district is to pump money and jobs into it. Second, perfect information in voting is almost impossible to achieve, and thus voters often cannot discern whether an incumbent is abusing his position. More importantly, even if voters can identify an irresponsible incumbent, they may actively support the incumbent for the district’s benefit. Finally, in districts where voters actively oppose a candidate’s pork-barrel spending, these concerns may be less important than other questions, such as social policy.

By understanding our congressional representatives as the agents of voters, the following argument presents the most effective solution to the coordination problem in Congress. Based upon the political constraints and current constitutional interpretation, the best solution to correct for the country’s fiscal irresponsibility is to impose financial penalties on members of Congress and entire congressional bodies The Founders were correct in believing that that misallocate resources and create voting alone was insufficient to deter abuse. significant economic losses for the nation. This is why they designed a bicameral legislature and gave the other branches Common proposals to reduce legislative power to check the Congress. After all, waste these men famously wrote, “ambition must be made to counter ambition.” In light of Many conservative commentators simplify the previous arguments, it is important the problem of defeating pork-barrel bills to acknowledge that efforts centered on in Congress by explaining that citizens honest voting and selfless, statesmen/ will generally vote out representatives citizen-centric reform will continue to be who engage in this practice. This method ineffective in overcoming the difficulties relies on public-minded citizens and honest and complexities of the public spending statesmen who favor helping the nation over problem. gaining votes. This is a “statesman/citizen-

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Principal-agent problems and representative democracy

breach their fiduciary duty to the citizens of the United States.

It is common knowledge that representative When the Founders wrote the Constitution, democracy springs from the impracticality perhaps the greatest fear was that government of direct democracy. Because it is too costly would oppress the citizenry. Their fears and time-consuming to have every citizen continue to be legitimate today, as any vote on every proposal, citizens delegate entity with lawful use of force deserves their sovereign authority to the winners intense scrutiny. In the 1930s, Franklin of elections, who then act on their behalf. D. Roosevelt’s liberalism added to the The voter-representative relationship is Founders’ plans by confronting problems of analogous to the principal-agent relationship economic inequality.3 Despite the advances, as described in economics: A business owner this new model of liberalism is incomplete: (the principal) hires an accountant (the agent) it still requires a system of checks and to help file his business and personal taxes, balances on the new economic functions of thereby giving the accountant authority to government, similar to the political checks act on his behalf towards the IRS. Though and balances in the Constitution. the accountant benefits from faithful service by way of keeping “The voter-representative relationship is analogous a client, it is not difficult to imagine to the principal-agent relationship as described in scenarios where economics.” the accountant— having access to sensitive information—would have a The New Deal as an ill and a cure market incentive to act in a way that would harm the businessman. Nevertheless, the One of the most maligned effects of businessman trusts that the accountant the New Deal is the intermingling of will not cheat him because the rule of law government and large firms, which paved prevents this abuse. By law, the accountant the way for the extensive lobbying of the has a fiduciary duty to the businessman, modern era. Wasteful government spending which induces the accountant to always has been one consequence of the increased act in an honest way that maximizes the lobbying and spending, and the current businessman’s benefit. system encourages representatives to “bring home the bacon,” so to speak, by directing The main difference between the voter- federal funds to the district. This scenario representative and the businessman- is analogous to the Prisoner’s Dilemma accountant relationships is that the of game theory. That is, given the simple fiduciary duty does not bind the agent in choice of whether to cooperate or not, both the voter-representative scenario. This players will choose the non-cooperative comparison suggests that we should punish strategy, achieving the only inefficient representatives for individual actions that result. If both players chose the cooperative

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Figure 1: The Voters’ Dilemma

strategy, both would be better off. But under the parameters of the game, for any possible choice by his opponent, the best response by either player is to not cooperate (this is called a Nash equilibrium). Thus, neither party will cooperate unless they are given an exogenous incentive to do so.

Payoff matrix for voters choosing between a representative who will bring federal projects to the district and one who will not. Payoffs are written in format (District A, District B). The Nash equilibrium is highlighted.

Waste identified 9,129 projects as pork barrel legislation, costing $16.5 billion.5 This does not even include the opportunity cost of that spending. But despite the growth of government, Americans typically favor the reforms and continue to appreciate the impact of the New Deal and similar efforts to counter harmful opportunism in the marketplace. Aside from the most radical corners, the disagreement is generally to the degree, not existence, of protection. We desire to keep the New Deal, in spite of its shortcomings. Therefore, the task for public policy experts is to provide institutional barriers to wasteful spending that do better than the current, informal methods.

The application of this game explains abuse of the national purse as well as the standoff mentality of America’s leaders during the debt crisis. A result of both parties following their individual incentives and choosing the non-cooperative strategy—to defend the projects they support and call for cuts elsewhere—Congress was not able to reach a consensus on a long-term deal and Standard & Poor’s downgraded the nation’s Principal-agency revisited credit rating. Accepting the principal-agent relationship The New Deal is not the only cause of pork with our elected officials clearly suggests barrel legislation, but it has contributed to that we should establish penalties to government outlays in a significant way. reconcile the incentives of each group. The Under the New Deal, the size and spending following rules would accomplish this: philosophy of government underwent a drastic change—and this trend has only 1. If, upon review by a special board of grown. In 2010, government outlays were economists, which shall convene and 23.8% of the gross domestic product (GDP). receive a salary solely for the purpose This is almost 1.5 times the average spending of such reviews, a legislator has during Roosevelt’s tenure, which was incorporated pork-barrel legislation into 4 16.5% of the GDP. This is true even despite a bill, he or she shall pay a fine; repeat low consumption and investment during the offenders shall lose their offices. Great Depression and government spending 2. If, upon review by the board, a on World War II. Congress has taken steps that, alone or in conjunction with outside actions, Furthermore, Citizens Against Government caused significant economic problems,

POLICY & RESEARCH 29

measured by a fall in the growth rate of GDP per capita, then the entire body shall be equally subject to the prescribed penalty. 3. Every ten years, Congress shall adjust financial penalties for inflation so that they are comparable to those for other high crimes and felonies. Each of these modifications could occur via statute upon the existing Congress without offense to the Constitution

setting high penalties for those convicted: Equation 1: Expected benefit of crime

EB = (1-P(x))B â&#x20AC;&#x201C; P(x)f â&#x20AC;&#x201C; C

P is the probability of detection on the interval [0, 1] as a function of spending on law enforcement, x; f is the cost of the penalty to the transgressor, and B is the benefit to the transgressor. C is the nonpunishment cost to the transgressor (this accounts for opportunity cost, potential Alternative solutions moral regret, etc.). The individual will undertake the activity if and only if EB > One modification of the proposed solution 0. Thus, for any value of B, we can deter above is to empower the review board to the criminal behavior by making EB < 0 by simply strike out any provisions in legislation adjusting x and f. Increasing the detection that are deemed to be pork. In Clinton v. City rate requires more money be spent on law of New York, the Supreme Court ruled that the enforcement. The optimal result is a high line-item veto was unconstitutional, which value of f. suggests that any such powers delegated to a non-congressional entity would violate the The beauty of this particular case is that we Constitution.6 This means that for such a plan can use more creative punishments than to go into effect, either we must be amend criminal law, since the transgressors in this the Constitution or the Court must overturn case have a particular asset (elected office) this ruling. Although this alternative offers that is very valuable to them. And unlike an easy and straightforward solution, both the other, more imaginative punishments, of these events are unlikely to occur. removing them from office would not offend the Eighth Amendment. Without question, Instead, my proposal is to devise a punishment the prospect of being removed from office scheme that has no constitutional barrier and facing national ignominy would be and can limit cost of enforcement. As noted a very harsh penalty for a representative by Nobel Prize-winning economist Gary and his or her spouse. To economists, this Becker, crime deterrence is a function of is equivalent to a fine for breaking the spending on law enforcement and stringency law, with the only difference being the of the penalty for infraction. Steep penalties magnitude. If we adopt this punishment, for infraction help to deter crimes and then the irresponsible representative must reduce the need for enforcement spending.7 recalculate his or her legislative strategy: This is because punishment depends on the Pork-barrel legislation would, in many probability of detection and magnitude of cases, become too great a risk for to the the penalty. Thus, we can limit enforcement potential reward. If it is accepted that costs (fees paid to the review board) by punishment is sufficient to deter behavior,

