John Glaser

The United States maintains a veritable empire of military bases throughout the world—about 800 of them in more than 70 countries. This forward-deployed military posture incurs substantial costs and disadvantages, exposing the United States to vulnerabilities and unintended consequences. The strategic justifications for overseas bases—that they deter adversaries, reassure allies, and enable rapid deployment operations—have lost much of their value and relevance in the contemporary security environment.

Deterrence is usually achieved by means other than nearby U.S. military bases, and a forward-deployed presence frequently exacerbates international tensions by causing fear and counterbalancing efforts by adversaries. In an era of reduced global threats, reassurance is not as important as it was during the early years of the Cold War, and most U.S. allies are wealthy and powerful enough to provide for their own defense. Furthermore, overseas bases are not necessary to retain long-range capabilities for most military interventions, thanks to revolutions in technology that have reduced travel times. Finally, forward bases and the rapid deployment capabilities they enable tempt policymakers to take military action for bad reasons, or in pursuit of counterterrorism goals that are not well served by the deployment of ground forces.

In the absence of a major peer competitor, and in an era of low security threats, the policy of maintaining a constant worldwide overseas military presence is unwise. The United States should withdraw its permanent peacetime military presence abroad and abandon its forward-deployed posture in Europe, the Middle East, and Asia.

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Introduction

In contemporary foreign policy debates, analysts and policymakers largely take America’s worldwide constellation of overseas military bases for granted. But America’s forward-deployed military posture—that is, its policy of maintaining a large overseas military presence—incurs substantial risk. Even under a strategy of primacy—the view that a peaceful world order and our own national security depend on maintaining a preponderance of U.S. power—the extent of U.S. overseas basing creates needless cost and danger. A less aggressive strategy requiring fewer overseas bases would greatly reduce both military spending and security dangers to the United States.

Particularly in the absence of a peer competitor such as the Soviet Union, overseas bases have become liabilities. By buttressing commitments to allies of the United States, overseas bases may, in some cases, deter adversaries and prevent spirals of conflict, but those military bases create several problems.

The first problem is that modern surveillance and targeting technology have made the bases increasingly vulnerable, even while increasing our allies’ ability to marshal their own defenses and to cooperate with U.S. forces outside the allies’ theater. Second, the presence of U.S. military bases can militarize disputes and can antagonize opponents who otherwise would have been more docile. Third, U.S. bases can encourage allies to take risks they might otherwise avoid, thus heightening instability and entangling the United States in peripheral conflicts. Finally, forward-deployed forces are a temptation for U.S. leaders; they can set in motion calls for intervention where core U.S. interests are not at stake.

The U.S. government does not keep a comprehensive and accessible account of its network of overseas bases. The most inclusive estimates are that at present the United States controls approximately 800 overseas facilities in more than 70 countries.¹ Base types fall into about five basic categories, ranging from Main Operating Bases—which hold tens of thousands of troops deployed for long periods of time, often with their families—to En Route Facilities Structures, which merely store weaponry and other equipment.

To get an idea of the scope of the U.S. military presence, consider that in Europe alone, about 80,000 active-duty personnel are stationed at more than 350 installations, 39 of which are major bases in the United Kingdom, France, Germany, Italy, Norway, Denmark, Belgium, the Netherlands, Portugal, Spain, Greece, and Kosovo. ² Smaller bases are located in Ireland, Poland, Hungary, Romania, Bulgaria, Turkey, and Georgia. The U.S. Navy’s Sixth Fleet rotates three destroyer squadrons, up to 40 ships, and 175 aircraft in the Mediterranean Sea, relying on several fixed bases on land. The United States maintains approximately 200 tactical nuclear weapons throughout the region. Europe is a major logistical hub for U.S. operations abroad, with more than 95 percent of U.S.-based units bound for Iraq and Afghanistan transiting the European Command area of responsibility. ³

In the Middle East, deployment numbers can be difficult to determine with precision because troops are stationed on a temporary and rotational basis, and the U.S. government keeps much information about deployed troops secret. But there are approximately 50,000 troops in the region currently, not including military or civilian contractors. ⁴ As of February 2017, major bases still exist in Afghanistan, where approximately 12,900 U.S. forces still operate, and Iraq, where about 7,500 troops currently rotate in and out. An air base is stationed in Jordan, where there are more than 2,500 troops, and a small number of U.S. troops are in Israel for surveillance and ballistic missile defense.⁵ U.S. Navy, Air Force, and Army installations are located in Egypt—in Cairo, at Port Said, along the Suez Canal, and in the Sinai Peninsula—as well as in Kuwait, which holds more than 13,400 troops. Major Air Force bases are located in Qatar, at Al Udeid, and in the United Arab Emirates, at Al Dhafra, where there are more than 5,200 and 1,800 troops, respectively. The U.S. Navy’s Fifth Fleet maintains a permanent presence of more than 6,400 personnel in Bahrain, from which it launches daily patrols of the Persian Gulf. Small bases and training facilities are also located in Yemen, Oman, and Saudi Arabia.

In the Asia Pacific area, there are more than 154,000 active-duty military personnel (330,000 if you include civilians). There are 49 major bases located in Japan, South Korea, Australia, Singapore, Guam, the Marshall Islands, and the Northern Mariana Islands. ⁶ Smaller bases are positioned in Hong Kong, Thailand, Cambodia, the Philippines, and elsewhere. The Obama administration’s “Asia-pivot” aspired to greater basing access and troop presence in countries such as Vietnam and the Philippines. Rotating through the Asia Pacific are five aircraft carrier strike groups, including as many as 180 ships and 1,500 aircraft, two-thirds of the Marine Corps’ combat strength, five Army Stryker brigades, and more than half of overall U.S. naval strength. ⁷

The United States also maintains many small bases in almost two dozen African countries—including Djibouti, Niger, Chad, Burkina Faso, Mauritania, Ghana, Liberia, South Sudan, and Uganda—as well as a relatively small number in Latin America—including those in Honduras, Cuba, Colombia, Peru, Chile, Argentina, and Brazil. Bases are also kept in such remote outposts as Greenland, Iceland, American Samoa, and Antarctica. The estimated total cost of maintaining this overseas base and troop presence ranges from about $60 billion to $120 billion annually. ⁸

America’s global military presence is the tangible manifestation of the grand strategy of primacy that has driven the U.S. approach to the world for decades. Primacy, according to proponents William Kristol and Robert Kagan, means maintaining a preponderance of U.S. power—a “benevolent hegemony”—over the international system. ⁹ According to an internal Pentagon memo in 1992, a forward-deployed military presence serves the core objective of “convincing potential competitors that they need not aspire to a greater role or pursue a more aggressive posture to protect their legitimate interests.” ¹⁰ Bases abroad help expand the domain of American influence and responsibility, enabling Washington to use force to police the world and suppress conflict spirals. ¹¹

America’s forward-deployed posture is not intended to protect the nation from direct attack. Rather, its goal is to provide security for other states and protect against contingencies that, for the most part, would not involve vital U.S. interests. Indeed, as a recent Rand Corporation analysis put it, “military facilities used primarily for power projection are not defensive strongholds but rather launching pads and logistical hubs that support operations beyond their immediate vicinity.” ¹² In other words, U.S. bases overseas are not about national defense per se. They are an insurance policy on stability abroad.

The argument of this paper is that this posture should be narrowed to prioritize U.S. defense interests. Despite the tendency of policymakers and the news media to exaggerate dangers and inflate threats from abroad, much scholarship shows that international conflict and overall levels of violence are at historic lows. The remarkably secure position of the United States, along with the relatively peaceful state of international politics, enables a withdrawal from this global network of overseas military bases. Rather than defending the security of other states and attempting to stabilize regions of conflict around the world, the United States should encourage allies to carry the burden of their own defense and should extricate itself from regional disputes lest it get drawn into conflicts in which its vital interests are not at stake. This paper evaluates the main strategic justifications for overseas bases, offers critiques of the current policy, and explores some additional costs and drawbacks of the status quo. The concluding sections propose an alternative posture consistent with a grand strategy of restraint—namely, withdrawing from all but a few overseas bases.

The Rationale for Overseas Military Bases

Historically, great powers constructed foreign military bases for essentially imperial purposes—to acquire additional territory, colonize new lands, control distant resources for the material benefit of the state, enable future conquest, and out-compete other empires. Throughout ancient Greece, rivalrous Athens and Sparta competed for basing access. Rome set up garrisons that extended from Britannia across the Mediterranean to the Persian Gulf. ¹³ China’s Second Ming Empire constructed a network of bases all across the Indian Ocean, from the Strait of Malacca to the Gulf of Aden. ¹⁴ The European empires, starting with Portugal and Spain in the 15th century and ending with the British and French in the 20th, used military bases across Asia, Africa, and the Americas, often as a means to satisfy mercantilist ends of monopolizing trade opportunities through colonization and strengthening the home economy at the expense of rivals. As coal-powered sea travel proliferated in the 19th and early 20th centuries, military bases served logistical requirements for refueling ships on trade routes and military missions.

Today, though, the strategic rationale for overseas military bases has changed significantly. The explosion of world trade has made the need for military garrisons for purposes of trade and ensuring access to resources dubious. ¹⁵ Conquest by great powers has declined, partly because of the ascendancy of post-World War II norms of territorial integrity and self-determination.¹⁶ Furthermore, the destructive power of modern militaries, especially through nuclear weapons, has discouraged the kind of aggressive expansionism common among the empires of old.

Maintaining overseas military bases is a uniquely American preoccupation: the United States has approximately 800 military bases; France and the United Kingdom have roughly 12 each; and Russia, the adversary with the next most overseas bases, has about 9. ¹⁷ The adoption of this worldwide American network of military bases began in World War II.

America’s share of world power at the end of the war was stupendous. Unlike the other great powers, the United States was largely untouched by combat, it accounted for more than half of the world’s manufacturing production, and it possessed two-thirds of the world’s gold reserves. It also had the greatest per capita productivity, the most powerful conventional military in the world, and a monopoly on nuclear weapons. ¹⁸ The goal of policymakers was to preserve that position for as long as possible and to ensure U.S. security and prosperity by “maintaining the division of Eurasia’s industrial might, preserving freedom of the seas, and … preventing the consolidation of Persian Gulf oil.” ¹⁹

In the past, America’s favorable geography, isolated from Eurasia, allowed it to remain aloof as long as there was a rough balance of power among the great nations. ²⁰ But for policymakers at the end of World War II, the development of airpower and nuclear weapons, not to mention the Japanese attack on Pearl Harbor, had established a new sense of vulnerability previously attenuated by the Atlantic and Pacific Oceans. ²¹ The postwar environment of enfeebled war-torn allies in Western Europe, a devastated U.S.-occupied Japan, and an empowered Soviet Union precluded a swift return to an offshore balancing strategy, in which America could let locals handle aggressors except when the stakes became too high. ²² The goal of a rough balance of power remained, and policymakers determined that forward deployment was required to maintain it.

Throughout the Cold War, overseas military bases had three functions. First, they were intended to prevent the buildup of military capabilities, or development of nuclear weapons, by states then under U.S. occupation, particularly Germany and Japan. The goal, explains the international relations scholar Christopher Layne, was “to foreclose the possibility that the West European states would re-nationalize their security policies” and thus “strip them of the capacity to take unilateral, national action.” ²³ Second, large numbers of ground, air, and naval forces were garrisoned in Europe and along the Asian littoral to deny territorial advances or attacks by the Soviet Union. Third, bases were to contain the Soviets and ensure against the outbreak of war through extended deterrence.

Today’s justifications for overseas bases have changed, but the bases remain as strong a part of the nation’s grand strategy as ever. Although the number of troops stationed abroad has declined since 1990, the United States still maintains the same forward-deployed posture more than a quarter century after the fall of the Soviet Union. Shed of military competition from the Soviet Union and unencumbered by external constraints on its power, the United States has been free to broaden the conception of its national interests. Not only does America take preventive actions to stave off potential peer competitors, but it also uses its military power, albeit selectively, in the name of protecting human rights, promoting democracy and the rule of law, disciplining rogue states, imposing regime change, engaging in nation-building missions, and managing local disputes around the globe.

Three broad strategic justifications motivate today’s forward-deployed posture: (1) to deter potential aggressors, (2) to reassure friends and allies, and (3) to enable a rapid military response for any operational contingency. The first two justifications are designed to demonstrate the trustworthiness of America’s threats and promises and thus to bolster the credibility of U.S. security guarantees. The third is based on the assumption that being there is essential for rapid deployment in military interventions.

To deter aggressors, bases serve as “a tangible indicator of American willingness to fight” should an adversary attack a U.S. ally or otherwise destabilize a region through military action.²⁴ They serve as a tripwire, by putting the lives of American soldiers at risk and thus triggering U.S. military intervention in case of attack. It would be very difficult politically for the United States to renege on a security guarantee if U.S. troops were already caught up in the fighting. Finally, large, permanent garrisons require a lot of time and resources to abandon, thus making it difficult to withdraw amid conflict, no matter how peripheral the strategic interests at stake. ²⁵

By bolstering U.S. credibility to intervene in response to attack, forward deployment is intended to simultaneously deter adversaries and reassure allies. The combination of dissuading adversaries from aggression and making allies feel safer is meant to enhance global peace and stability. That set of reasons is the logic of hegemonic stability theory, sometimes described as the “American pacifier.” ²⁶ The presence of the American military is supposed to discourage nuclear proliferation, conventional arms races, and war.

The third argument is that overseas bases provide the logistical infrastructure necessary for rapid response to any major military contingency, or what is sometimes called “contingency responsiveness.” As a recent Rand Corporation study explains, “In-place forces provide the immediate capabilities needed to counter major acts of aggression”; they “provide the initial response necessary to prevent quick defeat while awaiting the arrival of aerial, maritime, and ground reinforcements.” ²⁷ Any contingency that necessitates major military mobilization to a war zone will require substantial reinforcements, the bulk of which will be deployed from the continental United States. However, because that action can take days or weeks, forward-deployed forces are intended to rapidly respond to crises in which initial military successes may be decisive.

A Critique of U.S. Military Base Posture

As the circumstances of international politics have changed in the post-Cold War years, and as innovations in technology have both shortened travel times and made in-place forces more vulnerable, the strategic and operational utility of overseas bases deserves renewed scrutiny. This section critiques the three main strategic justifications for overseas bases mentioned previously—deterrence, reassurance, and contingency responsiveness—and explores some additional costs and drawbacks of maintaining a permanent peacetime military presence abroad.

Deterrence and Reassurance

The deterrence value of overseas military bases is frequently exaggerated. As Robert Johnson argues, the Soviet threat throughout the Cold War spurred “undue alarmism,” and “even without American forces deployed in Western Europe, a Soviet attack was extremely unlikely.” ²⁸ The Soviets were not as expansionist as generally feared and were easier to contain than many analysts and policymakers thought. Yet, as Alexander L. George and Richard Smoke write, “by 1956 the United States’ reliance on deterrence threats and alliance commitments as the primary tools of foreign policy vis-à-vis the Soviet Union had become a rigidified response to almost any perceived communist encroachment anywhere in the world,” and indeed had “the negative effect of reinforcing the policy-makers’ tendency to rely too heavily on deterrence … in lieu of … diplomacy.” ²⁹

Deterrence is difficult to demonstrate. ³⁰ Because success is measured by the absence of an unwanted action by the adversary, determining whether something did not happen because of deterrence, or because the adversary had no intention to attack in the first place, or some other reason, is inherently challenging. ³¹ That problem plagues many areas of U.S. foreign policy. For example, analysts and policymakers alike claim that the U.S. military presence in South Korea is the only thing deterring a unilateral North Korean attack. But South Korea’s economy is 40 times the size of North Korea’s, South Korea has twice the population of North Korea, and South Korean military capabilities so far exceed that of Pyongyang’s that there is little question which side would win an all-out war. These glaring gaps in economic and military might deter the North from attacking the South even absent U.S. military power in the region.

Similarly, advocates of a forward-deployed posture in the Middle East regard the U.S. Navy’s presence in Bahrain and its daily patrolling of the Persian Gulf as the principal deterrent that would stop a state like Iran from attempting to close the Strait of Hormuz. ³² But Iran exports most of its oil via the strait and would impose serious economic damage on itself in attempting to close it. Such an attempt would also threaten the vital interests of the regional powers as well as external powers that rely on the free flow of oil from the region. Iran would thus run unacceptably high risks of retaliation by an international coalition of states and would probably be deterred even without the permanent U.S. naval presence in the Gulf. ³³

Several trends that are unrelated to forward deployment contribute to general deterrence and stability, making overseas bases superfluous. Advocates of the United States’ forward-deployed posture contend that it is a driving force in creating a more peaceful world by dampening the effects of anarchy and by ameliorating conflict spirals. ³⁴ This argument is the essence of the logic behind deterrence and reassurance. But other plausible causal explanations exist for the lack of a great-power war since 1945. ³⁵ Although trade and economic interdependence are not always sufficient to stave off conflict between potential belligerents, there is solid evidence that the two factors do reduce the likelihood of war. ³⁶ The destructive power of modern conventional militaries has also made war prohibitively costly in many cases, and the fact that most of the world’s great powers possess nuclear weapons has likely been a major factor in the decline of international conflict. ³⁷ Normative changes in how people see war also contribute to peace among nations. War is increasingly seen as an abhorrent last resort instead of a glorified mission that creates masculine virtue. ³⁸

The absence of a true hegemonic threat in this increasingly stable international environment undermines the case for permanent alliances and the bases that underlie them. The rise of an expansionist European power bent on continental domination is nowhere on the horizon. And it is not clear that U.S. military forces on the ground are the reason for this. In any case, the countries in Europe and East Asia would likely confront any rising hegemon in the absence of U.S. bases and security commitments. As a prosperous and militarily capable continent, Europe is especially able to handle such an unlikely development without the presence of an extra-regional military power. ³⁹

Finally, advocates of forward deployment argue that the United States’ overseas presence prevents nuclear proliferation by reassuring host nations. The record on that score is decidedly mixed. ⁴⁰ Bases and security guarantees can reassure some allies and thereby discourage proliferation, most notably in Japan and South Korea. However, host nations are not always reassured. Some U.S. allies—for example, the United Kingdom, France, and Israel—developed and have retained nuclear weapons despite U.S. protection.

