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Virginia Policy Review Volume VI, Issue I Interviews I.

Jon Huntsman, Former Governor of the State of Utah Tony Woods, Former White House Fellow

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Editorials III.

Districts Can Take the Lead on Critical Education Reforms; They Just May Not Know It Michelle Rhee, Students First D.C. Statehood: Liberty and Justice for All Michael Brown, U.S. Shadow Senator (D-D.C.) A Twenty-First Century NATO: Smart Solutions for an Uncertain Future Harold Mock, Ph.D. Candidate at the University of Virginia Address Inefficiencies to Protect Victims of Domestic Violence Kelly Connors, MPP Candidate at the University of Virginia

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Obesity in the United States Evan Vahouny, MPP Candidate at the University of Virginia

Research VIII. Detroit’s Empowerment Zone: Evaluation of Success Tara Clark, MPP Candidate at the University of Virginia IX. Can’t You Just Sanction Them? Financial Measures as an Instrument of Foreign Policy Jonathan Burke, Department of the Treasury X. Finance, the Informal Welfare State, and the Crash Herman Schwartz, Professor of Political Science at the University of Virginia

Book Review XI.

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Prague Winter: A Personal Story of Remembrance, 1937-1948


All contents copyright Š2008-2013 by VIRGINIA POLICY REVIEW and its contributors. Contributors retain all rights to their work. No part of this publication may be reproduced in any form (electronic, photocopying, recording, or otherwise) without the prior written consent of the VIRGINIA POLICY REVIEW and its contributors. Although this organization has members who are University of Virginia students and may have University employees associated or engaged in its activities and affairs, the organization is not a part of or an agency of the University. It is a separate and independent organization, which is responsible for and manages its own activities and affairs. The University does not supervise, direct, or control the organization and is not responsible for the organization’s contracts, acts or omissions.


Volume XI

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Issue I

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Fall/Winter 2012

A student-run journal of:


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From the Editor ! In 2012, the VIRGINIA POLICY REVIEW reached a critical point in its publication. The VIRGINIA POLICY REVIEW adopted a new mission, charging the organization “to publish work that will impact the wider policy debate.” The winter issue aligns nicely with the new mission, coupling the outstanding work of students of the University of Virginia Frank Batten School of Leadership and Public Policy and professionals in the policy world. This issue focuses on widely debated topics including pieces on policy protections for domestic violence victims, effective taxation to prevent obesity, and appropriate regulation of U.S. financial markets. The winter issue also features a graduate research piece by Tara Clark, which examines the effectiveness of federal “Empowerment Zones” that are intended to revitalize economically challenged cities across the United States. Policymakers are prioritizing these issues and the VIRGINIA POLICY REVIEW is pleased to contribute to the debate. Additionally, this issue also sheds new light on lingering policy debates, such as statehood for the District of Columbia and the use of financial regulations in foreign policy. The recommendations proposed by our authors offer insightful policy solutions prime for consideration by lawmakers. The VIRGINIA POLICY REVIEW has a staff made up of graduate students who have an array of professional experience and inspires us to include pieces on an array of policy topics. This issue covers nationally prominent figures such as Utah Governor Jon Huntsman and former DC Schools Chancellor Michelle Rhee. We are also honored to include an interview with White House Fellow Tony Woods. VPR staff members have worked hard to ensure that the professionals published in our journal reflect pertinent policy topics of the day—a critical component of our mission. We are excited about our new mission and the future of the VIRGINIA POLICY REVIEW. We hope you enjoy this issue as much as we enjoyed working with our authors to inform the policy debate.

Addie Bryant Editor-in-Chief


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Staff Acknowledgements: ! Editor-in-Chief:

Addie Bryant

Executive Editor:

Melissa Rickman

Managing Editor:

Bailey Morton

Copy Editor:

Benjamin W. Lynch

Senior Domestic Editor:

Ammy George

Senior International Editor:

Tony Lucadamo

Outreach Coordinator:

Caitlin Cummings

Event Coordinator:

Natasha Reese

Associate Editors:

Maddie Bergner 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.

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Table of Contents: ! Interviews ! I.

FEATURED INTERVIEW: Jon Huntsman

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Jon Huntsman is the former Governor of the State of Utah. In the interview, Governor Huntsman discusses both foreign and economic policy, as well as his tenure as governor. More recently, Gov. Huntsman served in President Obama’s administration as the United States Ambassador to China.

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Tony Woods Former White House Fellow

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Editorials III. FEATURED EDITORIAL: Districts Can Take the Lead on Critical Education Reforms; They Just May Not Know It

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Michelle Rhee currently serves as the CEO and Founder of Students First, a non-profit education policy advocacy organization. She is the former Chancellor of the DC Public School System and served as Teach For America teacher in Baltimore, MD.

IV. D.C. Statehood: Liberty and Justice for All Michael Brown, U.S. Shadow Senator (D-DC)

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A Twenty-First Century NATO: Smart Solutions for an Uncertain Future Harold Mock, Ph.D. Candidate at the University of Virginia

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! VI. Address Inefficiencies to Protect Victims of Domestic Violence Kelly Connors, MPP Candidate at the University of Virginia

VII. Obesity in the United States Evan Vahouny, MPP Candidate at the University of Virginia

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Research VIII. FEATURED RESEARCH: Detroit’s Empowerment Zone: Evaluation of Success Tara Clark, MPP Candidate at the University of Virginia

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IX. Can’t You Just Sanction Them? Financial Measures as an Instrument of Foreign Policy Jonathan Burke, Office of Terrorism and Financial Intelligence

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X.

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Finance, the Informal Welfare State, and the Crash Herman Schwartz, Professor of Political Science at the University of Virginia

Book Review XI. Prague Winter: A Personal Story of Remembrance, 1937-1948 Ammy George, MPP Candidate at the University of Virginia

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! Interview: Governor Jon Huntsman Governor Jon M. Huntsman, Jr. began his career in public service as a staff assistant to President Ronald Reagan. He has since served four U.S. Presidents in critical roles around the world including Ambassador to Singapore; Deputy Assistant Secretary of Commerce for Asia; U.S. Trade Ambassador; and, most recently, U.S. Ambassador to China. Twice elected as Utah's Governor, Jon Huntsman brought about strong economic reforms, tripled the states rainy day fund and helped bring unemployment rates to historic lows. During his tenure, Utah was named the best-managed state in America and best state in which to do business. Recognized by others for his service, Governor Huntsman was elected as Chairman of the Western Governors Association, serving nineteen states throughout the region. Governor Huntsman most recently ran as a candidate for the Republican Presidential nomination until leaving the race in January 2012. In addition he serves as a distinguished fellow at the Brookings Institute, a trustee of the Carnegie Endowment for International Peace, a Trustee of the Reagan Presidential Foundation, and as Chairman of The Huntsman Cancer Foundation. He is a graduate of The University of Pennsylvania. VPR: The first topic is international trade. China’s export policies have led some to advocate for reconsidering our

free-trade policies. Republican nominee Mitt Romney mentioned tariffs as a possible idea in the second Presidential debate. Do you think we should more proactively address the trade imbalance with China? Huntsman: The only way we can address the trade imbalance is to enforce our laws and to somehow influence the emerging generation of entrepreneurs. Entrepreneurs are going to have a lot more influence domestically than we will. We need to get back on our feet domestically in terms of economic competitiveness. Those are the steps that I think are the most important. Tariffs that are in place for punitive reasons—in a perfect world you can make that argument. But we do not live in a perfect world. We live in a world of economics. We live in a world where you have to deal with the aftermath of tariffs or sanctions. So before you go about doing that, although it might sound like a good political line, you have to look at the chessboard. You have to look three or four moves ahead and see where it lands you. You have to be smart about it. VPR: Manufacturing has returned as a topic of the political conversation. Some experts think that we can compete for the lowwage jobs being shipped overseas. Some have advocated going after more specialized, high-end positions. Do you think the


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! United States can re-invigorate its manufacturing sector, and if so, what steps would you take to make that happen? Huntsman: Our manufacturing base is already reinvigorating itself. I see that in our use of natural gas, which increasingly—I think—will be the game changer. Moving more towards natural gas, as a means of fueling transportation, is a huge deal. We have an advantage in this country. We can be less reliant on imported oil and more reliant on our own natural gas. Most major markets in the world are down and have been for a number of years. We are still 25% of the world’s GDP. Therefore, we are in a position to have a huge amount of impact on the way the global economy moves. It helps if you can combine those advantages with workforce training and vocational skill development. We have lost touch with that in this country. We have to train a workforce for the 21st century. Educating our kids is another critically important step. Each of the individual states have to be teaching in a way that is consistent with subjects that are becoming increasingly important, such as math, science, and foreign languages. VPR: What areas of state budgets do you think will be hurt the most from the fallout of a slower economy? Do you think education and infrastructure will be included?

Huntsman: There are certainly aspects of both. Budgets have fixed costs that are tied to teacher salaries and the annual increases in salaries and healthcare costs. Budgets also include costs associated with population growth, which you cannot do anything about. Variable costs are driven more by programmatic areas. These are the ones that will be looked at it in most states. But in my mind, having run a state and having put education as one of my main priorities—knowing that is an investment because you are making your state competitive for tomorrow—it isn’t always about costs. It’s about priorities and how you allocate dollars. You can’t do everything, but you can do some things pretty well. You just have to figure out what your state needs to do well in order to stay relevant. You then rebuild your budget around those factors. VPR: Assuming some of those cuts are forthcoming, what can an executive do to maximize the dollars a state has? Huntsman: Education and infrastructure are critical components to competitiveness in the 21st century. When I was governor, education and infrastructure were critical expenditures. But in order to adequately address those needs, I had to make sure that the economy was functioning on the other side of the balance sheet. I made the argument to the legislature and the people of my state that we needed to reform


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! taxes. We needed to aggressively remarket the state. We needed to have closer alliances between the state and our major research universities. All of that made our state more competitive. You have to make the argument over competiveness from the standpoint of what feeds cash flows. Because the better you do at marketing your state and bringing in investment, the better you are going to do in terms of funding your education base and addressing your infrastructure needs. For me, it was all about proactively tightening our approach to competitiveness. We really focused on our bottom line issues. If our state is not bringing in investments, chances are we were losing out to other states. So why was it that Utah was losing out? These were real-time market issues. Was it taxes? Was it about regulation? Did it concern trimming government related to business development? We had to address those issues and make sure we were best in class. Ultimately, that made Utah the number one economy in the country during some of those years. We were also the bestmanaged state in America based on the PEW data that has gone out. Changes are coming to education and infrastructure. But changes can be good as long as they improve your competitive prospects and bring in more investment. We found that we

were able to build more roads, pay teachers more, and invest in infrastructure, and that all played into Utah’s long term needs. VPR: Is it politically and economically viable to label China a currency manipulator? Second, is it wise to take a harder stance in general given our present position? Huntsman: You can do whatever you want. It’s a political season, so a lot of the language and a lot of the posturing we hear has to do with that. When someone is elected, they sit down in the oval office and realize that the relationship is a whole lot more complicated than previously imagined. That has been the case ever since I traveled to China in the early 80’s. A lot of people have campaigned on a hard line. Bill Clinton campaigned that way in 1992. He then turned around and had an engagement-drive policy. Barack Obama criticized George W. Bush for going over to the Olympics in 2008. So there is the election season posturing, but there is also the recognition of what you can do in the real world. These are different realities. VPR: Let’s say we are in that post-election reality. As a policymaker, is it viable to draw a harder line? Huntsman: It depends what you mean by harder stance. There are idiotic stances like the ones that are being talked about today. Or, there are some of the hard line


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! stances that I took when I was ambassador. I went out and promoted our nation’s values like human rights, free markets, liberty and religious tolerance—a lot of stuff that China does not like to talk about. But it is who we are. It is an expression of 315 million Americans who are hoping that U.S. ambassadors will represent those kinds of values. But you also have to remember that interactions between the U.S. and China are part of a long-term relationship that you must build very carefully. There are no real short-term gains to be made. It is about a long-term focus when you build the two largest economies in the world, and you bring them together around trade. You have to build the relationship while keeping in mind how trade will affect small business and agricultural exports in the U.S. Some of those are small communities that are impacted. The last thing you want is to see them take a hit. You also have to build a longer-term security relationship, militarily speaking. That means building military and security links that contribute to transparency, trust, and dialogue. You must also make sure to not only build a bilateral relationship, but a global one. That is the challenge both countries face today – moving forward in a global context. VPR: Many have talked about overhanging mortgage and housing debt as an impediment to a full economic recovery. Do

you agree that those areas are still making an impact? If so, what can we do to address it? Huntsman: Well, we did it to ourselves with easy money policies. Those policies put people in debt, so now what do we find today? Everyone is de-leveraging. Every family, every company, every city, every state, and frankly the rest of the world, are doing the same thing. We are all getting out from under a pile of debt. That put us where we are. Twenty years of free money, or at least easy money, put us here. We are learning some hard lessons because of that. So I think policy number one is to not repeat the mistakes of the past. Whether it was auto loans or mortgage financing, specifically coverage plans that did not make a whole lot of sense, people saddled themselves with way more debt than they could handle. Of course, the market collapsed. Number two; we have to get our collective debt-to-GDP and debt-to-equity ratios down to a sustainable level. If we do not, we are going to find ourselves in trouble once again. It is one of these things where if the doctor gives you a dose of an antibiotic, you start taking it and, at first, you feel a little bit better. Then the doctor says, I want you to take the antibiotic over the longer term. He says that because, ultimately, it will make you better even if it does not cure you completely right away. That is where the economy is right now. The U.S. feels a little better, but


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! we should not stop whittling down the debt. VPR: In a recent conversation with the Federal Reserve, three options were discussed to address housing debt. One, raising inflation to help lower costs; two, changing the terms of mortgages to ease the burden; or three, waiting out the current situation. Do you find any of those policy options particularly preferable? Huntsman: Those are sound ideas. But the bottom line is: debt is debt, no matter how you dispose of it. I have heard people advocate re-financing. I have heard some say we should take mortgages that are completely underwater and put them out on the marketplace. Again, debt is debt. We have to whittle it down, and you cannot do that until the economy begins to see signs of life. People have to first get jobs that earn some form of income. That is the long-term necessity. Part of that also includes moving five million homes that are part of our housing inventory overhang. So, you ask yourself, why is housing still at a crawl? Well, in the last reporting period housing was 28% of our GDP. When housing becomes almost a third of our nation’s GDP, it makes it harder to move homes. It is also tied to the overall level of confidence in this economy. People have to be willing to invest. Investing leads to business expansion, which will lead to new opportunities for income. From

there, people can buy, re-finance, or begin to pay down debt. So it is the broader economy that we need to focus on. VPR: What is your take on the Citizens United case? What do you think the effect is on the overall system? If negative, what policy reforms can Congress make short of judicial repeal? Huntsman: Short of judicial repeal, I do not see any other way to work within the current system. I think that is a disaster to this country. It lessens our democracy when you have a few people that can buy their way into elections. People can use Super-PACs to push preferential policy measures that are tied to those dollars. The American political system has taken several steps in the wrong direction as it relates to campaign finance reform. I am not sure what the answer is, but I think it starts with repealing the disastrous law that we have on the books now.


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! Interview: Tony Woods Tony Woods, of Fairfield, CA most recently worked as a White House Fellow in the Office of Personnel Management. Tony campaigned in 2009 to represent California’s 10th congressional district in the U.S. House of Representatives. He has also served as an aide to New York Governor David Paterson and as an officer in the Army. While in the Army, he was deployed twice to Iraq as a platoon leader and earned the Bronze Star for his service. Tony's career in the military was cut short when he decided to speak openly and honestly about his sexual orientation in! protest of the military's "Don't Ask, Don't Tell" policy. Tony has extensive community service experience. This includes leading reconstruction trips to New Orleans and Haiti, bicycling across America to raise! money for Habitat for Humanity, and mentoring lowincome students through the college admissions process. He received an M.P.P. from Harvard’s Kennedy School and a B.S. in Economics and American Politics from the United States Military Academy at West Point. VPR: As I understand it, you just completed a fellowship program at the White House. Tell us a little bit about that. Woods: It’s a one-year program. There were 15 fellows, five of whom were in the West Wing. I

am one of the ten who were placed at an agency. I was at the Office of Personnel Management (OPM), where I was working for a guy named John Berry. He is one of the best leaders I have been around. Berry is currently the highest-ranking openly gay official in the American government. My hope is that they will push him up to the cabinet level if the President gets another term. VPR: Do you have any immediate plans to re-seek office following your run for Congress in 2009? Woods: The short answer is yes. Certainly I am interested in running for office again. I am, however, a bit uncertain as to what form that will take. For now, I am just doing the best I can from a personal level to plan and save. I am working on developing the relationships necessary to be successful. On a more important level, I am building an expanded understanding. That’s a big reason why I wanted to go in to the private sector. If you are ultimately going to be in a place where you have to make big decisions about large groups, you need more than just a public sector background. You have to understand how businesses and the economy work. All of this is going to help. And that can be for anything – whether I run for city council, school board, mayor, or congressman. I want to make sure that I am ready to make the jump whenever the right opportunity presents itself.


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! VPR: In your remarks at the Batten School, you mentioned that you were fourth in money raised and fourth in votes received in the congressional race. The implication seems to be that you feel donations played a large part in deciding the outcome. Do you think the influence of money is hurting the process? If so, how do we combat it?

public financing of elections. A public financing option would allow a wider, more diverse set of people to come forward and throw their hats in the ring. I also think, however, that money can be an indicator of someone who has good ideas. If you are able to attract financial support, you are probably able to attract voters. Allowing some private money to enter politics is important.