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then this alternative solution can be both effective and politically feasible. Implementing an economic Constitution If the foregoing analysis is accepted, then there are only a few more questions to ask. How ought we deal with legislation once it is determined to be pork, who should sit on the review board, what criteria will they consider, and how will a review be triggered? The answers are more relevant to institutional design than economics. Handling pork once it is exposed

Allowing Congress to make the appointments would also create problems, as politicians would recommend economists who make estimates and assumptions that correlate with the politiciansâ&#x20AC;&#x2122; own ideology. Instead, to minimize this bias, the 12 Federal Reserve banks and the Congressional Budget Office, all nonpartisan entities, should make the 13 board appointments. It would be fallacious to argue that because these institutions are apolitical, their appointees will be as well. Nevertheless, this method would reduce political bias more than the congressional appointment or voting methods. These 13 appointees ought to serve limited terms, with no chance of reappointment. This prevents one group of reviewers from occupying a powerful position for too long.

The punishments in rule (1.) apply to the sponsor of the bill. Bills determined to be pork-barrel legislation should have to gain a two-thirds supermajority to pass each house, which would be another form of checks and Criteria for separating pork from legitimate balances, this time by the review board.8 spending Establishing a review board

An intuitive idea or rough estimate is insufficient to separate pork from legitimate A candidate for the review board would spending. If we intend to punish specific require intelligence and sophisticated legislators for creating pork-barrel bills, we technical knowledge in both economics and must be able to say with certainty that they the political arena. We rarely use general have committed the infraction. elections for such positions and when we do, the results favor charismatic political For my purposes, the most important issue actors over other more sophisticated is not what the law is, but that it is clear. professionals. Electing the board members Legal clarity reduces judicial review costs, through a general election would also entail provides actors with better information large search costs. Voter naivety concerning regarding the expected value of cheating, the technicality of economics could cause and exposes potential biases on the part of problems. Similar to the appointment of the review board. The public interest group Supreme Court justices, it makes more Citizens Against Government Waste lays sense to select the technical members of this out the following criteria to identify porkreview board by appointment rather than barrel provisions as those which are: general election to correct for any political 1. Requested by only one chamber of influence that may bias decision-making.

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Congress; Not specifically authorized; Not competitively awarded; Not requested by the president; In large excess of the president’s budget request or the previous year’s funding; 6. Not the subject of congressional hearings; or 7. Only serving a local or special interest.9 2. 3. 4. 5.

Practically, this list would serve as red flags rather than the deciding factors in the case. It is not exhaustive, but it gives more than a good starting point for further refinement. A complete list of red flags cannot be a static set of rules, but rather must accrue over the course of time with amendments and new provisions.10

bills and the ways in which the bills will come before it. If we decide that “ambition must be made to counter ambition,”11 legislators should have the power to challenge otherslegislators’ bills that contain pork and take the case before the review board. The board would then take a vote on whether or not to hear the case, similar to the Court’s writ of certiorari, which requires only four of the nine justices to vote in favor for a case to be heard. This would allow the board to weed out capricious challenges that lack sufficient grounds for a case. Challenges should be allowed only once the president has signed a bill into law. This would eliminate the possibility of a challenge becoming moot due to presidential veto or lack of congressional support. Another way to prevent frivolous charges is to punish or reprimand legislators who engage in this practice. The United States legal system provides a model for this, as judges often chastise lawyers for bringing frivolous lawsuits.

The manner in which the pork-barrel provision entered into the legislation should also matter. For example, was it the original purpose of the bill or an amendment that was attached during debate? This would allow the board to explicitly scrutinize potentially questionable dealings. These elements are not independently sufficient to Reviewing Congress convict a representative, but they do provide roadmaps for attacking and preventing Although the primary concern of this future cases of pork-barrel spending. analysis has been to prevent wasteful spending by individual representatives, it Ultimately, the simplest criterion may be a is also important to review the actions of cost-benefit analysis of the project. The bill Congress as a whole. The primary indicator should be considered pork if the costs to of congressional waste would be GDP per the nation—including opportunity costs— capita, which is the most common metric of exceed the benefits. macroeconomic analysis. A national popular referendum, which would occur only if the Triggering the review of legislation GDP per capita growth rate declines by a certain amount, is one possible trigger An important reason to limit the power of option. this review board is to determine both the appropriate times for the board to consider Public support and potential difficulties

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The notion of trying a person for breaking a rule is very familiar to our society and so I doubt many Americans will be overly skeptical of such a system as applied to Congress. In order to ensure justice and prevent a legislator from being removed office too easily, we could adopt the standard of “beyond a reasonable doubt” that is used in criminal cases. Or, if we worry less about deterrence and more about convicting transgressors, we could use “preponderance of the evidence,” which is used in civil cases and requires a lower burden of proof. These are questions for society as a whole, not for this paper.

grossly inaccurate, potential employers and colleagues will believe the reviewers are either incompetent or dishonest. In either case, it will injure their career. Second, the identity of the legislator on trial could be hidden from the board, along with any identifying characteristics in the text of the bill. This would prevent biases in favor of or against a particular legislator. Conclusion

Economic theory can add an important element to the institutional design of government, ultimately reducing waste and inefficiency in the modern era of More importantly, the higher burden government fiscal policy. Economic theory of proof would not deter aspiring and can add checks and balances to the American intelligent public servants from running liberalism of Franklin Roosevelt, allowing for office. If a potential statesman is truly our current political system to become the honest, ambitious, and self-confident, do we descendant of the checked-and-balanced truly believe these penalties will impede the Constitution of 1787. dreams of such people of entering public service? And, if they do feel deterred, do we The most recent potential application of really want them holding office anyway? this paper is the national debt crisis this past summer, where America’s leaders The most significant difficulty for this plan is showed minimal cooperation and acted in determining the value of deadweight loss of a their personal best interest rather than in spending project. While the costs of a public the collective interest of the nation. In the project are relatively easy to estimate, there spirit of this paper, the incentives for being is some discrepancy in measuring benefits. uncooperative could decrease by imposing One option is to have each board member financial penalties on our congressional calculate the shadow value independently, representatives. and then have him or her apply the median value to each of his or her analyses. There The solutions offered are not perfect, is a concern, though, that individual board but I believe that they would be strong members will select estimate values to help improvements to our current system. By favored legislators. This is unlikely to understanding representative democracy as happen for two reasons. First, in conducting a principal-agent problem and noting the their analyses, reviewers are staking their new governmental role that the New Deal professional reputation. If the estimates are has created, we can institute checks and

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balances to correct for the limitations of a politically-guided economy. As the dangers of government power expand to include economic as well as political abuses, we should use economic analysis to implement rules for deterrence. Endnotes This is analogous to the Prisoner’s Dilemma in game theory. 1