Contingency Responsiveness

Overseas bases are generally thought to be the frontline forces needed to successfully prosecute a war. However, a forward-deployed presence is often more about deterrence than about operational convenience. During the Cold War, for example, a chief purpose of troops in Europe was to guarantee U.S. involvement in a conflict, not to be particularly useful in battlefield scenarios. As President Dwight D. Eisenhower once commented in reference to the 1958-59 Berlin crisis, “If resort to arms should become necessary, our troops in Berlin would be quickly overrun, and the conflict would almost inevitably be global war. For this type of war, our nuclear forces were more than adequate.” ⁴¹

A Rand Corporation report on basing posture reiterates that point for today: “the forces that are forward-deployed are not sufficient of themselves to address conflicts of every scope.” ⁴² Indeed, “after the initial phase of operations to stabilize or even resolve a situation, the response by the U.S. military to a contingency of any substantial size will come primarily from forces deployed from bases in the United States.” ⁴³

One of the prominent arguments in favor of maintaining an indefinite military presence is that it would be too difficult and time consuming to secure host governments’ permission for access during a crisis in which U.S. forces were needed. That concern is overstated. To begin with, the ability to use bases for new missions is always conditional on host government permission. Basing agreements typically stipulate that the United States must consult with host nation governments before conducting any nonroutine operations. A 2016 Rand Corporation study concludes, “the presence of large permanent bases does not increase the likelihood of securing contingency access.” ⁴⁴ But, more to the point, we have historically not had trouble securing basing access in wartime. Indeed, the United States has been able to add new operating facilities overseas for every major conflict in the past 40 years. ⁴⁵

For combat operations that do not rise to the level of a crisis requiring massive mobilization of forces, deployment from the continental United States is sufficient because of technological advances in military capability, travel, and communications. This is the case with deployments generally, but particularly so with air campaigns. According to Robert Harkavy, a basing expert at Pennsylvania State University, “the development of longer range aircraft and ships, plus the development of techniques for aerial refueling of planes and at-sea refueling of ships has had the effect of greatly decreasing the number of basing points required by major powers to maintain global access networks.” ⁴⁶ Carrier-based air power can now conduct major campaigns with around-the-clock sorties well beyond littoral reaches in remote areas on short notice and without access to nearby forward bases. ⁴⁷

The United States’ long-range bombers can deliver nonrefueled payloads for missions of up to 8,800 miles, and tanker refueling “can extend that almost indefinitely,” says Harkavy. ⁴⁸ In the 1991 Gulf War, the United States flew B-52s from Barksdale Air Force Base in Louisiana to conduct bombing raids against Iraq in roundtrip missions that exceeded 10,000 miles and took only 30 hours. ⁴⁹“During the first three weeks of the American buildup to the Gulf War,” according to Kent Calder, professor at Johns Hopkins School of Advanced International Studies, “the United States moved more troops and equipment than in the first three months of the Korean War.” ⁵⁰

In 1999, U.S. Air Force bombers conducted attacks against Serbian targets from the continental United States. In a 2000 North Atlantic Treaty Organization (NATO) exercise, the Global Hawk drone vehicle “provided direct, unmanned support for amphibious operations in Portugal from its station at Eglin Air Base in Florida,” and the following year it flew 7,500 miles across the Pacific to Australia. ⁵¹ Drone technology has advanced dramatically in the ensuing years. In the initial operations against Taliban-held Afghanistan in 2001, B-2 stealth bombers based at Whiteman Air Force Base in Missouri flew 44-hour missions with the help of aerial refueling capabilities “without using any bases in the vicinity of Afghanistan at all,” reports Calder. ⁵² And although the United States made use of in-theater bases in Kuwait, Qatar, and the United Arab Emirates to conduct operations against Saddam Hussein’s Iraq in 2003, it also flew bombing missions from a transcontinental distance. In addition to bombers’ ability to complete missions without nearby bases, cruise missiles launched from deployed naval assets can supplant the need for in-theater bases.

Even beyond airstrikes, U.S. troops can deploy to virtually any region fast enough that they can be based in the continental United States. In emergency situations, according to Rand, “lighter ground forces can deploy by air from the United States almost as quickly as they can from within a region.” ⁵³ An armored brigade combat team can get from Germany to Kuwait in approximately 18 days, only about 4 days more quickly than if it deployed from the East Coast of the United States. ⁵⁴ U.S.-based forces could handicap contingency responsiveness in certain smaller missions. The transit time to the Taiwan Strait, for example, for a carrier strike group deployed from Yokosuka, Japan, would take 3 to 5 days, whereas deployment from the West Coast would take up to 16 days. However, basing capacity in Hawaii or Guam can cut those transit times considerably. ⁵⁵

Admittedly, deploying heavy forces by air in bulk is not plausible for contingencies requiring massive ground troops. But contingencies that truly depend on extremely rapid deployment are rare. The United States tends to have the luxury of intervening at its own pace. And, given America’s relative insulation from external threats, it’s not clear that speedy intervention is even desirable. For one thing, reducing the emphasis on rapid response would likely signal to allies the need to cut back on free riding (that is, spending less on the military in the expectation that the United States will carry their defense burden).

Moreover, robbing the executive branch of the ability to rapidly insert the United States into a military conflict abroad may indeed be a good thing. Since World War II, constitutional restrictions on the president’s war-making powers have eroded. But the Framers of the Constitution were wise to constrain the president’s war-making powers. Affording the executive a speedy response with in-place forces, therefore, not only undermines the rule of law but also can intensify war proneness. As Bernard Brodie once wrote, “the notion that it is incontestably good to expand the chief executive’s options is rather peculiar” because “it runs directly counter to the basic tenets of constitutional government” and because “one way of keeping people out of trouble is to deny them the means for getting into it.” ⁵⁶

Vulnerability, Counterbalancing, and Entanglement

Keeping U.S. troops permanently stationed abroad presents several strategic problems. First, such forces are more vulnerable to attack than forces stationed at home. Even though the preponderance of U.S. power and the general decline in international war probably mean that U.S. overseas bases are not at risk of bombardment in the immediate future, certain plausible contingencies could make them priority targets. If conflict breaks out over Taiwan or maritime-territorial disputes in the East China Sea or the South China Sea, the United States would be obligated to intervene against China to fulfill its security guarantee to Taiwan, Japan, or the Philippines, which would then trigger Chinese actions against U.S. assets. ⁵⁷ To take another example that is now more remote, thanks to the recently negotiated nuclear deal with Iran, if Israel were to preventively strike one of Iran’s nuclear facilities, the United States would be implicated immediately because of its promises to fight to defend Israel. ⁵⁸ According to a 2012 report, U.S. bases in Bahrain would be a priority target in Iranian retaliatory strikes. ⁵⁹

For facilities based in certain countries, particularly in the Middle East, the risk of terrorist attacks on military bases has increased in recent years. Not only are homemade explosives and car bombs easier to access and produce, but also—especially after the damage done by the post-9/11 wars in Iraq and Afghanistan—an anti-American narrative has become even more popular, making U.S. bases desirable targets for terrorist attacks.

Overseas bases can inspire blowback in the form of terrorism. According to Robert Pape, “the principal cause of suicide terrorism is resistance to foreign occupation.” ⁶⁰ Infamous examples, like the 1983 bombings of the Marine barracks in Beirut, Lebanon, that killed 241 Americans, and the al Qaeda attack in 2000 on the USS Cole off the coast of Yemen, are illustrative. ⁶¹ But bases can also motivate attacks on U.S. soil. The presence of U.S. military bases in Saudi Arabia was one of the most prominent grievances cited by al Qaeda in the lead-up to the 9/11 attacks. ⁶² And the post-9/11 surge in the U.S. military presence in the Middle East coincided with a massive increase in the rate of terrorist attacks inspired by anti-Americanism. ⁶³

In addition to terrorism, the development of extremely accurate intermediate- and long-range ballistic missiles and modern satellite-based sensors, among other innovations, makes overseas bases susceptible to asymmetric attacks that are very difficult to defend against. China, in particular, has invested heavily in these capabilities, meaning that a large percentage of U.S. facilities—more than 90 percent of U.S. air facilities in northeast Asia—are in high-threat areas. China’s conventional theater-strike system, the DF-21, “can hit all military facilities along the entire Japanese archipelago,” says Toshi Yoshihara, the chair of Asia-Pacific Studies at the U.S. Naval War College. ⁶⁴ Michael J. Lostumbo and others write that these weapons and others like them “could cripple an airbase, incapacitate an aircraft carrier, and devastate concentrated ground forces.” ⁶⁵Granted, the tripwire effect of U.S. forward bases, along with the fact that U.S. allies benefit from these capabilities as well, means that deterrence remains robust in Asia. Still, Chinese strategic planners have discussed striking U.S. bases in the unlikely scenario that inadvertent escalation results in an outbreak of conflict.⁶⁶ In other words, bases offer only a marginal increase in deterrence at added risk to forward-deployed troops.

Another major strategic problem with a forward-deployed military posture is that it can sometimes have the opposite of its intended effect. Stationing military bases near an adversary can cause fear that generates counteraction instead of scaring an adversary into submission. ⁶⁷ The most intense crisis of the Cold War period may have had its origins in such a dilemma. In June 1961, the Kennedy administration placed Jupiter ballistic missiles in Turkey, bordering the Soviet Union. It was partly in response to that decision that the Soviet Union decided to place its own missiles in Cuba, precipitating a dangerous crisis between the nuclear powers in October of that year. ⁶⁸ Soviet leader Nikita Khrushchev reportedly called the deployment of Jupiter missiles “an intolerable provocation” and told his ambassador to Cuba, “Inasmuch as the Americans already have surrounded the Soviet Union with a circle of their military bases and missile installations of various designations, we should repay them in kind, let them try their own medicine.” ⁶⁹

Today, the U.S. military presence in Europe is tasked, in part, with deterring Russian military aggression. And on those recent occasions in which Russia has acted out militarily, as it did against Georgia in 2008 on the side of separatists in South Ossetia and Abkhazia and in Ukraine in 2014, advocates of a forward posture blame the incursions on a lack of deterrence or diminished American credibility. But Russia’s interventions in Georgia and Ukraine derive more from Moscow’s insecurities about the expansion of U.S.-led Western economic and military institutions into former Soviet republics, and even up to the Russian border, than from insufficient U.S. military presence in Eastern Europe. ⁷⁰ Post-Cold War NATO expansion is the source of profound anxiety and lingering resentment in Moscow. ⁷¹ Following Vladimir Putin’s annexation of Crimea, the Russian leader decried NATO expansion as an attempt at containment, and, when in 2015 NATO invited Montenegro to be the newest member of the alliance, the Kremlin warned that further expansion eastward “cannot but result in retaliatory actions.” ⁷² One could say that forward deployment contributes to the insecurity it purports to prevent.

Bases can also motivate nearby adversaries to pursue nuclear weapons. Iran’s expansion of nuclear enrichment in the run-up to the recent nuclear deal between Iran, the United States, the United Kingdom, France, Russia, China, and Germany, for example, was likely understood by many in Tehran as a measure of protection from the United States. After all, the United States habitually intervenes in the region, is allied with Iran’s two most vociferous enemies (Israel and Saudi Arabia), and has carried out regime change and years of military occupation in the countries on Iran’s immediate east and west flanks. In addition, while bases in Japan and South Korea have arguably helped dissuade these countries from developing nuclear weapons, the U.S. presence creates pressure for North Korea to do so. Pyongyang’s efforts to secure a deliverable nuclear weapon may be partly motivated by a desire for the prestige associated with such capabilities, but fear of U.S. military power in South Korea, and a desire to deter an attack by either or both countries, are also significant motivators. Proximate U.S. military forces and an adversarial relationship with Washington helped motivate China’s 1964 acquisition of nuclear weapons. ⁷³ And, in recent years, U.S. actions in Iraq and Libya have signaled to potential rogue states the wisdom, rather than the danger, of obtaining a nuclear deterrent, or at least maintaining a threshold breakout capability.⁷⁴

Entanglement is another risk exacerbated by the attempt to reassure allies with overseas bases. ⁷⁵ If U.S. troops are stationed abroad to demonstrate credibility, and then the United States refuses to intervene in the event of conflict, U.S. policymakers will suffer political costs, even if the circumstances do not involve vital U.S. interests. Much academic literature has questioned the need to take military action solely for the sake of credibility. ⁷⁶ But the presence of military bases in or near a conflict zone can intensify calls to intervene to satisfy credibility concerns, thus making entanglement more likely.

Allies can entrap a security patron into war with their rivals by pursuing high-risk strategies. U.S. military presence can encourage this moral hazard, sometimes called “reckless driving.” ⁷⁷ Current U.S. posture is plagued by plausible scenarios of entrapment in its commitments to Taiwan, Japan, and the Philippines over territorial and maritime sovereignty disputes with China. In 2012, the Philippines engaged in an intense and potentially dangerous two-month naval standoff with China, a much more capable military power, over the disputed Scarborough Shoal in the South China Sea. Heightened nationalist sentiments certainly played a role in the quarrel, but the unequal power dynamics between the two states raises reasonable questions about whether the relatively weak Philippines was emboldened to challenge a much stronger China because of the United States’ security guarantee and nearby military bases. That kind of moral hazard is a liability that could pull the United States into conflicts unconnected to its direct security and economic interests. Fundamentally, moral hazard is a function of the commitment, but it is exacerbated by the physical presence of bases and troops.

In the past, the United States stumbled into conflicts because of the entangling influence of credibility, commitments, and the capabilities presented by a forward military presence. Examples include such major wars as Korea and Vietnam. In the case of Korea, the United States established what was supposed to be a temporary military presence there following the Japanese surrender in August 1945. The U.S. military presence reflected prior agreements between President Franklin D. Roosevelt and Soviet Premier Joseph Stalin at Yalta to establish a multinational trusteeship that would, in Philip Bennett’s words, “guide the Koreans to self-government.” ⁷⁸ By December 1945, U.S. Gen. John R. Hodge recommended full withdrawal. Secretary of War Robert Patterson argued the same in April 1947. In 1948, the National Security Council proposed withdrawing all American troops by the end of the year. The joint chiefs explained that “Korea is of little strategic value to the United States” and warned that the lingering military presence risked entangling the United States in a war following some provocation on the peninsula. That entanglement indeed happened in 1950 when the North invaded the South. ⁷⁹ Unfortunately, calls to withdraw had been unheeded.

Similarly, in Vietnam, despite years of a slow trickle of troop deployments, President Lyndon Johnson was able to get congressional authorization for a massive escalation in military involvement only after a U.S. warship allegedly clashed with Vietnamese naval vessels in the Gulf of Tonkin, 12 nautical miles off the coast of Vietnam. The warship, the USS Maddox, was conducting electronic warfare support measures to assist U.S. military advisers in South Vietnam. The notion that American troops deployed to the area were in danger helped entangle the United States in what became one of the most costly quagmires in American history.

The presence of forces abroad can also tempt policymakers to get involved in elective wars that we could more easily forgo if we lacked in-theater bases. In NATO’s 2011 intervention in Libya’s civil war, for example, the United States bombed Libya from warships in the Mediterranean and from air bases in Spain, Italy, and Germany, among other nearby locations. The weak arguments in favor of U.S. involvement, which included conjectural claims about impending humanitarian disaster and pressure from NATO allies, might have been harder to sell politically if U.S. forces had not already been deployed in the area. ⁸⁰

American Values Abroad?

The United States has frequently supported dictators abroad to secure basing access. “American policy does frequently back dictators,” according to Calder. “And the tendency to back dictators—and to refrain from demanding their removal—appears to be greater where bases are involved, America’s democratic ideals … notwithstanding.” ⁸¹ U.S. support for the Somozas in Nicaragua, Mobutu in Zaire, Park Chung Hee in Korea, Papadopoulos in Greece, Franco in Spain, Marcos in the Philippines, and Karimov in Uzbekistan conforms to this trend. ⁸²

Uzbekistan is an illustrative example. Following 9/11, Uzbekistan served as a convenient logistical hub for U.S. troops fighting in landlocked Afghanistan. Accordingly, Washington increased support to Uzbekistan’s authoritarian regime of Islam Karimov, but concerns about human rights plagued the relationship from the beginning. In 2005, Karimov ordered troops to fire indiscriminately on a crowd of thousands of protesters and at one point cordoned off the site of the protest and “conducted a systematic slaughter of unarmed civilians,” killing hundreds in what came to be known as the Andijan massacre. ⁸³ The Karimov regime earned a reputation for its systematic use of brutal torture methods, including electric shock, asphyxiation, and boiling people alive. ⁸⁴ U.S. support has ebbed and flowed over the years—at one point prompting the Karimov regime to order the closure of the U.S. air base at Karshi-Khanabad in response to public U.S. criticism—but the current Uzbek regime continues to benefit from lavish economic and military support from Washington. ⁸⁵

Support for dictators in return for basing access has been an element in U.S. foreign policy for a long time, but even bases in relatively democratic countries can involve the sacrifice of liberal values. As far back as the early years of the Eisenhower administration, “[o]verseas military bases were beginning to provoke anti-American sentiment in the countries where they were located,” writes John Lewis Gaddis. ⁸⁶ Resentment over the presence of foreign bases can linger for generations. In 1991, the New York Times reported that the Philippine Senate “assailed [the U.S. military presence] as a vestige of colonialism and an affront to Philippine sovereignty,” and President Corazon C. Aquino ordered full withdrawal. ⁸⁷ Public opinion in Okinawa, Japan, is resoundingly opposed to the U.S. military base presence on the territory, a feeling that is exacerbated by the recurrent problem of crimes and misbehavior by U.S. troops there. From 1972 to 2011, the Okinawan prefectural government documented 5,747 criminal cases involving GIs, including more than a thousand violent offenses.⁸⁸ In June 2016, the alleged murder of a 20-year-old Okinawan woman by a U.S. Marine veteran working as a civilian contractor prompted a protest in the capital of the Okinawan Prefecture with 65,000 people in attendance. ⁸⁹ Such popular opposition can be difficult to square with purported American values about the importance of democracy.

Cost

The financial burden on U.S. taxpayers of maintaining a global military base presence is exceedingly difficult to calculate, primarily because neither the Pentagon nor Congress provides reliable estimates to the public. Most of the estimates they do provide are not comprehensive. According to Rand, “stationing forces and maintaining bases overseas does entail measurably higher direct financial costs to [the Defense Department]” as compared with bases in the continental United States. ⁹⁰ It costs an average of $10,000-$40,000 more per year to station a single member of the military in Europe or Asia, in zones without war, than in the United States. ⁹¹ The annual recurring fixed costs for a single overseas base—before any personnel, transport, equipment, or operational costs are factored in—range from $50 million to $200 million per year. ⁹²

For fiscal year 2015, the Pentagon’s Overseas Cost Summary (OCS) estimated the total cost of overseas bases, facilities, and personnel stationed abroad at about $19.6 billion. ⁹³ There are several problems with this tally. The Center for Strategic and International Studies estimates that the overall cost of the U.S. military presence in the Asia Pacific alone is more than half that amount, about $12 billion per year (excluding expenditures for equipment or U.S. Naval fleet operations). ⁹⁴ And according to Barry Posen, “between 15-20 percent of annual U.S. military spending”—between $91 billion and $121 billion for fiscal year 2016—is allocated “to the maintenance of forces for military action” in the Middle East alone. “Billions spent on the war in Iraq are not included in this estimate,” he explains. ⁹⁵

Furthermore, the OCS estimate includes an asterisk that lists 65 countries, with bases and facilities lumped into a single “Other” category comprising “countries with costs less than $5 million.” However, that list mysteriously excludes countries that are known to have U.S. bases costing well over $5 million, such as Kosovo, Honduras, and Colombia, which together cost hundreds of millions of dollars. ⁹⁶ The list also excludes U.S. territories, such as Guam, and as much as $4.6 billion in military construction spending at “unspecified locations”—a figure found in the Pentagon budget but omitted from the OCS. ⁹⁷

Some of the annual expenses of overseas bases are offset by host nations that cover the costs of U.S. bases in their territory. Although data are “scant and scattered,” one rough estimate that incorporates everything from direct cash payments to tax and lease discounts and in-kind goods and services, concludes that the total annual host nation support for U.S. bases abroad amounts to about $7 billion to $8.5 billion. ⁹⁸ But far more often the United States is footing the bill for its own overseas facilities. Frequently, Washington even pays host governments in return for basing rights. According to former deputy assistant secretary of defense James Blaker, approximately 18 percent of total foreign military and economic aid is payment for basing access,⁹⁹ which amounted to about $6.3 billion in fiscal year 2014. ¹⁰⁰

Part of the discrepancy in cost estimates comes from the fact that there are several official methods of measuring the costs of America’s overseas presence. Narrower measures involve tallying how much more overseas bases cost as compared with domestic bases, or simply calculating personnel costs plus construction and maintenance costs. More inclusive methods add indirect operating costs, such as administrative support, investment in weapons procurement, health care, and equipment repairs. The most comprehensive estimates include the cost of training, recruiting, and maintaining domestically based forces that will become available to fulfill military commitments in coordination with in-place forces. ¹⁰¹

Keeping to what he calls a “very conservative estimate,” American University’s David Vine estimates a total of $71.8 billion in annual cost for overseas bases, facilities, and personnel, excluding those in use in active war zones. ¹⁰² This total doesn’t include nonessential operations and missions that the United States engages in because it has a network of bases at its disposal, such as humanitarian missions, show-of-force patrols, counternarcotics efforts, and anti-piracy operations.