Woods: I think it hurts democracy in a lot of ways. On the one hand, money certainly is a form of expression. It is a way that people can take part in the process. There is certainly a place for money, but it cannot get to the point that it crowds out other voices. Now, with Citizens United upheld, we have a small number of people who possess a disproportionate effect on elections. If you get ten millionaires in a room together, they can now effectively buy a congressional race. That is really concerning. It is also an issue on the candidate side. It was hard for me to take money knowing that people may think they are owed something later. Further, it also has the negative effect of discouraging others from running who feel priced out of elections.

Most importantly, I can think of no reason why donors should not have their names made public. There is no value to democracy if it is veiled in secrecy. That is one policy initiative that I would pursue.

VPR: Short of overturning Citizens United, what can be done legislatively to start mitigating some of the negative effects of big, big money? Woods: There is no easy answer. One idea is a form of partial

Basically, there is no quick fix. But there are the two things I would advocate for: partial public financing and mandatory public disclosure of all donations. VPR: In an earlier interview, you said you ran for Congress because you felt you best represented your generation. What issues define your generation? What would you do as a policymaker to address them? Woods: Our generation is inheriting a group of issues that have been debated for years and no one has come to any sort of viable long-term solution. Whether it is climate change— which I take extremely seriously— or entitlement spending, reforms are needed. As much as I am a believer in Social Security and Medicare, I definitely believe that


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! change must happen. In the case of Social Security, that could mean increasing the retirement age or other tweaks that make it viable over the long haul. That is really important. Across the board, it’s time that we had people looking at these issues from our perspective. I want to address it now in a way that works for our age group. Additionally, Congress has fewer and fewer members who have either served in the military or been to war. The military is a critically important area that our government has control over. We need people who have that experience. I also have a mom that is struggling to pay for her own health insurance. In looking at the wars in Iraq and Afghanistan, or exploring options for health care, I think it helps to have people with common sense perspectives involved in the conversation. VPR: You mentioned Mr. Barry as a great leader you have worked under. You have also worked for Governor Patterson, Senator Hagel, President Obama, and I am sure a number of outstanding officers in the military. What commonalities did you notice among the leaders who impressed you the most? Woods: The great ones are good at understanding people. Not because they knew how to give a good speech, but because they knew how to connect with and

genuinely care about people. Whether you are talking about soldiers in the military or employees at an agency, you have to appreciate the struggles they are going through. It’s incredibly important that you lead by example as well. Given all of the ethics challenges we have seen among the members of Congress, that rings especially true. Sometimes, it seems as if they are playing by a different set of rules. That could mean paying a different set of taxes or getting kickbacks. Conversely, good leaders recognize that they must abide by a stricter set of rules. Everyone I have ever respected led by a similar example. VPR: You recently made the difficult decision to come out halfway through your time at Harvard. That led to a remittance of $35,000 to the U.S. government. So the repercussions of your decision were not only social but clearly financial as well. Was that decision in line with this idea of holding yourself to a higher standard? Woods: It was certainly a major part of it. It was very tough. I had been accepted to go back and teach at West Point. I was really looking forward to working with cadets. Honesty and integrity are incredibly important in the military and I realized, however, that I would be standing in front of a classroom of cadets lying about who I was, lying to stay in the military. Once I realized that I


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! would be incapable of leading by example, it made my decision easier. VPR: On your campaign website, you regularly cite the influence of having a single mother and the obstacles it posed. What in particular in the way you were raised had the largest impact on shaping who you are today as a civil servant? Woods: My mom worked incredibly hard to provide a life for me. But there was always that recognition that she would not be able to pay for my college. The financial strain of trying to get a good education is what propelled me towards West Point. Once there, I realized that I owed a lot to this country. That mentality fostered the idea that I have to be a public servant in some way, shape, or form. Since I had the opportunity to get out of my situation, it is equally important to make sure that others have a similar chance. Initially, that was a huge part of why I ran for office. I wanted to be a champion for the idea of individual opportunity. VPR: Do you ever feel like that upbringing has helped you to avoid taking things for granted that others perhaps might? Woods: Totally. One of the first things I remember growing up is my mom working six days a week. Knowing that, I said to myself, you need to do everything you can to not be—well—a jerk. I did not

need to add to her stresses and challenges by hanging out with the wrong kids, or not doing my homework. I knew to work very hard, stay out of trouble, and get a part-time job early. I did all of it to make it a little bit easier on my mom. That started me off on the path I am still on today. I want to work my butt off today to make sure that I can, as much as possible, help her with retirement ten or fifteen years down the road.


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! Districts Can Take the Lead on Critical Education Reforms; They Just May Not Know It Michelle Rhee There is no question that primary and secondary schools in the United States ought to be doing a much better job of educating students. Consider some of the evidence: on a key international test, U.S. students ranked 25th in math and 17th in science among the 34 industrialized countries assessed. i Furthermore, the current gap in academic achievement between low- and high-income children is actually growing. Every year, more than one million teenage students fail to graduate from high school on time. ii Thus, the question is this: what can school districts do about the crisis unfolding before our eyes? While there is no single-step solution, there are several policies that school districts can adopt. Potential actions include the adoption of meaningful educator evaluation systems that drive personnel decisions, empowering parents with information and school choices, and ensuring that resources are targeted toward having the greatest impact for students. Districts that lead the adoption of student-centered policies tend to

be in states that have embraced change. For example, districts in Delaware and Tennessee, states that both received Race to the Top grants, are ahead of the curve in enacting transformative policy. Both states have instituted strong teacher evaluations and state-level interventions for low-performing schools, providing the framework for districts to implement effective local policy. Local school districts, however, do not have to wait for approval from their state legislature to adopt sound reform policies. This is especially the case in places like Virginia, where much of the decision-making on education is left up to respective districts. Using Evaluations to Truly Gauge Teacher Effectiveness In any school district, teacher quality is the most important internal factor that influences academic achievement. Current teacher evaluation and development methods should be reconsidered. Most districts do not use objective or meaningful review methods to evaluate teacher performance. Districts do not incorporate links between instructional strategies and student learning when evaluating teachers. Districts also often fail to codify clear standards for quality instruction. Furthermore, there is little opportunity to receive the constructive feedback that is critical to improvement. New evaluation policies should be based on multiple measures of success and should assess teachers


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! based on relative classroom gains in academic performance, as well as classroom observations. Adopting new evaluation systems of this kind should be the first priority of school districts and state legislatures. I have traveled the country and visited numerous school districts. Superintendents have told me that they want to implement new evaluations. Many school districts do not think they could implement such policies because of opposition from local teachers’ unions. Superintendents and district administrators can move forward with implementing evaluations rather than waiting for the state legislature to act. In fact, in 26 states, including Virginia, the law is silent as to whether evaluations are subject to contract negotiations with teachers’ unions. An additional thirteen states explicitly exempt evaluations from those negotiations. As chancellor of the Washington, D.C. school system, I leveraged this authority to design and implement an entirely new evaluation system prioritizing the teacher’s impact on student learning as the key measure of effectiveness. The D.C. teacher evaluation policy calls for 50 percent of a teacher’s evaluation to be based on student growth over the course of the school year. The remainder of the evaluation is derived from classroom observations and contributions to the school community. This evaluation system stratifies

teachers into tiers of effectiveness. Strong teachers receive financial rewards, as D.C. has one of the most competitive compensation structures in the country. Teachers receive a base salary, with increases based on performance, and further opportunities for annual bonuses. In addition, the structure provides meaningful feedback and targeted professional development opportunities for all teachers and principals. Throughout the development of the evaluation system, educators provided vital input: input that was not provided beforehand during contract negotiations. Importantly, a new study by The New Teacher Project found that the D.C. Public School evaluation, as well as the corresponding compensation system, has helped the city become a leader in the retention of strong educators. Most districts fail to make quality distinctions before deciding which teachers to keep. Conversely, the D.C. school system retains its strongest performers at a 2:1 ratio. This is critical, considering what we know about the enormous and long-lasting impact high-quality educators have on their students. High-quality teachers can overcome challenges that linger for students with a history of lowquality teachers. Furthermore, students who learn from effective teachers are more likely to attend college, attend higher-ranked colleges, earn higher salaries, live in better neighborhoods as adults,


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! and have lower rates of teen pregnancy.iii Increasing Reliance on New Teacher Evaluation Data Once districts have compiled comprehensive data on the performance of their educators, they must use that information to make personnel decisions. Again, this is an area where states tend to leave districts significant discretion to maneuver and set policy. In Virginia for example, local officials have the power to establish salary schedules based on job performance rather than on outdated criteria, such as length of tenure or degrees held. Unfortunately, districts across the state spent nearly $132 million in the 2007-2008 school year on higher salaries for teachers corresponding to higher degrees. This occurred despite the fact that there is generally no link between teacher education level and student achievement. iv Schools should use those funds to provide incentives for strong evaluation scores instead. Similarly, when able, administrators should make decisions regarding staff cuts based on objective performance. While no one wants layoffs to occur, they are an unfortunate reality in tight economic times. District administrators who make personnel decisions must prioritize retaining high-quality teachers. To do this, superintendents must increase reliance upon revised teacher

evaluations that incorporate student assessment growth. Too often, districts make such cuts in a quality-blind way, based on seniority alone, which defies common sense and hurts students. Improved Parental Communications Student learning can also be improved through more effective parental communication. Far too often, parents are left in the dark when it comes to their child’s education. Districts ought to provide meaningful school-level data to combat this and proactively engage parents in their student’s educational opportunities. Report cards that assess school performance using an A-F letter grade provide parents with a userfriendly depiction of their child’s school. Parents should also be provided with information about the effectiveness of their child’s teachers. Raising parental awareness of teacher quality should be prioritized in schools and classrooms taught by underperforming teachers. I know this is a hotly debated issue, but I am a mom, and I know if one of my daughters were placed in the classroom of an ineffective teacher, I would want to know about it. Expanding School Choice It is fair to say that most districts are working to turn poorly performing schools around. But reform can take time and, unfortunately, students currently


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! sitting in failing classrooms do not have time to wait. Students only have one shot at a decent education, and consecutive years in an ineffective classroom can have a negative effect on a child’s life. A student who is not reading by the end of third grade is four times as likely to not graduate high school. v There is only a short window of time for that student to catch up.

leaders can target funds toward initiatives that raise student achievement. Additionally, principals who effectively use resources should be empowered with budget autonomy to best address the needs of their students. Removing initial funding restrictions not only puts the focus on outcomes instead of inputs, while also encouraging innovation. Conclusion

Unfortunately, too often in this country, a child’s zip code is predictive of his or her educational success. While school choice laws are often determined at the state level, local leaders can take steps on their own to ensure that no child is trapped in an under-performing school. One policy to adopt, for example, is to allow open enrollment within the district. In this scenario, children can choose which local school to attend regardless of their home address. Empowering Effective Administrators Finally, leaders can increase positive impact on students by effectively using limited financial resources. Dollars should be spent in the classroom, not on ballooning bureaucracies. To manage this, districts should track and report to the public, in a transparent, accessible format, how financial resources are being spent. By linking resource investments to student outcomes, district administrators can be held accountable. Furthermore, school

At StudentsFirst, we intend to keep pushing for state-level policies that improve America’s public schools. But districts need not wait. Administrators in New York City, Charlotte-Mecklenburg, and Hillsborough, Fla. are just a few of those leading the way. They are each creating equity and excellence in their schools. The students are benefiting, and other districts should follow suit. Michelle Rhee is the founder and CEO of StudentsFirst, a bipartisan grassroots movement to improve America’s schools. She previously served as chancellor of D.C. Public Schools and founded and led the New Teacher Project, which helps train and place great teachers in highneeds schools.


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! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! i

“PISA 2009 Key Findings,” Organization for Economic Cooperation and Development (OECD) Programme for International Student Assessment (PISA), 2009, http://www.oecd.org /pisa/pisaproducts/pisa2009/pisa20 09keyfindings.htm. ii “About the Crisis,” Alliance for Excellent Education, accessed December 19, 2012, http://www .all4ed.org/about_the_crisis. iii Raj Chetty, John Friedman, and Jonah Rockoff, “The Long-Term Impacts of Teachers: Teacher Value-Added and Student Outcomes in Adulthood,” National Bureau of Economic Research Working Paper Series No. 17699, (2011). iv Raegen Miller and Marguerite Roza, “The Sheepskin Effect and Student Achievement: Deemphasizing the Role of Master’s Degrees in Teacher Compensation,” (Washington: Center for American Progress, 2012), accessed July 17 2012, http://www.americanprogress.org/i ssues/2012/07/pdf/miller_masters.p df. v Donald J. Hernandez, Double Jeopardy: How Third-Grade Reading Skills and Poverty Influence High School Graduation, (New York, NY: The Annie E. Casey Foundation, 2011).!

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D.C. Statehood: Liberty and Justice for All U.S. Shadow Senator Michael Brown (D-D.C.) Best Laid Plans Charles Dickens nicknamed Washington, D.C., the “city of magnificent intentions.”i By this, he meant that that the nation’s Capital had not lived up to the expectations of grandeur its planners intended. Although his depiction referred to the city’s infrastructure, it also serves as a critique of its political life. In short, Washington, D.C. is the city that democracy forgot. After all, it has no voting member in Congress and no autonomy over its local budget or legal process. Today, 165 years after Dickens walked its streets, not much has changed. In a very real sense, Washington, D.C. is America’s last colony. There is no other democracy in the world that denies the citizens of its capital equal rights. The founding fathers believed that they needed full control over the District. To act otherwise, they claimed, would put the independence needed to govern at risk. Thus, when the Capital was created, the Framers reasoned that they should “exercise exclusive legislation in all cases whatsoever over the District.”ii This became

Article 1, Section 8 of the U.S. Constitution. There is no explicit reference that supplants the rights of D.C. citizens. However, the phrase, to “exercise exclusive legislation” has translated to the suspension of basic civil liberties for all residents. This idea that Congress needs to control the nation’s capital has resulted in more than 200 years of involuntary servitude for the city’s residents. There is a total contradiction between the principles of democracy and the suspension of basic civil rights. Thus, Congress has experimented with various forms of local government over time. Although it has granted D.C. some control over local matters, a voice in national affairs eludes them. The people of Washington, D.C. have never placed a vote in the national legislature. It is a regrettable legacy that persists for 630,000 loyal American citizens today. There have been a few attempts to increase participation at the national level. However, these advances have serious limitations. For example, we have a delegate in the House of Representatives, but that delegate has no vote. We have an elected Mayor and a thirteenmember City Council. Yet all legislation passed is subject to federal approval. Further, Congress retains the right to approve the city budget. Even the right to vote for President, granted under the 23rd amendment, is limited to “no more electoral votes than the smallest state.”iii This


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means that our vote for President could potentially count for less than the votes of citizens of smaller states. In the 1980’s, when D.C.’s population was in excess of 850,000, the District should have been entitled to four electoral votes. Instead, it was limited to three. This resulted in votes cast for President being worth only 75% as much as votes cast in Wyoming, whose population was less than 600,000 at the time. In addition, there is no provision for D.C. voters in case of a tie. Therefore, in effect, voters have no say in the event of a tiebreaker. Additionally, Congress approves our laws. They sign off on the spending of our local tax dollars. They can intervene in local affairs at will, with the authority to alter, suspend, or eliminate the form of D.C.’s government. This runs contrary to the basic principals, or “magnificent intentions,” on which the country was founded. Washingtonians face nothing less than “taxation without representation.” We Shall Overcome From the beginning, residents of the new capital began to petition the federal government for equal rights. There have been multiple court cases.iv Residents have made several attempts at legislation or a constitutional amendment.v These attempts have failed for a variety of reasons. First, we do not have a national constituency. The local

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nature of the statehood struggle seriously handicaps the undertaking. The District does, however, have the support of a majority of Americans. A 2005 nationwide poll showed that 82% of those surveyed agree on the subject of equality.vi Unfortunately, the issue does not affect them directly and therefore is not a priority. AfricanAmericans and women, for example, were able to get national support in their respective civil struggles in part because these groups were widely dispersed. They were not constrained by locale. Since this issue affects only D.C. residents, it is hard to engage others across the country. The proposed constitutional amendment passed in 1978 by both houses of Congress is an example of this. The amendment would have granted representation in both the House and Senate. Even though it passed overwhelmingly, it failed to receive the approval from the threefourths of state legislatures needed for ratification. In the end, only sixteen of the required thirty-eight states passed the D.C. statehood amendment. Second, the problem of apathy is exacerbated by misinformation. A 2005 survey shows that 78% of Americans believe D.C. residents have the same rights as they do. After all, it is counter-intuitive to think that American citizens do not share in its full benefits.