William Alden, “US Credit Downgrade By S&P Darkens Economic Outlook, Stokes Recession Fears,” The Huffington Post, August 6th, 2011. http://www.huffingtonpost.com/2011/08/06/ US-downgrade-standard-poors-credit-ratingeconomy_n_920228.html 2

Franklin D. Roosevelt, The Continuing Struggle for Liberalism (New York: The Macmillan Company, 1938). 3

It is worth considering whether a supermajority in the legislature could pardon, but my initial concern is that this would lead to quid pro quo voting and setting a precedent of collusive behavior and granting of reprieves in all instances that do not attract media attention. This is merely an intuitive answer and I leave fuller analyses of the pardoning question for future study. 8

Citizens Against Government Waste, h t t p : / / w w w. c a g w. o r g / r e p o r t s / p i g book/2010/#Requested_by_only_one_ chamber_of_Congress, May 8, 2011. 9

Criminal laws are constantly modified as new technologies are developed and would-be criminals devise new methods of abusing them. 10

Alexander Hamilton or James Madison, “Federalist No. 51: The Structure of the Government Must Furnish the Proper Checks and Balances Between the Different Departments,” New York Packet, (1788). 11

Scott Masselli is a senior economics major at Virginia Tech. His interests include the intersections of law, economics and public policy. This paper is an adaptation of his 5 Citizens Against Government Waste, Pig Book independent study thesis from spring 2010, which he wrote while studying under his 2010. 6 Clinton v. City of New York, 524 US 417 (1998). advisor, Professor Nicolaus Tideman. He welcomes all thoughtful critiques and can 7 Gary Becker, Crime and Punishment: An Economic Approach, Journal of Political be contacted at swm89@vt.edu. The White House Office of Management and Budget, Historical Tables, Table 1.2 – Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP: 1930–2016. 4

Economy (1968), 44.

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Rethinking the Military’s Energy Policy by Daniel Sater Abstract In the first six months of 2011, the U.S. civilian power grid suffered 155 blackouts that affected an average of 83,000 people with each incident. Thirty-six of those blackout incidents affected over 100,000 people.1 Despite this example of unpredictability, U.S. military bases rely solely on the civilian grid to power 99% of their war-fighting capabilities, homeland security missions, and rescue and relief operations.2 This paper analyzes the Department of Defense’s (DOD) current efforts to increase energy efficiency and reliability, then makes recommendations on the policy options available to the DOD to increase the incorporation of smart microgrids onto its military installations. Despite the benefits of microgrids, the DOD and legislators have focused on less efficient energy alternatives. The Environmental Conservation Investment Program (ECIP), one of the principle mechanisms to fund conservation efforts in the DOD, rarely invests in microgrids and focuses too much on less cost-efficient projects. Further, the DOD’s Net Zero Energy Installation Initiative does little to increase energy reliability at military installations. By focusing too much on renewable energy generation, legislators have decreased the available funds for microgrids which, if installed before a renewable energy project, can enhance its viability Introduction

The Department of Defense (DOD) requires vast amounts of petroleum for its tactical and fleet vehicles as well as vast amounts of electricity to power its facilities. This consumption makes it the largest single end user of fuel in the world. In fiscal year 2009, the DOD spent $9.6 billion on fuel for its tactical and fleet vehicles and $3.6 billion on facility energy.3 The DOD’s energy expenditures outpace those of entire countries, including highly developed states such as Denmark and Israel. DOD energy consumption breaks down into two categories: tactical and facility use. During wartime, tactical fuel use represents about 75% of energy expenditures with the other 25% coming from facility electricity. Tactical fuel creates all of the energy used in a war zone. Most of the tactical fuel is petroleum based: jet fuel and gas power generators and represent the largest portion of this fuel use.4 Facility energy use is mainly electricity to power military bases with a very small portion going to non-fleet vehicles. By 2010, this represented $4 billion of the DOD’s energy expenditures.5 Background Increasing fuel efficiency to increase combat effectiveness is not a new idea. A 2001 report from the Defense Science Board (DSB) entitled “More Capable Warfighting Through Reduced Fuel Burden” provided recommendations to the DOD to increase combat effectiveness through changes in its fuel policy.6 However, in the 2008 DSB report “More Fight—Less Fuel,” the first

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principal finding was that “the recommen- will supply power to the entire base instead dations from the 2001 Report… have not of first directing electricity to vital command been implemented.”7 Regardless of the ev- and control functions, wasting precious fuel er-increasing cost on non-critical of fuel and pressure “The underlying problem is the assources. As a from bases, within sumption that the commercial grid is result of its asthe department, the sumption of a safe and reliable source of power.” DOD has failed to reliability, the make significant DOD has failed changes to its energy strategy. to adapt its fuel strategy to the evolving role of military installations. Bases in the U.S. The second principal finding of the DSB and abroad that host operations “that are 2008 report warned that the “almost com- critical in strategic and tactical terms and plete dependence of military installations” must function 24/7” often have larger backon a civilian power grid “places critical up systems with more fuel supply, but nevmilitary and homeland defense missions at ertheless remain ill prepared to cope with a an unacceptably high risk of extended dis- long-term outage10. ruption.”8 Military bases require a constant, secure flow of electricity to perform their The loss of power at a military installamissions. Energy assurance is a national pri- tion can have disastrous effects: in October ority in light of the increasing involvement 2010, at Warren Air Force Base in Wyoof bases in Department of Homeland Secu- ming, a power outage caused the Air Force rity efforts. Apart from training and housing to lose communication with 50 nuclear mismilitary personnel, bases have war-fighting siles for approximately 45 minutes.11 The and disaster-relief responsibilities. For ex- dangers were obvious, although backup ample, military bases in the southern United systems were in place and an Air Force ofStates aided the Hurricane Katrina recovery ficial said that the base never lost the ability by using military assets in relief and rescue to launch the missiles. In January 2011, the missions, acting as a command and control Fort Kamehameha Wastewater Treatment center for relief agencies, and providing Plant at Joint Base Pearl Harbor-Hickam in personnel for medical and other emergency Hawaii experienced a power disruption that services to survivors.9 caused the release of “110,000 gallons of The underlying problem is the assumption treated but un-disinfected effluent” into the that the commercial grid is a safe and reli- waters surrounding the base. The health deable source of power. This is a dangerous partment warned swimmers and boaters to assumption to make, given the almost com- avoid the area for several days.12 After the plete dependence of the military on the civil- Fukushima nuclear disaster in Japan, Miian power grid. The confidence in the grid’s sawa Air Force Base required an airlift of reliability affects the robustness of backup extra generators to the base so that it could systems. Diesel generators with limited continue its normal operations and act as fuel supply are the most common source of a hub for search and rescue missions. The backup power on military installations and power outage caused the loss of Internet and often do not prioritize power to critical ar- phone service—leaving the base isolated— eas. In the event of a blackout, generators and shut down gas station pumps that be-