Although the specific total outlay is hard to pin down, the cost of our permanent peacetime overseas military presence is substantial. Closing redundant bases abroad, or at least consolidating forces at fewer bases, could provide considerable savings that could be left in more productive sectors of the economy. The Rand Corporation’s Cost Reduction Posture—an illustrative scenario in which some overseas bases would be closed, relocated, or consolidated at fewer locations—suggests that modest reductions in the overall overseas posture could yield up to $3 billion in annual savings even without jettisoning any of our current treaty obligations or security arrangements. ¹⁰³ Other studies by the National Commission on Fiscal Responsibility and Reform, the Congressional Budget Office, and the Center for American Progress estimate that cutting our overseas bases and personnel in Europe and Asia by one-third could save between $7 billion and $12 billion a year.¹⁰⁴ More thoroughgoing reforms that involve reducing overseas presence and commitments could reduce annual defense spending by 25 percent or more.¹⁰⁵

The Case for Reducing America’s Global Military Footprint

The United States is arguably the most secure great power in history. No nation in the world credibly threatens to attack or invade the United States. With weak and pliant neighbors to its north and south, vast oceans to its east and west, and a superior nuclear deterrent, it has achieved a level of protection from external threats without parallel. The United States accounts for almost 40 percent of worldwide defense spending and possesses the most capable and sophisticated military in history. ¹⁰⁶ A globe-straddling forward-deployed military presence is a costly burden that elevates peripheral interests to the level of vital ones, takes on security responsibilities that can and should be fulfilled by other states, and produces negative unintended consequences for U.S. interests.

A forward-deployed military posture is useful, if decreasingly so, for a grand strategy of primacy, which posits that the United States, as the most powerful and righteous state, has the capacity and the obligation to maintain military bases throughout the world to uphold global peace and stability in an otherwise dangerous international system. But primacy does not yield strategic benefits commensurate with the costs and risks it imposes. As Robert Jervis, professor of international affairs at Columbia University, has written, “the pursuit of primacy was what great power politics was all about in the past,” but in a world of nuclear weapons, with “low security threats and great common interests among the developed countries,” the game is not “worth the candle.” ¹⁰⁷ Charles Glaser, professor of political science and international affairs at George Washington University, similarly argues that primacy, and the worldwide military presence associated with it, is “much overrated.” The United States can protect core national interests without it and, in fact, the strategy causes the United States to “lose track of how secure it is and consequently pursue policies that are designed to increase its security but turn out to be too costly and/or to have a high probability of backfiring.” ¹⁰⁸ Nor does U.S. dominance reap much in the way of tangible economic rewards. Daniel Drezner, professor of international politics at Tufts University, contends, “The economic benefits from military predominance alone seem, at a minimum, to have been exaggerated… . There is little evidence that military primacy yields appreciable geoeconomic gains” and therefore “an overreliance on military preponderance is badly misguided.” ¹⁰⁹

Alternatively, a grand strategy of restraint holds that the preeminent power of the United States, coupled with an increasingly peaceful world, means it can afford to pull back from its worldwide military presence and rein in its activist foreign policy.¹¹⁰ The foregoing critique suggests that the sprawling U.S. basing system does not provide enough value to justify its continued existence. Instead, the U.S. presence abroad should be minimized to match with the dearth of acute threats and limited strategic benefits to U.S. interests. This section will make the case for withdrawing the U.S. base presence from three key regions—Europe, the Middle East, and Asia.

Europe

Europe is the simplest case for the withdrawal of U.S. military bases. One of the most stable regions on the planet, Europe contains four great powers—the United Kingdom, France, Germany, and Russia. Conflict between any of them is unlikely. European Union member states have a combined gross domestic product (GDP) greater than that of the United States. Great Britain, France, and Germany are all liberal democracies and have advanced, peaceful relationships based on closely aligned political, diplomatic, and economic interests. That statement does not apply to Russia, but the United Kingdom and France possess nuclear weapons, making military conflict even in the event of deteriorated relationships extremely unlikely. In Europe especially, the costs of conflict, even in a conventional war, have become prohibitive, while the gains have greatly diminished.

In addition to the declining utility of war, Europe is politically and culturally unique in the extent to which the memory of the devastation of the world wars has contributed to the decline of militarism and a greater focus on social stability and economic well-being. ¹¹¹

Even in a pure balance-of-power analysis, none of the major states of Europe is strong enough to make a bid for regional hegemony, something nuclear weapons make essentially impossible. Russia, the regional power that generates the most calls for a U.S. presence, has an aging population and a relatively weak economy that is overreliant on oil and natural gas. Its GDP is about $1.36 trillion, not much higher than Spain’s. ¹¹² Although Russia possesses nuclear weapons, such weapons are not useful for offense and do not aid in coercive diplomacy, as Todd S. Sechser, associate professor of politics at the University of Virginia, and Matthew Fuhrmann, associate director of political science at Texas A&M University, show in empirical studies. ¹¹³ In terms of conventional weapons and forces, the Russian military is comparatively frail, lagging behind the other great powers. ¹¹⁴ Extended offensive operations against other states would put considerable strain on Russia and thus would be unsustainable for very long. ¹¹⁵

NATO was established to contain Soviet growth and influence on the European continent. That objective has been achieved and an American exit from the military alliance is overdue. ¹¹⁶ U.S. presence in Europe, especially in former Warsaw Pact states and former Soviet republics, arguably does more to provoke Russian meddling than to deter it. And bases in Europe do not provide much of an operational or tactical advantage for the United States, even for unlikely contingencies, meaning that even if Washington upheld its current set of security commitments there, it could fulfill those obligations with a dramatically reduced overseas presence.¹¹⁷ Even though the positioning of U.S. military bases throughout the European nations did once pacify relations between Europe and Russia, the European Union is now rich and powerful enough to achieve that objective on its own. ¹¹⁸

Middle East

Since the terrorist attacks of September 11, 2001, terrorism has risen to the top of the list of national security priorities. Vast sums of money, considerable manpower, and a slew of new base sites abroad have been devoted to fighting Islamic terrorist groups. However, contrary to the bulk of the rhetoric from policymakers, terrorism does not represent an existential threat to the United States. ¹¹⁹ Terrorism is a problem to be managed, not a war to be won. And a forward-deployed military posture is not very useful in addressing it. Indeed, U.S. military presence was one of the primary motivators and recruiting mechanisms of al Qaeda in the lead-up to 9/11, and U.S. military action in the region post-9/11 served as an even more potent generator of Islamic jihadism. ¹²⁰

In most cases, a sensible military solution to terrorism does not exist, and heavy-handed military action can exacerbate the problem by fueling resentment and recruitment. The Islamic State in Iraq and Syria (ISIS), for example, is an outgrowth of the Sunni insurgency that rose up to fight U.S. forces in Iraq ¹²¹ and subsequently gained strength in the Syrian civil war. ¹²² Fighting blowback with more of the same interventionism that generated it in the first place is unlikely to produce desirable results. ¹²³

The traditional justification for U.S. policy in the Middle East has been to secure the free flow of oil through the Persian Gulf via a forward-deployed posture, thereby stabilizing prices. But the argument that maintaining such a military posture in the Middle East protects the free flow of oil is flawed. According to Joshua Rovner, professor at Southern Methodist University, and Caitlin Talmadge of George Washington University, the policy of “large, permanent peacetime land forces in the Gulf” is not particularly useful for oil security. That policy has often been “just as counterproductive as the vacuums created by hegemonic absence,” generating regional instability and making the terrorist threat worse through blowback. ¹²⁴ Rovner and Talmadge argue that even if the United States had fostered a forward-deployed posture before Iraq’s invasion of Kuwait, it’s not clear that this posture would have deterred Saddam Hussein. ¹²⁵ It is possible that “the economic and political stakes may have been so high that, from his perspective, a different American force posture might not have affected his calculations.” ¹²⁶ Similarly, Rovner and Talmadge conclude, it is “unclear that a hegemonic presence in the region could have done much to prevent” the OPEC oil embargo of 1973. ¹²⁷ As Eugene Gholz and Daryl Press conclude, “the day-to-day peacetime presence of U.S. military forces in the Persian Gulf region is not merely ineffective; it is probably counterproductive for protecting U.S. oil interests.” ¹²⁸

The United States does have interests in the security and supply of oil, but those interests are often exaggerated, and the region’s energy resources are not as vulnerable as is often claimed. ¹²⁹ Strictly in terms of the U.S. economy, the direct reliance on Persian Gulf oil imports is modest and declining. ¹³⁰ But the price of oil is determined by global supply and demand, not by reliance on specific geographic sources. Fortunately, the United States is relatively insulated from price spikes associated with supply disruptions. Although a major disruption could cause an economic downturn, today’s economy is better equipped to deal with sudden changes in energy markets than it was in the 1970s. Kenneth Vincent explains that the causes are reduced oil imports and consumption, more flexible labor markets and monetary policies, and “reduced energy intensity of economic output—or the amount of energy required to produce a dollar of GDP.” ¹³¹ In every major oil shock since 1973, global energy markets adapted quickly through increasing production from other sources, rerouting shipping transportation, and putting both private and government-held inventories around the world into use. These market adjustments mitigated the ramifications of the shocks and stabilized prices and supply. ¹³²

The balance of power, both in the region and globally, is favorable for energy security. The threat of an external power gaining a foothold in the Persian Gulf region is not in the cards in the policy-relevant future. The Soviet Union is long gone, and today’s Russia suffers from systemic economic problems that hinder its potential to project power in the Middle East. China, although increasingly powerful in its own sphere, lacks the political will to dominate the Gulf. ¹³³

Regionally, the circumstances are similarly advantageous. According to Rovner, “the chance that a regional hegemon will emerge in the Persian Gulf during the next twenty years is slim to none. This is true even if the United States withdraws completely.” ¹³⁴ There are only three potential major powers in the region: Iraq, Iran, and Saudi Arabia. None of them possesses the capabilities necessary to conquer neighboring territories or gain a controlling influence over Persian Gulf oil resources. In addition to being too weak to make a bid for regional dominance, all three are bogged down and distracted by internal problems. Overall, the region is in a state of defense dominance: the major states are too weak to project power beyond their borders, but they do have the capability to deter their neighbors. Deterrence works well in this environment because the costs of offensive action remain prohibitively high.¹³⁵

Some scholars argue that the decreased importance of Persian Gulf oil means the United States should completely phase out its military commitment to the region during the next 10 years.¹³⁶ But even if Washington rejects that position and continues to factor in military intervention to deal with supply disruptions and other contingencies, maintaining a peacetime military presence in the region is not necessary. The United States can rely on carrier-based airpower and long-range bombers if military intervention in a crisis becomes necessary. ¹³⁷

East Asia

The United States’ military presence in East Asia has several goals. It is meant to deter and contain China, to stave off spirals of conflict, to bolster the credibility of security agreements that bind the United States to defend allies, and to provide for a rapid contingency response. ¹³⁸

China’s rise is not nearly as much of a threat to U.S. security as is often claimed. ¹³⁹ China’s posture is defensive in nature. ¹⁴⁰ According to official Chinese news sources, the country’s military modernization effort “lags far behind advanced global peers,” and its “army is not capable enough of waging modern warfare.” ¹⁴¹ Despite much consternation in Washington over China’s renewed assertiveness, Beijing “has compromised more frequently than it has used force,” explains MIT professor of political science M. Taylor Fravel, and “has been less belligerent than leading theories of international relations might have predicted for a state with its characteristics.” ¹⁴²

Nor is China a viable candidate for hegemony in the near term. Although the growth in China’s economy is impressive, it is only a crude indication of actual and latent military power and it obscures the many metrics—technological innovation, overall military readiness, power projection capability, and a dearth of allies—that illustrate America’s huge lead over China. ¹⁴³ As Dartmouth University professors Stephen G. Brooks and William C. Wohlforth argue, China is “nowhere near a peer of the United States,” which “will long remain the world’s sole superpower.” ¹⁴⁴ That statement coincides with findings from the Rand Corporation, which concludes that China “cannot possibly catch up to, much less ‘leapfrog,’ the United States or Japan in the foreseeable future,” when it comes to military capability. ¹⁴⁵

Even assuming China’s continued rapid economic growth, the prospect that China would achieve regional dominance is remote. ¹⁴⁶ Asia’s geography, characterized by island and peninsular powers and mountainous regions throughout, provides challenging physical obstacles to China’s quest for hegemony. ¹⁴⁷ Moreover, China is surrounded by major powers such as Russia, India, Japan, and South Korea, which would resist such a gambit. The U.S. military presence in Korea and its security commitment to Taiwan, explains Robert Ross, are “not major factor[s] in the balance of power or in U.S. protection of shipping lanes” and could be relinquished at little cost to U.S. security. ¹⁴⁸

America’s military presence in East Asia is arguably exacerbating instability in the region by making China feel encircled. ¹⁴⁹ The United States’ presence along China’s maritime periphery is highly militarized and provocative, with the U.S. Pacific fleet conducting 170 exercises and 600 training events with more than 20 allied countries in the region every year. ¹⁵⁰ China sees Washington’s massive military presence on the Korean peninsula, and just across the East China Sea on the southern tip of the Japanese archipelago, as a threat to Chinese security. ¹⁵¹ The United States’ status as the largest naval presence in the region also stokes fear in China; the roughly 40 percent of China’s seaborne oil imports that pass through sea-lanes and critical chokepoints such as the Strait of Malacca are subject to interdiction by the United States. ¹⁵² China’s concern about that possibility at least partially explains Beijing’s attempts to militarize the South China Sea, which in turn contributes to regional instability.

The other reason to reevaluate the U.S. posture in Asia is that China’s rise, while not imminently on track to achieve regional hegemony, does raise the cost of U.S. commitments. If conflict were to break out, “Washington would need to dispatch reinforcements from thousands of miles away, sustain its military units over lengthy air and sea lines of communication, and operate them from a small number of bases,” writes Evan Braden Montgomery, senior fellow at the Center for Strategic and Budgetary Assessments, whereas China “would be able to concentrate its forces more rapidly and support them more easily.” ¹⁵³ In this strategic environment, America’s security commitments to allies are increasingly strained and its military presence is a dwindling asset.

In the near term, careful retrenchment would likely have a favorable influence on U.S.-China relations. ¹⁵⁴ The job of defending allies such as Japan, South Korea, Taiwan, the Philippines, Thailand, and Australia should be left to those countries to perform on their own. U.S. military presence and security guarantees discourage active self-defense among regional allies and unwisely obligate American intervention into local disputes that have little to no inherent importance for U.S. interests and security. Even if the United States were to maintain its commitments to allies, withdrawing the military presence from the region would allow allies to be the first line of defense in case of war, forcing the countries to do the heavy lifting, while America plays the role of balancer. ¹⁵⁵

Overseas Bases to Keep

If the United States were to withdraw from the regions described, there is a reasonable argument for keeping U.S. bases at two locations abroad in order to compensate for the decrease in contingency responsiveness and area access: Guam and Diego Garcia.

Strategically located in the Pacific Ocean, Guam is the nearest sovereign U.S. territory to the nations of the Asia Pacific—about 1,600 miles from Japan and about 1,550 miles from the Philippines. This location means that the Guam base is useful for decreasing transit times in case of any (unlikely) contingencies in which U.S. forces would be quickly needed. Submarines operating at 20 knots take about 5 days to reach the East Asian littoral from Guam, whereas they take about 8 days from Hawaii and 15 days from San Diego. A Guam-based brigade combat team could deploy by air or sea to key Asia-Pacific areas in a span of 5 to 14 days. Ships cruising at 25 knots from Guam can arrive at the Taiwan Strait in about two and a half days, not much longer than the one day they take from the Philippines. That extra distance from the East Asian littoral also means Guam is less vulnerable to Chinese and North Korean missiles. ¹⁵⁶

Because Guam is a U.S. territory, it does not face the problems of uncertainty and host nation concerns that many bases in foreign territory must deal with. Plans are already under way to increase the military presence at Guam by relocating troops from Japan, thanks to a 2012 agreement with Tokyo meant to resolve intense local opposition to U.S. bases in Okinawa. As part of that overall shift, Guam is being further developed as a logistics hub to enable forces in Asia and serve as a base for at-sea prepositioning and air defense capabilities. Guam, therefore, serves as a convenient location for a low-cost, fully capable military base that avoids the strategic baggage of in-place forces on foreign territory.

Diego Garcia, a small island in the Indian Ocean, offers similar advantages without the liability of most other forward-deployed bases. It is approximately 1,000 miles south of India, 700 miles southwest of Sri Lanka, and 2,500 miles southeast of the Persian Gulf. Owned by our close ally Great Britain, Diego Garcia has hosted U.S. military facilities since the 1960s. Like Guam, Diego Garcia’s distance from potential adversaries on land means it is less vulnerable than many bases along the Asian littoral or in the Middle East. ¹⁵⁷

Diego Garcia has limitations as a basing hub. It is only 11 square miles, with an average land elevation of only 4 feet, meaning it cannot necessarily host large Navy platforms.¹⁵⁸ But it nonetheless allows the United States to project considerable military power. According to Walter C. Ladwig III and others, it currently “serves four primary functions for American commanders: a full one-third of the entire U.S. Afloat Prepositioning Force occupies the lagoon; fast attack submarines and surface ships use the deep-draft wharf; an Air Expeditionary Wing supports tactical and long-range broadcasts to units in the area; and a telecommunications station tracks satellites and relays fleet broadcasts to units in the area.” ¹⁵⁹ Diego Garcia has been one of the Air Force’s most important assets for the war in Afghanistan. It is situated so that long-range bombers based there, such as the Air Expeditionary Wing’s B-52s, do not require refueling support for missions in South Asia or the Middle East. ¹⁶⁰

Facilities at Diego Garcia are not (and should not be) designed for deterrence and reassurance objectives; they merely provide proximity to strategic areas for any potentially serious contingency requiring U.S. intervention. Diego Garcia is far enough afield to be much safer from attack by long-range ballistic missiles and poses a negligible risk of entangling the United States in elective conflicts or creating host nation complications.