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Therefore, simply informing people of our status is a major challenge. Until 2008, Congress had banned the District from using its own money to lobby for statehood. This makes a national outreach campaign all but impossible. Finally, we are seriously encumbered by the fact that the Constitution so definitively gives Congress the right to decide all matters within the District by granting it “exclusive legislation in all cases.” This has consistently undermined legal reform efforts. Something cannot be declared unconstitutional that is clearly stipulated within the Constitution. This is apparently true even if it violates the most basic principles of our democracy. Although the Constitution does not prohibit District residents from having equal representation, it does explicitly give Congress the right to have absolute control. Consequently, Washingtonians must either amend the Constitution or detach themselves by creating a separate state to achieve permanent equality. Since statehood requires a simple majority vote of Congress and all states enter the union on equal footing, this, in my opinion, is the most practical path to take. Once granted statehood, the residents of DC would be fully vested members of our democracy. The Constitution does not specify the size of the capital; only that it can be no larger than ten-mile square. Thus, under my proposal,

all federal buildings and the White House would remain in the capital (what is commonly referred to as the National Capital Service Area). The remaining area would become the state of New Columbia. The idea satisfies legal requirements while granting residents their equal rights. Although all these issues have stymied our efforts over the years, the biggest obstacle these days seems to be partisanship. The District has no Republican elected officials. It has never voted for a Republican for President. Further, Democrats outnumber Republicans ten-to-one among registered voters.vii The thought of two Democratic senators and a voting Democratic member in the House in perpetuity has lead to fierce opposition on Capitol Hill from Republicans. As Walter Fauntroy, our first delegate to Congress put it, “conservatives see Washington as too –too urban, too liberal, too black, and too Democratic.” Although some Republicans have stood with us, they have been few and far between.viii Today, as the country grows more divided, partisanship becomes an increasingly formidable impediment in our struggle. In an attempt to try and create a bipartisan approach, the D.C. Voting Rights Act was introduced in 2009. Similar to the Missouri Compromise, it would have given a single House vote to D.C. as well as an additional vote to Utah. Although it had bipartisan support and passed in the House, it failed after John


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Ensign, a conservative Republican Senator from Nevada, added a “poison pill” gun rider, and it was withdrawn. We Hold These Truths Representation and equality are the prerequisites of democracy. Indeed, Jefferson described them as “self evident.” The Framers’ concern for there own autonomy is an anachronism. Congress has long been able to defend itself from intrusions by the local populace. The controversy now is not over if, but rather how, to restore the rights of D.C. residents. Some people who oppose statehood argue that a constitutional amendment is required. Not only has this been tried unsuccessfully, but also it is unnecessary. The Constitution does not limit the rights of local residents. In fact, it only gives Congress the right to do as it pleases. Since the amendment process is so cumbersome, this approach is the least practical. Others argue for retrocession to Maryland. Proponents note that this process was used in 1846 to return land to Virginia that had been ceded for the Capital. Although this would restore our rights, it requires acceptance not only by Congress but also Maryland. This would double the urban population of the state. In addition, the overwhelming influx of registered Democrats would lead to opposition from state

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Republicans. Again, this makes this approach seem impractical. Still others believe we should proceed incrementally. This approach has dominated efforts for the past decade. The feeling is that we should attempt to secure our rights one at a time as we progress towards full equality. Thus far, millions of dollars have been expended and years have been wasted with little to show for our efforts. Although the District continues in this vein, most recently proposing a local referendum on budget autonomy, my opinion is that this approach will continue to be unproductive. Even if successful, these measures result in small gains and may, in fact, be counterproductive. If the D.C. Voting Rights Act had passed, giving us a single vote in the House, I believe that our effort for a vote in the Senate would have been handicapped because many would view partial representation as sufficient. In addition, Congress can take away any right granted by Congress. Therefore, it should be viewed as temporary. Our efforts should be aimed at permanent equality—in other words, statehood. Making the District a state is the only reasonable way to restore equality in a way that is permanent and irrevocable. The District voted overwhelmingly for statehood in a 1980 referendum. It held a Constitutional Convention, approving a Constitution for the


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state of New Columbia two years later. All it takes is a simple majority vote in Congress, and the District would enter the union on equal footing with all other states. All federal buildings and public facilities would remain property of the nation’s Capital, thereby fulfilling the requirements of the Constitution. The surrounding area would become the state of New Columbia. The only residents of the capital would be the President and his family, who would retain their voting rights through the state in which they resided at the time of their election. There was a statehood bill introduced in both houses of Congress in 2012. The House version had twenty-eight cosponsors and the Senate version had four. I expect that both versions will be reintroduced in the next few weeks in the 113th Congress. It’s simple, really: to be equal in the United States of America you need to be one of the states. Anything less is just that— less. On November 6, 2012, Puerto Ricans voted, for the first time, to become a state. With 61% in favor of statehood, they took a major step on the road to statehood. Elected officials from the District of Columbia are talking with them in attempt to develop a joint strategy. The goal is to help both jurisdictions reach their goal of becoming fully vested American citizens. Many territories have become states by entering the Union in pairs and this may well provide us with a new opportunity

to advance statehood for both the District and Puerto Rico. The people of the District of Columbia have been part of America since its inception. We pay among the highest per capita federal income taxes in the nation. More than 200,000 of us have served during wartime, with 5,000 casualties of that service. We are proud to be the home of 28 Congressional Medal of Honor recipients and proud of our more than 200 years of loyal citizenship. We hold fast to the ideals set forth in the Declaration of Independence and Constitution. We move forth with a faith that we will soon fulfill their promise of democracy guaranteed to all Americans. The time has come to turn our “magnificent intentions” into reality and finally finish one of the last great battles for inclusion in our democracy. The 630,000 residents of the District must be admitted as fully vested American citizens of New Columbia, the 51st State. The principles on which this great nation was founded demand equality. For the citizens of the District of Columbia, that means statehood. As the new Congress begins, I will be organizing citizens to lobby the Senate and the House to support the New Columbia Admissions Act. Although the District has not developed a comprehensive plan yet, those of us in the statehood movement are consistently reaching out to try and garner the


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support that was reflected in the nationwide survey. Every attempt has been made to put forth a comprehensive, well-designed piece of legislation. The New Columbia Admissions Act takes into account all that we have learned over the years. It carefully outlines the boundaries of both the new state and new capital. It limits the power of the new state to tax federal property or interfere with the operation of the federal government. It codifies existing law and sets forth provisions for the orderly transition from municipal to state government. It provides for the admission of the District on equal footing with all other states. It incorporates the Constitution passed by the District and recognizes the superiority of the U.S. Constitution. This legislation has been designed to anticipate potential objections and to mitigate them. It maintains the right of Congress to control the jurisdiction it inhabits. It satisfies the Constitutional requirement for the establishment of a national seat of government. It establishes a republican form of government like all other states and clearly defines each new jurisdiction. It is a solid piece of policy backed by the most fundamental principles of our democracy. Even so, we know that we will have to continue to struggle, especially given the current partisan divisiveness on Capitol Hill. We know that until we can get America to stand with

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us, we face an uphill battle. In the end however, we will succeed because we also know that America believes in “liberty and justice for all.” Senator Michael D. Brown was first elected in 2006 with 84% of the vote. He serves the people of the District of Columbia as an advocate for statehood and equal rights. President Obama has said “Even without a vote, Senator Brown has always been a strong advocate for the rights of D.C. residents.” In 2009, he created the non-profit, Teach DemocracyD.C., to engage teachers and students to get involved in D.C.’s struggle for statehood. Last year he was arrested and went to trial in an act of civil disobedience, protesting federal interference with the District’s local budget. Senator Brown is a graduate of the University of Maryland, where he received a Bachelor’s degree in Government and Politics and a Master’s degree in Public Policy.


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i Charles Dickens, “American Notes for General Circulation,” Chapter 8, 1842. ii “The Constitution of the United States,” Article 1, Section 8, Clause 17. iii The Constitution of the United States,” 23rd Amendment, Ratified March 29, 1961; “D.C. Voting Rights Constitutional Amendment,” Passed August 28, 1978. iv There have been many cases in Federal Court dating back to the 1800’s Three of the most recent are: Adams v Clinton; 40 F.Supp.2d 1 (1999); Banner v. United States, 44 Fed. Cl. 568, 577 (1999); District of Columbia v. Heller, 554 U.S. 570 (2008). v Many pieces of legislation have been introduced in both Houses of Congress. The following is a list from the last decade: H.R. 1285, “No taxation without Representation Act of 2003”; H.R. 5388, “The District of Columbia Fair and Equal Voting Rights Act of 2006”; H.R. 328, “The fair and Equal Voting Rights of 2007”; H.R. 157, “District of Columbia Voting Rights Act of 2009”; H.R. 265, “The New Columbia Admissions Act of 2011”; H.R 345, The District of Columbia Budget Autonomy Act of 2011”; H.R. 506, “The District of Columbia Legal Autonomy Act of 2011.” Senate Bills: S. 617, “No Taxation without Representation Act of 2003”; S. 1257, “ The District of Columbia Fair and Equal Voting Right Act

of 2007”; S. 160, “District of Columbia Voting Right Act of 2009”; S. 3697, The New Columbia Admissions Act of 2012.” vi “Poll shows nationwide support for D.C. Voting Rights,” D.C. Vote, 2005; KRC Research. vii “District of Columbia Board of Election and Ethics,” As of April 2012: 344,448 Registered Democrats; 30,276 Registered Republican eligible Voters in the District of Columbia. viii The first notable Republican to take a stand for equal rights for the people of the District was Frederick Douglas. Over the years others have included Dr. Martin Luther King, Jr. who marched for statehood, US Senators Barry Goldwater and Ed Brooke who supported the 1978 Constitutional Amendment, President Dwight Eisenhower who campaigned for the 23rd Amendment and supported Home Rule for the District and five Republican Senators who cosponsored the “District of Columbia Voting Rights Act of 2009: Orin Hatch (UT), Bob Bennett (UT), Susan Collins (ME); George Voinovich (OH) and Olympia Snowe (ME) also Representative Tom Davis of Virginia, who helped lead the fight for this legislation in the House and was an original sponsor.


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A Twenty-First Century NATO: Smart Solutions for an Uncertain Future Harold Mock “If we open a quarrel between past and present,” remarked Winston Churchill, “we shall find that we have lost the future.” Rising from the front bench, he famously called upon the House of Commons to meet the challenges of a new era in international politics. Just as in Churchill’s day, our political and military institutions are torn between their original purposes and the demands of a new era; the North Atlantic Treaty Organization proves no exception. Seven decades later, we should heed Churchill’s counsel, judiciously adapting to a new strategic environment through NATO’s Smart Defense initiative. Though the transatlantic alliance has endured for more than sixty years and weathered a generations-long Cold War, its most dangerous threats have always been internal. Anxious, budget-conscious governments have been thrust into perennial domestic battles over NATO’s utility and purpose. Since the end of the Cold War, the quest for NATO’s raison d’être has proved more elusive. Some European critics have gone so far as to

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question the alliance’s continued existence. Their chief question: Should a Cold War relic continue to operate in this new, ostensibly more peaceful era? In 2011, outgoing U.S. Defense Secretary Robert M. Gates railed against his NATO allies, whom he identified as “willing and eager for American taxpayers to assume the growing burden left by reductions in European defense budgets.” As the crisis in Libya mounted, Gates criticized the lackluster European response: “Frankly, many of those allies sitting on the sidelines do so not because they do not want to participate, but simply because they can’t. The military capabilities simply aren’t there.”i The European sovereign-debt crisis, which has racked the continent since 2009, has heightened the stakes. Within two years, European defense spending fell by $45 billion.ii Across Europe, as governments struggle, or fail, to balance their budgets, defense spending inevitably falls prey to the auditor’s pen. NATO faces a new set of challenges as austerity measures reshape national priorities. In response, the alliance must overcome internal politicking and rearticulate its integral position in a peaceful international order.iii NATO, which Gates identified as “the mightiest military alliance in history,” faces “a dim, if not dismal future.”iv Since 1945, defense spending in Europe has never held the sacrosanct position


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seen in the United States.v Whether by necessity or choice, European contributions to NATO are waning. Gates isn’t alone in eulogizing the alliance. With considerable overlaps between NATO and the European Union in matters of foreign and security policy, governments particularly question whether they should continue to meet their alliance obligations. Increasingly, they have resolved in favor of European institutions. Indeed, in the German Marshall Fund’s latest Transatlantic Trends survey, only fifty-eight percent of respondents in the EU identified NATO as “still essential.”vi To many, the alliance has become little more than an expensive archaism. NATO Secretary-General Anders Fogh Rasmussen has boldly confronted those challenges. Since the spring of 2011, he has championed his Smart Defense initiative, aiming to return the North Atlantic alliance to its central position in European defense. Through Smart Defense, he proposes (1) expanding interoperability, (2) reconciling respective national capabilities with NATO priorities, and (3) facilitating national specialization. According to Rasmussen, alliance members must avoid duplicating one another’s defense programs. They should “pool and share capabilities, set the right priorities, and better coordinate [their] efforts.”vii

Rasmussen commands the helm at a perilous time in the alliance’s history. The British, French, Germans, and Italians all will reduce their contributions to NATO operations by upwards of ten percent in the coming years. In the last fiscal year alone, nearly three-quarters of the allies have cut their defense budgets. All the while, as Camille Grand of the Fondation pour la Recherche Stratégique recently has observed, since 9/11, the American defense budget has grown by 81 percent.viii Budgets alone fail to tell the whole story. More importantly, we must consider the effectiveness of NATO’s budget outlays and member state defense expenditures. Allies have frequently duplicated one another’s efforts and have not synchronized their procurement efforts or their development of new capabilities. In an era when many European militaries lack the out-of-area capabilities increasingly demanded by interallied interests, Smart Defense effectively streamlines the allies’ disparate efforts into a singular program. Rasmussen’s approach displays a keen sense of pragmatism. Pledging “to build greater security with fewer resources,” Smart Defense meets the harsh realities of Europe’s economic crisis without compromising the alliance’s core strength. Rasmussen’s agenda helps insulate NATO’s future from domestic upheaval and the vicissitudes of


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public finance. It simultaneously discourages unilateral defense cuts and encourages economies of scale. Furthermore, through the initiative, NATO can facilitate the coordination of resources and capabilities across its diverse twenty-eight member states. To meet NATO’s challenges, we need to understand the alliance as a dynamic force, one united around shared interest in liberalism, democracy, and security. In 1949, the anxious governments of Western Europe took great comfort in the North Atlantic Treaty’s article five: “that an armed attack on one . . . shall be considered an armed attack on them all.” Today, however, we must broaden our strategic thinking to emphasize article four: “The parties will consult together whenever, in the opinion of any of them, the territorial integrity, political independence or security . . . is threatened.” Taking into account cyberwarfare, arms proliferation, and terrorism, NATO’s new strategic concept redefines the alliance’s utility and greatly enhances operational capacity. Smart Defense now focuses those efforts and calibrates national capabilities to the alliance’s evolving demands. The political realities of NATO’s future have become starkly apparent. U.S. defense policy in Europe has, in a sense, fallen victim to its own successes. Few Europeans question the permanence of America’s commitment to transatlantic

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security. With the mantle of American protection enfolding the continent, European governments find less incentive to expend precious limited resources when Washington will offset their commitments. Whether by overreliance on the European Union, diminished political support, or scant financial resources, European governments are falling short of their NATO obligations. Smart Defense accounts for that reality. Complex challenges are not solved by simple policy prescriptions. They require strategic thinking, cultural consideration, and political will. Unlike sixty years ago, each member state maintains its own distinct reason for belonging to the alliance, and no universal consensus supports the transatlantic alliance. Governments must continue to support the alliance in an era when they perceive stability in the strategic landscape. The Smart Defense initiative guarantees careful stewardship of national funding and will offer advocates in member state parliaments the political leverage in domestic budgetary discussions. Churchill was correct. While NATO’s challenges will evolve over the years, its interests remain constant. Through Smart Defense and prudent streamlining NATO’s military, the alliance established during the twentieth century to face off against the Soviets will evolve in the twenty-first century to meet its global challenges —


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both internal and external.

Harold Mock is Ph.D. candidate in European history at the University of Virginia. He is writing a doctoral dissertation entitled Dangerous Power: An International History of German Unification, 1974-1993. i Robert M. Gates, “The Security and Defense Agenda,” Future of NATO, June 10, 2011, available online at http://www.defense.gov/Speeches/ Speech.aspx?SpeechID=1581. ii Anders Fogh Rasmussen, “Building Security in an Age of Austerity,” Keynote Address to the Munich Security Conference, February 4, 2011, available from NATO online at http://www.nato.int/cps/en/natoliv e/opinions_70400.htm. iii When economic crisis strikes, raising the two percent of gross national income required by NATO’s cost-sharing formula could prove difficult. As Madeleine Albright, who chaired the 2010 NATO Strategic Concept Group of Experts, recently pointed out, only six of NATO’s twenty-eight member states currently meet their pledged support to the alliance. Madeleine Albright, “The Future of NATO” (lecture, Council on Foreign Relations, Washington, DC, May 27, 2010). iv Gates, “The Security and Defense Agenda.” v Cf. Transatlantic Trends 2012: Key Findings, German Marshall Fund of the United States (2012),

available online at trends.gmfus.org. vi Ibid. vii Rasmussen, “Building Security in an Age of Austerity.” Some opponents particularly criticize Rasmussen’s call for national specialization through Smart Defense. Critics argue that allies would forego a modicum of sovereignty by tying their military fortunes to NATO. Bastian Giegerich has answered some of those criticisms. See his “NATO’s Smart Defence: Who’s Buying?” Survival 54, no. 3 (June-July 2012): 69-77. viii In the same period, the Chinese defense budget has grown by 189 percent, the Russian by 82 percent, the Saudi Arabian by 62 percent, and the Indian by 54 percent. Data from the Stockholm International Peace Research Institute (SIPRI) Military Expenditure Database. See Camille Grand, “Smart Defense,” Smart Defense and the Future of NATO: Can the Alliance Meet the Challenges of the Twenty-First Century? Chicago Council on Global Affairs, (2012): 45-46.


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Address Inefficiencies to Protect Victims of Domestic Violence

implementation of policy to grant protective orders in Fairfax. Lastly, I contend that, if local policy makers can address these inefficiencies by mandating implementation changes, Fairfax can improve protections for domestic violence victims and prevent future violence.