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came even more important as the air base is to increase energy efficiency. This step had to transport search and rescue teams to does require capital expenditures. Installthe disaster site.13 ing more efficient lighting, replacing older HVAC systems, and using more efficient Current efforts boilers are examples of how to increase energy efficiency. The final step to reach Net Zero Military Installations net-zero status is to use on-site renewable energy generation to meet the electricity Developed in 2008, the DOD’s Net Zero needs of the base. Wind turbine generation Energy Installation Initiative is a plan to and solar photovoltaic arrays are the most turn military installations into net-zero en- common renewable energy sources, with a ergy users. The term “net zero” means that smaller number of bases using geothermal “the energy produced on site over the period or biomass generation.16 of a given year is equal to the installation’s energy demand.”14 Net zero does not imply The U.S. Army has six pilot installations that an installation will be separate from the scheduled to become net-zero users by commercial power grid. A Net Zero Instal- 2020. The designated bases are Fort Detrick lation remains connected to the grid and in Maryland, Fort Hunter Liggett in Califoruses renewable energy generated on site to nia, Kwajalein Atoll in the Marshall Islands, meet the installation’s energy demand. If Parks Reserve Forces Training Area in Calithe renewable energy exceeds demand, the fornia, West Point in New York, and the Siinstallation can sell the surplus back to the erra Army Depot in California. In FY 2014, grid. If the renewable energy produced on the Army intends to designate 25 more bassite is less than the demand, the installation es to become net zero by 2030 and have all draws power from the civilian grid. “The Army bases be net zero by 2058. 17 Army goals for this initiative are for five Army installations to be net zero by 2020, The Net Zero Energy Installation Initiative 25 installations by 2030, and all Army in- suffers from several drawbacks, including stallations by 2058.”15 its timeline, cost, and impact on energy assurance. First, the net zero initiative takes an To reach net-zero status, an installation incredibly long-term approach despite the follows three main steps: conservation, in- call for immediate action from the DSB’s creased energy efficiency, and on-site en- “More Fight—Less Fuel” report and DOD’s ergy generation. The National Renewable Quadrennial Defense Review. The initiative Energy Laboratory’s “Net Zero Energy came to fruition in 2008 but the DOD did Military Installations: A Guide to Assess- not choose the pilot installations until 2011. ment and Planning” lays out each of these Furthermore, the pilot installations will steps. The first step is to increase conser- not reach net-zero status until 2020. Even vation. Conservation is the simplest and worse, the next batch of bases to become least expensive method of reducing energy net zero will take 16 years (2014-2030) and use because most initiatives have little cost. the remainder will not reach net zero until Educating the residents and workers of the 2058.18 This drawn-out timeline of the Net installation about their energy use and ways Zero Initiative puts military installations at to conserve electricity is step one. Step two risk and jeopardizes the DOD’s war-fighting

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and homeland security missions. The first step of the initiative, conservation, requires little to no capital expenditures and the DOD should expand conservation efforts to all bases immediately instead of waiting until it deems an installation ready to start working towards net-zero status. As an installation eliminates all of the low hanging fruit, the marginal cost of the later options will be far higher and the marginal benefits will be lower.

stand a prolonged blackout, the focus on Net Zero shifts the focus away from isolating bases from the civilian grid. In 2008, the DSB advised the DOD to take immediate action to isolate the bases with roles critical to national security.19 The list of bases appears in the “Classified” appendix G and is not publicly available. As a result, some or all of the bases chosen as pilot installations may be on the critical list but the focus on Net Zero takes resources away from the efforts to isolate these critical installations.

The second drawback to the Net Zero Initiative is its cost. Environmental Conservation Investment Program (ECIP) data show that investment in energy efficiency has a more significant return on investment than investment in renewable energy generation. The DOD could see an average return of three dollars for every dollar invested in conservation programs (known as a savings-toinvestment ratio, or SIR) while renewable energy generation could generate less than half of that benefit. Renewable energy projects provide tangible benefits to military installations but at a high cost compared to efficiency upgrades. The Net Zero Initiative encourages some installations to apply for funds for renewable energy projects before other installations have completed all of the more cost-effective energy efficiency improvements. A more cost-effective initiative would focus on conservation and energy efficiency improvements at all military installations and then transition into renewable energy generation.

Not all installations can reach net-zero status. There must be significant opportunities for renewable energy generation for netzero status to be a possibility. The National Renewable Energy Laboratory states that “a net zero goal too strictly applied can lead to solutions that make poor sense from economic or other perspectives.”20 For example, wind turbines can interfere with radio transmissions, making them unfit for placement near airfields. The DOD’s focus on making all installations net zero energy producers is not economically feasible and could conflict with an installation’s war-fighting and homeland security missions. According to a 2005 DOD study, the department only has the resources to get about 20% of its electricity from renewable sources on site. This figure is likely even lower due to possible conflicts between renewable energy and the ability to fulfill all military functions.21 Given the problems with renewable energy generation, the drive towards net-zero status promises to be costly and difficult.

The third and final problem with the Net Zero Initiative is its effects on energy reliability at military installations. A net-zero status does not imply independence from the civilian grid. While Net Zero Installations are undoubtedly better able to with-

Renewable energy generation Since 2005, the federal government has made significant efforts to increase the use of electricity from renewable sources. The Energy Policy Act of 2005 directs federal

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agencies to consume 3% of their electrical energy from renewable sources from FY 2007 through FY 2009. The percentage gradually increases to 7.5% in FY 2013, with the caveat that progress towards the goal should be “economically feasible and technically practicable.”22 In 2007, the standards became far more rigorous. The “Energy Independence and Security Act of 2007” required a reduction in fossil fuel use by 55% by 2010; by 2030, the reduction would increase to 100%. 23 Executive Order 13423 directs that in each fiscal year, at least half of the renewable energy counted towards the “Energy Independence and Security Act” must be from a new technology that did exist before January 1, 1999.24 In 2008, the DOD acquired 2.9% of its electricity from renewable sources, falling just below the goal. Then, it surpassed the 3% goal in 2009 with 3.6% of its electricity coming from renewable sources.25 These numbers are deceiving, however: the DOD was only able to exceed its goal with the purchase of renewable energy certificates. When a utility generates electricity through renewable sources, it creates a renewable energy certificate in addition to the electricity. The utility can then sell that certificate on the open market. In meeting its renewable energy goal, the DOD does not distinguish between buying renewable energy certificates and the actual use of renewable energy. The DOD’s FY 2009 Annual Energy Management Report did not specify what percentage of the energy use came from certificates. However, the Government Accountability Office (GAO) reported that 90% of the DOD’s renewable energy use came from the purchase of certificates in 2007.26 The DOD’s efforts to increase renewable

energy usage raise three key issues: cost, problematic state laws, and unintended effects. Cost Electricity generated through renewable sources tends to be more expensive than electricity from fossil fuel sources because of the high upfront costs of building solar and wind farms—the two most common sources of renewable energy. By focusing so heavily on renewable energy generation projects, the DOD diverts resources away from other energy-efficient investments that are often more cost effective. The guiding directive of the ECIP instructs military bases that “additional consideration can be given to projects that substitute renewable energy for non-renewable energy.”27 The same document states that all projects should have an SIR of more than 1.25 (that is, the project must return $1.25 for every dollar invested) and a payback period of ten years or less. However, the ECIP reports show that many renewable energy-generation projects do not meet either of these standards. Despite their long payback periods and low SIR, renewable energy projects constitute a large portion of ECIP funds every year. For FY 2010, renewable energy-generation projects received 52% of the $120 million in ECIP funds. The DSB, in 2008, encouraged the DOD to pursue renewable energy generation projects, but “to a level commensurate with their operational and financial value.”28 The heavy focus on renewable energy generation crowds out other projects that would be more cost efficient and that would lower the DOD’s energy usage to a greater degree.

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Problematic state laws

fossil fuels or provide superior energy assurance at installations.