Conclusion

Despite the bipartisan support for extensive overseas bases, there is some interest in reform. In 2011, Sen. Ron Wyden (D-OR), along with five of his Senate colleagues, signed a bipartisan letter calling for “dramatically reducing our overseas military presence,” which would have “minimal negative impact on our nation’s readiness or ability to efficiently respond to emerging threats.” ¹⁶¹ The following year, Sen. Jon Tester (D-MT) and then Sen. Kay Bailey Hutchison (R-TX) introduced legislation calling on the Defense Department to “appoint an independent commission to review the military’s overseas basing needs and their associated costs as a first step toward closing facilities that are no longer needed.” ¹⁶²

The George W. Bush administration, though by no means advocating a retreat from America’s global role, initiated a Global Defense Posture Review that proposed moving away from large, elaborate bases in favor of maintaining access to smaller facilities with little or no permanent U.S. military presence, but which could be used for deployments when needed. The plan included “reduc[ing] and consolidat[ing] the existing U.S. overseas military presence in Western Europe and Northeast Asia, which was seen as less useful for dealing with future security challenges,” write Lostumbo and others. ¹⁶³ Furthermore, polls show that a plurality of Americans remain very skeptical of the United States’ activist role in international affairs,and some polls find a majority who think the nation should “deal with its own problems and let other countries deal with their problems the best they can.”¹⁶⁴

The lack of serious efforts to reduce America’s overseas military base presence is less a function of such ideas being out of the mainstream and more a function of bureaucratic inertia. As far back as December 1970, a congressional investigation led by the Senate Committee on Foreign Relations studied “Security Agreements and Commitments Abroad.” The report explained why the strategic use of U.S. military bases abroad is never seriously scrutinized: “Once an American overseas base is established, it takes on a life of its own. Original missions may become outdated, but new missions are developed, not only with the intent of keeping the facility going, but often to actually enlarge it,” the study concluded. “Within the government departments most directly concerned—State and Defense—we found little initiative to reduce or eliminate any of these overseas facilities,” which “is only to be expected” since they would be “recommend[ing] a reduction in their own position.” It went on: “Such reductions were often resisted on the ground that they would appear to be a withdrawal from a commitment, and a lessening of will on the part of the United States—conclusions which do not necessarily follow.”¹⁶⁵

The same logic holds today. Entrenched interests both inside and outside government, remain committed to America’s global military presence. Those interests, combined with the ideological belief that forward deployment is the cornerstone of a stable world order, result in scant political incentive to propose even partial withdrawal from overseas bases.

To the extent that overseas bases are intended to prevent war and manage faraway disputes through deterrence and reassurance, they serve outdated foreign policy objectives and a grand strategy that needs to be narrowed. On top of that, modern technology has reduced the problems of travel times over long distances and simultaneously has increased the vulnerabilities of in-place forces. Acknowledging these new realities and initiating appropriate reforms, including full withdrawal from nearly all overseas bases, would serve U.S. interests.