Kelly Connors One in four American women has been a victim of domestic violence in her lifetime, according to the Center for Disease Control and Prevention. i Although American women have come a long way in promoting gender equity, the statistics concerning domestic violence against women continue to be appalling. U.S. public policy has been insufficient in protecting women from violence. The most public example is Congress’s failure to reauthorize the Violence Against Women Act, which provides federal funding for assistance and support programs for victims of domestic violence. The federal inattention to domestic violence trickles down, as seen through the inefficient implementation of domestic violence programs on the state and local level. I will highlight how this lackadaisical attitude has trickled down to my hometown of Fairfax, Virginia in the form of three major inefficiencies in the system to grant protective orders to domestic violence victims. First, I lay out the legal definitions of domestic violence and protective orders in the state of Virginia, providing appropriate context. Then, I detail specific inefficiencies in the

Background: Domestic Violence Policy in Virginia Legal definitions of domestic violence vary from state to state. Virginia law names domestic violence as “family abuse” and defines it as “any act involving violence, force, or threat including, but not limited to, any forceful detention, which results in bodily injury or places one in reasonable apprehension of bodily injury and which is committed by a person against such person's family or household member.” ii The state and local legal systems protect victims of domestic violence by providing recourse through protective orders and legal services, helping victims regain power over their lives. It is extremely important for victims to obtain protective orders because not only does it forbid their abuser from continuing the abuse and contacting the victim, but also the victim receives temporary possession of their house and any jointly held motor vehicles. Protective orders also provide other measures to keep the victims safe and away from the abuser.iii

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! Until recently, women’s access to protective orders in Virginia had been limited to the criteria of family abuse or stalking protective orders. iv The tragic murder of University of Virginia student Yeardley Love, however, prompted the proposal of new legislation that would increase access to protective orders. v The Virginia General Assembly passed bills HB 2063 and SB 1222 in February 2011, creating a single standard for victims to obtain protective orders. Protective orders could now be issued for an expanded list of reasons, which include “family abuse” and other acts of violence such as dating violence, stalking, and sexual assault. This legislation also expanded access to protective orders to “any act involving violence, force, or threat that results in bodily injury or places one in reasonable apprehension of death, sexual assault, or bodily injury.”vi Although these laws represented a monumental step to expand protection for women in Virginia, Fairfax policymakers’ faulty implementation of policy to grant protective orders prevents many victims from achieving the protection they need. Here, I outline the following three inefficiencies in Fairfax Virginia’s implementation to grant protective orders and how addressing these efficiencies will result in more protection for victims of domestic violence.

First, Fairfax County should improve record keeping and analyze the rate of filed protective orders that are granted. Second, Fairfax County should amend the policy of granting preliminary protective orders. Third, Fairfax County should increase the number of legal aid services available to victims of domestic violence. Using Records to Track Success First, the Fairfax County record keeping system lacks the process and structure to effectively measure the success of domestic violence reforms. In 2009, the Fairfax County Magistrate’s Office issued 1,939 emergency family abuse protective orders, but it did not record how many applications were filed. Also in 2009, Fairfax County Juvenile and Domestic Relations District Court filed 829 petitions for preliminary family abuse protective orders, but did not track the number of protective orders granted by the court. vii A Bilingual Domestic Violence Advocate at the Fairfax Women’s Center explained that 800 to 900 domestic violence victims apply for protective orders each year, but there is no record of the success rate of women obtaining these orders. viii Fairfax County needs to improve its record keeping so it can identify if its policies are effective. Improved record keeping can then result in improved policies.


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! A Protective System for Filing Protective Orders

Fairfax County places these domestic violence victims in dangerous situations in which their abuser knows of the victim’s accusations and knows that the victim is not protected. Fairfax should enact a policy similar to that in Minnesota’s that allows the victim to decide if she wants to pursue a two-year protective order after she is denied a preliminary protective order. Therefore, the victim can decide if she wants to take on the risk of retaliation from her abuser before the hearing.

Second, Fairfax County must adjust the policy of filing preliminary protective orders. Currently, preliminary protective orders offer protection for at least 15 days, or until the hearing for the two-year protective order. ix For example, if a woman applies for a preliminary protector order in Fairfax, she is required to file a petition at court for a two-year protective order. An affidavit is then sent to her alleged abuser stating the accusations and the date of the hearing. If the court denies the applicant a preliminary protective order, the court does not put anything in place to prevent the accuser from harming or contacting the victim before the hearing. x This process can aggravate the abuser, further endangering the victim.

Improved Services

Access

to

Legal

Lastly, if Fairfax County hopes to protect more victims of domestic violence from continued abuse they should increase the availability of legal services for domestic violence victims. Currently, only one non-profit organization, the Legal Services of Northern Virginia (LSNV), regularly provides pro-bono legal services for domestic violence victims in Fairfax County. The LSNV obtains funding from the federal government, local government, philanthropic foundations, and other donors to provide their services. LSNV has a small permanent staff, with only three to four lawyers who can only take a small number of cases. Additionally, LSNV provides an Attorney of the Day Program, in which other lawyers in the community can volunteer time to provide pro-bono work. These

Other states and localities have enacted a safer alternative. In the Minnesota system, women have the ability to speak directly to a magistrate when applying for a preliminary protective order. If the magistrate denies the preliminary order, the woman can stop the process there. Thus, her abuser would never know she filed for a protective order and she could avoid potential violent reciprocations that result from her accusations. The Women’s Center in Fairfax stated that Fairfax County courts deny many preliminary protective orders.

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! lawyers do not need experience in domestic violence or protective order law, and there is no required training. Occasionally the LSNV will offer optional training to volunteer lawyers but it is at the volunteer’s discretion to attend. Therefore, even if a woman has a lawyer from the Attorney of the Day Program, if the lawyer is not trained in protective order law, this representation may not be as effective. xi Thus, the Attorney of the Day Program does not mitigate Fairfax’s lack of pro-bono legal services. As a result, some domestic violence victims represent themselves at their protective order hearings. This places traumatized victims at a great disadvantage, as they often forget important information in court, especially when they are facing their abuser. The abuser, on the other hand may obtain a public defender under the 6th Amendment of the U.S. Constitution. Furthermore, it is also common that the abuser has more disposable income and can afford a qualified private attorney to defend them in court. Fairfax County needs to provide increased legal services for victims of domestic violence by providing more funding to LSNV to increase the number of prosecutors that are trained in protective order law and can provide pro-bono representation for domestic violence victims. More knowledgeable legal service providers will give victims an equal opportunity to obtain

protective orders. It will also provide for more accurate representation of domestic violence cases because the victim’s lawyer will be able to gather evidence and make a better case against the victim’s abuser than the victim will be able to create herself. Conclusion I have spoken with many concerned citizens whom work or volunteer in Fairfax with domestic violence victims and they acknowledge that Fairfax is not doing enough to protect victims of domestic violence. Fairfax policymakers should take a stand and address the inefficiencies in our system of granting protective orders to prevent the continued abuse of domestic violence victims. Policymakers must change Fairfax’s current system by (1) improving the record keeping for both filed and granted protective orders, (2) ensuring that the victim’s safety is the priority in all policy options, and (3) increasing women’s access to legal services, so they can make stronger cases for their protective orders. Kelly Connors is a second-year student at the Frank Batten School of Leadership and Public Policy. She has a B.S. in Commerce from the University of Virginia. She served in the Peace Corps for two years as a community economic development volunteer in the Dominican Republic and also served a third year as a volunteer manager. This summer


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!

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Kelly interned with Deloitte Consulting LLP. At the University of Virginia she is the Student Council Representative from the Batten School, Managing Director of the Formative Change Group, and member of the Raven Honor Society.

Fairfax County,” http://www.fairfa xcounty.gov/dsm/dviolence/dvstats local.htm. viii Elizabeth McCarthy, “Bilingual Domestic Violence Victim Advocate,” Fairfax Women’s Center, in discussion with author, November 14, 2011. ix “What You Need to Know About Protective Orders,” Fairfax Juvenile and Domestic Relations District Court, accessed November 14, 2011, http://www.courts.state. va.us/forms/district/protective_ord er_information_sheet.pdf. x Elizabeth McCarthy, “Bilingual Domestic Violence Victim Advocate.” xi Ibid.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! i Patricia Tjaden and Nancy Thoennes, “Extent, Nature, and Consequences of Intimate Partner Violence,” The Centers for Disease Control and Prevention and The National Institute of Justice, July 2000, https://www.ncjrs.gov/pdffiles1/nij/ 181867.pdf. ii Va. Code Ann. § 16.1-228 (2012). iii Ibid. iv Amy Weiss, “How House Bill 2063 and the Expansion of Access to Protective Orders Could Have Saved Yeardley Love’s Life,” Richmond Journal of Law and the Public Interest 15, no. 1 (2011): 77. v Mary Pat Flaherty and Jenna Johnson, "Lacrosse player George Huguely charged in fellow U-Va. student Yeardley Love's death," The Washington Post, May 4, 2010, accessed January 4, 2012, http://www.washingtonpost.com/w pdyn/content/article/2010/05/03/A R2010050304574_pf.html. vi “2011 General Assembly Update,” Virginia Sexual and Domestic Violence Action Alliance, accessed January 4, 2013, http://lis.virginia.gov/cgibin/legp604.exe?111+sum+HJ0800. vii Fairfax County Virginia, “Domestic Violence Data in

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! Economic Solutions to the Obesity Problem in the United States Evan Vahouny Obesity In The United States In the past 20 years, the Centers for Disease Control and Prevention (CDC) have classified obesity as an “epidemic.” Approximately two-thirds of U.S. adults are overweight or obese. An adult with a body mass index (BMI) – the widely used measurement of healthy weight for a given height – between 25 and 29.9 is considered overweight, and an adult with a BMI 30 or higher is considered obese. In 2000, no state had an obesity rate over 30 percent, but that figure increased to 12 percent in 2010 (See Figure 1 for more on National Obesity Trends).i The primary cause of this obesity epidemic is increased caloric intake, a result of improvements in technology that have that led to lower costs of consumption and increased sedentary behavior.ii Although genetic predisposition is a contributing factor in the development of obesity, it is highly unlikely to have caused the sharp rise in obesity in the past two decades. Rather, the recent increase in obesity strongly points toward changes in consumption as the primary cause.iii

Why Does Obesity Matter And What Can Be Done? The obesity epidemic partially arises from a negative externality, which forms the basis for the government’s intervention into the crisis. In order to cover rising health care costs associated with obesity, third party individuals, such as those at average weight and healthiness, must pay more. Treating the negative health outcomes of the obese costs the United States approximately $79 billion annually, half of which is taxpayer money used for Medicare and Medicaid.iv Along with the direct costs, including prevention, diagnosis, and treatment of obesity-related illnesses, a number of indirect costs also contribute to the economic impact of obesity. These include morbidity costs, such as the value lost from decreased productivity, and mortality costs, or the value lost from future income following an individual’s premature death.v Recent studies also suggest that the costs of less worker productivity among the obese population costs as much as direct medical expenditures.vi In order to reverse the rising trend of obesity and the associated medical costs, discussion in the policy arena has focused on taxing two possible sources of the problem: fattening foods and sugary beverages. Tax on Fat Content Many researchers and policymakers have suggested


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! taxing fattening foods to combat the obesity problem. States such as California, Maine, and Maryland have all experimented with a tax on fat, and New York legislator Felix Ortiz has proposed a fat tax that would generate $50 million per year. Despite the appeal of this solution, studies have shown that taxing fattening foods is not effective at reducing consumption. In 2007, Gelbach, Klick, and Stratmann conducted a statistical analysis to determine how individuals in the United States would respond to a tax increase on unhealthy foods.vii The researchers used 13 different unhealthy foods, such as salted butter, ice cream, and potato chips, 11 of which had high fat content. The study found that a 100 percent increase in the price of these fattening foods led to only a 1 percent reduction

in BMI, a negligible difference in relation to the size of the tax. This data suggests that even a tax that is double the price of fattening food would not affect consumption and subsequent BMI. A more rigorous analysis highlighted further arguments against a tax on fat content in foods. In this analysis, only moderately healthy mothers, or those with a BMI below 28.1, responded to a tax on fattening foods. Moderately healthy mothers were influenced much more by the price increase, not only purchasing smaller amounts of unhealthy food, but also resorting to more healthy alternatives. On the other hand, obese mothers with a BMI of 30 or higher were virtually unaffected by the price

Figure 1. Centers for Disease Control and Prevention, Overweight and Obesity U.S. Obesity Trends, February 27, 2012. viii


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! increase and continued to buy taxed, unhealthy foods.ix The unhealthy foods in this study consisted primarily of fattening foods, as opposed to sugary foods, and did not include sugary beverages. This is important because unlike a tax on fattening foods (or even sugary foods in some cases), a tax on sugary beverages does, in fact, reduce consumption, as this editorial describes later on. The results from the two studies above illustrate the overall ineffectiveness of a tax on fattening foods. The basic purposes of the tax are to lower consumption and prevent obesity, but the results from

Gelbach et al. (2007) demonstrate a direct ineffectiveness of the tax on food consumption.x The second study provided additional insight into the effectiveness of the tax on fattening foods, further reinforcing a lack of responsiveness to price change. The virtually nonexistent change in consumption patterns of the obese mothers is strong evidence that the tax increase would not fulfill its original purpose of preventing obesity. Another important argument against taxing fattening foods is consumers’ willingness to substitute the taxed good in exchange for other unhealthy alternatives. In a statistical analysis by Mytton, Allstair, Rayner, and Rutter (2006), consumers responded to a 17.5

Figure 2. Centers for Disease Control and Prevention, More Food, and More of It Carbohydrates, 2008. xi


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! percent tax on fattening foods. Rather than buying healthier foods, the consumers ate foods with much higher sodium levels. Instead of eating high-fat meats, for example, consumers bought bread, which tends to be high in sodium.xii As opposed to a decrease in fat leading to better health outcomes, the substitute of high-sodium foods for fatty-foods led to the same probability of cardiovascular disease in the sample population. This study demonstrates that fattening foods have a likely substitute and one that also leads to adverse health outcomes. In addition to confirming the increased use of an unhealthy substitute, this study also demonstrates the complexity of determining which types of fat to tax. Although the researchers targeted saturated fat, typically known for its negative health consequences, they noted that the reduction in saturated fat led to a parallel reduction in healthier and more satiating unsaturated fats.xiii Other nutrition experts have expressed skepticism regarding a tax on fattening foods for similar reasons. They point toward the complex taxes that would need to be in place to prevent potentially malnutritious effects of reduced fat intake.xiv Many fats are also needed for a healthy diet, further complicating the potential for an effective tax.

Tax on Sugar Content The second potential solution for the obesity problem is a tax on products with high levels of refined sugar. Multiple experts argue that sugar, not fat, is the largest contributor to the obesity problem in the United States. A recent meta-analysis supports this belief, showing clear connections between sugary drinks and increased body weight, unhealthy nutrition, and increased risk of both diabetes and obesity. More importantly, the most significant statistical effects come from more reliable and valid longitudinal and experimental methods as opposed to correlational measures. In the past several decades, consumption has increased by 250-300 calories daily, and half of this increase comes from sugar. Unlike fat content in foods, added sugar to beverages has no nutritious value and is not necessary for survival.xv As seen in Figure 2, the primary cause of the rise in caloric intake comes from a rise in carbohydrates, including simple sugars, and not an increase in fat consumption. A recent statistical analysis supports the claim that sugar-sweetened liquids have a much greater effect on weight gain than solid caloric intake. The researchers found that a decrease in sugar-sweetened liquid intake, primarily beverages such as soft drinks and fruit juices, was significantly more effective at reducing body weight than lowering consumption of solid


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! food. Possible explanations for this difference between liquids and solids include no chewing before swallowing, allowing for quicker fundamental digestion of liquids, and less satiation from liquids without fiber and protein.xvi Perhaps the most important justification for imposing a tax on sugary beverages is evidence that it will reduce consumption. An experimental study by Epstein et al. (2009) demonstrates that taxing unhealthy drinks leads to overall reductions in consumption.xvii In this study, four soft drinks and one salad dressing made up the top five foods out of nearly thirty others with higher than normal calories per nutrient. This form of measurement illustrates the low level of nutrients gained from drinks with added sugar despite the high calorie count. Data from a soda industry trade publication also support evidence of the efficacy of a tax, showing that a jump of 12 percent in soda taxes (or a one-cent tax per ounce) led to a 14.6 percent drop in sales. Other sources report that every 10 percent increase in soda price is associated with a 7.8 percent decrease in consumption (Brownell et al. 2009). The benefits of an effective tax on sugary beverages clearly outweigh any costs. In one statistical analysis, the researchers argue the positive impact of such a tax:

“We examined the potential impact on health and health spending of a nationwide pennyper-ounce excise tax on these beverages. We found that the tax would reduce consumption of these beverages by 15 percent among adults ages 25–64. Over the period 2010–20, the tax was estimated to prevent 2.4 million diabetes person-years, 95,000 coronary heart events, 8,000 strokes, and 26,000 premature deaths, while avoiding more than $17 billion in medical costs. In addition to generating approximately $13 billion in annual tax revenue, a modest tax on sugar-sweetened beverages could reduce the adverse health and cost burdens of obesity, diabetes, and cardiovascular diseases.”xviii The Congressional Budget Office predicted that a tax of 3 cents for every 12 ounces of soft drinks – 9 cents fewer than the penny-perounce tax described above – would generate $50 billion in revenue from 2009 to 2018, taking into account lost revenues from reduced production and consumption of the drinks.xix These projections offer two possibilities for the potential magnitudes of an excise tax, which may be useful in calculating where to set the tax in the future. Although the benefits of this tax clearly outweigh the costs, the tax is regressive in nature. It will have the greatest impact on those with the lowest income, who spend a greater proportion of their income on food and drink. As a result,


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! external and political pressures against regressive taxes may cause a smaller increase than is necessary—one that may not capture the full scope of benefits that result from a higher tax. A lower tax rate in this scenario would mean fewer reductions in episodes of diabetes, heart disease, and premature death. It would also generate less revenue to be directed towards improving the health of lower income families, and it may not be enough to induce a substantial number of consumers to reduce their consumption. Popular opinion polls show that many more people support an excise tax on sugary drinks if they know that the tax revenue will be aligned with the purpose of the tax itself (i.e., health promotion).xx For example, tax revenues could subsidize healthy foods, either exclusively in public facilities or more broadly in restaurants and grocery stores. Various empirical studies demonstrate that lowering the price of healthy foods encourages consumption.xxi Other studies find that subsidies actually increase caloric intake (Epstein, Dearing, Roba, and Finkelstein 2009), but these studies do not combine the lower subsidy price with a higher price on sugary beverages.xxii This combination of tax and subsidy has a high probability of success, although more research should be carried out to evaluate the predicted success before making a final decision.