According to a GAO report, a Navy base in California had to downgrade the size of its Certificates do not have a fixed price as planned solar array from 20 megawatts to commodities traders buy and sell them on five megawatts after California law allowed the open market. In 2008, the price of the the utility to bill the installation a surcharge certificates rose 185% compared to the 2007 because it would be self-producing a certain price. The dramatic price increase kept the DOD from meeting level of electricity. The reasoning behind “Like the smart grid, a microgrid its renewable enerthe law is that the utilwould improve energy efficiency gy requirement for that year because in ity made an investand accelerate the integration of 2008, it purchased ment in its infrastrucrenewable energy sources.” certificates for 0.32 ture and expected to million megawatt recoup that money hours compared to through charging customers for electricity. If the customers begin 0.88 million megawatt hours of energy in to produce electricity themselves, then the 2007.30 The DOD should not rely on a comutility will never cover the cost of its invest- modity that is so volatile. Certificate purment. The state therefore allows the utility chases are a gimmick that allows the DOD to place a surcharge, called a departing load to meet its congressionally-mandated encharge, on a customer’s bill if they self-pro- ergy goals, but drains DOD resources and duce a certain percentage of their electric- fails to provide any tangible benefit in fossil ity.29 If bases, such as this one in California, fuel reduction and energy reliability. face additional charges for producing their own electricity, it is unlikely they will invest Smart grids and microgrids in renewable energy given that it is usually more expensive per kilowatt hour than con- The term “smart grid” represents a concept more than it does any device or component. ventional electricity. In its most basic form, the smart grid is “an automated electric power system that moniUnintended effects tors and controls grid activities, ensuring When Congress passed the Energy Policy the two-way flow of electricity and informaAct of 2005, it was unlikely that they in- tion between power plants and consumers— tended for federal agencies to purchase and all points in between.”31 The smart grid renewable energy certificates instead of improves upon the existing grid in several producing or purchasing actual renewable ways: first, it uses information technology to energy. The DOD’s reliance on the purchase improve how electricity travels from power of certificates serves little purpose beyond plants to consumers. Second, it allows those compliance with renewable energy goals. consumers to interact with the grid. Finally, After a base purchases an energy certificate, it integrates new and improved technologies it still has to buy energy to power the base. into the operation of the grid.32 Purchasing certificates increases the DOD’s energy costs and does not lessen reliance on Changes to the grid allow for improved re-

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sponse during peak demand times, meaning that consumers could set appliances such as washing machines and water heaters to only run during off-peak hours when electricity is less expensive. A smart grid better manages power outages, decreasing their length and frequency. It also allows for better integration of such renewable energy sources as wind or solar. Finally, smart grids will enhance energy storage, especially with increased use of electric vehicles and plug-in hybrid vehicles.33 A microgrid is a small, localized version of the smart grid. It increases energy efficiency by regulating demand and allows for better incorporation of renewable energy sources. During a power outage, a microgrid will disconnect itself from the civilian power grid and turn on an installation’s generators to ensure electricity availability to a base’s critical loads. By prioritizing loads during an emergency, a microgrid will drastically decrease the need for fuel resupplies during a civilian power grid failure.

ity from the main power grid. Once isolated, the microgrid will route power only to loads deemed critical, thus conserving fuel for the backup generators. If renewable energy options or battery backups are available, the microgrid will use energy from these sources to further conserve generator fuel. For example, if the civilian grid experiences a blackout during the day, a microgrid will draw power from solar photovoltaic arrays to run as many critical loads as possible, only turning on as many generators as are needed to meet the critical load demand. Some surprising evidence of the resiliency of electric grids controlled by microgrids comes from an unexpected place: Cuba. Cuba’s population of 11 million suffered 188 and 224 blackouts lasting more than one hour in 2004 and 2005, respectively. However, in 2007, the island suffered zero blackouts lasting more than one hour. In 2006, the Cuban government made a widespread, concerted effort to increase energy efficiency among its population and install microgrids with distributed energy resources (DERs) across the country. In 2008, when two hurricanes in two weeks felled 167 transmission towers, the DERs and microgrids proved their resiliency. In the most damaged areas, microgrids islanded themselves and turned on portable diesel backup generators to maintain power to such critical services as hospitals, food plants, and schools. The government is currently investing in renewable energy generation to replace its older diesel generators and make Cuba more energy independent.34

Like the smart grid, a microgrid would improve energy efficiency and accelerate the integration of renewable energy sources. During normal operations, a microgrid acts no differently than the smart grid. It increases energy efficiency by relying more heavily on non-continuous sources of power when they are available, such as wind and solar, and decreasing the use of generators or power from the civilian grid. Microgrids better manage energy use to avoid peak demand times when electricity is most expensive and can incorporate energy storage devices such as electric vehicles. Cuba’s experience provides two lessons for the U.S. military. First, the resiliency shown If the microgrid detects a disruption in the by Cuba’s microgrids and DERs, despite civilian grid—for example, a blackout—the severe damage from the hurricanes, lends microgrid will isolate or “island” the facil- itself to possible application in areas where

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the electric grid is always at risk, such as Baghdad’s Sadr City. 35 Providing reliable electricity to a hazardous area could serve as a valuable counterinsurgency tool. However, this is a topic deserving of its own analysis and report and is too nuanced to discuss in depth here. The second lesson for the U.S. military is the ability of a commandstructured organization, such as the Cuban government or the U.S. military, to enact major reforms quickly and effectively when significant problems arise. According to the National Renewable Energy Laboratory, the structural hierarchy of the DOD gives it advantages in enacting radical change at speed and scale. Evidence of the benefits of full-scale integration of microgrids is available from the U.S. as well. The residents and the public utility in Naperville, IL decided to invest in microgrid technology in the 1990s when their average duration of a blackout for a consumer approached two hours. By 2010, the average duration was only 18 minutes. Naperville’s most important investment was probably the construction of a real-time data acquisition system called System Control & Data Acquisition (SCADA) or the “smart grid brain.” SCADA gathered and processed data and allowed the utility to anticipate demand spikes. Apart from the net benefit of $52 million the city expects over the next 15 years, the microgrid will eventually allow for lower prices per kilowatt hour of electricity as the utility better understands consumers’ needs and will serve as initial infrastructure for the integration of electric vehicles.36 DOD development of microgrids Despite their benefits, microgrid development projects have received little funding

from the ECIP. Since 2007, ECIP has funded only eight microgrid installation projects and two of those were the expansion of microgrids previously built. The peak investment of 50% for renewable energy generation projects stands in stark contrast to the meager investment of 10% for microgrids.37 This comes a surprise when the savings-toinvestment ratio for both types of projects is compared: 1.54 for the renewable energy generation projects and 2.43 for the microgrid projects. The SIR of the microgrids makes them one of the most cost-effective projects funded through ECIP. Another drawback to the further development of microgrid projects is the fact that the ECIP only estimates their expected lifetime to be ten years. This is in stark contrast to the renewable energy generation systems that have an expected lifetime of 20 years.38 The expected lifetime of a system is important because it affects the savingsto-investment ratio. If the expected lifetime were fifteen or twenty years, the SIR for the microgrid projects would rise considerably. Unfortunately, simply doubling the SIR for these projects to allow for a better comparison to renewable energy projects will not work due to the effect of discounting longterm savings compared to short-term savings. Though there is a lack of development of microgrids through ECIP, the DOD has made limited investments in microgrid development mainly through the Environmental Security Technology Certification Program (ESTCP). The Marine Corps signed a contract with General Electric for $2 million to develop a microgrid for its largest base, Twenty-Nine Palms in California. This microgrid will manage consumption and allow for the more efficient use of renewable en-