Notes

1. David Vine, Base Nation: How U.S. Military Bases Abroad Harm America and the World (New York: Metropolitan Books, 2015), pp. 6-7.
2. Michael J. Lostumbo et al.,Overseas Basing of U.S. Military Forces: An Assessment of Relative Costs and Strategic Benefits (Santa Monica, CA: Rand Corporation, 2013), p. 20.
3. The Heritage Foundation, “2017 Index of U.S. Military Strength,” ed. Dakota L. Wood, http://index.heritage.org/military/2017/resources/download/.
4. The troop levels listed in this paragraph come from the Defense Department’s Defense Manpower Data Center, updated February 2017.
5. Anthony H. Cordesman, “The Changing Gulf Balance and the Iranian Threat,” Center for Strategic and International Studies, Working Draft, August 3, 2016, p. 41, https://csis-prod.s3.amazonaws.com/s3fs-public/publication/160804_Gulf_Balance_Iranian_Threat.pdf.
6. Lostumbo et al., Overseas Basing, p. 25.
7. Andrew S. Erickson and Justin D. Mikolay, “Guam and American Security in the Pacific,” in Rebalancing U.S. Forces: Basing and Forward Presence in the Asia-Pacific, ed. Carnes Lord and Andrew S. Erickson (Annapolis, MD: Naval Institute Press, 2015), p. 16.
8. Kent Calder, Embattled Garrisons: Comparative Base Politics and American Globalism (Princeton, NJ: Princeton University Press, 2008), p. 56. Calder estimates $60 billion, while Vine, in Base Nation, p. 9, cites estimates as high as $120 billion.
9. William Kristol and Robert Kagan. “Toward a Neo-Reaganite Foreign Policy,” Foreign Affairs 75, no. 4 (July/August 1996): 18-32.
10. “Excerpts from Pentagon’s Plan: ‘Prevent the Re-emergence of a New Rival,’” New York Times, March 8, 1992,http://www.nytimes.com/1992/03/08/world/excerpts-from-pentagon-s-plan-prevent-the-re-emergence-of-a-new-rival.html?pagewanted=all.
11. Stephen G. Brooks and William C. Wohlforth, America Abroad: The United States’ Global Role in the 21st Century (New York: Oxford University Press, 2016).
12. Stacie L. Pettyjohn, U.S. Global Defense Posture, 1783-2011 (Santa Monica, CA: Rand Corporation, 2012), p. 12.
13. Vine, Base Nation, p. 18.
14. Robert E. Harkavy, Strategic Basing and the Great Powers, 1200-2000 (New York: Routledge, 2007), pp. 29-30.
15. For a different view arguing that bases facilitate trade, see Daniel Egel, Adam R. Grissom, John P. Godges, Jennifer Kavanagh, and Howard J. Shatz, Estimating the Value of Overseas Security Commitments (Santa Monica, CA: Rand Corporation, 2016), http://www.rand.org/content/dam/rand/pubs/research_reports/RR500/RR518/RAND_RR518.pdf.
16. Mark W. Zacher, “The Territorial Integrity Norm: International Boundaries and the Use of Force,” International Organization 55, no. 2 (Spring 2001): 215-50.
17. Vine, Base Nation, p. 4.
18. Paul Kennedy, The Rise and Fall of the Great Powers (New York: Vintage Books, 1987), pp. 357-59.
19. Eugene Gholz, Daryl G. Press, and Harvey M. Sapolsky, “Come Home, America: The Strategy of Restraint in the Face o f Temptation,” International Security 21, no. 4 (Spring 1997): 15. The Persian Gulf gained in importance over the years, but its importance was recognized not long after the war, as a Top Secret National Security Council briefing put it in 1954, “the Near East is of great strategic, political, and economic importance,” as it “contains the greatest petroleum resources in the world” as well as “essential locations for strategic military bases in any world conflict.” National Security Archive, “United States Objectives and Policies with Respect to the Near East,” July 23, 1954 (declassified February 27, 1981), http://nsarchive.gwu.edu/NSAEBB/NSAEBB78/propaganda%20127.pdf.
20. Nicholas J. Spykman,America’s Strategy in World Politics: The United States and the Balance of Power (New York: Harcourt, Brace, 1942), p. 124.
21. Patrick Porter, The Global Village: Distance, War, and the Limits of Power (Washington: Georgetown University Press, 2015).
22. John J. Mearsheimer, The Tragedy of Great Power Politics (New York: W. W. Norton, 2001), pp. 157-59.
23. Christopher Layne, The Peace of Illusions: American Grand Strategy from 1940 to the Present (Ithaca, NY: Cornell University Press, 2006), pp. 88-91.
24. Alexander Lanoszka and Michael Hunzeker, “Land Power and American Credibility,” Parameters 45, no. 4 (Winter 2015-2016): 17-26.
25. Ibid.
26. Josef Joffe, “Europe’s American Pacifier,” Foreign Policy 54 (Spring 1984): 64-82.
27. Lostumbo et al., Overseas Basing, p. xx.
28. Robert H. Johnson, Improbable Dangers: U.S. Conceptions of Threat in the Cold War and After (New York: St. Martin’s Press, 1994), pp. 78, 126. And Robert Jervis writes, “The Soviet archives have yet to reveal any serious plans for unprovoked aggression against Western Europe, not to mention a first strike on the United States.” Robert Jervis, “Was the Cold War a Security Dilemma?” Journal of Cold War Studies 3, no. 1 (Winter 2001): 59.
29. Alexander L. George and Richard Smoke, Deterrence in American Foreign Policy: Theory and Practice (New York: Columbia University Press, 1974), p. 7.
30. Richard Ned Lebow and Janice Gross Stein, “Deterrence: The Elusive Dependent Variable,” World Politics 42, no. 3 (April 1990): 336-69.
31. Steve Chan, “Extended Deterrence in the Taiwan Strait: Learning from Rationalist Explanations in International Relations,” World Affairs 166, no. 2 (Fall 2003): 109-25. Also see Robert Jervis, Perception and Misperception in International Politics (Princeton, NJ: Princeton University Press, 1978),p. 90.
32. Amos Yadlin and Yoel Guzansky, “The Strait of Hormuz: Assessing and Neutralizing the Threat,” Strategic Assessment (Institute for National Security Studies, Tel Aviv, Israel) 14, no. 4 (January 2012): 7-22.
33. See William D. O’Neil, “Correspondence: Costs and Difficulties of Blocking the Strait of Hormuz,” International Security 33, no. 3 (Winter 2008/09): 190-198. Also see Joshua R. Itzkowitz Shifrinson and Sameer Lalwani, “It’s a Commons Misunderstanding: The Limited Threat to American Command of the Commons,” in A Dangerous World? Threat Perceptions and U.S. National Security, ed. Christopher A. Preble and John Mueller (Washington: Cato Institute, 2014), pp. 238-39. They argue that U.S. presence in the Persian Gulf “can create new incentives for other actors to threaten, disrupt, or close strategic chokepoints as a way of deterring or retaliating against American activities.”
34. As these authors write, “By supplying reassurance, deterrence, and active management, the United States lowers security competition in the world’s key regions.” Stephen G. Brooks, G. John Ikenberry, and William C. Wohlforth, “Don’t Come Home, America: The Case Against Retrenchment,” International Security 37, no. 3 (Winter 2012/2013): 39.
35. See Bruno Tertrais, “The Demise of Ares: The End of War as We Know It?” Washington Quarterly 35, no. 3 (Summer 2012): 7-22. For a comprehensive review of explanations for the decline of war, see Steven Pinker,The Better Angels of Our Nature: Why Violence Has Declined (New York: Viking, 2011).
36. Dale C. Copeland, Economic Interdependence and War (Princeton, NJ: Princeton University Press, 2014); John Mueller, “Capitalism, Peace, and the Historical Movement of Ideas,” Cato Policy Report (March/April 2012); Erik Gartzke, “The Capitalist Peace,” American Journal of Political Science 51, no. 1 (2007): 166-91.
37. For a nuclear peace argument, see Kenneth Waltz, “The Spread of Nuclear Weapons: More May Be Better,” Adelphi Papers 21, no. 171 (1981). Also see Robert Rauchhaus, “Evaluating the Nuclear Peace Hypothesis: A Quantitative Approach,” Journal of Conflict Resolution 53, no. 2 (April 2009): 258-77.
38. John Mueller, Retreat from Doomsday: The Obsolescence of Major War (New York: Basic Books, 1989). Also see Ed Rhodes, “The Search for Monsters to Destroy: Theodore Roosevelt, Republican Virtue, and the Challenges of Liberal Democracy in an Industrial Society,” in U.S. Grand Strategy in the 21st Century: The Case for Restraint, ed. Benjamin H. Friedman and A. Trevor Thrall (New York: Routledge, forthcoming).
39. Stephen Van Evera, “Primed for Peace: Europe after the Cold War,” International Security 15, no. 3 (Winter 1990-1991): 7-57.
40. As these authors write, “Primacy likely causes more proliferation among adversaries than it prevents among allies. States crosswise with the United States realize that nuclear arsenals deter U.S. attack and diminish its coercive power.” Benjamin H. Friedman, Brendan Rittenhouse Green, and Justin Logan, “Debating American Engagement: The Future of U.S. Grand Strategy,” International Security 38, no. 2 (Fall 2013): 181-99.
41. John Lewis Gaddis, Strategies of Containment: A Critical Appraisal of Postwar American National Security Policy (New York: Oxford University Press, 1982/2005 edition), p. 166.
42. Lostumbo et al., Overseas Basing, p. 81.
43. Ibid., p. xxi.
44. Stacie L. Pettyjohn and Jennifer Kavanagh, Access Granted: Political Challenges to U.S. Overseas Presence, 1945-2014 (Santa Monica, CA: Rand Corporation, 2016), p. xv.
45. Lostumbo et al., Overseas Basing, pp. 107-8.
46. Harkavy, Strategic Basing, pp. 25-26.
47. Benjamin S. Lambeth, American Carrier Air Power at the Dawn of a New Century (Santa Monica, CA: Rand Corporation, 2005).
48. Harkavy, Strategic Basing, p. 167.
49. Ibid.
50. Calder, Embattled Garrisons, p. 48.
51. Ibid., p. 213.
52. Ibid., p. 211.
53. Lostumbo et al., Overseas Basing, p. xx. Also see p. 256: “the movement and time advantages for moving light and medium BCTs from overseas compared with CONUS by air is minor.”
54. Ibid., p. 291.
55. Erickson and Mikolay, “Guam and American Security,” p. 25.
56. Bernard Brodie, “The Development of Nuclear Strategy,” International Security 2, no. 4 (Spring 1978): 80-81.
57. Indeed, this tripwire effect is technically an intended feature of the strategy, although policymakers and the public rarely understand it this way. Public support for U.S. intervention to defend allies like Taiwan, South Korea, and the Philippines is low. See Andrew Shearer, “Can America Still Rely on Its Allies?” Center for Strategic and International Studies, Washington, Dec. 15, 2016, https://www.csis.org/analysis/can-america-still-rely-its-allies.
58. Such reassurances have been widely reported, for example, Thomas Friedman, “Iran and the Obama Doctrine,” New York Times, April 5, 2015. In addition, the U.S. Senate in 2013 passed Resolution 65, which states, “If the Government of Israel is compelled to take military action in legitimate self-defense against Iran’s nuclear weapons program, the United States Government should stand with Israel and provide, in accordance with United States law and the constitutional responsibility of Congress to authorize the use of military force, diplomatic, military, and economic support to the Government of Israel in its defense of its territory, people, and existence.”
59. Austin Long et al., “Weighing the Benefits and Costs of Military Action Against Iran,” research paper, The Iran Project, New York, 2012. https://www.scribd.com/document/106806148/IranReport-092412-Final.
60. Robert Pape and James K. Feldman, Cutting the Fuse: The Explosion of Global Suicide Terrorism and How to Stop It (Chicago: University of Chicago Press, 2010), p. 19. Also see Robert Pape, “The Strategic Logic of Suicide Terrorism,” American Political Science Review 97, no. 3 (August 2003): 343-61.
61. Since 2002, there have been at least 25 terrorist attacks on U.S. bases, consulates, or embassies in the Middle East, according to a compilation of news reports by the author.
62. In his 1996 fatwa, bin Laden declared, “There is no more important duty than pushing the American enemy out of the holy land… . The presence of the USA Crusader military forces on land, sea and air of the states of the Islamic Gulf is the greatest danger threatening the largest oil reserve in the world. The existence of these forces in the area will provoke the people of the country and induces aggression on their religion, feelings and prides and pushes them to take up armed struggle against the invaders occupying the land.” See “Osama Bin Laden v. the U.S.: Edicts and Statements,” PBS Frontline, WGBH Educational Foundation, http://www.pbs.org/wgbh/pages/frontline/
    shows/binladen/who/edicts.html.
63. See Pape and Feldman, Cutting the Fuse, p. 2: “In the 24-year period from 1980 to 2003, there were just under 350 suicide terrorist attacks around the world—of which fewer than 15% could reasonably be considered directed against Americans. By contrast, in the six years from 2004 to 2009, the world has witnessed 1,833 suicide attacks—of which 92% are anti-American in origin.”
64. Toshi Yoshihara, “Japanese Bases and Chinese Missiles,” in Rebalancing U.S. Forces: Basing and Forward Presence in the Asia-Pacific, ed. Carnes Lord and Andrew S. Erickson (Annapolis, MD: Naval Institute Press, 2015), p. 53.
65. Lostumbo et al., Overseas Basing, p. 111.
66. This report is according to Toshi Yoshihara, who cites Chinese military publications laying out such a strategy. See Yoshihara, “Japanese Bases and Chinese Missiles,” p. 38. See also David A. Shlapak et al., A Question of Balance: Political Context and Military Aspects of the China-Taiwan Dispute (Santa Monica, CA: Rand Corporation, 2009).
67. Robert Jervis, “Cooperation under the Security Dilemma,” World Politics 30, no. 2 (January 1978): 167-74. See also Jervis, Perception and Misperception, pp. 58-113.
68. In a letter to Kennedy, Khrushchev wrote, “You are worried over Cuba. You say that it worries you because it lies at a distance of ninety miles across the sea from the shores of the United States. However, Turkey lies next to us… . You have stationed devastating rocket weapons, which you call offensive, in Turkey, literally right next to us.” Quoted in Richard Ned Lebow, A Cultural Theory of International Relations (New York: Cambridge University Press, 2008), p. 451. There are other explanations for the Soviet decision to place missiles in Cuba, but this rationale is also explored in Graham Allison and Philip Zelikow, The Essence of Decision: Explaining the Cuban Missile Crisis, 2nd ed. (New York: Longman, 1999), pp. 93-98.
69. Quoted in Lebow, A Cultural Theory, p. 452.
70. See Stephen Kotkin, “Russia’s Perpetual Geopolitics,” Foreign Affairs 95, no. 3 (May/June 2016). See also John J. Mearsheimer, “Why the Ukraine Crisis Is the West’s Fault,” Foreign Affairs 93, no. 5 (September/October 2014): 1-12.
71. Joshua R. Itzkowitz Shifrinson, “Deal or No Deal? The End of the Cold War and the U.S. Offer to Limit NATO Expansion,” InternationalSecurity 40, no. 4 (Spring 2016): 7-44. Also Jonathan Masters writes, “Russia’s invasion of Georgia in the summer was a clear signal of Moscow’s intentions to protect what it sees as its sphere of influence.” Masters, “The North Atlantic Treaty Organization (NATO),” CFR Backgrounder, Council on Foreign Relations, February 17, 2016, http://www.cfr.org/nato/north-atlantic-treaty-organization-nato/p28287?cid=soc-twitter-in-nato-080316.
72. Masters, “The North Atlantic Treaty Organization (NATO).”
73. John Mueller, Atomic Obsession: Nuclear Alarmism from Hiroshima to Al-Qaeda (New York: Oxford University Press, 2010), pp. 95-96.
74. See Ted Galen Carpenter and Doug Bandow, “U.S. Conduct Creates Perverse Incentives for Proliferation,” Nuclear Proliferation Update no. 4, Cato Institute, December 28, 2009. Carpenter and Bandow write, “In particular, countries such as Iran and North Korea have seen how the United States has treated non-nuclear adversaries such as Serbia and Iraq, and that may have led to the conclusion that the only reliable deterrent to U.S. coercion is a nuclear arsenal.”
75. See Joseph A. Bosco, “Entrapment and Abandonment in Asia,” The National Interest (online), July 8, 2013, http://nationalinterest.org/commentary/entrapment-abandonment-asia-8697?page=show; Glenn H. Snyder, “The Security Dilemma in Alliance Politics,” World Politics 36, no. 4 (July 1984): 461-95. For a skeptical view on the role of entangling alliances, see Michael Beckley, “The Myth of Entangling Alliances,” International Security 39, no. 4 (Spring 2015): 7-48. Also see Jennifer Lind, “Article Review 52 on ‘The Myth of Entangling Alliances’,” International Security Studies Forum, April 13, 2016.
76. See Jonathan Mercer,Reputation and International Politics (Ithaca, NY: Cornell University Press, 1996); Daryl G. Press, Calculating Credibility: How Leaders Assess Military Threats (Ithaca, NY: Cornell University Press, 2007).
77. Barry R. Posen, Restraint: A New Foundation for U.S. Grand Strategy (Ithaca, NY: Cornell University Press, 2015), pp. 44-50.
78. Philip F. Bennett, “Korea and the Thirties (A): Case Study,” John F. Kennedy School of Government, Harvard University, 1983.
79. Ibid.
80. See Ted Galen Carpenter, “The Benghazi Report Misses the Real Scandal of Libya,” The National Interest (online), June 29, 2016. See also Jonathan S. Landay, “Despite Reluctance, U.S. Could Be Forced to Act in Libya,” McClatchy Newspapers, March 2, 2011.
81. Calder, Embattled Garrisons, p. 116.
82. Ibid., p. 115.
83. Ted Galen Carpenter and Malou Innocent, Perilous Partners: The Benefits and Pitfalls of America’s Alliances with Authoritarian Regimes (Washington: Cato Institute, 2015), p. 477.
84. Human Rights Watch, “Uzbekistan: Detainees Tortured, Lawyers Silenced,” December 13, 2011, https://www.hrw.org/news/2011/12/13/uzbekistan-detainees-tortured-lawyers-silenced.
85. Casey Michel, “The Obama Administration Is Gifting War Machines to a Murderous Dictator,” New Republic, February 3, 2015. Also see Craig Whitlock, “U.S. Turns to Other Routes to Supply Afghan War as Relations with Pakistan Fray,” Washington Post, July 2, 2011.
86. Gaddis, Strategies of Containment, p. 146.
87. David E. Sanger, “Philippines Orders U.S. to Leave Strategic Navy Base at Subic Bay,” New York Times, December 28, 1991.
88. Vine, Base Nation, p. 267.
89. Jonathan Soble, “At Okinawa Protest, Thousands Call for Removal of U.S. Bases,” New York Times, June 19, 2016.
90. Lostumbo et al., Overseas Basing, p. xxv.
91. Ibid.
92. Ibid.
93. “Operation and Maintenance Overview: Fiscal Year 2015 Budget Estimates,” Office of the Under Secretary of Defense, p. 195, http://comptroller.defense.gov/Portals/45/Documents/defbudget/fy2015/fy2015_OM_Overview.pdf.
94. David J. Berteau and others write, “The overall cost of the U.S. military presence, according to DoD, has been approximately $36 billion for fiscal years 2010-2013. These costs do not include expenditures for equipment or operation of the U.S. Naval fleet that supports the PACOM AOR.” The $12 billion cited above divides by three this cost estimate for three years to give a rough annual cost. Berteau et al., U.S. Force Posture Strategy in the Asia Pacific Region: An Independent Assessment (Washington: Center for Strategic and International Studies, August 2012).
95. Posen, Restraint, p. 108.
96. Vine, Base Nation, pp. 198-99.
97. Ibid., p. 202.
98. Lostumbo et al., Overseas Basing, pp. 131-64.
99. Vine, Base Nation, p. 204.
100. U.S. State Department, “Congressional Budget Justification, Foreign Assistance: Summary Tables, Fiscal Year 2015,” http://www.state.gov/documents/organization/224071.pdf.
101. Stephen Daggett, “Defense Budget: Alternative Measures of Costs of Military Commitments Abroad,” Congressional Research Service, June 16, 1995.
102. Vine, Base Nation, p. 207.
103. Lostumbo et al., Overseas Basing, pp. 256-57, 284. This scenario would save $3 billion annually through minor cutbacks and base closures in Europe, Asia, and the Middle East.
104. The National Commission on Fiscal Responsibility and Reform and Congressional Budget Office proposals were cited by then senator Tom Coburn in his budget plan in 2011, “Back in Black,” pp. 125-26, https://web.archive.org/web/20141207010053/http://www.coburn.senate.gov/public/index.cfm/files/serve?File_id=bc1e2d45-ff24-4ff3-8a11-64e3dfbe94e1. See also Michael Ettlinger and Michael Linden, “A Thousand Cuts,” Center for American Progress, September 2010, https://cdn.americanprogress.org/wp-content/uploads/issues/2010/09/pdf/athousandcuts.pdf.
105. Benjamin Friedman, “Restrained Strategy, Lower Military Budgets,” in Our Foreign Policy Choices: Rethinking America’s Global Role, ed. Christopher Preble, Emma Ashford, and Travis Evans (Washington: Cato Institute, 2016).
106. See The Military Balance 2016 (London: International Institute for Strategic Studies, 2016), p. 17.
107. Robert Jervis, “International Primacy: Is the Game Worth the Candle?” International Security 17, no. 4 (Spring 1993): 52-67.
108. Charles Glaser, “Why Unipolarity Doesn’t Matter (Much),” Cambridge Review of International Affairs 24, no. 2 (June 2011): 135-47.
109. Daniel Drezner, “Military Primacy Doesn’t Pay (Nearly As Much As You Think),” International Security 38, no. 1 (Summer 2013): 52-79.
110. Posen argues for “demobiliz[ing] most U.S. Army troops based abroad” and contends most U.S. bases across Europe, Asia, and the Middle East should “ultimately close.” Posen, Restraint, pp. 158-60.
111. James J. Sheehan, Where Have All the Soldiers Gone? The Transformation of Europe (New York: Mariner Books, 2008).
112. The World Bank, “Russian Federation,” http://data.worldbank.org/country/russian-federation; and The World Bank, “Spain,” http://data.worldbank.org/country/spain.
113. Todd S. Sechser and Matthew Fuhrmann, Nuclear Weapons and Coercive Diplomacy (New York: Cambridge University Press, 2017).
114. Jonathan Masters writes that despite ongoing efforts to revitalize its military, “rearmament has been slow, and much of the military’s equipment remains decades old.” Masters, “The Russian Military,” CFR Backgrounder, Council on Foreign Relations, September 28, 2015, http://www.cfr.org/russian-federation/russian-military/p33758.
115. Justin Logan writes, “The Russian military is weak and constrained, and the further it gets from home, the weaker and more constrained it gets.” Logan, “NATO: Think Again,” Foreign Policy (online), June 20, 2014.
116. Ted Galen Carpenter, “NATO at 60: A Hollow Alliance,” Cato Institute Policy Analysis no. 635, March 30, 2009.
117. Lostumbo et al., Overseas Basing, p. 291. According to Rand, “the ground forces based in Europe do not provide a significant deployment benefit to other theaters.”
118. Todd Sandler and Hirofumi Shimizu, “NATO Burden Sharing 1999-2010: An Altered Alliance,” Foreign Policy Analysis 10, no. 1 (January 2014): 59.
119. See John Mueller, Overblown: How Politicians and the Terrorism Industry Inflate National Security Threats and Why We Believe Them (New York: Free Press, 2006).
120. The 2006 National Intelligence Estimate on Trends in Global Terrorism concludes that the Iraq War was “breeding deep resentment of U.S. involvement in the Muslim world and cultivating supporters for the global jihadist movement,” https://www.dni.gov/files/documents/Special%20Report_Global%20Terrorism%20NIE%20Key%20Judgments.pdf.
121. “The Islamic State (Full Length),” VICE News interview, December 26, 2014, https://news.vice.com/video/the-islamic-state-full-length. President Obama said, “ISIL is a direct outgrowth of Al-Qaida in Iraq which grew out of our invasion which is an example of unintended consequences which is why we should generally aim before we shoot.”
122. See Emma Ashford, “Friends Like These: Why Petrostates Make Bad Allies,” Cato Institute Policy Analysis no. 770, March 31, 2015. See also John Glaser, “America’s Toxic Middle East Allies,” The National Interest (online), December 28, 2014.
123. See Audrey Kurth Cronin, “U.S. Grand Strategy and Counterterrorism,” Orbis 86, no. 4 (Spring 2012): 1-23. Also see Brad Stapleton, “The Problem with the Light Footprint: Shifting Tactics in Lieu of Strategy,” Cato Institute Policy Analysis no. 792, June 7, 2016.
124. Joshua Rovner and Caitlin Talmadge, “Hegemony, Force Posture, and the Provision of Public Goods: The Once and Future Role of Outside Powers in Securing Persian Gulf Oil,” Security Studies 23, no. 3 (2014): 549-50.
125. Ibid., p. 571. Hussein’s invasion of Kuwait was hardly a failure of deterrence in the first place. Chaim Kaufmann describes the “conventional wisdom” as being that “Hussein was misled by a series of U.S. official statements,” signaling that the United States was not interested in defending Kuwait’s territorial integrity. Kaufmann, “Threat Inflation and the Failure of the Marketplace of Ideas: The Selling of the Iraq War,” International Security 29, no. 1 (Summer 2004): 13.
126. Rovner and Talmadge, “Hegemony.”
127. Ibid., p. 564. In any case, the economic pain during the 1973 embargo was the result not of the embargo itself, but from oil price controls imposed by the Nixon administration. Peter Van Doren and Jerry Taylor, “Time to Lay the 1973 Oil Embargo to Rest,” Cato Institute, October 17, 2003, https://www.cato.org/publications/commentary/time-lay-1973-oil-embargo-rest.
128. Eugene Gholz and Daryl G. Press, “Protecting ‘The Prize’: Oil and the U.S. National Interest,” Security Studies 19, no. 3 (August 2010): 453-85.
129. Danielle F. S. Cohen and Jonathan Kirshner, “The Cult of Energy Insecurity and Great Power Rivalry Across the Pacific,” in The Nexus of Economics, Security, and International Relations in East Asia, ed. Avery Goldstein and Edward Mansfield (Redwood City, CA: Stanford University Press, 2012).
130. U.S. Department of Energy, Energy Information Administration, “How Much Petroleum Does the United States Import and Export?” April 1, 2016, http://www.eia.gov/tools/faqs/faq.cfm?id=727&t=6. Also see U.S. Department of Energy, Energy Information Administration, “Oil Net Imports Have Declined Since 2011, with Their Value Falling Slower Than Volume,” February 25, 2014, http://www.eia.gov/todayinenergy/detail.cfm?id=15151.
131. Kenneth R. Vincent, “The Economic Costs of Persian Gulf Oil Supply Disruptions,” in Crude Strategy: Rethinking the U.S. Military Commitment to Defend Persian Gulf Oil, ed. Charles Glaser and Rosemary Kelanic (Washington: Georgetown University Press, 2016), pp. 97-98.
132. Gholz and Press, “Protecting ‘The Prize’,” pp. 453-85.
133. Andrew Scobell and Alireza Nader,China in the Middle East: The Wary Dragon (Santa Monica, CA: Rand Corporation, 2016). As Jon B. Alterman writes, China has “avoided challenging U.S. predominance” in the region and “clearly seek[s] to reinforce the status quo” and “to cultivate the benefits of being just such a disinterested outside power.” Jon B. Alterman, “The Vital Triangle,” in China and the Persian Gulf: Implications for the United States, ed. Bryce Wakefield and Susan L. Levenstein (Washington: Woodrow Wilson International Center for Scholars, 2011), pp. 30-31.
134. Joshua Rovner, “After America: The Flow of Persian Gulf Oil in the Absence of U.S. Military Force,” in Crude Strategy: Rethinking the U.S. Military Commitment to Defend Persian Gulf Oil, pp. 141-65.
135. Ibid.
136. Charles L. Glaser and Rosemary A. Kelanic, “Getting Out of the Gulf,” Foreign Affairs 96, no. 1 (January/February 2017).
137. Lambeth, “American Carrier Air Power.”
138. G. John Ikenberry, “The Rise of China and the Future of the West,” Foreign Affairs 87, no. 1 (January/February 2008): 23-37.
139. According to Thomas J. Christensen, Beijing has a “hedging strategy” that calls for avoiding “direct confrontation [with] the United States and its allies.” Christensen, “Fostering Stability or Creating a Monster? The Rise of China and U.S. Policy toward East Asia,” International Security31, no. 1 (Summer 2006): 123.
140. The U.S. Defense Department describes China’s posture as “strategically defensive” and “rooted in a commitment not to attack, but to respond aggressively once an adversary decides to attack.” Department of Defense, “Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2016,” April 2016, https://www.defense.gov/Portals/1/Documents/pubs/2016%20China%20Military%20Power%20Report.pdf.
141. Yao Jianing, “Xi Brings Strength, Integrity to Chinese Armed Forces,” Xinhua (China), July 30, 2016, http://english.chinamil.com.cn/news-channels/china-military-news/2016-07/30/content_7182049.htm.
142. M. Taylor Fravel, “Power Shifts and Escalation: Explaining China’s Use of Force in Territorial Disputes,” International Security 32, no. 3 (Winter 2007/2008): 44-45.
143. See Thomas J. Christensen, The China Challenge: Shaping the Choices of a Rising Power (New York: W. W. Norton, 2015), pp. 63-94.
144. Stephen G. Brooks and William C. Wohlforth, “The Rise and Fall of the Great Powers in the Twenty-First Century,” International Security 40, no. 3 (Winter 2015-2016): 7-53.
145. Roger Cliff, The Military Potential of China’s Commercial Technology (Santa Monica, CA: Rand Corporation, 2001). Quoted in David P. Rapkin and William R. Thompson, Transition Scenarios: China and the United States in the Twenty-First Century (Chicago: University of Chicago Press, 2013).
146. Friedman, Green, and Logan, “Debating American Engagement,” pp. 181-99.
147. Robert S. Ross, “The Geography of Peace: East Asia in the Twenty-First Century,” International Security 23, no. 4 (Spring 1999): 81-118.
148. Ibid., pp. 111-14. See also Charles Glaser, “A U.S.-China Grand Bargain,” International Security 39, no. 4 (Spring 2015): 49-90.
149. Barry R. Posen, “Pull Back,” Foreign Affairs 9, no. 1 (January/February 2013): 116-28.
150. Robert Haddick, Fire on Water: China, America, and the Future of the Pacific (Annapolis, MD: Naval Institute Press, 2014), p. 139.
151. Andrew J. Nathan and Andrew Scobell, “How China Sees America,” Foreign Affairs 91, no. 5 (Sept­ember/October 2012): 32-47.
152. Toshi Yoshihara writes, “Chinese leaders fret about the so-called Malacca dilemma. China’s heavy dependence on seaborne energy supplies that transit the Malacca Strait has set off Chinese speculation that the United States might seek to blockade that maritime chokepoint to coerce Beijing.” Yoshihara, “Japanese Bases and Chinese Missiles,” p. 43.
153. Evan Braden Montgomery, “Contested Primacy in the Asia Pacific: China’s Rise and the Future of U.S. Power Projection,” International Security 38, no. 4 (Spring 2014): 115-49.
154. Jennifer Lind argues “smooth relations between the United States and China will only be possible in the unlikely event that China adopts an extremely docile national-security strategy, or in the equally unlikely event that the United States cedes its dominant position in the Western Pacific.” Lind, “Are China and America Destined to Clash?,” The National Interest (online), June 27, 2015.
155. John Mearsheimer and Stephen Walt, “The Case for Offshore Balancing,” Foreign Affairs 95, no. 4 (July/August 2016): 70-83. The United States can “wait to intervene after a war starts, if one side seems likely to emerge as a regional hegemon,” as it did to its advantage in both world wars. Also see Eugene Gholz and Daryl Press, “The Effects of Wars on Neutral Countries: Why It Doesn’t Pay to Preserve the Peace,” Security Studies 10, no. 4 (Summer 2001): 1-57.
156. Erickson and Mikolay, “Guam and American Security in the Pacific,” p. 18.
157. Walter C. Ladwig III, Andrew S. Erickson, and Justin D. Mikolay, “Diego Garcia and American Security in the Indian Ocean,” in Rebalancing U.S. Forces: Basing and Forward Presence in the Asia-Pacific, ed. Carnes Lord and Andrew S. Erickson (Annapolis, MD: Naval Institute Press, 2015), p. 137.
158. Ibid.
159. Ibid., p. 145.
160. Ibid., pp. 146-47.
161. See Sen. Jon Tester’s press release on the letter: “Tester: Cut Spending on Unnecessary Overseas Military Construction,” October 18, 2011, https://www.tester.senate.gov/?p=press_release&id=1017.
162. See Sen. Jon Tester’s press release on the bill: “Tester Calls for Update on Overseas Bases Review,” April 5, 2012, https://www.tester.senate.gov/?p=press_release&id=1878.
163. Lostumbo et al., Overseas Basing, p. 10.
164. Pew Research Center, “Public Uncertain, Divided Over America’s Place in the World,” May 5, 2016, http://www.people-press.org/2016/05/05/1-americas-global-role-u-s-superpower-status/.
165. Report to the Committee on Foreign Relations, U.S. Senate by the Subcommittee on Security Agreements and Commitments Abroad, December 21, 1970. Also cited in Vine,Base Nation, p. 243.

Ike Brannon and Ari Blask

Authorization for the National Flood Insurance Program (NFIP) expires on September 30, 2017, offering policymakers an opportunity to rethink the scheme and bring forward reforms that would allow a private flood insurance market to develop in its place.

The NFIP has serious design flaws. Premiums are not priced to be actuarially sound, meaning they do not reflect covered risk. About 15-20 percent of policyholders receive an explicit subsidy, saving them 60-65 percent on the cost of their premium. Such subsidies are not based on need. The remaining “full-risk” policies are not actuarially priced either, as they do not include a “loading charge”—something private insurers use to build up reserves for especially costly years. Largely as a result of these deficiencies, the NFIP owes more than $25 billion to the U.S. Treasury.

NFIP rates are also inaccurate.Covered properties are classified into risk-based categories, and premiums reflect average historical losses within those categories. Such broad aggregation misses property-level nuances that are included in more advanced catastrophe models used by the private sector.

Market insurance premiums reflect the real cost of owning a property. Subsidized and inaccurate premiums distort that cost. Often, the NFIP stokes moral hazard by underpricing insurance, encouraging over development in flood-prone areas. In other cases, property owners pay too much.

Congress tried to fix the NFIP’s flawed premium structure in 2012. However, most of the changes made were repealed or put on hold two years later. This time around, Congress should focus on measures that would enable the growth of the private flood insurance market. Advances in catastrophic modeling, as well as financial instruments used to hedge risk, make widespread private coverage more commercially viable than ever.