Conclusion The obesity problem in the United States is growing at an alarming rate. The resulting medical expenses have increased substantially, costing the United States $147 billion per year in obesity-related health issues. One way to help reduce unhealthy behaviors is through excise taxes on food or beverages, but the specific target of the tax makes a significant difference. Taxes on fattening foods are ineffective and do not reduce negative health effects. Alternatively, beverages with added sugar are clearly contributing to the sharp rise in obesity, and taxes on these products would be effective and highly beneficial to society. The revenue from this tax could further increase the benefits and improve national health.

Evan is a second-year graduate student at the University of Virginia Batten School of Leadership and Public Policy. Evan interned at the Department of Justice in the Criminal Division’s Office of Policy and Legislation this past summer. He also worked for Senator Jim Webb (DVa) on Capitol Hill and interned for Burke PLLC, a law firm in Washington, D.C. During the 2009 fall semester, Evan interned with Larry Sabato at the University of Virginia’s Center for Politics. He is particularly interested in criminal justice policy and heath care policy.


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! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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i

ix

“Overweight and Obesity: U.S. Obesity Trends,” Centers for Disease Control and Prevention, updated on August 1, 2012, http://www.cdc.gov/obesity/data/tr ends.html. ii Sara N. Bleich, David Cutler, Christopher Murray, and Alyce Adams, Why is the developed world obese?, Annual Review Public Health 58, no. 29 (2008): 273-295. iii Angela Hasemann (registered dietician, University of Virginia Health System Medical Center), phone call with the author, March 1, 2012. iv Kelly D. Brownell and Thomas R. Frieden, “Ounces of prevention – the public policy case for taxes on sugared beverages,” The New England Journal of Medicine 360, (April 2009): 1805-1808. v “Overweight and Obesity: U.S. Obesity Trends.” vi Stephanie Pappas, “Obesity’s hidden job cost -- $73 billion,” MSNBC, updated on October 8, 2010, accessed on March 1, 2012, http://www.msnbc.msn.com/id/395 71973/ns/health diet_and_nutrition/t/obesityshidden-job-costs-billion/. vii Jonah B. Gelbach, Jonathan Klick, and Thomas Stratmann, “Cheap donuts and expensive broccoli: The effect of relative prices on obesity,” Working Paper, Tallahassee, FL: Florida State University College of Law, March 13, 2007. viii “Overweight and Obesity: U.S. Obesity Trends.”

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Leonard H. Epstein, Kell K. Dearing, Rocco A. Paluch, James N. Roemmich, and David Cho, “Price and maternal obesity influence purchasing of low- and high energy-dense foods,” The American Journal of Clinical Nutrition 86, no. 4 (October 2007): 914-922. x Gelbach et al., “Cheap donuts and expensive broccoli: The effect of relative prices on obesity.” xi “More Food, and More of It Carbohydrates,” Centers for Disease Control and Prevention, accessed on March 1, 2012, http://www.theiflife.com/carbdiets-overrated-part-ii kitavanokinawa-diets/. xii Oliver Mytton, Allstair Gray, Mike Rayner, and Harry Rutter, “Could targeted food taxes improve health?” Journal Epidemiol Community Health 61, (November 2006): 689-694. xiii Ibid. xiv Angela Hasemann (registered dietician, University of Virginia Health System Medical Center), phone call with the author, March 1, 2012. xv Brownell et al., “Ounces of prevention – the public policy case for taxes on sugared beverages,” 1805-1808. xvi Liwei Chen, Lawrence J. Appel, Catherine Loria, Pao-Hwa Lin, Catherine M. Champagne, Patricia J. Elmer, Jamy D. Ard, Diane Mitchell, “Reduction in consumption of sugar-sweetened beverages is associated with weight loss: the PREMIER trial,”

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! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! American Journal of Clinical Nutrition 89, no. 5(2009): 12991306. xvii Leonard H. Epstein, Kelly K. Dearing, Lora G. Roba, and Eric Finkelstein, “The influence of taxes and subsidies on energy purchased in an experimental purchasing study,” Association for Psychological Science 21, no. 3 (2009): 406-414. xviii Claire Y. Wang, Pamela Coxson, Yu-Ming Shen, Lee Goldman, and Kristen BibbinsDomingo, “A penny-per-ounce tax on sugar-sweetened beverages would cut health and cost burdens of diabetes,” Health Affairs 31, no. 1 (2012): 199-207. xix “Impose an excise tax on sugarsweetened beverages,” Congressional Budget Office, Budget Options 1 (2008): 192. xx Brownell et al., “Ounces of prevention – the public policy case for taxes on sugared beverages,” 1805-1808. xxi Katherine B. Horgen, and Kelly D. Brownell, “Comparison of price change and health message interventions in promoting healthy food choices,” American Psychological Association 21, no. 5 (2002): 505-512. xxii Epstein et al., “The influence of taxes and subsidies on energy purchased in an experimental purchasing study,” 406-414.!

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Detroit's Empowerment Zone: Evaluation of Success Tara Clark Abstract The following report evaluates whether or not the Detroit Empowerment Zone had a statistically significant impact on average household income. Detroit, Michigan was one of the first cities selected to create an Empowerment Zone and it ambitiously aimed to both better residents’ lives and reinvigorate the auto industry within the city limits. The report and two previous studies, including a review conducted by the Government Accountability Office, attempt to isolate the Empowerment Zone effect and determine if the program truly improved residents’ quality of life. The analysis of the report relies on first difference regression to test the significance of the Empowerment Zone effect on the improvement of household incomes from 1990 to 2000. When interaction control variables are added to the Empowerment Zone variables, significant results are achieved. The results may be impacted by possible sources of bias such as limited data and endogeneity — a consequence that limits the ability to determine causality because average household income may be related to dependent variables used in the regression and vice versa. However, the report suggests that the policy has not been properly evaluated. Instead of evaluating

whether or not the Empowerment Zone improved conditions for residents in comparison with other like areas, analysts should seek to understand if the Empowerment Zone closes the measurement gap that exists between the city neighborhood and the suburbs. Overview In 1993, as part of the Omnibus Budget Reconciliation under President Clinton, the United States Congress created the Empowerment Zone program that would target certain neighborhoods in struggling cities in order to promote economic health. In 1994, the Round I cities were announced: Baltimore, Chicago, Detroit, New York City and Philadelphia. Each Empowerment Zone — a collection of census tracts in the chosen cities — received federal funding to provide tax breaks for businesses and was also granted $100 million for social services through U.S. Health and Human Services. The program also contained two supplemental cities that received different program parameters: Cleveland and Los Angeles. All Empowerment Zones expired December 2011.i Once the cities were announced, guidelines were given regarding what characteristics an Empowerment Zone should have. These guidelines included criterion such as a high poverty concentration. Cities were also able to carve out Empowerment


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Zones based on what they perceived as areas requiring extra attention. The urban renewal program sought to improve businesses in the area, reduce unemployment, and lower the poverty rate. One of the fundamental driving questions of the project was – could the policy actually benefit the people living in the Empowerment Zone prior to the implementation of the program? In a 2006 report, the U.S. Government Accountability Office (GAO) found that the targeted areas experienced all the benefits the program intended: improved

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economic performance as well as lowered unemployment and poverty rates. However, the results of the report were inconclusive as to whether or not the program was the actually the cause of these improvements. In fact, the name of the report was “Empowerment Zone and Community Enterprise Program: Improvements Occurred in Communities, but the Effect of the Program is Unclear.� Due to data limitations and survey results, the GAO was unable to draw conclusions regarding causation. For example, one primary, observational survey suggested that individuals originally living in the Empowerment Zone moved

Figure 1 Map from Detroit Empowerment Zone.ii


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out and were replaced by individuals with higher earnings. The GAO report concludes that more data collection is necessary, specifically detailed accounts of grant spending, to understand the full effect of the program.iii Similarly, in 2006, Deirdre Oakley and Hui-Shien Tsao released the report “A New Way of Revitalizing Distressed Urban Communities? Assessing the Impact of the Federal Empowerment Program,” in which the authors conclude Empowerment Zones had little effect. The study focuses on measures of socioeconomic wellbeing and analyzes the differences between the identified census tracts in 1990 and 2000 and tracts that had been matched using a propensity score. Oakley and Tsao also analyze the aggregate zones by using fixed-effects. After analyzing each of the first round Empowerment Zones, Oakley and Tsao note that while some improvements can be observed, there is no notable impact across the Empowerment Zones that support the program’s hype.iv

My intention when performing the analysis was similar to Oakley and Tsao’s. I wanted to investigate what real effect the zones had on the socioeconomic wellbeing of the residents. Like Oakley and Tsao, my primary variable of interest is the log change of average household income in 2000 from 1990. Because so much happens in a ten-year span that could be unique to a city, instead of focusing on all of the first round cities, my report focuses on the Empowerment Zone census tracts in Detroit, Michigan. Oakley and Tsao identify Detroit’s Empowerment Zone plan as the most ambitious among the first round cities’ plans. Detroit was focused on creating economic opportunity, and General Motors committed to creating a manufacturing plant within the Empowerment Zone.v The city was experiencing vast decentralization of the population, and the core of Detroit and its impoverished population were competing for industry with outlying areas. vi Since the outlying areas relied on the city’s established

Table 1: Average Household Income by Year and Empowerment Zone Status Empowerment Zone Non-Empowerment Zone 1990 $30,080 $62,789 2000 $39,605 $68,636 *Figures rounded to nearest whole dollar.


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base industry — the auto industry — the Empowerment Zone can be thought of as an effort to keep the city as a relevant component of the regional economy. Urban revitalization projects can be judged as successful by two different measures: as urban facelifts or as improvements on native citizens’ quality of life. My statistical model attempts to ascertain the impact of the Empowerment Zone on the latter by analyzing the Empowerment Zone effect on census tracts’ average household income before and after the policy implementation. The results are in line with the GAO and Oakley and Tsao findings. A small percent increase in the average household income is observed for families living within the Empowerment Zone. Yet, when interaction variables controlling for a census tract within the zone and the tract’s poverty rate, blue-collar employment rate and white-collar employment rate were added into the regression analysis, the percent increase in the average household income is significant at the five percent confidence level. Table 1 above shows the increase in average household income. In Figure 2 below, the changes in variables in the Empowerment Zone tracts and the non-treated tracts look similar, though the change in household income is significant. Based on the apparent similar trends, this paper seeks to uncover what else may be going on to account for the significant

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change in income in the Empowerment Zone tracts that is not reflected by the data. Even with the significant outcome, the results are weak due to limited data and endogeneity. Beyond common issues associated with regression analysis — endogeneity, selection bias and omitted variable bias — the following report and referenced studies may have all attempted to evaluate the policy on a criterion that does not indicate the true purpose of the program. In other words, maybe we have been asking the wrong question. Currently, we investigate whether or not the Empowerment Zone improves the treated area in comparison to a “similar” control area. I suggest that the true purpose of the Empowerment Zone program is to promote the relevance and competitiveness of inner cities in comparison to suburban areas, which had been experiencing population and industry growth the context of decentralizing populations and suburban industry growth. Perhaps, we should be asking whether or not the implementation of the Empowerment Zone has significantly closed the outcome gap between flourishing suburbs and the treated city centers to determine the policy’s effectiveness. The Discussion section contains an examination of how to properly evaluate Empowerment Zones moving forward.


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Theory In order to run regression analysis to evaluate a policy, the policy implementation must be considered a natural experiment. Meaning, those affected by the policy must not foresee the change and begin to prepare for, or react to it, in advance. Ensuring that the policy is a natural experiment helps protect the analysis from selection bias that would be accounted for by randomization in true experiments. Cities petitioned the federal government for the opportunity to institute an Empowerment Zone. As previously mentioned, each

Empowerment Zone proposal had to meet certain federal guidelines, but cities were also able to formulate their plan so it addressed local needs. The City of Detroit formed a committee to design the Empowerment Zone. As part of the plan to be submitted to the federal government, Detroit secured private sector commitments to participate in the Empowerment Zone. Besides considering industrial interests, the committee had to also show that the Empowerment Zone would engage with the resident community, so community leaders were also included on the committee.

Figure 2 Mean change in census tract ratio variables from 1990 to 2000 by census tract in and out of the Empowerment Zone.


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Since the City had to create a plan with economic and community leader buy-in, it may be hard to see how the Detroit Empowerment Zone can be considered a natural experiment. Yet, in terms of every day residents, the policy can be considered a natural experiment. The GAO study in particular identifies a primary observational problem: that individuals originally living in the Empowerment Zone moved out and were replaced by individuals with higher earnings. While the problem makes it difficult to understand if native household incomes were, in fact, positively impacted by the policy, it does prove that the policy resulted in a natural experiment at the residential level. If locals had anticipated the policy prior to implementation landlords, homeowners, and residents may have preemptively reacted by raising rent, sale, and sublease prices to levels that only new welloff consumers could afford. However, no such trends were observed, and migration patterns were noted only after the policy implementation. The reaction of local individuals both incoming and outgoing were post-policy, and therefore the report may use regression analysis to determine if being in the Detroit Empowerment Zone had a causal effect on household incomes.

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Regression Model and Identification Strategy The report uses aggregate census tract variables that act as panel data, which provides observations for the same subjects for several time periods. Because the analysis uses panel data, the first difference regression method is used. The first difference method corrects for heterogeneity that is correlated with time and the independent variables by normalizing the time-based individual effects through taking the difference of the variables from two time periods. The original regression equation follows: ∆Ln Average Household Income = ß0 + ß1EmpowermentZoneDummy + ß2∆PopulationDensity + ß3∆MaleRatio + ß4∆AgeRatios + ß5∆RaceRatios + ß6∆HouseholdRaceRatios + ß7∆MarriedRatio + ß8∆HouseinGroupQuartersRatio + ß9∆EductionLevelRatios + ß10∆EmployedRatio + ß11∆UnemployedRatio + ß12∆BluecollarRatio + ß13∆WhitecollarRatio + ß14∆FamilyBelowPovertyRatio + ß15∆WalktoWorkCommuterRatio + ß16∆Lessthan10minuteCommuteRatio +u Data and Results Decennial Census Data from 1990 and 2000 is used to run the regression. All of the census tracts in Wayne County, Michigan,


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which houses Detroit, provide the sample for the analysis. Descriptive variables at the census tract level are used as controls for the first difference regression. To provide proper control, ratio variables were created. As opposed to controlling a random number of families living in poverty that may not be relevant to another census tract, the model controls for ratio of families living in poverty per census tract. Using ratio variables should properly ensure census tract characteristics are held constant so that the Empowerment Zone dummy variable can be interpreted. Census tract ratio variables that are important to hold constant are variables that could explain household income and possible differences in census tracts. Population demographics such as age, gender, race, household income, and education attainment are commonly-seen population controls. The ratio of married individuals in the census tract is included because there is some academic thought that marriage rates may indicate the social cohesion of a community, and therefore such a community may be able to maximize the opportunity to work together to develop the area. Further, in an effort to control the economic baseline of census tracts, families in poverty and blue-collar and white-collar employment are added as variables. Adding the blue-collar and white-collar

employment variables is also an attempt at account for possible shifting populations due to gentrification. All of the aforementioned variables can also be considered migratory controls. Two variables regarding commuting — ratio of individuals who walk to work and ratio of individuals with less than a ten minute commute to work — are added into the regression in an attempt to control for census tracts that contain a proportion of the population who work within their neighborhood of residence. The commuter controls were created because one intention of the Empowerment Zones is to create more economic opportunities for individuals living in those areas, so controlling for families who may have higher incomes but are traveling to the suburbs for work (or are traveling from the suburbs for work) could be misleading. Therefore, the commuter control ratios act as a proxy for workers employed in their residential neighborhood and were important to include in the regression. Table 2 below depicts the general trends from 1990 to 2000. Across all of the Wayne County census tracts—both in and outside of the Empowerment Zone—average family income increased, families in poverty decreased, walking commuters decreased, commuters with less than a ten minute commute increased, and both blue-collar and white-collar


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employment decreased. The most notable difference appears to be the increase in the number of individuals with a commute less than ten minutes. Meanwhile, while both categories of employment dropped, average household income still rose.

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In order to perform the first difference regression, change variables are created for each of the ratio variables over the two sample years. Additionally, the log of average household income must be calculated before the difference variable is created. Taking the log of average household income normalizes income differences — just as the ratio variable does — and allows the betas to be interpreted as a percent increase or decrease of average household income. Figure 2 above shows the measure of change for variables of note.

In both Empowerment Zone census tracts and nonEmpowerment Zone census tracts, average household income rises from 1990 to 2000. Viewing the average household incomes of the two different groups — displayed in Table 1 — makes the economic disparities apparent. The regression analysis will evaluate whether the income increase in the Empowerment Zone census tracts is statically significant in comparison with the increase in the non-Empowerment Zone census tracts.

Figure 2 above depicts that some of the factors increase over the years, while others decrease. The variation in positive and negative changes may dilute the Empowerment Zone effect.

Table 2: Variable means per census tract in Wayne County, Michigan 1990 2000 Average household income $60,208 $66,605 (in 2010 U.S. dollars) Families below poverty 145 105 Walk-to-work commuters

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Less than 10-minute commute Blue-collar workers

141

1311

1062

974

White-collar workers

1571

835

*Figures rounded to nearest whole number.