42 POLICY & RESEARCH

ergy sources. Cost savings are likely to result from decreased generator use on base. The base tends to run generators to handle any spikes in demand and thus runs more generators than necessary. Fossil fuel generators are most efficient when they run at peak capacity, so the base’s use of multiple generators at a lower capacity wastes fuel. The microgrid predicts consumption levels to avoid this wasteful practice. Moreover, the microgrid can divert power away from non-essential equipment if the spike in demand is particularly high. Lockheed Martin received a contract similar to GE’s to develop a microgrid at Fort Bliss in Texas. ESTCP expects to see a reduction of more than 20% in greenhouse gas emissions and energy consumption at the base because of the microgrid.39 High levels of fuel use in combat zones come from unexpected users. The DSB reports that of the top ten biggest consumers of fuel in the field, only two are combat devices while the rest are support systems. For example, “the water heater for the field kitchen created a larger battlefield fuel demand than the AH-64D attack helicopter.”40 Microgrids could lessen the burden on generators by turning off the generators when they are not in use and allowing a bank of generators to supply power to the entire base instead of having generators hooked up to single systems. According to the DSB, generators are often overpowered compared to the necessary load, meaning that generators either run below peak efficiency or run at peak efficiency and produce more power than is necessary.41 Policy options Option 1: Let present trends continue

The first option available to the DOD is to allow present trends to continue. Although the pace of development has been slow, the military is deploying microgrids at home and abroad. Currently, the military has about 20 microgrids deployed.42 By comparison, in 2010 the DOD had 454 renewable energy generation projects in active use or in the planning and development stage.43 Widespread development of microgrids will require large capital expenditures by the DOD and Congress. In the current climate of budget cuts, especially for the DOD, any new spending is likely to attract heavy scrutiny. One of the benefits of allowing present trends to continue is that it does not require any new action by the DOD or Congress. Option 2: Make changes to DOD regulations, including project rules for the ECIP A no-cost solution for the DOD to increase the number of microgrid projects would be to change the regulations of the Environmental Conservation Investment Program (ECIP). The DOD could add a stipulation to the program’s rules that microgrids should receive special consideration for funding, similar to the regulation that gives additional consideration to renewable energy projects. Another possible change would be to increase the expected lifespan of microgrids from ten to 20 years. By increasing the expected lifespan, the savings-to-investment ratio would increase, thereby making these projects more appealing. Most project categories in the ECIP already have an expected lifespan of 15 or 20 years. Microgrid projects are currently the lowest at ten years. Finally, the DOD could allow base commanders to enter into special contracts with microgrid developers to build the grid at no upfront cost and pay the developer over time with the money saved from increased

POLICY & RESEARCH 43

efficiency. The GAO labels these contracts as alternative financing agreements, which already exist for the development of renewable energy projects.44 Avoiding upfront costs circumvents the appropriations process and could allow installations to deploy microgrids more rapidly.

the ESTCP estimation of 20% reduction in energy costs holds true and uses the DODâ&#x20AC;&#x2122;s expenditures of $2.4 billion on facility electricity in 2009. Recommendation

The DOD should immediately enact OpOption 3: Request appropriations from tion 2 and follow Option 3 as a long-term Congress strategy. Allowing present trends to continue (Option 1) ignores the warnings of the A special appropriation for the development Defense Science Board and the Quadrennial of microgrids in the next defense authori- Defense Review. Overreliance on the civilzation and appropriations bills is the best ian grid threatens the capability of military option for the immediate widespread de- installations to carry out their missions. The velopment of microgrids. The Secretary of current pace of microgrid development is Defense could urge Congress to authorize not fast enough to ensure the energy supply and appropriate these funds because of the to critical military installations. importance of energy security at military installations. The current budget climate will Option 2 is an ideal short term strategy bemake it difficult to secure additional fund- cause it entails zero cost. Changes to the ing. However, if the DOD presents the re- ECIP and new alternative financing agreequest with an emphasis on its cost-saving ments will ensure an increased number of measures, Congress might realize the poten- microgrids. The ECIP reports do not make tial savings in long-term energy costs and public the submitted projects that were not accept the extra funding in the short-team. chosen for funding, so it is impossible to know how many microgrid projects lost out There are approximately 381 military bases to other proposals. With the changes in Opin the United States and abroad.45 Removing tion 2, microgrid proposals will have a betthe 20 that already have microgrids leaves ter chance of receiving funding because of 361 bases. Assuming an average cost of their increased SIR and the special consid$2.75 million to install a microgrid (this fig- eration afforded to them. The changes will ure is the average of most recent microgrid also increase the number of microgrid proprojects developed for military bases by posals submitted to the ECIP because base General Electric and Lockheed Martin) commanders are more likely to submit promeans that the necessary appropriation from posals they believe will have a good chance Congress would be approximately $993 of receiving funding. million. It is reasonable to assume that the DOD will stagger the development of the The main drawback of Option 2 is that it grids, building the most critical ones first. relies on base commanders to submit miAfter the installation of all the microgrids, crogrid projects for development. To enthe DOD will see cost savings of approxi- sure widespread development, the DOD mately $473 million per year in reduced must inform base commanders of the benelectricity costs. This figure assumes that efits of microgrids as well as their associ-

44 POLICY & RESEARCH

ated costs and risks. Increasing the number of microgrid projects without an associated increase in the funding for the ECIP will reduce the number of other projects funded through the ECIP. Fewer renewable energy projects funded through ECIP could hinder the DOD’s efforts to meet the renewable energy goals dictated by the Energy Policy Act of 2005. However, microgrids ease the transition to renewable sources of energy, meaning that even if efforts to increase the percentage of electricity obtained from renewables suffers in the short-term, they would benefit the DOD in the long-term. Option 3 is important as the DOD’s longterm strategy because the budget of the ECIP is too small to deploy microgrids at every military base. Receiving the nearly $1 billion necessary to build grids on every base in one appropriation is unlikely. Instead the DOD could take a staggered approach. First, the DOD should request sufficient funds to develop microgrids for the bases deemed critical by the DSB. After securing its most important installations, the DOD can focus on its other bases. The advantage of focusing on the most critical bases first is that these initiatives would supply Congress with crucial savings data. The DOD should make the request to Congress by saying, for example, that “the last appropriation of X dollars made the U.S. more secure and provided savings of Y dollars per year.” Emphasizing the necessity of security and savings will increase the chances of receiving extra appropriations from Congress during a time of budget cuts. Further, additional funding could increase the development of microgrids for bases in Afghanistan and Iraq for which ECIP funding is not suitable. Option 3 is not a viable alternative by itself because it is too dependent upon the actions

of Congress. If the DOD fails to persuade Congress to appropriate money for improved grids, it will have to wait until a new defense authorization bill is up for debate to try again. By combining Options 2 and 3, the DOD will be able to take immediate actions to reduce energy costs and increase energy security while ensuring that energy supply is a priority for the department now and in the future. Endnotes Office of Electricity Delivery and Energy Reliability. (2011). Electric Distrubance Events Annual Summary 2011. National Energy Technology Laboratory. 1

Defense Science Board Task Force on DOD Energy Strategy. (2008). More Fight - Less Fuel. Washington, DC: Office of the Under Secretary of Defense For Acquisition, Technology, and Logistics. 2

Department of Defense. (2010). Annual Energy Management Report Fiscal Year 2009. Office of the Deputy Under Secretary of Defense (Installations and Environment). 3

Defense Science Board Task Force on DOD Energy Strategy. (2008). More Fight - Less Fuel. Washington, DC: Office of the Under Secretary of Defense For Acquisition, Technology, and Logistics. 4

Robyn, D. (2011). Statement of Dr. Dorothy Robyn, Deputy Under Secretary Of Defense (Installations and Environment). Washington, DC. 5

Defense Science Board Task Force. (2001). More Capable Warfighting Through Reduced Fuel Burden. Washington, DC: Office of the Under Secretary of Defense For Acquisition, Technology, and Logisitics. 6

Defense Science Board Task Force on DOD Energy Strategy. (2008). More Fight - Less Fuel. Washington, DC: Office of the Under Secretary of Defense For Acquisition, Technology, 7

POLICY & RESEARCH 45

and Logistics. 8

Ibid.