Privatization would not disproportionately hurt the working class. A fully private flood insurance market coupled with a targeted, means-tested subsidy would be much less regressive than the status quo. Short of full privatization, Congress should ensure that private insurers can compete on an even playing field with the NFIP.

Introduction

The National Flood Insurance Program (NFIP) was established by the National Flood Insurance Act of 1968, with the intent of reducing the need for post-disaster federal aid by offering flood insurance and providing mitigation incentives to properties that have significant flood risks. The NFIP holds over five million flood insurance policies—roughly 5 percent of all households in the country—that amount to over $1.2 trillion in coverage. The program collects about $3.5 billion in premium revenue annually.¹ It has grown over the past half century, even though no sound economic justification exists for government involvement in flood insurance.

The NFIP is currently about $25 billion in debt to the Treasury, because the premiums do not accurately reflect real risk for a sizable fraction of the program’s clientele.² The inaccurate pricing of risk not only exacerbates short-term losses but also engenders potentially costly long-term risks by obscuring the true cost of building in flood-sensitive areas. Moreover, the NFIP is a fiscally regressive program, with its beneficiaries primarily being wealthy owners of high-value waterfront property in the Southeast.³

Moral hazard, regressive subsidies, and unnecessary debt, among other problems, have prompted lawmakers to consider reforming the NFIP on several occasions over the past 15 years, but without lasting success. However, the current iteration of the NFIP is set to expire before the end of 2017, and debates around its reauthorization will offer Congress a new opportunity to make important changes. The NFIP’s myriad flaws and costly failures should encourage lawmakers to bring forward measures that would allow a robust private market to flourish in place of government-provided insurance.

This policy analysis examines the NFIP’s history, structure, and current problems, as well as the failures of recent reform efforts. It also explores the recent growth of the private market for flood insurance and evaluates the conditions that have enabled that market to emerge. The evidence suggests that, by all salient criteria, a private market is superior to a government-run flood insurance program. Accordingly, this analysis concludes by outlining various steps that Congress could take to encourage the continued growth of a robust and competitive private insurance market.

A Short History of the National Flood Insurance Program

Flood insurance came under federal policymakers’ purview as part of a general trend during the mid-20th century of government increasingly serving as a backstop against large-scale public risks.⁴ A 1934 New Deal provision that offered low-interest federal loans to people affected by natural disasters, including floods, was the first federal policy offering financial compensation to flood victims. The Disaster Relief Act of 1950 created a formal system whereby states and localities could petition the federal government for disaster relief.⁵

Policymakers proposed the government provision of flood insurance throughout the 1950s and 1960s. President Harry S. Truman suggested that the federal government act as a reinsurer for private flood insurers to encourage more private flood policy writing. President Dwight D. Eisenhower signed into law the Federal Flood Insurance Act of 1956, which provided funds for a federal insurance and reinsurance (that is, insuring the insurers) program, but the government never completed the requisite feasibility studies, and no policies were ever underwritten.

Extensive flooding in the 1960s led Congress to direct the Department of Housing and Urban Development (HUD) to conduct a study on constructing and implementing a national flood insurance program.⁶ The study concluded that, if constructed correctly, a federal flood insurance program could help individuals living in floodplains bear the risk of floods while also encouraging future mitigation efforts, all while discouraging further building in the most flood-prone areas. Congressional drafters designed the NFIP largely according to the HUD report’s core recommendations.⁷

Some notable aspects of the current program were not part of that original version. For example, the original program did not require homeowners with government-backed mortgages to buy NFIP insurance if they lived in high-risk areas; Congress added that provision in the 1970s in an attempt to counteract low enrollment.⁸ And it was the Federal Emergency Management Agency (FEMA) that initiated the policy of grandfathering properties transferred from lower-risk to higher-risk areas during remapping, rather than charging such homeowners the market price for their insurance.⁹

Unfortunately, Congress did not sufficiently appreciate that the limited availability of private flood insurance indicated the steep underlying cost of living in a floodplain. The risk of flood damage served to limit people’s interest in living in or developing flood-prone areas, which Congress should have recognized as a good thing, not a “market failure” that government needed to address.

The National Flood Insurance Program in a Nutshell

FEMA bases the prices for NFIP policies on a nationwide system of flood insurance rate maps that mark floodplains and help gauge flood risk. FEMA uses a categorical system to determine the amount of flood risk in a given area, which notes the type of body of water nearby, the elevation, the presence of levees or other mitigating structures, and various other factors material to determining risk.

NFIP insurance is available to property owners only if their local government decides to participate in the program, which entails its agreeing to the FEMA risk map and accepting floodplain management and a community-wide mitigation standard devised by the agency.¹⁰

FEMA encourages risk mitigation through its community rating system, which allows policyholders located in a community’s higher-risk areas to pay lower rates if that community implements mitigation efforts, such as enforcing strict building codes, enacting zoning rules that limit development in floodplains, and building or improving flood control structures such as dams and levees. FEMA rates communities on the basis of their flood mitigation efforts, and its ratings determine the cost of insurance, with the best communities receiving a nearly 50 percent discount.¹¹

Premiums and Subsidies

FEMA designates properties participating in the NFIP that have a 1 percent or greater risk of flooding in a given year as being in special flood hazard areas (SFHAs). Owners of such properties are required to purchase flood insurance if they have a mortgage issued or guaranteed by the government. Lawmakers introduced this mandate to counteract adverse selection problems and to reduce potential free riding on expected post hoc federal aid.

FEMA cannot deny coverage to anyone who purchases a policy for a property located within an SFHA.¹² Owners and renters of property located within a community participating in the NFIP, but outside an SFHA, have the option of purchasing preferred risk policies (PRPs), which receive discounted rates relative to standard NFIP policies based on risk. In contrast to policies written for properties within an SFHA, FEMA can deny coverage to a PRP applicant if the property has a significant history of flood loss.

About 20 percent of all NFIP policies receive an explicit subsidy. By law, FEMA is required to subsidize policies for properties constructed or substantially renovated before 1975, or before the date FEMA published the first rate map for the community that the property is in.¹³ FEMA refers to this subsidy as the pre-flood insurance risk map, or pre-FIRM, subsidy. The logic behind offering this subsidy was that the owners of properties built before the mitigation incentives of the NFIP took root needed an extra incentive to participate in the program and deserved to be protected from falling property values resulting from the insurance mandate.

Congress expected these subsidies to be temporary, believing that old properties would gradually be replaced by buildings better designed to withstand flood risk. However, the subsidies have effectively discouraged the replacement of these properties, as well as any mitigation efforts. Premiums for pre-FIRM subsidized policies are just 35 to 40 percent of comparable nonsubsidized rates.¹⁴

FEMA also subsidizes policyholders of properties that are reclassified into a higher risk zone when FEMA issues new maps. An estimated 10-20 percent of all NFIP policies are grandfathered into a lower rate.¹⁵

Policies that do not receive an explicit subsidy are referred to as “full-risk policies.” Despite the name, their premiums are not high enough to allow for sufficient profits in years with below-average flood damage to compensate for years with flood damage that is well above average.¹⁶

Problems with the National Flood Insurance Program, and the Potential for Solutions

The NFIP is plagued by myriad structural problems. Although some of these problems could theoretically be ameliorated by legislation, the reality is that they are endemic to any government insurance scheme. An objective examination of the NFIP’s problems and their causes shows the importance of a growing private flood insurance market as an alternative to government-run insurance.

Debt

The NFIP is currently $25 billion in debt, which reflects the nonactuarial pricing of the full-risk policies as well as the effects of the pre-FIRM and grandfathering subsidies. The NFIP’s pricing of a full-risk premium does not include a catastrophe loading surcharge, a typical feature of private disaster insurance in which the insurer builds reserves in low-cost years to cover losses in high-cost years. As a result, the NFIP unavoidably accrues massive debt in especially bad years that it cannot repay.¹⁷ The NFIP’s current debt burden comes largely from two events—Hurricane Katrina in 2005 and Superstorm Sandy in 2012. The NFIP was nearly solvent before Katrina, but that storm left it with $18 billion of debt. The aftermath of Sandy accounts for most of the rest.¹⁸ Figure 1 summarizes the NFIP’s annual net income since 1978.

In 2011, the Property Casualty Insurers Association of America conducted a study on the difference between NFIP pricing and private flood insurance pricing. It concluded that NFIP coverage is offered at half the standard price of comparable private coverage, on average. Although subsidies account for some of the difference, the study still determined that private insurance would on average be priced about 25 percent higher than an NFIP plan in low-risk areas, where subsidies are minimal.¹⁹

The NFIP also differs from private insurance companies in that it cannot deny coverage to especially risky properties with histories of repeated extensive flood damage, so long as they are located in an SFHA. These especially risky properties—which FEMA refers to as repetitive loss properties and severe repetitive loss properties—are a significant source of the NFIP’s debt.²⁰ A Government Accountability Office study found that from 1978 to 2004, repetitive and severe repetitive loss properties comprised only 1 percent of all NFIP insured properties, but accounted for 38 percent of all claims paid by the program.²¹

Figure 1

National Flood Insurance Program Annual Net Income, 1978-2017 (millions of dollars)

Source: “Loss Dollars Paid by Calendar Year,” Federal Emergency Management Agency, https://www.fema.gov/loss-dollarspaid-calendar-year; “Earned Premium, Total by Calendar Year,” Federal Emergency Management Agency, https://www.fema.gov/total-earned-premium-calendar-year.

Regressivity

Wealthier households benefit disproportionately from the reduced average cost of flood insurance brought about by government intervention. Of course, not all NFIP-insured properties are high value, but insured homes are on average more valuable than noninsured homes. Conclusions about the program’s regressive effects are in line with the intuitive proposition that property near water, especially along the coast, is more valuable than property without a water view, on average.²²

Table 1

Median Property Values, National Flood Insurance Program vs. All Owner-Occupied

Source:“Value of Properties in the National Flood Insurance Program,” U.S. Congressional Budget Office, June 2007, p. 6.

The increased attention paid to flood risk management policy in the aftermath of Hurricane Katrina provided an impetus for policy researchers to consider the distributional effects of the NFIP. In 2007, the Congressional Budget Office (CBO) published a report containing statistics on the average and median values of properties in the NFIP. The CBO divided properties into four categories: full-risk coastal properties, subsidized coastal properties, full-risk inland properties, and subsidized inland properties. The median value of properties in the NFIP exceeded the median value of an American home across all four categories, as shown in Table 1. Coastal properties with NFIP policies, both with and without explicit subsidies, had a median value roughly $200,000 higher than the median American home. Moreover, the CBO report emphasized that many subsidy recipients own properties with well above average values; 40 percent of coastal properties receiving subsidies were worth more than $500,000 and 12 percent were worth more than $1 million.²³

In a recent Stanford Law Review article, Omri Ben-Shahar and Kyle Logue argue that the NFIP is regressive because any insurance scheme that cross-subsidizes on the basis of risk exposure will inescapably benefit those who are most exposed to risk—and, in the case of flooding, the disproportionately wealthy residents of coastal areas tend to face the most risk. Comparisons of NFIP premiums with potential private premiums show that NFIP policyholders with the most risk exposure tend to receive the largest subsidy, with 80 percent of explicit subsidy recipients living in counties in the top income quintile.²⁴

Geographic Redistribution

Since the premiums of policyholders do not fully support the NFIP, it necessarily entails distributing taxpayer money to coastal areas. A 2010 study published by the Institute for Policy Integrity, which is affiliated with the New York University School of Law, shows that about half of the residential properties covered by the NFIP are located in either Florida or Texas. That study also examined the coverage amount of claims paid per capita since 1978 by state and found that the Gulf Coast in general is disproportionately represented in each metric. As the authors conclude, “The largest benefit of the program—namely, access to below-market rate coverage—represents a significant shift in resources to the hurricane-vulnerable states along the Gulf and Atlantic coasts.”²⁵ Figure 2 shows the 10 states that have received the most money since 1978.

Figure 2

States with the Most Payments Received, 1978-2015 (millions of dollars)

Source:“Claim Information by State, 1978-Present,” Federal Emergency Management Agency, https://bsa.nfipstat.fema.gov/reports/1040.htm.

Moral Hazard

The clearest evidence of the moral hazard caused by the NFIP is the slower-than-expected rate of demolition and renovation of subsidized pre-FIRM properties. One reason lawmakers enacted the pre-FIRM subsidies was that they expected the properties to be quickly replaced or subjected to mitigation efforts; the 1966 HUD study that motivated the creation of the NFIP predicted that most preexisting properties would be replaced within 25 years of the legislation’s enactment. Contrary to that expectation, the number of existing pre-FIRM flood-prone buildings has declined at a rate of about 1 percent a year since the NFIP was established. More than 3.5 million of those buildings were still in existence at the time of the most recent survey.²⁶ The slow rate of demolition reflects the fact that the availability of subsidized insurance makes pre-FIRM properties more valuable.²⁷

The moral hazard engendered by the NFIP also distorts decisions about new building. The NFIP requires participating communities to ensure that all new buildings since the adoption of the insurance program conform to minimum mitigation standards, which has reduced insurance payouts by a considerable sum. However, the underpricing of most flood insurance has still inflated property values and encouraged more building in dangerous areas. Because the NFIP has increased the value of many properties at risk of flood damage without forcing those costs to be fully internalized, it unwittingly increased the real and social costs of flood risk.²⁸

Imprecise Pricing

In addition to nonactuarial pricing and explicit, non-need-based subsidies, the NFIP’s premium pricing is maddeningly imprecise. Full-risk rates are set using a formulaic approach that assumes that flood risks in a given risk zone are more or less consistent, and that historical claims data can serve as a good proxy for estimates of future risk. As a result, premium rates for individual policies are less accurate than they would be in an insurance system that used granular data and forward-looking probabilistic modeling.

Table 2

NFIP Average Premium Loss vs. Private Market

Source: Erwann Michel-Kerjan, Jeffrey Czaijowski, and Howard Kunreuther, “Could Flood Insurance Be Privatised in the United States? A Primer,” Geneva Papers on Risk and Insurance 40, no. 2 (2014): 17, 18.

In 2014, researchers from the Wharton School’s Center for Risk Management and Decision Processes compared the NFIP’s premiums with those yielded by a private-sector model.²⁹ The researchers—Erwann Michel-Kerjan, Jeffrey Czaijowski, and Howard Kunreuther—used comprehensive property-level data from Travis and Galveston Counties in Texas.³⁰ They chose Texas because of the state’s significant exposure to both coastal and riverine flood risk.

To calculate standard private-sector premiums, the researchers used a catastrophe model for floods provided by international reinsurer Swiss Re and data provided by the firm CoreLogic.³¹ Premiums yielded by the catastrophe model differed from the premiums the NFIP charges for two reasons. First, the NFIP gauges risk using only historical data. Solely relying on historical data is a deterministic approach: it assumes that the past is indicative of the future. By contrast, the catastrophe model is stochastic: it accounts for the fact that flood occurrences are random and quantifies risk according to probability of occurrence. Second, the catastrophe model yields individualized results for each single property measured. The NFIP, by contrast, charges the same price per coverage amount for each property within a risk zone. The only factor mediating this generic pricing is the elevation of a property’s base floor.

The catastrophe model yields the average annual loss for properties examined by measuring the frequency and severity of flood risk and applying that risk measurement, as stochastically modeled, to the vulnerability (that is, the ability to withstand risk) of each property. Average annual loss represents a pure private insurance premium—the amount a private insurer would charge to cover its risks perfectly, without accounting for “loading.” Loading refers to any additional charge a private insurer might include in a premium beyond expected average annual loss—so as to make a profit, for example, or to pay administrative fees or build a reserve fund. The Wharton researchers compared the pure private premium with the NFIP rates. That allowed for an accurate comparison of price accuracy, as the NFIP does not include a loading charge in its premiums.

In both Galveston and Travis Counties, premiums determined by the catastrophe model displayed significantly more variance than the NFIP premiums. In Travis County, the distribution of NFIP premiums somewhat resembles a bell curve, as about 65 percent of premiums cost between $2.50 and $5.51 for a thousand dollars’ worth of coverage. By contrast, the distribution of premiums determined by the catastrophe model is much more even. If anything, the private premium distribution resembles an “inverted bell curve,” as over 35 percent of premiums are priced at less than $2.50, and about 30 percent of premiums are priced over $10. In Travis County, the NFIP undercharged on average in the riskiest zones while overcharging on average in low-risk zones. In Galveston County, the pattern reversed, with the NFIP overcharging the riskiest V zone but undercharging all others.³² The paper’s results are summarized in Table 2.

The researchers emphasized that premiums yielded by the catastrophe model displayed a greater variance than the premiums charged by the NFIP for each risk zone, regardless of whether the average catastrophe model premium exceeded or fell below the NFIP average premium for that zone. As they noted, “We find important elements of cross-subsidization within each of the risk categories where some high-risk properties are actually over-priced and some low-risk properties are underpriced.”³³ In essence, the Wharton study shows that the NFIP premiums are less accurate than they could be, and that to an extent it is random whether a policyholder pays too much or too little. It is, of course, seriously problematic that NFIP premiums are much less accurate than today’s technology and insurance methodology allow.

Recent Reform Efforts

The effects of Katrina and Sandy made the long-run unsustainability of the NFIP clear to policymakers and catalyzed discussions of significant reform. Those discussions led to Congress passing a large-scale reform in 2012, but most of the changes made did not last long, being largely repealed just two years later.

The 2012 Flood Insurance Reform Act, cosponsored by then Rep. Judy Biggert (R-IL) and Rep. Maxine Waters (D-CA), attempted to address the NFIP’s accrual of debt as well as the unintended effects of improperly priced premiums. The legislation enacted a series of premium increases that would end the pre-FIRM and grandfathering subsidies, established an initiative to improve risk mapping, mandated that premiums reflect catastrophic loss probabilities, and contained measures to encourage the development of a primary private market, including allowing residents of SFHAs to meet mandatory purchase requirements through buying private insurance.³⁴

However, a political backlash ensued only one year after enactment, when a first round of premium increases was scheduled to take place. Affected policyholders expressed concerns to their political representatives, and politicians representing coastal areas portrayed the premium increases as disparately affecting working-class Americans with little budgetary flexibility. Industry groups with a stake in maintaining existing property values also applied political pressure.³⁵ As a result, Congress passed the Homeowner Flood Insurance Affordability Act in 2014, which rolled back many of the Biggert-Waters reforms while subjecting others to a delayed implementation contingent on further studies.³⁶

The Biggert-Waters backlash demonstrates the applicability of core public choice insights about public policy in modern democratic states to the NFIP. Public choice would say that policy often concentrates benefits on a small, vocal interest group while spreading corresponding costs across society as a whole. The combination of concentrated benefits and diffused costs makes rolling back policy much more difficult than enacting it, as the interest group receiving large benefits is likely to place much more pressure on political representatives than the general citizenry bearing the diffused costs.³⁷

Essentially, reforming the NFIP so that it operates like an actuarially sound private insurance company entails imposing a large cost on those policyholders receiving highly subsidized insurance while granting only a limited benefit to society at large. A more direct and politically palatable approach to reducing the debt and moral hazard wrought by the NFIP would be to encourage the growth of the private insurance market.