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The control groups represent different baselines in which the Empowerment Zone operates, and the Empowerment Zone may operate differently in each baseline. Hence, the total impact the Empowerment Zone has on average household income may be masked by the variety of ways in which the Empowerment Zone interacts with the different baselines. The first regression determines that the Empowerment Zone increases average household income within the treated census tracts by three percent. However, the result is not statistically significant at the five percent confidence interval, with a p-value of 0.190. Interaction variables are added to the regression to determine if the Empowerment Zone has a more concrete effect when more variables are used as controls. The interaction variables created combine the designation of the Empowerment Zone with the change in blue-collar employment, white-collar employment, and families living below poverty. The interaction variables were chosen because they indicate a baseline economic composition of the census tract. For example, controlling for census tracts identification as an Empowerment Zone and its change in ratio of families living below poverty may be important, because as previously stated the Empowerment Zone may interact

differently given the different baseline environment. The second regression model executed is: ∆Ln Average Household Income = ß0 + ß1EmpowermentZoneDummy + ß2EZ*∆BlueCollarRatio + ß3EZ*∆WhiteCollarRatio + ß4EZ*∆FamilyBelowPovertyRatio + ß5∆PopulationDensity + ß6∆MaleRatio + ß7∆AgeRatios + ß8∆RaceRatios + ß9∆HouseholdRaceRatios + ß10∆MarriedRatio + ß11∆HouseinGroupQuartersRatio + ß12∆EductionLevelRatios + ß13∆EmployedRatio + ß14∆UnemployedRatio + ß15∆BluecollarRatio + ß16∆WhitecollarRatio + ß17∆FamilyBelowPovertyRatio + ß18∆WalktoWorkCommuterRatio + ß19∆Lessthan10minuteCommuteRatio +u The second regression results indicate that the Empowerment Zone increases the treated census tracts’ average household income by almost 16 percent and is significant at the five percent confidence interval, with a p-value of 0.007. The observed increase in the Empowerment Zone effect and the newly determined significance indicates that the Empowerment Zone may indeed interact differently given the baseline traits of the census tract. If the Empowerment Zone does perform differently given different baseline characteristics, then analysis may be able to determine in which settings Empowerment Zones are the most successful.


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In order to test the theory, an FTest of the interaction variables is performed to determine if the interaction variables are jointly significant. The results of the FTest show that the interaction variables are not jointly significant at the five percent confidence interval, with an f-value of 0.121. It is possible the F-Test would obtain a significant result if more relevant interaction variables indicating the baseline traits of the census tract were added to the regression. Although the joint significance test failed to find significance between interaction variables, the significant effect of the Empowerment Zone after the addition of the interaction variables suggests that the Empowerment Zone identification and other baseline economic traits must be controlled. This may be due to the fact that Empowerment Zones inherently must contain certain traits because of the goals of the program.

that is not obvious by looking at the descriptive variables.

Perhaps the most interesting aspect of the analysis is that the Empowerment Zones does not appear to be experiencing anything different than the nontreated tracts that could account for the significant increase in average income when using interaction variables. Consider the significant results in contrast with Figure 2. Descriptively speaking, Empowerment Zone census tracts appear to mirror control census tracts. However, something must be happening that is different in the Empowerment Zone to account for the significant average income change

The policy should have sparked economic activity, including increased employment, within the Empowerment Zone, as well as reduced poverty. Poverty was reduced countywide, but employment was also reduced countywide. Figure 2 highlights that tracts in the Empowerment Zone experienced:

What else may be happening? Both the treatment and control group experience a growth in individuals with less than a 10minute commute to work, which is shown to be a countywide trend in Table 2. The increase of the less than 10-minute commuters may indicate that more jobs have been created within the county, but not specifically in the Empowerment Zone. It may also suggest that jobs have been created in the Empowerment Zone and the entire county is benefiting from those jobs. The information tells us that people in Wayne County are working closer to home after the policy implementation than before. The information does not indicate as to whether or not individuals living in the Empowerment Zone are working closer to home, within the Empowerment Zone.

1.

A larger decrease of both blue-collar and white-collar employment than non-treated tracts,


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A larger decrease of families living below poverty than non-treated tracts, and A larger increase of average household income than nontreated tracts.

housing. The less than 10-minute commuter dramatic increase may be greatly impacting the regression, and therefore also impacting the resulting significant increase in household incomes.

The differences were not tested for statistical significance. Two possible narratives come to mind given the decrease of employment, increase in people working near home, decrease of poverty, and increase of household income. First, the social service grants may have been successful and the employment available has gone to people living within the Empowerment Zone. In other words, the policy worked. The second scenario is that individuals with higher incomes have moved into the Empowerment Zone and do not necessarily work there or have taken the employment available.

The second staged regression results, pictured in Table 4 below, show again that adding the housing variables had a large impact on the results of the regression. Interestingly, when the housing variables are added, the effect of the interaction between the Empowerment Zone designation and the poverty ratio, on average household income, decreases. The staged second regression results reiterate the possibility that an increase in less than 10-minute commuters may have a large impact on the significant average household increase in the Empowerment Zone.

In order to dissect further what may be having a large impact on increase in household income in the Empowerment Zone, the two regressions are performed in stages to see which groups of variables may have a great impact on the results. Table 3 below displays the incremental regression results adding in the different categories of control variables. Adding the housing controls noticeably creates the largest change in the regression results. The housing controls added included walk-to-work commuters, less than 10-minute commuters, and group quarter

Possible Bias

3.

One possible major source of bias that may dilute the Empowerment Zone effect is that since the program did not expire until December of 2011, not all of the benefits had come into effect by the time of 2000. A more rigorous analysis could be conducted using data from 1990, prior the program, from 2000, in the midst of the program, and from 2010, near the end of the program. At best the analysis performed in this report and the analysis done by Oakley and Tsao is a mid-program evaluation.


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More data is necessary to truly control differences in the census tracts. In addition to controlling for the primary category of employment in the census tracts, industry-side variables such as number of employees and revenue will be helpful in establishing the baseline traits of the census tract. The industry-side variables could also be interacted with the Empowerment Zone dummy variable, which may then result in a more complete understanding of how Empowerment Zones interact with baseline traits and could change the result of the performed F-Test. Additionally, industry-side variables would also allow analysis to determine if the tax breaks resulted in firms significantly increasing their hiring in the Empowerment Zone. Furthermore, including data showing the number of employees working in a census tract and the number of employed living in a census tract would give insight into who may be truly benefiting from any increase in hiring — people outside or inside the Empowerment Zone. The GAO report suggests that data regarding spending the grant money could assist in identifying the impact of the program. If data were available on when different amounts of grant money was spent and for what purpose that money was available, regression analysis could be more effectively carried out regarding the variables of interest. Then, the Empowerment Zone could be evaluated on the basis if, individually, the grant

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money can have a significant impact on desired outcomes. The additions of instrumental variables that affect average household income, but not Empowerment Zone designation, or vice versa, are also desirable. One such instrumental variable would be identifying the ratio of individuals who live in the Empowerment Zone — before and after the implementation of the policy — but consistently earn an income outside of the Empowerment Zone that brings their family above the poverty line. Another possible instrument in an attempt to prove causality may be the dollars spent per census tract included in the zone by Detroit to pull together the Empowerment Zone plan. These would include lobbying private companies to secure investment commitments. Good instrumental variables would be invaluable in isolating the Empowerment Zone effect and determining a causal relationship. Discussion: Are we properly evaluating Empowerment Zones? My report follows the style of the studies performed by the GAO and Oakley and Tsao. Inherent in all of the analyses is the question: Does the Empowerment Zone significantly improve certain outcome variables in comparison with a like non-Empowerment Zone control group? However, the theoretical basis for the implementation of the


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Table 3: Staged Regression One Results; Empowerment Zone Effect on Household Income 1. Controlling just demographic variables 0.014 (0.025)

2. Adding housing variables 0.033 (0.025)

3. Adding employment variables 0.032 (0.024)*

Empowerment Zone Effect *Complete regression one result. Interpret: The designation of an Empowerment Zone, controlling all other factors, results in a three precent increase of average household income. Standard error is presented within parenthesis.

Table 4: Staged Regression Two Results; Empowerment Zone and Interaction Variable Effect on Household Income 1. Controlling 2. Adding 3. Adding just demographic housing employment variables variables variables Empowerment 0.014 (0.030) 0.043 (0.031) 0.155 (0.065)* Zone Effect Empowerment Zone Interacted --0.115 (0.093) with Blue-Collar Effect Empowerment Zone Interacted --0.137 (0.073) with WhiteCollar Effect Empowerment Zone Interacted 0.270 (0.160) 0.108 (0.171) 0.168 (0.171) with Poverty Ratio Effect *Complete regression two result. Interpreted: The designation of an Empowerment Zone, controlling all other factors, results in a 15.5 percent increase of average household income. Standard error is presented within parenthesis.


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Key to Table 3 and 4 1. Demographic variables included: ∆PopulationDensity, ∆MaleRatio, ∆AgeRatios, ∆RaceRatios, ∆HouseholdRaceRatios, ∆MarriedRatio, ∆EductionLevelRatios, ∆FamilyBelowPovertyRatio 2. Housing variables included: ∆HouseinGroupQuartersRatio, ∆WalktoWorkCommuterRatio, ∆Lessthan10minuteCommuteRatio 3. Employment variables included: ∆BluecollarRatio, ∆WhitecollarRatio, ∆EmployedRatio, ∆UnemployedRatio

Empowerment Zone suggests that the analyses thus far conducted on Empowerment Zones may be looking for the wrong significance. The previously cited McCarthy article identifies three primary reasons for the implementation of Empowerment Zones, and none of them suggest that Empowerment Zones should significantly improve identified areas in comparison with similar areas that have not been selected to be part of the Empowerment Zone. McCarthy suggests the three reasons the federal government intervened and instituted Empowerment Zones is because: 1.

2.

3.

Due to decentralization, the traditional large city—like Detroit—now has to compete with outlying suburban areas, or “edge cities,” for economic development; The negative image of city centers were further inhibiting development; and The economic base of the edge cities is usually rooted in the economic base of the primary city.vii

The theoretical basis for the Empowerment Zone intervention is actually to mitigate the growth differences between edge cities and the primary city center. Considering the intention for the intervention, the critical question analyst should be asking is: Do Empowerment Zones close the outcome gap between designated areas and non-similar edge cities? The analysis could be performed at the census tract level or aggregate Empowerment Zone/edge city level. First, analysis would calculate the difference between the variables of interest in the Empowerment Zone and the edge city prior to the implementation of the Empowerment Zone. Then, the analysis would do the same after the implementation of the zone. The dependent variable would be the rate of improvement of the Empowerment Zone, and the Empowerment Zone dummy variable would indicate if the Empowerment Zone significantly impacted the Empowerment Zone’s rate of improvement. The


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control group would be the measurement gap between edge cities and a non-treated area matched with the Empowerment Zone area prior the policy. The analysis will encounter the same issues of bias that are presented in the report, and should seek to eliminate them through the suggestions made in the “Possible Bias” section of the report. To thoroughly and properly evaluate the effectiveness of the program, analysts must look at both aspects of the program and evaluate the market-based and socio-economic effects. This paper, in addition to Oakley and Tsao’s work, attempts to outline methods for isolating the socioeconomic impact of the policy. In order for future research to best analyze the market-based effect, the researcher may want to consult the U.S. Cluster Mapping website, lead by Harvard Business School Professor Michael Porter. viii The website identifies characteristics of industry clusters by economic area displaying which industry clusters are dominate in the region. The Institute for Strategy and Competitiveness defines clusters as the “geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region.”ix The analyst could select clusters leading the area in employment and create a gap variable between the level of employment in those industries in the treatment or control group

and the edgy city. The Empowerment Zone ideally would significantly close the outcome measurement gap between the zone and edge cities. Table 1 illustrates a clear discrepancy between the average household income of families in Empowerment Zone census tracts and non-Empowerment Zone census tracts in Wayne County, Michigan. In this regard, this report and other mentioned studies do inherently address the measurement gap between inner city neighborhoods that have been left behind in the context of broader regional growth. However, the problem is that the program was never meant to improve measurements significantly in identified areas over non-Empowerment Zone census tracts. Rather, the program is meant to significantly close the gap between the measurements reported by the identified areas and the non-Empowerment Zone census tracts. In other words, the important aspect of the program is not actually that the identified neighborhoods improve significantly relative to the control neighborhoods, but that the identified neighborhoods significantly close the outcome gap between the Empowerment Zone and edge cities as compared to the gap between a matched non-Empowerment Zone area and edge cities. If the program is evaluated in terms of its purpose — to close


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outcome gaps between inner cities and edge cities — then analysts and policy makers will have to ask if it matters whether or not gentrification occurs despite the attempts to avoid the effect. For example, a researcher may be able to determine that the high-wage earners have relocated into the treatment area, as hypothesized based on qualitative surveys. When solely considering the treatment area, and not the residences, competitiveness with edge cities, or if the income increase significantly closes the outcome gap, then the policy may be considered successful. Focusing on only closing the outcome gap with edge cities would make the quantitative aspect of the policy evaluation indifferent as to which groups of people are actually experiencing the effect. Evaluating the outcome gap variable means analysts and policy makers will have to make a value judgment in addition to a numbers judgment. They must ask themselves: 1.

2.

Is the only concern the outcome gap of the physical area, and therefore should the social services money be perceived only as an attempt to mitigate market-based failure? Or, must the program do more than close the outcome gap — the policy cannot be indifferent as to which people are personally experiencing the Empowerment Zone?

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Revising how Empowerment Zones are evaluated is essential, because current studies conclude that the results of the Empowerment Zone may not be worth the money spent to institute the program. However, the studies, including this report, do not evaluate the program based on whether or not it closes outcome gaps between inner cities and edge cities. If an outcome gap analysis was conducted and a significant result achieved, policymakers could perceive such a program as desirable, even if the gentrification effect exists. Arguably, the money to mitigate the gentrification effect would be welcomed by the community, in addition to the expanding tax base. Yet, others may argue that the policy must close the outcome gap in a way that is meaningful to those who live within the Empowerment Zone. Policymakers cannot have the necessary discussions without a proper evaluation of the program. The Detroit Empowerment Zone and the policy in general should not be written off as ambiguous until: 1. 2.

3.

Sources of bias are adequately addressed; The significance of closing the measurement gap is evaluated; and Analysts and policymakers determine which effects make or break the success of the policy.


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Tara Clark is a Master of Public Policy Candidate at the Frank Batten School of Leadership and Public Policy. She is from Escanaba, Michigan and received her Bachelor of Arts from Michigan State University's James Madison College. After graduation, she campaigned for Mark Schauer (MI-07), and continued on with Cong. Schauer’s Office, predominately working with the veteran, immigrant and labor communities on relevant issues. Tara spent the summer in New Orleans, LA as an independent consultant for Good Work Network. She is currently a research assistant at the Miller Center of Public Policy for Professor Guian McKee.

i “Welcome to the Community Renewal Initiative,” U.S. Department of Housing and Urban Development, accessed October 16, 2012, http://portal.hud.gov/hudportal/H UD?src=/program_offices/comm_p lanning/economicdevelopment/pr ograms/rc. ii “City of Detroit – GIS: Empowerment Zone,” City of Detroit, accessed December 31, 2012, http://www.detroitmi.gov/Portals/0 /docs/its/maps/gis_new/map_empo werment.pdf. iii “Improvements Occurred in Communities, but the Effect of the Program is Unclear,” U.S. Government Accountability Office, Empowerment Zone and Enterprise Community Program, September 2006, accessed on May 8, 2012,

http://www.gao.gov/products/GAO -06-727. iv Deirdre Oakley and Hui-Shien Tsao, “A New Way of Revitalizing Distressed Urban Communities? Assessing the Impact of the Federal Empowerment Zone Program,” Journal of Urban Affairs 28, (2006): 443-471. v Ibid, 452. vi John McCarthy, “Revitalization of the Core City: the Case of Detroit,” Cities 14, (1997): 1-11. vii Ibid, 6. viii Led by Harvard Business School Professor Michael Porter and Partners. “U.S. Cluster Mapping,” Institute for Strategy and Competitiveness at Harvard Business School, accessed on May 8, 2012, http://clustermapping.us/index.ht ml. ix “Clusters and Cluster Development,” Institute for Strategy and Competitiveness at Harvard Business School, accessed on October 17, 2012, http://www.isc.hbs.edu/econclusters.htm.


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“Can’t You Just Sanction Them?” Financial Measures as an Instrument of Foreign Policy Jonathan Burke In the 2006 film Casino Royale, the villain is a financier of global terrorism. After losing money belonging to a Ugandan terrorist organization, the villain attempts to recoup his losses via a highstakes poker game. James Bond’s mission is to disrupt the plan by winning the game, thereby depriving the terrorists of their money. At the center of this saga are money and a terrorist organization’s banker. Like in any economy, money is a necessity for most activities, including those that are illegal and that threaten global security. But at some point, most money must flow through the formal financial sector. There, it becomes vulnerable to government oversight and regulation. Governments cannot ignore this vulnerability when combating threats to national security. Financial measures, including sanctions, sometimes offer useful policy solutions. Following September 11, 2001, President George W. Bush began

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the War on Terror by saying: “We will direct every resource at our command to win the war against terrorists.” He stated that the administration would utilize “every financial influence” and would “starve the terrorists of funding.”i Subsequently, in 2004, Congress created the Office of Terrorism and Financial Intelligence within the Treasury Department. Its mission is to integrate intelligence, policy, and enforcement functions to protect the U.S. financial system from abuse, promote the integrity of the international financial system, and combat national security threats. These range from terrorism to troublesome nations such as Iran. The Office does this by developing and implementing financial measures made up of sanctions, other financial regulatory authorities, and international diplomacy. Financial measures have since become some of the sharpest arrows in the quiver of national security. They are part of an arsenal of global sanctions and strategies designed to deprive bad actors of access to the global financial system. However, the concept of financial measures is often misunderstood. Some think that the government can apply sanctions indiscriminately. Others believe that sanctions will automatically stop certain behavior. None of these assumptions is true and very few people see the extensive


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diplomacy and myriad regulatory authorities that brought to bear.

of are

What are Financial Measures? Sanctions are nothing new. Historically, they have been viewed as trade restrictions based primarily on political posturing towards a particular country. However, the rise of transnational threats and an increasingly integrated international financial system create new risks for financial institutions, and new opportunities to combat illicit actors. Financial measures can therefore be used both as a tool of foreign policy and to protect the international financial system from abuse. The fall-out from September 11, 2011 and the growing threat posed by Iran provide excellent examples. In these cases, the United States developed targeted financial measures to sanction actors based on their conduct, freezing assets within the United States and prohibiting access to the U.S. financial system. The United States does this by publicly “designating” individuals and entities that provide support to terrorist organizations or aid in the proliferation of weapons of mass destruction (WMDs).ii Labeling these enablers exposes their illicit conduct, often resulting in a loss of access to other major financial centers and near complete isolation from the international financial system.