Booth, S., Barnett, J., Burman, K., Hambrick, J., & Westby, R. (2010). Net Zero Energy Military Installations: A Guide to Assessment and Planning. Golden, Colorado: National Renewable Energy Laboratory. 20

Government Accountability Office. (2009). DOD Needs to Take Actions to Address Challenges in Meeting Federal Renewable Energy Goals. Washington, DC: Government Accountability Office.

Fox News. (2010, October 26). Military: Power Outage at Nuke Site Entrusted with 50 Missiles. Retrieved June 20, 2011, from http:// www.foxnews.com/politics/2010/10/26/military-power-outage-nuke-site-shut-missiles/

Associated Press. (2011, January 4). Wastewater Discharged after Hickam Power Outage. Retrieved June 20, 2011, from http://www.airforcetimes.com/news/2011/01/ap-air-forcehickham-wastewater-discharged-010411/

Brewin, B. (2011, March 14). Despite Power Outage, Key US Air Base in Japan Supports Rescue Operations. Retrieved June 20, 2011, from http://www.nextgov.com/nextgov/ ng_20110314_7198.php. 13

Department of Defense. (2010). Annual Energy Management Report Fiscal Year 2009. Office of the Deputy Under Secretary of Defense (Installations and Environment). 15

Department of Defense. (2011, April 20). Army Identifies Net Zero Pilot Installations. Retrieved July 8, 2011, from http://www.defense. gov/releases/release.aspx?releaseid=14420 17

Ibid.

Defense Science Board Task Force on DOD Energy Strategy. (2008). More Fight - Less Fuel. Washington, DC: Office of the Under Secretary of Defense For Acquisition, Technology, and Logistics. 19

Ibid.

Department of Defense. (2010). Annual Energy Management Report Fiscal Year 2009. Office of the Deputy Under Secretary of Defense (Installations and Environment). 23

Government Accountability Office. (2009). DOD Needs to Take Actions to Address Challenges in Meeting Federal Renewable Energy Goals. Washington, DC: Government Accountability Office. 24

Department of Defense. (2010). Annual Energy Management Report Fiscal Year 2009. Office of the Deputy Under Secretary of Defense (Installations and Environment). 25

Government Accountability Office. (2009). DOD Needs to Take Actions to Address Challenges in Meeting Federal Renewable Energy Goals. Washington, DC: Government Accountability Office. 26

Office of the Assistant Secretary of Defense Production and Logistics. (1993). Energy Conservation Investment Program Guidance. Washington, DC: Department of Defense. 27

Defense Science Board Task Force on DOD Energy Strategy. (2008). More Fight - Less Fuel. Washington, DC: Office of the Under Secretary of Defense For Acquisition, Technology, and Logistics. 28

Ibid.

National Energy Technology Laboratory. (2011). Environmental Impacts of Smart Grid. Washington, DC: Office of Strategic Energy 31

46 POLICY & RESEARCH

Analysis and Planning. 32

Ibid.

Lovins, A. (2010). Efficiency and Micropower for Reliable and Resilient Electricity Service: An Intriguing Case-Study from Cuba. Boulder, Colorado: Rocky Mountain Institute. 34

Ibid.

Galvin Electricity Initiative. (2010). The Naperville Smart Grid Initiative. The Galvin Project, Inc. 36

Office of the Under Secretary of Defense Acquisition, Technology, and Logistics. (20072012). FY 2007-2012 Energy Conservation Investment Program Reports. Washington DC: Department of Defense. 37

Office of the Assistant Secretary of Defense Production and Logistics. (1993). Energy Conservation Investment Program Guidance. Washington, DC: Department of Defense. 38

Vanbebber, C. (2010, December 15). Lockheed Martin to Demonstrate Full-Scale Intelligent Microgrid Solution at Fort Bliss. Retrieved July 15, 2011, from http://www.lockheedmartin. com/news/press_releases/2010/MFC_121510_ LMtoDemoFullScaleIntelMicrogridatFtBliss. html. 39

Ibid.

Shifra, M. (2011, May 27). Safe and Secure: The US Military Takes a Stand on Energy Efficiency. Retrieved August 3, 2011, from http:// energy.aol.com/2011/05/27/safe-and-securethe-us-military-takes-a-stand-on-energy-efficie/ 42

Government Accountability Office. (2010). Defense Infrastructure: Department of Defenseâ&#x20AC;&#x2122;s Renewable Energy Initiatives. Washington, DC: Government Accountability Office. 43

Government Accountability Office. (2009). DOD Needs to Take Actions to Address Challenges in Meeting Federal Renewable Energy Goals. Washington, DC: Government Accountability Office. 44

Military Bases. (2011). Military Base Directory. Retrieved July 28, 2011, from http://militarybases.com/directory/ This figure removes bases in Afghanistan and Iraq because microgrids developed for bases in war zones have different development costs and abilities. 45

Daniel Sater is a second year MPP candidate at the Frank Batten School of Leadership and Public Policy. He graduated with distinction from UVA last semester with a degree in Foreign Affairs and a focus on the Middle East. This past summer he was 40 Defense Science Board Task Force on DOD a Research Fellow at Global Green USA, Energy Strategy. (2008). More Fight - Less where he did the research for this article. Fuel. Washington, DC: Office of the Under Sec- After graduation, Daniel hopes for a career retary of Defense For Acquisition, Technology, in foreign policy and government service. and Logistics.

OP-EDS 47

New Startups: Are Entrepreneurs the Answer to Job Creation? by Mary Drach “Entrepreneurs embody the promise of America…and in fulfilling this promise, entrepreneurs also play a critical role in expanding our economy and creating jobs.”

In September2010, President Obama demonstrated his support for small businesses by signing into law the Small Business Jobs Act. This law provided critical resources to help small businesses create jobs and extended more lending support and tax cuts to – President Barack Obama, entrepreneurs and small business owners.5 The United States currently faces a “jobless As defined by the Small Business Adminrecovery” with poor unemployment trends istration, a small business is usually comand job creation numbers that leave much to prised of 500 employees or less.6 be desired. The unemployment rate dropped below nine percent for the first time since Though I do not necessarily disagree with March 2009, but 8.6% is well below the the idea that small businesses create the pre-recession average. Despite the drop, most jobs, I believe it does not tell the full October only created 80,000 new jobs. story. Not just any small business can do Some economists estimate that anywhere the trick; new startups and fresh innovafrom 90,000 to 127,000 new jobs each tion from entrepreneurs are key ingredients month is necessary to keep up with popula- in most economic growth. The following tion growth.12 With about five unemployed initiatives could work in the favor of small workers for every open job, the economic business owners, increasing innovation as landscape is bleak as a new group of uni- well as job creation. versity graduates enter the labor market in • Increasing access to capital for entrepreneurs May, and President Obama looks toward his 3 • Implementing tax credits for small busire-election campaign. nesses and innovative research So where will we find these jobs? Some ad- • Reducing bureaucratic red-tape in government to ease access for entrepreneurs vocate for more small business creation and support, as many believe that small busi- • Increasing entrepreneurial education at all levels nesses create the most jobs in an economy. In 1979 and 1981, MIT economist David • Supporting corporate investment in startup firms Birch published two papers supporting this thesis. He described small businesses as offsetting their high failure rates with their New data from the U.S. Census Bureau’s even greater growth and expansion rates, Business Dynamic Statistics (BDS) lends while calling larger businesses “stagnant.”4 evidence to this argument. The BDS is the first publicly available data set on job cre-

48 OP-EDS

ation that takes into account firm size and age by using longitudinal data collection techniques. By analyzing job creation by age as well as by size, I find that new firms – not necessarily small firms – are the drivers of job creation.

the jobs created were in established and bigger firms like McDonald’s and Wal-Mart.