Private-Sector Alternatives

In the 1977 article that led to their Nobel Prize in Economics, economists Finn Kydland and Edward Prescott explained that an optimal public policy discretionarily chosen by government officials can result in suboptimal long-term results. If policy is static, then economic agents can adjust their behavior in a way that undermines the longer-term goals of policy. Kydland and Prescott demonstrated their point through a formal (mathematical) model, but they also included a few hypothetical qualitative examples.

One of those hypotheticals was government flood policy. Kydland and Prescott described a discretionary government flood policy of restricting new building in a floodplain but also protecting preexisting structures. Such policy would be optimal in the short run, but rational agents would surmise that so long as the government is committed to protecting existing structuresnow, it will likely come to protect new structures constructed in the future. If the government did not adopt a specific, hard-to-breach rule prohibiting building or restricting the provision of aid in the future, optimal short-run flood policy would actually encourage more building and result in a suboptimal long-term result.³⁸ And, the authors added, that ostensibly hard-to-breach rule would be almost impossible for a government to stick to.

Kydland and Prescott’s hypothetical accurately describes the course of U.S. flood insurance policy. The NFIP has had some success in reducing post hoc federal aid and encouraging the adoption of mitigation technology. But by making the NFIP available to all property owners in flood-prone communities, the government unwittingly encouraged the continued overdevelopment of at-risk areas.³⁹

To counteract forward-looking economic agents undermining discretionary government policy, Kydland and Prescott recommended dynamic policy rules that incorporated a fixed feedback mechanism, thus institutionalizing a response to changing future conditions. In the case of flood policy, that sort of dynamism can best be accomplished by private insurance. Private insurers engage in many of the same tasks as government regulators of safety. They measure the probability of harm and gauge the effectiveness of mitigation measures and behavior. They also impose private insurance premiums that function like a Pigouvian tax—that is, a charge that internalizes a negative externality.⁴⁰ The profit motive of private insurers serves as a dynamic feedback rule, encouraging continued socially optimal risk management.

The ideal “reform” to the NFIP would be to fully privatize flood insurance. That would be more likely to fix the system in a way that would limit the long-run government liability than any alternative legislative approach. Today, financial innovation and risk modeling technology improvements make broad-scale private insurance more feasible than when the NFIP was adopted. Moreover, concerns about affordability can be addressed more accurately and fairly through a means-tested subsidization program than under the current system.

No Justification for Government Flood Insurance

Before discussing the practical benefits and feasibility of private insurance, it is worth emphasizing that government should not have become involved in the flood insurance market to begin with.

The federal government’s rationale for providing flood insurance stemmed from a belief that limited private-market flood insurance constituted a market failure, as well as from faith in government’s own ability to centrally plan an optimal mix of development and conservation in flood-prone areas. In a 1966 executive order, President Lyndon B. Johnson expressed confidence that a centralized flood management system could “preclude the uneconomic, hazardous, or unnecessary use of flood plains,” while also “reducing future Federal expenditure for flood protection.”⁴¹

The HUD report that provided a blueprint for the NFIP contained similar thinking. It also expressed the idea that near-universal access to flood insurance for floodplain residents was socially beneficial. The report went on to suggest that it was “unlikely, based on past experience” that a fully private market could provide such access. Government-run insurance would, the report continued, “limit future flood damages without hampering future economic development.” If designed correctly, such insurance would “prompt an adjustment in land use to reduce individual and public losses from floods.”⁴²

Unfortunately, the government’s thinking in the late 1960s turned out to be misguided. Limited private flood insurance did not constitute a market failure, and the government’s flood management goals would have been easier to meet if market forces had continued to hold sway. Exposure to flood risk depends on one’s choice of where to live, which means there is no “market failure” argument to justify intervention. In economics, market failure refers to instances where a condition inherent in the structure of a market for a given good or service results in an inefficient outcome. Some economists argue that government regulation can competently address the problems brought about by a market failure. Types of market failure include information asymmetry, adverse selection, and public goods.

Nothing, however, is inefficient about insurance being prohibitively expensive in a risky area, especially when viable alternate locations to live or operate a business exist. If anything, the limited availability or expense of insurance before the enactment of the NFIP was a sign of a properly functioning market, which accurately reflected the costs of living in a flood-prone area at that time. The government’s decision to intervene should be understood as a social, rather than economic, policy choice. And by any reasonable social perspective, intervention was a poor choice, as the NFIP has imposed costs on society at large while disproportionately benefiting wealthier Americans.

Moreover, the federal government does not offer insurance for other natural disaster risks such as wind or earthquake. The disparity between the government’s treatment of tornado risk and its treatment of flood risk is especially telling. Tornadoes are, of course, a natural disaster, and the private market for wind insurance faces similar pitfalls as those for flood: the riskiest properties are uninsurable, individuals facing risks may expect post hoc federal aid or otherwise choose not to buy insurance, and less wealthy people living in risky areas may not be able to afford market-based premiums. In fact, some analysts have confessed their surprise that the government offers flood but not wind insurance, given that areas with tornado risk tend to be in less desirable regions with less wealthy residents than areas with flood risk. What’s more, tornadoes are a more random occurrence.⁴³

Modern financial and geographic modeling technology means that private insurers can profitably offer insurance againstmost flood risk today. That doesn’t mean, however, that the private insurance market was deficient in 1968. Just as we would reasonably consider the development of new homebuilding technology as altering the calculus about building in flood-prone areas, so we should also consider the development of insurance technologies as altering the real price of risk.

Growth of the Private Market after Biggert-Waters

Private-sector involvement in the flood insurance market increased significantly after Biggert-Waters allowed property owners to meet mandatory insurance requirements with private plans. Along with increasing premiums on subsidized policies, the law encouraged insurance firms to investigate the competitiveness of private alternatives. Results of catastrophic modeling suggest that such alternatives would be competitive.⁴⁴

Syndicates of high-profile international insurance companies—including Lloyd’s of London, AIG, Chubb, Allianz, and Berkshire Hathaway—began offering primary insurance in competition with FEMA soon after the law passed.⁴⁵

The results have been encouraging: private insurers have taken not only the least risky properties in the NFIP, as some suggested might happen, but also the riskier coastal properties as well. In some instances, private insurers have even been able to compete with the NFIP on properties eligible for subsidized rates.

Only a small number of primary NFIP policyholders have switched to private insurance so far, but leaders of the insurance and reinsurance firms involved in the market have expressed confidence that they can take on most NFIP policies. A 2014 Wall Street Journal article quoted Edward Noonan, CEO of international reinsurer Validus Group, on the capacity for privatization: “The flood-insurance program [NFIP] shouldn’t exist. . . . The private sector can provide all the capacity required… . There’s just nothing unique about flood that requires a government program today.”

A 2016 report by Aon Benfield, a leading global provider of consulting and advisory services to reinsurance firms, dedicated a section to private-sector opportunities in flood insurance, which was aptly titled “Flood Remains a Major Global Growth Opportunity.” Discussing opportunities specifically from U.S. risk held by the government, the report went on to state:

The reinsurance market is showing that there is confidence in the analytics to price these risks and to reinsure portfolios of flood risk. This is primarily based on the flood models that are becoming readily available and the confidence in the science underlying these models. There is now an opportunity for insurers to evaluate the flood risk and look to provide coverage for these properties… . This is an exciting time in the flood risk analysis space and the opportunity for insurers is substantial.⁴⁶

In January 2017, the NFIP made its first significant purchase of private-market reinsurance, for over $1 billion in coverage (which the 2012 Biggert-Waters Act authorized). The interest of global reinsurers in American flood risk will persist if a competitive private market is allowed to develop.⁴⁷

Recent congressional testimony by Evan Hecht, CEO of Lloyd’s of London subsidiary The Flood Insurance Agency (TFIA), drove home the promise and potential benefits of large-scale private flood insurance. Hecht noted that a majority of the policies TFIA has underwritten so far qualified for the NFIP’s pre-FIRM subsidies, and that the properties in FEMA’s riskiest zones tend to be easier to insure privately than those with “preferred risk” policies. Hecht also claimed (without providing evidence) that private insurers offer a better customer service experience than the NFIP, a contention that’s perfectly consistent with people’s experience in other places where the government has competed against private companies.⁴⁸

The 2014 Wharton School research outlined earlier demonstrated that private insurance firms have the technical capacity to price insurance more accurately than the NFIP. A proliferation of private insurance offerings could thus lead to savings for those NFIP homeowners who are currently paying overpriced premiums because of overly broad risk aggregation. The Wharton researchers noted several factors that could discourage private insurers from entering the flood insurance market: possible risk correlation; difficulty in distinguishing flood damage from wind damage, which requires different risk calculations; various regulatory constraints; and logistical difficulties inherent in transitioning from the NFIP to a private market. Nevertheless, those same researchers concluded that the entry of private firms into the market suggested that free enterprise “seemed to have solved some of these issues.”⁴⁹ A 2014 report from Deloitte emphasized that flood insurance is the largest area for property and casualty insurance growth in the United States, with billions in potential annual premiums, and it stressed that private insurers will be interested in the market so long as the market is profitable and government policy does not hinder fair competition.⁵⁰

That said, given that NFIP insurance is underpriced in aggregate, it is unreasonable to assume that private insurers could offer cheaper premiums for the majority of NFIP policies without a change to the NFIP’s premium structure. Other advantages that private insurers wield relative to the NFIP may allow those insurers to compete even in instances when they cannot win on price, however. First, NFIP coverage is limited in important respects. Residential policyholders can insure only up to $250,000 worth of building contents property, and most personal basement property is not covered under NFIP plans.⁵¹ Some policyholders will likely prefer to purchase a comprehensive plan and not worry about gaps in NFIP coverage.

Moreover, many policyholders would likely prefer to have all property and casualty risk covered under the same policy. All-hazards insurance is common in the United Kingdom, and experts note that insurers would benefit from supplying such policies in the United States.⁵² All-hazards insurance would solve issues related to discerning whether wind or flood caused a given set of damages. Such issues have led to disputes and litigation between policyholders, the NFIP’s Write Your Own contractors, and private property and casualty insurers.⁵³ It is reasonable to expect that some consumers would prefer to pay a slightly higher premium in exchange for the certainty and convenience stemming from having an all-hazards policy.

The surest way to promote the growth of private flood insurance short of completely ending the NFIP would be to couple broad-based premium reform with an active effort to transfer policies to private insurance. The state-run Florida Citizens Property Insurance Corporation, which provides subsidized wind insurance to properties with hurricane risk, transferred about two-thirds of its policies to private insurers from 2012 to 2016 after undertaking these steps.⁵⁴ However, the inaccuracy of the NFIP’s current pricing system, coupled with the nonprice advantages of private insurance, demonstrates that consumer demand will be strong for private flood insurance even if the NFIP’s distortive premium structure remains intact.

Private Insurance and Financial Innovation

The recent success of private flood insurance has been encouraging and gives hope that future gains might be attainable as well. However, the continued success of private flood insurance depends largely on further gains in financial innovation, and that is problematic, at least from a political perspective.

The accepted narrative of the financial crisis of 2008-9 was that the complexity of advanced financial products contributed to the depth of the crisis; as a result, regulators of late have cast a wary eye on new innovations in financial markets.⁵⁵ However, taking such a strict approach to financial innovation is both shortsighted and unfair: it overlooks the very real gains advanced financial instruments have brought to the economy by deepening capital markets and allowing risk to be more widely distributed and hedged against.

Floods are a challenge for private insurers because of covariant risk (flood damage hits many properties at the same time), and they also have the potential for high-severity losses. A year in which a substantial number of policyholders in a given risk pool all file maximum claims can bankrupt a flood insurer that’s not sufficiently hedged and diversified. For example, Hurricane Andrew bankrupted nine property and casualty insurers with wind or secondary flood exposure.⁵⁶ In addition to the difficulty in accurately gauging flood risk, scholars have pointed to covariance and the possibility of deep losses as historically limiting the availability of private flood insurance—and thereby providing a rationale for a government-managed program.⁵⁷

However, today’s advanced, global capital markets have superseded any barriers to private flood insurance stemming from covariant risk. The experience of Hurricane Andrew motivated academics—and then insurance companies—to investigate the possibility of reinsuring through global securities markets. Advanced risk modeling allowed insurance companies to price and issue catastrophe (CAT) bonds, which are a securitized, tradable financial instrument that entitles the owner to interest payments while stipulating that owners must forfeit their principal if losses from a given catastrophe exceed a predetermined value.⁵⁸ In the past decade, insurers worldwide have issued CAT bonds as reinsurance against catastrophic risks such as terrorism, war, and natural disasters. An active global trading market in CAT bonds developed over the past 15 years; hedge funds are especially attracted to CAT bonds because risks are mostly uncorrelated with traditional financial assets.⁵⁹

Figure 3

Global Reinsurance Capital, 2007-2016 (billions of dollars)

Source: “Reinsurance Market Outlook,” Aon Benfield, January 2017, p. 2, http://thoughtleadership.aonbenfield.com/Documents/20170105-ab-analytics-rmo.pdf.

The CAT bonds that those insurers issue usually offer protection for multiple severe, catastrophic risks, including winter storms, wildfires, earthquakes, and so on, in addition to floods.⁶⁰ CAT bonds would play an integral role if private firms were to become the main flood insurers in the United States. Their development is a triumph of private-sector innovation and evidence that, in the words of Wharton’s David Cummins, “government involvement in the market for natural catastrophe insurance should be minimized to avoid crowding-out more efficient private market solutions.”⁶¹

Figure 4

Alternative Market Reinsurance Capital, 2007-2016 (billions of dollars)

Source: “Insurance-Linked Securities,” Aon Benfield, September 2016, p. 15, http://thoughtleadership.aonbenfield.com/Documents/20160907-securities-ils-annual-report.pdf.

Catastrophe bonds, along with other forms of insurance-linked securities (ILS), have increased the capacity for primary insurers to hedge flood risk through the reinsurance market. As Figures 3 and 4 show, ILS have contributed significantly to a rapid expansion in the total amount of global capital dedicated to reinsurance.⁶² Consulting firm Aon Benfield recently predicted that total ILS capital will continue to grow rapidly, to between $120 billion and $150 billion by 2018. CAT bonds and other ILS are especially advantageous (compared with traditional equity capital) for insuring against low-probability, high-damage events.⁶³ Moreover, the securities markets allow for reinsurers to access new capital much more quickly if a shock drains existing levels. Underwriting cycles have dampened since Hurricane Andrew, the last global shock to occur before the development of CAT bonds and other ILS.⁶⁴

Private Insurance and Distributional Issues

A common objection to any reform of the NFIP is that attempts to fix debt and moral hazard issues will punish working-class Americans who cannot afford higher insurance premiums. During the 2014 floor debate over the Homeowner Flood Insurance Affordability Act, the legislation that rolled back the 2012 premium increases under Biggert-Waters, Rep. Bill Cassidy (R-LA) expressed that objection thus: “Now, is this a bailout for rich people? The people in Louisiana who will benefit … are working people.” Sen. Robert Menendez (D-NJ) likewise spoke of “families who could lose their homes due to crushing flood insurance premiums.”⁶⁵

Although it may be true that some lower-income people benefit from the NFIP, the program, as a whole, is highly regressive. It is worth emphasizing that private insurance, coupled with a means-tested subsidy, would be less regressive than what currently exists under the NFIP. The NFIP’s financial weakness reflects the randomness of the premium structure and is not evidence of any system-wide subsidy for the working class.

Although private insurance might result in higher premium payments on average as a consequence of the need to include a “catastrophe loading” charge, premiums will more closely reflect real risk. Kunreuther’s study comparing private insurance with NFIP rates in Texas suggests that some policyholders would, in fact, pay lower rates with private insurers, despite the catastrophe loading charge. In other words, both rich and poor homeowners could receive rate cuts.

Moreover, although subsidized insurance premiums might ease financial burdens for those receiving subsidies, they also exacerbate the collective exposure to risk, which leads to greater damages and a higher cost to taxpayers. If the government is to subsidize the provision of flood insurance, it should be done in a way that maximizes benefits to the truly needy while minimizing costs to society. The NFIP’s rate structure is far from meeting that ideal. Transitioning to a private insurance system with carefully implemented, means-tested subsidies would allow for a more efficient and fairer flood insurance system.⁶⁶

Conclusion: First Steps toward Reform

Congress’s decision to create the NFIP in 1968 was not economically or socially justified. This year’s reauthorization deadline should prompt a reconsideration of the program and discussions of reform. The most important initial steps that policymakers can take in reforming the NFIP are those that improve the viability of private insurers and allow them to compete with the NFIP on a level playing field.

Congress took a major step in 2012 toward normalizing private flood insurance by requiring that federally backed lenders accept private insurance, but legal impediments to private flood insurance penetration remain. Congress can and should address those impediments in conjunction with the September 2017 reauthorization deadline. First, restrictions on coverage terms—as well as criteria that private insurance plans must meet to qualify for the mandatory purchase requirement—should be eased. Currently, private insurance must contain all coverage requirements present in NFIP plans to meet the mandatory purchase requirement. However, that approach overlooks the NFIP’s one-size-fits-all approach to policy writing; the greater flexibility of private insurers to tailor coverage to specific characteristics of the properties they insure is a feature, not a bug.

Second, statutes governing the NFIP prevent private firms that sell and manage policies through the Write Your Own program from selling competing insurance. Congress should eliminate that noncompete clause. Ideally, in a fully privatized system, private insurers would not have to compete with the government at all. In the transition stage, it is reasonable to expect a robust private market developing parallel to the NFIP (as is the case in, say, the mortgage market). It is therefore imperative that all potential private insurers be given the opportunity to offer insurance—the goal being to create a deeper and more competitive market.

Third, FEMA should release all historical property-level data related to flood risk to private insurers and modeling companies. Such data are necessary for private insurers to develop the most accurate and precise risk models and to price insurance plans accordingly. As private insurers have a greater incentive and capacity to use historical and scientific data to determine the most accurate and fair premiums, no good reason exists to deny data sharing. Adequate steps can be taken to ensure that any sensitive information on specific individuals is not revealed.

Fourth, Congress should clarify rules on whether mortgage lenders are required to accept surplus lines insurance—that is, insurance purchased from a firm that is not licensed in the policyholder’s state of residence. Usually, surplus lines insurance is purchased when consumers cannot find an insurer licensed in their home state.

Surplus lines insurance is a significant component of the private flood market. In 2014, the surplus lines market accounted for $126.6 million in premiums from six states that collect data. By comparison, the NFIP collected about $3.5 billion in premiums in 2014.⁶⁷ As of now, proposed rulemaking designed to clarify the requirement that lenders accept private insurance—issued jointly by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Reserve, the Farm Credit Administration, and the National Credit Union Administration—would exclude surplus lines insurance policies that offer narrower coverage than an NFIP policy.⁶⁸ Congress should explicitly clarify that lenders must accept a surplus lines policy so long as the provider is approved by any state-level regulator.⁶⁹

These measures and any others that encourage a more robust, deep, and penetrating private flood insurance market should be Congress’s priority during the upcoming reauthorization debate. Congress should lay the groundwork for the gradual privatization of the NFIP, as a private system offers the best way of addressing the problems of moral hazard, excessive debt, regressive subsidies, and imprecision that plague our flood insurance system today.