“Multilateralizing” Actions

Unilateral

As a foreign policy tool, unilateral sanctions in today’s global financial system are inherently limited. For example, the U.S. Treasury has designated over 200 individuals and entities for supporting Iran’s WMD proliferation activities. However, most of them neither had assets in the United States to freeze nor access to the U.S. financial system to block. In order to augment the effectiveness of these sanctions, the United States engaged in an extensive diplomatic campaign aimed at exposing the illicit conduct behind the designations. The belief was that foreign governments and global financial institutions would not want to facilitate illicit activity and, if aware of the risk, would take actions similar to the United States. This belief turned out to be true. As a result, a truly international sanctions framework emerged, comprised of separate, but complementary, unilateral financial measures against Iran by almost every major financial sector in the world. These actions have severely impaired Iran’s access to the international financial sector. In 2010, there was a paradigm shift in the application of targeted financial measures. Exposing the illicit activities of certain Iranian banks had been enough to get many foreign governments and many banks to sever all direct ties. However, Iran still retained a few access points to the financial


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system. The political appetite within the United States government to increase pressure on the Iranian government and deny Iranian banks from using their remaining access to facilitate illicit activities spawned the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). Under this law, foreign banks that continue to conduct certain business with Iran can lose their access to the U.S. financial system. The rationale was that if a non-Iranian foreign bank is doing business with designated Iranian banks, then U.S. financial institutions could still be indirectly exposed to Iranian risks by virtue of their relationship to those non-Iranian foreign banks. For this reason, those non-Iranian foreign banks should not be able to access the U.S. financial system. The CISADA was an extraordinary move that leveraged the role of the U.S. financial system in international commerce. What global bank would want to forego its access to the United States in favor of continuing its business with bad Iranian banks? Currently, only two have been sanctioned under CISADA. Most Banks Care The U.S.-designated Iranian banks, now numbering twentythree, have struggled to maintain their international access. In the face of U.S. sanctions, only two banks, Kunlun Bank in China and Elaf Bank in Iraq, continued their

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business with designated Iranian banks. Using CISADA, the U.S. Treasury Department took action to prohibit Kunlun and Elaf from accessing the United Statesiii , even though they did not actually have any access. Why would Kunlun, Elaf and their respective governments be concerned about losing access when they do not have any access anyways? As the Chinese government pointed out when condemning the sanction, it “hurt China’s interest.” iv This is likely very true as Kunlun has probably faced a loss of access to other financial sectors where it once did have access. As China rightly acknowledged, financial measures against Kunlun, however symbolic, hurt both the interests of Kunlun Bank and the greater Chinese financial sector because it caused damage to both of their reputations. The world was put on notice that Kunlun and Elaf were doing significant business with institutions linked to terrorism and Iran’s nuclear program and that the Chinese and Iraqi governments did not have measures in place to stop them. Most global banks are extremely sensitive to the risks of being connected to illicit activity. As a result of the U.S. Treasury’s action, international financial institutions would likely apply enhanced scrutiny on any business with Kunlun or Elaf, if they even agree to continue any business with them at all.


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For the most part, banks want to do the right thing. Banks know if they incur damage to their reputation, the ability to conduct international business becomes increasingly difficult and expensive. Financial institutions are also more swift, decisive, and nimble than governments. Banks can and do act quickly to respond to risks while governments often get mired in political debates over the cost and effectiveness of sanctions. Sanctions and Financial Measures: Are They Effective? Many advocates of sanctions expect them to have an immediate and crippling effect, while many opponents feel sanctions only harm the innocent. Some believe that sanctions on Iran have not worked because the Iranian government is believed to be continuing its nuclear program. Others believe those sanctions have only hurt the Iranian people. Some think that using sanctioning authorities to designate a pirate or terrorist is as good as a bullet. Through this lens, financial measures will never look effective. When evaluating effectiveness, it is important to consider the foreign and national security policy objectives. In the case of Iran, financial measures are intended to pressure the Iranian government to pursue a diplomatic solution. In that context, financial measures have isolated the Iranian government from the global economy and

strained its ability to manage its domestic economy. A result that some believe likely contributed to Iran’s decision to come to the negotiating table and request relief from sanctions.v While the Iranian regime has so far entertained no offers to achieve that relief, the sanctions will likely continue to increase until the effects are unsustainable for the Iranian government and its economy. Financial measures used to combat terrorism are both similar and different to those targeting Iran. In both cases the intent is to protect the international financial system from abuse by illicit actors. However, unlike in the Iran context, sanctions targeting terrorism are not designed to create pressure through isolation. Instead, financial measures are used to deny terrorists the ability to collect, use, and move funds. Effective sanctions against terrorism do not only identify and cut off the flow of money to the terrorists themselves. Most terrorists live outside of the formal financial sector where sanctions are implemented. Financiers of terrorist organizations, however, traditionally depend on access to the formal financial sector for legitimate business as well. Therefore, the ability to target terrorist financiers with sanctions offers a deterrent for those who have legitimate business interests that they do not want to jeopardize by supporting terrorism. As a result, funding sources for terrorist organizations such as Al Qaeda have become significantly


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limited and strained. Terrorist organizations are now seeking new methods to finance their operations. Choose Wisely In a New York Times Op-Ed, Former Deputy Secretary of the Treasury, Robert Kimmitt, advocated for the Treasury Secretary to be added as a statutory member of the National Security Council, rather than an invited attendee.vi His argument that financial and economic issues have become an integral part of national security is absolutely true. But it also goes beyond just having the Department of Treasury represented to evaluate the economic considerations of particular issues. The Department of Treasury is often turned to for specific actions and policy solutions. In the early days of the Arab Spring, when prompted for policy recommendations during an interagency meeting at the White House, one attendee asked, “What can Treasury do?” However, financial measures are not always the right answer. Even when they do offer appealing options, it is important to understand what authorities are available and what the potential ramifications of any action may be. When Libya erupted in February 2011, the Arab Spring turned into a Qaddafi thunderstorm. Yet, despite the urge to impose some sort of financial sanction, the

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appropriate authorities did not exist. A new Executive Order was necessary to provide the authority for financial sanctions on Qaddafi and his government. Given the circumstances and a concern over Qaddafi’s misappropriation of state assets, President Obama declared a national emergency and issued a new Executive Order under the International Emergency Economic Powers Act (the same law used for WMD and terrorism sanctions).vii That Executive Order froze over $30 billion of Qaddafi’s assets including those of his family and members of his government. This was an extraordinary circumstance that called for the creation of a new authority. Qaddafi was no friend of the United States and he had embarked on a destructive path against the Libyan people. Financial restrictions such as asset freezes, however, are not a panacea. Qaddafi was not ultimately defeated by financial sanctions, and sanctions cannot be applied on a whim or solely on political desire. Effective Financial Measures Are Not Easy Despite the appeal of financial measures as a middle ground, offering more tangible impact than diplomacy alone while avoiding the use of military force, financial measures are significantly more difficult to implement in a


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multilateral environment. Not every government wants to calibrate them the same way, which can limit effectiveness and create loopholes for circumvention. In the Iranian example, the United Nations Security Council agreed four separate times to impose sanctions on Iran for its failure to adhere to international obligations regarding its nuclear program. UN sanctions are potentially the most powerful because they are truly multilateral and each UN member state is obligated to implement them. However, UN sanctions can also be the most limited because each nation on the Security Council must agree to the extent of the sanctions. Among those four resolutions on Iran, only two Iranian banks were sanctioned. One of those two banks was First East Export Bank (FEEB), a Malaysian-based subsidiary of Iran’s Bank Mellat. The Security Council stated in Resolution 1929 that FEEB is “owned or controlled by, or acts on behalf of, Bank Mellat,” and that “Bank Mellat has facilitated hundreds of millions of dollars in transactions for Iranian nuclear, missile, and defense entities.”viii However, the Security Council did not, and still has not, sanctioned Bank Mellat. Conversely, the United States, European Union, Japan, and South Korea, among others, have independently imposed sanctions on Bank Mellat and over twenty other additional Iranian banks.

Governments that resist imposing far-reaching financial measures often cite an interest in preserving legitimate trade and avoiding consequences on the innocent population. Indeed, tailoring financial measures to specific targets allows for a balanced ability to disrupt illicit financial flows, pressure authoritarian regimes, and maintain legal commerce. However, when the threat of a military conflict becomes a real possibility, a resistance to sanctions will become more difficult to justify. After all, it is difficult to imagine that war would strengthen legitimate trade or benefit the global population either. Conclusion In Casino Royale, James Bond was the option chosen to shut down the flow of illicit funds to a threatening organization. The real world of illicit finance is far more multi-faceted and complex. However, illicit actors still rely on financial services, a vulnerability for which governments can take countermeasures. Some policymakers may not necessarily possess the glamour or physical skills of James Bond, but they can still be just as, if not more, effective in combatting illegal activity and threats to national security through targeted financial measures. Such measures are powerful tools that have become, and will continue to be, part of today’s comprehensive approach to achieving global security.


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Jonathan Burke is currently a manager at Ernst & Young LLP. He assists financial services clients with issues related to economic sanctions and anti-money laundering compliance. Prior to joining Ernst & Young, Jonathan was a senior policy advisor for the Treasury Department’s Office of Terrorism and Financial Intelligence. He has also worked in security policy for the State Department and as a legislative fellow in the U.S. Senate. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP, the United States Government, or any other organization.

i

George W. Bush, “Address to a joint session of Congress and the nation,” September 20, 2001. ii Authorities relating to terrorism and WMD proliferation are examples. There are additional authorities that relate to certain human rights abuses, narcotrafficking, organized crime, and others. iii Press Release, “Treasury Sanctions Kunlun Bank in China and Elaf Bank in Iraq for Business with Designated Iranian Banks,” July 31, 2012. iv “China Scolds U.S. over IranRelated Bank Sanctions,” WSJ, August 1, 2012. v “Iran seeks ‘sanctions relief’ at nuclear talk,” Associated Press, June 18, 2012. vi Robert M. Kimmitt, “Give Treasury Its Proper Role on the National Security Council,” New

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York Times, July 23, 2012. vii Executive Order 13566 – Libya, February 25, 2011. viii United Nations Security Council Resolution 1929, Adopted June 9, 2010.


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Finance, the Informal Welfare State, and the Crash Herman Schwartz How has the deregulation and globalization of finance affected the welfare state? Most answers focus on the alleged constraint global financial markets place on deficits and social spending. In this view, states fear that actors in financial markets will punish states running fiscal deficits or doing excessive social spending by raising interest rates on their loans or moving their money to other economies. However, that does not tell the whole story. The deregulation and globalization of finance has had a second, more important consequence, namely that it allowed banks to engage in a dangerous form of investment that used short-term loans to finance the acquisition of longterm assets. On this view, globalization combined with the loss of an informal welfare state to produce the current global financial crisis. We can think of the formal welfare state as a set of mechanisms that protect workers and small businesses from risk. But large business and finance also benefitted from an informal welfare state that protected large businesses from finance, and protected finance from its own

tendency to take excessive risk. The centerpiece of the informal welfare state was a regulated housing finance system that assured a matching of maturities for assets (lenders) and liabilities (borrowers). Huge flows of international capital into the US housing market encouraged firms to take advantage of the risky opportunities that deregulation opened up. This created a maturity mismatch by using shortterm liabilities to purchase longterm assets. Maturity mismatches expose banks to the danger of a classic bank run, where depositors attempt to withdraw all their money at once, forcing banks to sell illiquid assets at rock bottom prices. This kind of bank run lies at the heart of the global crisis. Formal and Informal Regulation Following World War II, America had a well-regulated financial system. The various components of the financial system were effectively separate. Simultaneously, an informal system of regulation — never legislated but rather a derivative of administrative practice — helped prevent the emergence of serious maturity mismatches. Formal regulation created a firewall to prevent problems in one part of the financial system from spreading. Informal regulation prevented small problems inside a given sector from growing. In effect, they made sure combustible materials were not stored near sources of flame. Deregulation in the 1990s removed the firewall,


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! and deregulation in the 2000s piled oil-soaked rags near the furnace. This produced the conflagration of 2007-2008. The most important formal regulation separating different parts of the American financial system was the 1933 Glass-Steagall Act. The bill segmented the financial system by prohibiting banks from owning insurance companies. It also split commercial banks, whose deposits are insured by the Federal government, from investment banks, who place their clients’ money at risk. As George Soros has argued, Glass-Steagall created a system likened to watertight compartments in a ship. In many ways he was correct. Although the system was never entirely watertight, problems in one compartment could not easily spread to others. Thus, the normal job of the financial system – intermediating between savers and borrowers, and intermediating between those who wished to consume now and those who wished to consume in the future – could continue unabated if a crisis erupted in one sector. Small problems could become mediumsized problems, but they could not bring the entire economy to a screeching halt. Equally important, financial firms could not mobilize all of the liquidity in the system and concentrate that liquidity on one risky bet. They could not risk everyone’s savings in a financial bubble. Other regulations controlled pricing and market entry, but Glass-Steagall

protected banks from themselves and from each other. The 1980s savings and loan crisis illustrated the formal regulatory system’s strengths. Savings and loan banks traditionally accepted consumer deposits and recycled them as local mortgages and commercial lending. When the Reagan administration deregulated interest rates on deposits and loans in the early 1980s, the savings and loan banks suddenly faced competition from larger banks that could afford to pay consumers higher interest rates on deposits. To stay profitable and stable, savings and loan banks began funding increasingly risky real estate developers. Predictably, many loans went bad when commercial and home real estate prices fell at the end of the 1980s. Failing loans meant failing banks. Yet this crisis did not cause a systemic financial crisis. Insurance companies, investment banks, and commercial banks went about their normal business, unaffected by insolvent savings banks. The 1980s real estate bust created a mild and shallow recession in 1990-91. This contrasts strongly with the catastrophic recession of 20082009. Glass-Steagall’s segmentation of the financial system into relatively discrete savings, insurance, commercial, and investment boxes prevented the savings and loan debacle from damaging the other sectors. The second, more informal barrier was much less visible, but no less


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! critical than Glass-Steagall. This barrier removed maturity mismatch from large parts of the financial system, and in particular housing finance. Maturity refers to length of time before a given debt must be repaid. Thus, for example a loan or bond with a one-year maturity must be repaid after one year, and so forth. Maturity mismatches occur when an organization borrows in credit markets on a short-term basis and then reinvests the proceeds into less liquid, longer-term assets. Mismatched maturities create risk for a financial system. If the shortterm lender calls in her loan from the actor who has borrowed shortterm in order to lend or invest long-term, that long-term investor may not be able to generate enough cash to repay the original loan. This forces debtors to liquidate their long-term assets at fire sale prices, potentially defaulting on their short-term liability to the bank. In a full panic, the flood of distressed property drives down prices for all property — for all assets — making it impossible for all debtors to repay banks, and for all banks to repay depositors. Banks are Ground Zero for mismatched maturities in most economies. Indeed, banks exist precisely in order to turn shortterm liabilities (depositor’s money) into long-term assets (loans to homebuyers and industrial firms). In addition, post-World War II states offered public deposit insurance to reassure potentially panicky depositors. Deposit

insurance stabilized the liability side of banks’ balance sheets. The structure of publicly controlled long-term finance that emerged after the New Deal prevented problems on the asset side of the bank run, namely it forced liquidation of long-term assets. It shifted long-term assets from banks’ balance sheets to the balance sheet of entities that wanted those assets to balance their long-term liabilities. On a balance sheet, all assets must have a corresponding liability. Mortgages are liabilities to the person who borrows money to buy a home. At the same time, the mortgage is also an asset for the bank, as it generates interest income. Consumer deposits accepted by the bank are the offsetting liability for the bank. In principle, this matching of assets and liabilities should net out. Yet, mismatched maturities could force a liquidation of long-term assets at prices too low to repay the depositors. But if long-term assets could be moved off banks’ balance sheets and onto the balance sheet of institutions that had long-term liabilities, then the maturity mismatch would disappear. Banks would match short-term liabilities, or deposits, with short-term assets, like commercial loans. But where would long-term assets match long-term liabilities? The natural holders of mediumand long-term assets are funded public pensions, public sector entities financing infrastructure, and, most important, private