Coupled with this high rate of job creation for small, young firms is a high rate of job destruction. Many startups face a significant chance of failure as they discover they have New Firms and Job Creation high startup costs or are unable to sustain a profit. This highly volatie relationship beAlthough about half of the jobs in the U.S. tween job creation and job destruction in economy are in firms with more than 500 small, young firms is a crucial part of an employees, firms with fewer than fifty em- economy’s growth overtime and is imporployees are creating the greatest number of tant in maintaining a steady employment new jobs. (Figure 1). These firms include the dynamic.7 However, as the net job creation new coffee shop down the street or a new numbers will demonstrate, new firms still web-based advertising group. From 2000 to create more jobs than they destroy. 2009, new firms with fewer than fifty employees created almost 25 million new jobs This creative destruction sentiment is – about 14 percent of the total number of echoed by Brian Headd, economist with new jobs created. The majority of the rest of the Small Business Administration’s Office

Figure 1. Number of jobs created, by firm size and age (2000 to 2009) Source: Business Dynamics Statistics, 2009, author’s analysis

OP-EDS 49

Figure 2. Net job creation, all firms vs. absent new firms (2000 to 2009) Source: Business Dynamics Statistics, 2009, author’s analysis

of Advocacy: “While small and large firms provide roughly equivalent shares of jobs, the major part of job generation and destruction takes place in the small-firm sector, and small firms provide the greater share of net new jobs. In some ways, this role as a major creator and destroyer of jobs is a result of being the major creator and destroyer of businesses in general.”8

creation, creating more than 20 million new jobs from 2000 to 2009. It is also important to note that other small and young firms have negative net job creation – only once firm size increases do these firms also exhibit positve net job creation.9 Therefore, it appears that fast-growing small businesses are the best bet for long-run job creation.

It is also interesting to look at the net job Net Job Creation creation numbers with and without new firms. (Figure 2) Absent new firms, the net Based on a brief analysis of net job cre- job creation numbers are negative in all but ation data from the BDS, new firms are re- two years from 2000 to 2009. This finding sponsible for the greatest amount of net job emphasizes the importance of new firms in creation by an overwhelming margin. New the job creation process. Although many of firms have an advantage across all firm size the jobs are soon destroyed, research from groups, though their net job creation drops the Kauffman Foundation Research Series as firms get bigger. Microfirms with fewer on firm formation and economic growth than 20 employees have the greatest net job shows that, on average, 80 percent of these

50 OP-EDS

new jobs still exist after five years. The number of establishments, however, decreases by 50 percent. Data also show that firms that start during a recession initially hire fewer workers, though the effect deteriorates as the firms age.10 This is promising information as the U.S. economy struggles through its recovery and faces the threat of a double-dip recession.

credits for small businesses and innovative research, and reducing red tape in the government for entrepreneurs to accelerate innovation.11 These efforts, however, should not only target small businesses but new startups in particular. With increased access to capital and tax credits for new businesses, more firms would be able to cover their high startup costs. Fostering growth for new startups would alleviate job destruction in What Should Be Done Now? these firms and ideally result in increased job creation. Reducing red tape and streamIn order to help foster growth and provide lining the patent process would also incenfor more job creation, I believe that the gov- tivize more potential entrepreneurs to purernment should support not only small busi- sue their innovative ideas. nesses but also new startups. Jobs will come from the entrepreneurial spirit that drives Private sector initiatives include expanding the American economy. Support for new programs for entrepreneurial education at startups, as well as for the entrepreneurs every age, and supporting corporate investwho helm them, is crucial during recession- ment in startup firms.12 By putting more foary and recovery periods like the economic cus on entrepreneurial education, our counsituation we face today. try can foster the inherent entrepreneurial spirit of America and give more young peoAs I have already outlined, most of net ple the tools to realize the next great idea job creation comes from new businesses. – the next Apple, the next Google. More Though many of these startups face failure business “incubators” should also be estabwithin a few years, a majority of jobs cre- lished. These programs form a network of ated from startup firms still exist five years businesses that offer support resources and after inception, this is especially relevant for services to new, entrepreneurial companies. small startups that experience rapid growth. Current corporations are also potential investors in startups and entrepreneurial inThe Obama administration has already novation. shown support for small businesses through the Small Businesses Jobs Act and has con- I support the administration’s initiatives, tinued these efforts through the Startup including the Startup America Partnership, America Partnership. The Startup America and believe the government should continue Partnership is designed to support small to foster growth for small businesses. Howbusinesses and accelerate high-growth en- ever, more focus should be placed on new trepreneurship. startups and innovative entrepreneurship, as opposed to just generic small business. As Public sector initiatives include increas- our political and economic leaders look foring access to capital for entrepreneurs, tax ward in their efforts to spur job creation in

OP-EDS 51

these troubled times, I recommend support- Kauffman Foundation Research Series, Reing new startup firms â&#x20AC;&#x201C; by spurring growth trieved from http://www.kauffman.org/uploadin these firms, we can start back on to the edFiles/firm-formation-inception-8-2-10.pdf 11 path of economic growth. Startup America: Obama administration comEndnotes

mitments . (n.d.). Retrieved from http://www. whitehouse.gov/issues/startup-america-public

Startup America: private sector commitments . (n.d.). Retrieved from http://www.whitehouse. gov/issues/startup-america-private 12

How many jobs do we need. (2011, October 09). Retrieved from http://www.cepr.net/index. php/blogs/beat-the-press/how-many-jobs-dowe-need-teaching-arithmetic-to-economists 1

Mary Drach is a second year student from Shierholz, H. (2009, December 09). Signs of Arlington, VA in the accelerated program in healing in the labor market, though unemploy- the Batten School and will graduate in May. ment remains in double digits. Retrieved from She completed her undergraduate degree http://www.epi.org/publication/signs_of_heal- in economics. Currently, she serves as the ing_in_the_labor_market_though_unemploy- Community Engagement Chair on Batten ment_remains_in_double_/ Council. This commentary piece is based 3 U.S. Department of Labor, Bureau of Labor off research she helped with at the Center Statistics. (2011). The employment situation - for American Progress, where she interned September 2011. Retrieved from http://bls.gov/ with the economic policy team. 2

news.release/pdf/empsit.pdf

Birch, D. L. (1981). Who creates jobs?. The Public Interest, 65(Fall), 3-14. 4

Small business jobs act of 2010 . (n.d.). Retrieved from http://www.sba.gov/content/smallbusiness-jobs-act-2010 5

What is sbaâ&#x20AC;&#x2122;s definition of a small business concern? . (n.d.). Retrieved from http://www. sba.gov/content/what-sbas-definition-smallbusiness-concern 6

Hijzen, A., Upward, R., & Wright, P. W. (2010). Job creation, job destruction and the role of small firms: firm-level evidence for the UK. Oxford Bulletin of Economics and Statistics , 72(5), 621-647. 7

Headd, B. Small Business Administration, Office of Advocacy. (2010). An analysis of small business and jos. Retrieved from http://www. sba.gov/advo/research/rs359tot.pdf 8

Business Dynamics Statistics. (2009).

Horrell, M., & Litan, R. (2010). After inception: how enduring is job creation by startups?. 10

Acknowledgments We would like to thank our sponsors for their generous financial support. Without their assistance, this publication would not have been possible.

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