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! pension plans. Mortgage debt is typically the single largest component of the private longterm debt market. In 2002, before the big run up in housing prices and debt, mortgage debt already accounted for more than 50% of the private bond market in 12 of the 19 rich OECD countries, exceeded gross public debt in 10 of 19 (including the U.S.), and was larger than the equity market in 9 of 19.i After the Great Depression, states in nearly all North Atlantic countries developed housing finance systems that contained this safer maturity match. This informal regulation of finance in general and housing in particular was not only part and parcel of the more general regulation of finance, but also, given the growing scale of housing finance, its most important aspect. But how did this work in the United States? The Mighty HOLC Before the 1940s, US banks tried to limit their maturity mismatch by structuring mortgages as balloon loans that had to be repaid in full within three to five years. Even so, the 1930s saw a vicious cycle of bank runs, property liquidation, and falling prices for banks’ assets. The government responded to this by moving illiquid and undervalued assets – mortgages – off banks’ balance sheets and onto the balance sheet of a state institution with a longer time horizon, the Home Owners Loan Corporation (HOLC). The HOLC, and its children, Fannie Mae (Federal National Mortgage

Corporation – FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation – FHLMC), replaced short-term mortgages with what is now the standard 30year mortgage in US home finance. A longer term meant lower monthly payments for debtors, and thus allowed them to get back in good standing. By getting back in good standing, they restored value to the assets (the mortgages) now held by HOLC and its successors. And by restoring value to these assets, they helped restore value to the assets remaining in banks’ hands, enabling them to resume lending. But how could HOLC, and later Fannie and Freddie, fund their purchases of mortgages? Unlike banks, they could not and did not want to accept consumer deposits. Instead, they borrowed from pension and insurance funds. These firms needed some place to invest the steady and predictable stream of consumer payments into insurance and pension accounts. On the liability side of their balance sheet, they had a commitment to fund long-term annuitized pension or life insurance payments to their clients. To fund these liabilities, pension, and insurance funds needed assets generating a stable and predictable cash flow. Directly or indirectly, mortgages provided that stable and predictable cash flow. Pension and insurance funds created a longterm asset for themselves by lending money on a long-term


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! basis to the federal housing corporations, and thus indirectly connected pension funds to mortgage markets. The housing corporations used money from the pension funds to buy mortgages from the banks that had made the initial loan. This removed longterm assets from the banks’ books. In turn, the federal housing corporations used the cash flow from those mortgages to pay back their debts to the pension funds. In the 1980s, Fannie Mae and Freddie Mac began to package mortgage debt together and sell the income from those mortgages directly to investors as mortgage backed securities (MBS). They transformed individual mortgages into a kind of corporate bond, replacing the need for Fannie Mae to actually hold mortgages on its books (as assets) and debts to its funders (as liabilities). Fannie, and later Freddie, thus eventually created a new class of liquid, longterm assets that pension funds could buy, removing mismatched maturities from banks’ balance sheets. Deregulating Welfare State

the

Informal

Deregulation in the late 1990s reintroduced the possibility of largescale bank panics and a systemic crisis. Put simply, financial firms used their political power to remove the firewalls separating different segments of the financial system, and to reintroduce largescale maturity mismatches. These changes allowed financial firms to increase their profits, but at the

cost of greater risk to the entire financial system and thus to society at-large. The last remaining big barrier to bank runs – deposit insurance – meant that those risks would fall on taxpayers and not on banks if their speculative gambles failed. If banks gambled with depositors’ money and lost, the deposit insurance system would bail them out. Bankers could thus gamble with taxpayer money, keeping the winnings as bonuses and passing the losses onto the rest of society. Deregulation thus made the 200708 crisis possible. Banks gambled with derivatives built from mortgage-backed securities. These in turn were built from subprime mortgages. They gambled in ways that connected all parts of the financial system, they gambled in ways that magnified any losses they might take on those gambles, and they tapped global capital markets to expand their bets. When the subprime mortgages blew up, the derivatives blew up. When the derivatives blew up, they took down not just the investment banks, but also the commercial banks, big parts of the insurance industry, and the money market funds. Unlike the savings and loan collapse, this crisis damaged all parts of the financial system, including in Europe. Two major pieces of legislation undid the formal and informal systems of regulation. The 1999 Gramm-Leach-Bliley Act (officially the Financial Services Modernization Act of 1999) undid


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! Glass-Steagall. It permitted commercial banks to enter the insurance and investment banking business. Banks had already attacked the Glass-Steagall restrictions during the 1970s and 1980s, sponsoring twelve failed attempts to repeal Glass-Steagall. In 1996, Alan Greenspan, then chairman of the Federal Reserve, issued a ruling that banks could own investment bank subsidiaries whose activities amounted to 25% of total bank revenue. De facto, this gutted Glass-Steagall. But the 25% limit was still a considerable obstacle limiting commercial banks’ investment activities, and, on the other side, preventing investment banks from getting access to billions of consumer deposits. The GLB Act removed the 25% limit. The end of Glass-Steagall led to a frenzy of mergers and the emergence of the “too big to fail” banks at the national level, such as JP Morgan Chase, Citibank, Wells Fargo-Wachovia, and Bank of America. Bringing the different parts of the financial system back together was dangerous but not necessarily catastrophic. After all, many European banks were and are still large universal banks dealing in banking services, insurance, and underwriting. What made the emergence of universal banks in the United States problematic was the subsequent deregulation of derivatives, or more precisely refusal to regulate derivatives in the 2000 Commodity Futures Modernization Act (CFMA).

The CFMA basically put all derivatives outside of regulatory control. Derivatives that were contracted between “sophisticated parties” – i.e. banks – were not subject to oversight. While the government could still exercise some regulatory oversight over the banks, the CFMA limited this to supervision of the bank as a whole and not of specific derivatives. This created a huge hole in the law. Derivatives sold over the counter to non-financial firms remained regulated. But new derivatives that mimicked older regulated derivatives could also be sold, without regulation, even though they were functionally identical to existing, regulated derivatives. Insurance products are regulated. But insurance-like products like the new credit default swaps (CDS) were not. This regulatory void allowed the financial sector to generate trillions of dollars of derivatives, by building derivatives on top of other derivatives. In this maze of financial instruments, nothing of substance ever existed, as the vast expansion of CDS shows. CDS started out in the early 1990s as a simple way for banks to insure themselves against default by a borrower. For a monthly fee, an insurance company would agree to buy a loan in default at face value from the lending bank. If there were no default the insurance company would keep the fees, and the bank would continue to earn interest from the borrower. Banks clearly had an interest in this product – they stood to lose money if a borrower defaulted –


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! and the firms issuing CDS could assess the probability of a discrete firm going bankrupt using normal insurance principles. In principle, this was nothing more complicated than a life insurance policy for an indebted firm. In practice, CDS soon deviated from normal insurance in very dangerous ways. The most important of these was the sale of ‘naked CDS.’ In normal insurance markets, parties without an insurable interest cannot buy insurance, because the ability to buy insurance without having an interest creates an incentive, or moral hazard, to trigger the insured event. A naked CDS allows a third party – neither the lender nor the borrower – to bet that the borrower will default. They thus have an interest in seeing the borrower default. The potential for mischief here is evident. Naked CDS also meant that a single firm or a group of firms could offer many times the value of the actual insured object (in this case a borrower’s debt). In the event of a default, the insurers’ losses could be many times the actual loss of the insured debt. Very small defaults could trigger very large losses for financial firms, like AIG, that had offered naked CDS.

maturity mismatch that informal policy had removed from housing finance. How? First, banks began issuing billions of dollars of subprime mortgages. Subprime mortgages had always been a small part of the US housing market. Fannie and Freddie were barred from buying these mortgages in large numbers, and pension plans likewise could not legally buy a bond with a junk credit rating. But deregulation of the derivatives market made it possible to construct synthetic bonds called collateralized debt obligations (CDO) from subprime mortgages. Financial engineering could make an AAA rated CDO out of C and D rated mortgages. By enlarging the demand side of the market for subprime, the investment banks created a huge incentive to expand the supply side as well. The more subprime mortgages banks issued, the more income they earned from the fees associated with those mortgages. /The more CDOs that could be constructed from those mortgages, the more fees investment banks could earn selling CDOs. And the more CDOs there were, the more money insurance firms could make selling CDS to insure them. Securitized subprime mortgages grew from $36 billion in 1994 to $665 billion in 2005.

The structural contours of the financial crisis should now be visible. After removing the regulatory firewalls separating different parts of the financial system, what were now too-big-tofail banks reconstructed the

Banks then deliberately recreated a huge maturity mismatch. Longterm subprime mortgages paid roughly 8-10% interest. But in the short-term market, US money market funds were lending money for only 3-4% interest. ii In


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! response, banks created subsidiaries with a very thin capital base to take advantage of this interest rate disparity. Their subsidiaries bought subprime mortgages using money borrowed from the money market. That is, they deliberately mismatched maturities, borrowing short-term money to buy long-term assets. Money market funds were willing to lend this money because they thought that the bank subsidiaries had adequate collateral in the form of the actual mortgages. Bank subsidiaries were willing to borrow 20 to 30 times their equity because they thought housing prices could not fall nationwide. And if they did fall, the bank subsidiaries had bought CDS insurance against default. Meanwhile, the combination of extreme leverage, as well as shortterm versus long-term leverage, created huge profits. Banks thus recreated the risky conditions prevailing before regulation. The mismatch of maturities meant that any panicked sale of some assets to pay off depositors could lead to a fire sale of all collateral assets, making one bank’s problems everyone’s problem. They created the conditions for a new bank run, this time by money market funds rather than by individual depositors. This also magnified the possibility of a crash, because the money market funds were lending to many banks, and could withdraw loans to all of them on short notice. By connecting money market funds and insurance

companies to their speculative deals, the banks assured that any crisis would bring down all parts of the financial system simultaneously — as it did. As subprime borrowers began to default, the CDOs built on those mortgages lost value. As those mortgages lost value, money market funds essentially started a bank run. Worried about the collateral behind their loans to bank, they began to call in those loans. As that bank run accelerated, more and more CDOs had to be liquidated, driving down their value, and bankrupting the bank subsidiaries. When those subsidiaries tried to cash in their CDS insurance policies, they discovered that insurance firms had issued far too many to make good on all CDS. By 2008, banks, money markets, and insurance companies were effectively all bankrupt. A Regulatory Response? In principle, the “Volcker rule” in the new Dodd-Frank Bill resegregates different parts of the financial system. It mostly prohibits the kind of speculation identified here as the primary source of the recession. In practice, the Volcker rule is not yet in effect. The Volcker rule prohibits banks that take insured consumer deposits from making speculative investments on their own account (that is, no proprietary trading). At present, banks can speculate with consumer deposits in hopes of


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! making big profits. But even if they gamble badly, and lose more than their capital, depositors’ money is still protected by the public FDIC deposit insurance system. The moral hazard this permits is enormous and is the same as before the crisis. Good bets mean big profits and big bonuses for bankers; bad bets mean a taxpayer-financed bailout. While other provisions of the bill limit the government’s liability to the value of assets that can be recovered from a failed bank, it is difficult to believe that the Federal Reserve and Department of Treasury would allow losses to cascade through counterparties to the failing bank. However, it remains to be seen whether the rule will be implemented and effective. It’s not just people that need a welfare state to protect them from life and market risks. Corporations are also like people, and they need protection from their own temptation to engage in bad behavior and from the consequences of other corporations’ bad behavior. The pre-1990s system of formal and informal regulation limited the probability, size, and severity of a financial crisis. Coincidentally, it also delivered higher average GDP growth rates than those in the 1990s and 2000s. Deposit insurance continues to protect bankers from their own bad behavior. The rest of us need something to protect us from the negative employment and growth shocks this bad behavior creates.

But banks themselves would benefit from a limit on their ability to create market risk and their vulnerability to that market risk. Thus, it becomes clear that effective reform requires more regulation than is currently proposed. The new system of regulation needs four features. First, a real return to GlassSteagall is needed. Regulators need to separate the risks of investment banking from shortterm commercial banking. Second, mortgage debt should continue to be channeled through Fannie and Freddie to institutions with an interest in long-term returns. This would reduce speculation in what are not only the average household’s biggest asset but also one that is important for reducing cash flow needs in old age. Third, regulators should link compensation for investment bankers to the long-term value they create for the economy. This would incentivize bankers to reduce volatility, to create products that serve customer needs rather than the banks’ desire for short-term profit, and to create products that enlarge the productive capacity of the economy, Bankers’ bonuses should be held in escrow, and where possible a significant proportion of their bonuses should be in the form of the products they are selling, to assure that those products are value creating. Fourth, the Financial Stability Oversight Council should strengthen and implement the Volcker rule, which limits


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! proprietary trading by banks holding FDIC insured deposits. Banks should not be able to trade with an explicit public safety net beneath them. These four actions would reduce the probability of a future financial crisis on the scale of 2007-2008. This would help bring money back into the banking system on a market basis, rather than having the big banks on a FED sponsored life-support system. No system of regulation is perfect, just as no burglar alarm or lock is fail-proof and policing does not eliminate crime. But we spend money on police, locks and alarms to reduce the probability and scale of crime. The costs of the financial crisis far exceed the cost of crime in the United States. It’s time to re-regulate the financial system to replace the current predatory financial casino with a financial system that helps the economy grow. Herman Schwartz is currently a professor in the Department of Politics at the University of Virginia.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! i Author calculations from World Federation of Exchanges, http://www.worldexchanges.org/statistics; IMF, Global Financial Stability Report, September 2003; OECD, Economic Outlook, # 80, December 2006. ii “3-Month AA Nonfinancial Commercial Paper Rate,” Federal Reserve Database (FRED), accessed

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! on December 20, 2012, http://research.stlouisfed.org/fred2 /series/CPN3M?cid=120; S. Chomsisengphet and A. Pennington-Cross, “Evolution of the Subprime Market,” Federal Reserve Bank of St. Louis Review 88, no. 1 (2006): 37-8.


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Book Review: Prague Winter: A Personal Story of Remembrance, 1937 – 1948 by Madeline Albright Ammy George

The former Secretary of State and New York Times bestselling author, Madeline Albright, once again delights readers with an insightful and thoughtful account of her family history set within the larger context of World War II. The history of Czechoslovakia in particular is an interesting backdrop to her story since it is not widely covered in the retelling of World War II. Prague Winter is the outcome of a journey that started with a Washington Post story. On February 4, 1997, the Washington Post led with the headline of “Albright Family Tragedy Comes to Light,” which broke the news to, not only its readers but also, Albright herself that her family was Jewish. This revelation came after the death of her parents and other contemporary family members, so their decision to raise

their children as Catholics was a mystery. During her research into her family history, she was hoping to uncover the reasons behind the choices that were made, as there is “much still to learn about the complex moral choices that my parents and others in their generation had been called on to make — choices that were still shaping my life and also that of the world.”i In her own words, the central theme of the book was to discover why we make the choices we do.ii Throughout the narrative of the Czechoslovakian history prior to, during, and shortly after World War II, Albright adds a rich account of the details about her family history — her father and mother’s journey from Kyšperk (now Letohrad) Czechoslovakia, to Prague, Belgrade, London, and eventually Denver, Colorado. She also recalls her childhood as a refugee. Though she was only three years old when the war began and eight years old when it ended, her experiences at that young age shaped her leadership and strength. These characteristics were vital in her years serving as Secretary of State. Albright also includes the story of her extended family and their time in Terezín (Theresienstadt), a walled Jewish ghetto during


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World War II. This portion of the story was discovered during her research and the situation provided an extremely poignant example of the human spirit – people forced to live within the walls of Terezín held onto the values that make them human even while their choices were limited and primal instincts began to control their decision-making processes. The Jewish community of Terezín, however, remained steadfast, holding onto the tenets of fairness, caring for each other, and hoping for better times, despite the dehumanizing efforts of the Nazis. In this book, Albright focused on the hard decisions the European leaders and leaders within Terezín faced. This emphasis is a message to current and future policymakers. We too will face similar situations where information is limited and clouded with our own perceptions and expectations. However, Albright does not point this out to confound our efforts to make ethical decisions. Ethical decisions are always difficult, and doubly so in situations like those in World War II. It is only after the dust has settled that the implications of those decisions are brought to light, forever entrenched in the context of the times. Albright’s father served in the public policy

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world and put forth the idea that “A scholar inescapably reads the historical record in much the same way as he would look in a mirror — what is most clear to him is the image of his own values [and] sense of … identity.”iii

i

Madeleine Albright, Prague Winter: A Personal Story of Remembrance and War, 1937-1948, Harper Collins, Inc., Kindle Edition, 10. ii Ibid. iii Albright, p. 17.


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! Requirements for Submission Research Article: These articles are typically longer and reflect some kind of research in a particular policy area of interest. It can be an empirical analysis of a government program or perhaps a case study of some kind. They can take a position, make recommendations or suggest specific improvements to a particular program or policy. Length may vary, but they must be no longer than 7000 words. Please also include an abstract no longer than 250 words and a short biography on each author no longer than 100 words. Commentary/Op-ed: These entries are generally shorter and are intended to reflect different perspectives on a particular issue. These articles should take a position on a particular topic. They must be no longer than 2000 words. Please include a short biography no longer than 100 words on each author(s). Citations: Citations must follow the Chicago Manual of Style. Also, citations should be included as endnotes. Remember to: 1. Use the font Didot. 2. Double-space your submission. 3. Follow the Chicago Manual of Style for all endnote citations. 4. Convert all your citations to endnotes.

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Cover Photograph “Detroit” provided by professional photographer and Detroit native Carlos A. Padilla to accompany Tara Clark’s Detroit’s Empowerment Zone: Evaluation of Success.

Carlos Padilla retains all rights to artworks herein. No part of this artwork can be reproduced without the prior consent of Carlos Padilla. He can be reached at carlosapadillaphotography.zenfolio.com


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Profile for Virginia Policy Review

Fall Winter 2012  

This issue focuses on widely debated topics including pieces on policy protections for domestic violence victims, effective taxation to prev...

Fall Winter 2012  

This issue focuses on widely debated topics including pieces on policy protections for domestic violence victims, effective taxation to prev...

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