Notes

1. “Statistics by Calendar Year,”FederalEmergency Management Agency,https://www.fema.gov/statistics-calendar-year;“Quick Facts,”U.S. Census Bureau,https://www.census.gov/quickfacts/table/PST045216/00.
2. Meghan Milloy, “How to Stop the US Flood Insurance Program from Drowning in Debt,”The Hill, January 31, 2017.
3. See generally Omri Ben-Shahar and Kyle Logue, “The Perverse Effects of Subsidized Weather Insurance,”Stanford Law Review68, no. 3 (2016): 571-626; and Ike Brannon and Elizabeth Lowell, “Rebuilding Our Nation’s Flood Insurance Program,” white paper, American Action Forum, Washington, May 2011, pp. 1-9,https://www.americanactionforum.org/press-release/press-release-rebuilding-our-nations-flood-insurance-program.
4. David Moss,When All Else Fails: Government as the Ultimate Risk Manager(Cambridge, MA: Harvard University Press, 2002).
5. Mark Browne and Martin Halek, “Managing Flood Risk: A Discussion of the National Flood Insurance Program and Alternatives,” working paper, University of Georgia Terry College of Business, Athens, January 2009, pp. 10-14.
6. U.S. Department of Housing and Urban Development,Insurance and Other Programs Available for Financial Assistance to Flood Victims: Report from the Department of Housing and Urban Development to the President, as Required by the Southeast Hurricane Disaster Relief Act of 1965(Washington: Government Printing Office, 1965).
7. French Wetmore et al.,“The Evaluation of the National Flood Insurance Program Final Report,” American Institutes for Research,Washington, October 2006, p. 23,https://www.fema.gov/media-library-data/20130726-1602-20490-1463/nfip_eval_final_report.pdf.
8. Jennifer Wriggins, “In Deep: Dilemmas ofFederal Flood Insurance Reform,”UC Irvine
   Law Review5, no. 6 (2015): 1447,http://scholarship.law.uci.edu/cgi/viewcontent.cgi?article=1238&context=ucilr.
9. Adam Scales, “A Nation of Policyholders: Governmental and Market Failure in Flood Insurance,” Washington and Lee Public Legal Studies Research Paper no. 2007-15, April 2007, p. 16; Wriggins, “In Deep,” pp. 1447-48.
10. The definition of “community” within theNFIP is included on the FEMA website:https://www.fema.gov/community.
11. “Community Rating System,” Federal EmergencyManagement Agency,https://www.fema.gov/national-flood-insurance-program-community-rating-system.
12. Wriggins, “In Deep,” p.1447; Wetmore et al., “Final Report,” p. 25.
13. Browne and Halek, “Managing Flood Risk,” p. 14; 42 U.S.C. §4015(c) (West 2014).
14. “More Information Needed on Subsidized Properties,” GAO-13-607, U.S. Government Accountability Office, Washington, July 2013, pp. 1, 6-15.
15. Browne and Halek, “Managing Flood Risk,” p. 17.
16. For an overview of the difference between private “actuarial” pricing methods and the NFIP’s, see Carolyn Kousky and Leonard Shabman, “How and Why the NFIP Differs from a Private Insurance Company,” Resources for the Future Discussion Paper no. 14-37, October2014, pp. 5-12,http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-14-37.pdf.
17. Ibid., pp. 4, 9.
18. “The National Flood Insurance Program: Factors Affecting Actuarial Soundness,”U.S. CongressionalBudget Office, Washington, November 2009, p. 2.
19. “True Market-Risk Rates for Flood Insurance,” white paper, Property and Casualty Insurers Association of America, Chicago, June 2011, pp. 1-13,https://www.pciaa.net/pciwebsite/common/page/attachment/13821. See also “Strategies for Increasing Private Sector Involvement,” GAO-14-127,U.S. Government Accountability Office, Washington, January 2014, p. 25.
20. FEMA defines “repetitive loss property” as “any insurable building for which two or more claims of more than $1,000 were paid by the National Flood Insurance Program (NFIP) within any rolling ten-year period, since 1978.” The National Flood Insurance Reform Act of 2004 defined “severe repetitive loss” as “a single family property (consisting of 1 to 4 residences) that is covered under flood insurance by the NFIP and has incurred flood-related damage for which four or more separate claims payments have been paid under flood insurance coverage, with the amount of each claim payment exceeding $5,000 and with cumulative amount of such claims payments exceeding $20,000; or for which at least two separate claims payments have been made with the cumulative amount of such claims exceeding $20,000; or for which at least two separate claims payments have been paid with the cumulative amount of such claims exceeding the value of the property.” See “National Flood Insurance Program Frequently Asked Questions,” Federal EmergencyManagement Agency,https://www.fema.gov/media-library/assets/documents/272.
21. William O. Jenkins Jr., director, Homeland Security and Justice Issues, U.S. Government Accountability Office, Testimony on “Actions to Address Repetitive Loss Properties”before the Subcommittee on Economic Policy of the Senate Committee on Banking, Housing, and Urban Affairs, GAO-04-401T, 108th Cong., 2nd sess., March 25, 2004, p. 2.
22. See Brannon and Lowell, “Rebuilding Our Nation’s Flood Insurance Program,” p. 1; and Ben-Shahar and Logue, “Effects of Subsidized Weather Insurance.” Both emphasize that the program’s regressive aspects should be intuitively obvious.
23. “Value of Properties in the National Flood Insurance Program,”U.S. Congressional Budget Office, Washington, June 2007, pp. 2-6.
24. Ben-Shahar and Logue, “Effects of SubsidizedWeather Insurance,” pp. 609-18; Eli Lehrer, “Doing the Wrong Thing,”Weekly Standard, December 16, 2013,http://www.weeklystandard.com/doing-the-wrong-thing/article/769628.
25. Jason Schwartz and J. Scott Holladay, “The Distributional Consequences of the NFIP,” Policy Brief no. 7, Institute for Policy Integrity, New York University School of Law, April 2010, p. 6.
26. Wetmore et al., “Final Report,” p. 23.
27. Camilo Sarmiento and Ted Miller, “Costs and Consequences of Flooding and the Impact of the National Flood Insurance Program,” American Institutes for Research, Washington, October 2006, p. 42,https://biotech.law.lsu.edu/disasters/insurance/nfip_eval_costs_and_consequences.pdf.
28. Wriggins, “In Deep,” p. 1447; U.S. Congressional Budget Office,“Factors Affecting Actuarial Soundness,”p. 6; Ben-Shahar and Logue, “Effects of Subsidized Weather Insurance,” p. 612.
29. See Erwann Michel-Kerjan, Jeffrey Czaijowski, and Howard Kunreuther, “Could Flood InsuranceBe Privatised in the United States? A Primer,” Geneva Papers on Risk and Insurance40, no. 2 (2014): 179-208.
30. Austin, Texas, is located in Travis County.
31. CoreLogic is a private firm that meets much of the federal government’s needs for property-level data. Its database includes 40 years’ worth of information on 3.3 billion properties. CoreLogic’s database contains 99 percent of U.S. properties.
32. See Michel-Kerjan, Czaijowski, and Kunreuther, “Could Flood Insurance Be Privatised in the United States?” p. 17, fig. 2.
33. Ibid., p. 16.
34. Biggert-Waters Flood Insurance Reform Act of 2012, 42 U.S.C. § § 4001-4130 (West 2014).
35. See, for example, Michael Crittenden and Siobhan Hughes, “Senate Votes to Delay Flood-Insurance Premium Increases,” Wall Street Journal, January 30, 2014,https://www.wsj.com/articles/senate-votes-to-delay-floodinsurance-premium-increases-1391113520.
36. Homeowner Flood Insurance Affordability Act of 2014, 42 U.S.C. § § 4014(g), 4015.
37. For more on this dynamic, see David Boaz,The Libertarian Mind: A Manifesto for Freedom(New York: Simon & Schuster, 2015), pp. 250-57. See also Barry Weingast, Kenneth Shepsle, and Christopher Johnsen, “The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics,”Journal of Political Economy89, no. 4 (1981): 642-64. On the difficulty of shrinking government, see Robert Higgs,Crisis and Leviathan(Oxford: Oxford University Press, 1987).
38. Finn Kydland and Edward Prescott, “Rules Rather than Discretion: The Inconsistency of Optimal Plans,”Journal of Political Economy85, no. 3 (1977): 473-90. George Horwich—“Disasters and Market Response,”Cato Journal9, no. 3 (Winter 1990): 547—offers a similar account of the long-run malign effects of well-intended short-run government flood policy.
39. Howard Kunreuther and Mark Pauly, “Rules Rather than Discretion: Lessons from Hurricane Katrina,”Journal of Risk Uncertainty33 (2006): 101-16.
40. As discussed in Ben-Shahar and Logue, “Effects of Subsidized Weather Insurance.”
41. Lyndon B. Johnson, “Executive Order 11296—Evaluation of Flood Hazards in Locating Federally Owned or Financed Buildings, Roads, and Other Facilities, and in Disposing of Federal Lands and Properties,” August 10, 1996,http://www.presidency.ucsb.edu/ws/?pid=60542.
42. U.S. Department of Housing and Urban Development,Insurance and Other Programs, pp. 9-10 (see note 6).
43. Ben-Shahar and Logue, “Effects of Subsidized Weather Insurance,” p. 578.
44. Michael Thrasher, “The Private Flood Insurance Market Is Stirring after More than 50 Years of Dormancy,”Forbes,August 26, 2016; Michel-Kerjan, Czaijowski, and Howard Kunreuther, “Could Flood Insurance Be Privatised in the United States?”
45. Leslie Scism, “Private Insurers Start to Offer Flood Coverage,”Wall Street Journal, February 25, 2014; Michel-Kerjan, Czaijowski, and Kunreuther, “Could Flood Insurance Be Privatised in the United States?”
46. “Reinsurance Market Outlook,”Aon Benfield,January 2016, p. 28,http://www.aon.com/japan/product_services/by_specialty/reinsurance/report/20160101-ab-analytics-reinsurance-market-outlook-january-2016.pdf.
47. “National Flood Insurance Program’s ReinsuranceProgram for 2017,”Federal Emergency Management Agency,https://www.fema.gov/nfip-reinsurance-program. It is worth noting that althoughallowing the NFIP to purchase reinsurance reduces its exposure to one-time losses, such provision is not a panacea. The NFIP’s January purchase included a $4 billion deductible.
48. Evan Hecht, chief executive officer, Flood Insurance Agency, Testimony on “Flood Insurance Reform: A Community Perspective” before the House Financial Services Subcommittee on Housing and Insurance, 115th Cong., 1st sess., March 16, 2017,https://financialservices.house.gov/uploadedfiles/hhrg-115-ba04-wstate-ehecht-20170316.pdf.
49. Michel-Kerjan, Czaijowski, and Kunreuther, “Could Flood Insurance Be Privatised in the United States?” p. 199.
50. Aditya Udai Singh and Sam Friedman, “The Potential for Flood Insurance Privatization in the U.S: Could Carriers Keep Their Heads above Water?”Deloitte Center for Financial Services, New York, April 2014, pp.1-18,https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-the-potential-for-flood-insurance-privatization-in-the-us-040114.pdf.
51. “What Is Covered (and Not Covered) under My NFIP Policy,” Fact Sheet, Federal Emergency Management Agency, May 2015,https://www.fema.gov/media-library-data/1432130966606-ec9a9793a03f4a4b5655de0db708a256/Fact_Sheet_What_is_Covered-508.pdf.
52. “Reinsurance Market Outlook,” Aon Benfield, January 2016, p.26,http://thoughtleadership.aonbenfield.com/Documents/20160101-ab-analytics-reinsurance-market-outlook-january-2016.pdf; Howard Kunreuther, “All-Hazards Homeowners Insurance,” Resources for the Future Discussion Paper no. 17-08, February 2017; Rawle O. King, “The National Flood Insurance Program: Statusand Remaining Issues for Congress,” Congressional Research Service Report 7-5700, February 2013, p. 29.
53. For example, such disputes resulted in thousands of lawsuits after Superstorm Sandy. See Matthew Sturdevant, “Superstorm Sandy Insurers Battle Flood Claim Lawsuits,”Hartford Courant, December 22, 2014,http://www.govtech.com/em/disaster/Sandy-Insurers-Battle-Flood-Claim-Lawsuits.html.
54. “Private Flood Improves the NFIP’s Stability,” Policy Fact Sheet, Reinsurers Association of America, June 2017.
55. See, for example, Paul Krugman, “How Did Economists Get It So Wrong?”New York Times, September 2, 2009.
56. Howard Kunreuther, “Mitigating Disaster Losses through Insurance,” Journal of Risk and Uncertainty12, no. 2/3 (1996): 179,http://opim.wharton.upenn.edu/risk/downloads/archive/arch167.pdf.
57. Browne and Halek, “Managing Flood Risk,” p. 8.
58. J. David Cummins, “Should the Government Provide Insurance for Catastrophes?”Federal Reserve Bank of St. Louis Review88, no. 4 (July/August 2006): 342-53.
59. Carolyn Cohn, “Hedge Funds Move into Catastrophe Reinsurance,”Insurance Journal, October 29, 2014.
60. For a current review of CAT bond issue, see“Insurance-Linked Securities,”Aon Benfield,September 2016, pp. 1-8,http://thoughtleadership.aonbenfield.com/Documents/20160907-securities-ils-annual-report.pdf.
61. Cummins, “Should the Government Provide Insurance for Catastrophes?” p. 337.
62. “Reinsurance Market Outlook,” Aon Benfield, January 2017, p. 2,http://thoughtleadership.aonben field.com/Documents/20170105-ab-analytics-rmo.pdf; Aon Benfield, “Insurance-Linked Securities,” p. 15.
63. On the benefits of CAT bonds and other ILS for handling extreme risks, see Erwann Michel-Kerjan and Frederic Morlaye, “Extreme Events, Global Warming, and Insurance-Linked Securities: How to Trigger the ‘Tipping Point,’”Geneva Papers on Risk and Insurance33, no. 1 (2008): 153-76; and J. David Cummins, “CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments,”Risk Management and Insurance Review11, no. 1 (2008): 23-47.
64. “Global Reinsurance Market Outlook,” Aon Benfield, “January 2016, p. 4.
65. Menendez quoted in Thomas Ferraro, “U.S. Senate Passes Bill to Delay Hikes in FloodInsuranceRates,” Reuters, January 30, 2014;Cassidyquoted in Ben-Shahar and Logue, “EffectsofSubsidized Weather Insurance,” p. 593.
66. Howard Kunreuther and Carolyn Kousky “Addressing Affordability in the National Flood Insurance Program,” Issue Brief no. 13-02, Resources for the Future and Wharton Risk Management Processes Center, August 2013, pp. 1-22,http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-IB-13-02.pdf;“National Flood Insurance Program: Options for Providing Affordability Assistance,” U.S. Government Accountability Office, Washington, February 2016, pp. 1-60; Omri Ben-Shahar and Kyle Logue, “The Unintended Effects of Government-Subsidized Weather Insurance,”Regulation38, no. 3 (2015): 29.
67. “Potential Barriers Cited to Increased Use of Private Insurance,” GAO-16-190,U.S. Government Accountability Office,Washington, February2016,https://www.gao.gov/assets/680/675132.pdf.
68. Notice of Proposed Rulemaking, “Loans in Areas Having Special Flood Hazards—Private Flood Insurance,” 12 CFR Part 760,https://www.federalregister.gov/documents/2015/07/21/2015-15956/loans-in-areas-having-special-flood-hazards.
69. R. J. Lehmann, “SmarterSafer Comments on Private Flood Insurance Standards,” R Street Institute, Washington, January 4, 2017,http://www.rstreet.org/outreach/smartersafer-comments-on-private-flood-insurance-standards.

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793. New York’s Bank: The National Monetary Commission and the Founding of the Fed by George Selgin (June 21, 2016)

792. The Problem with the Light Footprint: Shifting Tactics in Lieu of Strategyby Brad Stapleton (June 7, 2016)

791. Hate Speech Laws: Ratifying the Assassin’s Veto by Robert Corn-Revere (May 24, 2016)

790. A Walk Through the JOBS Act of 2012: Deregulation in the Wake of Financial Crisis by Thaya Brook Knight (May 3, 2016)

789. Menu Mandates and Obesity: A Futile Effort by Aaron Yelowitz (April 13, 2016)

788. Japan’s Security Evolution by Jennifer Lind (February 25, 2016)

787. Reign ofTerroir: How to Resist Europe’s Efforts to Control Common Food Names as Geographical Indications by K. William Watson (February 16, 2016)

786. Technologies Converge and Power Diffuses: The Evolution of Small, Smart, and Cheap Weapons by T. X. Hammes (January 27, 2016)

785. Taking Credit for Education: How to Fund Education Savings Accounts through Tax Credits by Jason Bedrick, Jonathan Butcher, and Clint Bolick (January 20, 2016)

784. The Costs and Consequences of Gun Control by David B. Kopel (December 1, 2015)

783. Requiem for QE by Daniel L. Thornton (November 17, 2015)

782. Watching the Watchmen: Best Practices for Police Body Cameras by Matthew Feeney (October 27, 2015)

781. In Defense of Derivatives: From Beer to the Financial Crisis by Bruce Tuckman (September 29, 2015)

780. Patent Rights and Imported Goods by Daniel R. Pearson (September 15, 2015)

779. The Work versus Welfare Trade-off: Europe by Michael Tanner and Charles Hughes (August 24, 2015)

778. Islam and the Spread of Individual Freedoms: The Case of Morocco by Ahmed Benchemsi (August 20, 2015)

777. Why the Federal Government Fails by Chris Edwards (July 27, 2015)

776. Capitalism’s Assault on the Indian Caste System: How Economic Liberalization Spawned Low-caste Dalit Millionaires by Swaminathan S. Anklesaria Aiyar (July 21, 2015)

775. Checking E-Verify: The Costs and Consequences of a National Worker Screening Mandate by Alex Nowrasteh and Jim Harper (July 7, 2015)

774. Designer Drugs: A New, Futile Front in the War on Illegal Drugs by Ted Galen Carpenter (May 27, 2015)

773. The Pros and Cons of a Guaranteed National Income by Michael Tanner (May 12, 2015)

772. Rails and Reauthorization: The Inequity of Federal Transit Funding by Randal O’Toole and Michelangelo Landgrave (April 21, 2015)

771. Beyond Regulation: A Cooperative Approach to High-Frequency Trading and Financial Market Monitoring by Holly A. Bell (April 8, 2015)

770. Friends Like These: Why Petrostates Make Bad Allies by Emma M. Ashford (March 31, 2015)

769. Expanding Trade in Medical Care through Telemedicine by Simon Lester (March 24, 2015)

768. Toward Free Trade in Sugar by Daniel R. Pearson (February 11, 2015)

767.Is Ridesharing Safe? by Matthew Feeney (January 27, 2015)

766. The Illusion of Chaos: Why Ungoverned Spaces Aren’t Ungoverned, and Why That Matters by Jennifer Keister (December 9, 2014)

765. An Innovative Approach to Land Registration in the Developing World: Using Technology to Bypass the Bureaucracy by Peter F. Schaefer and Clayton Schaefer (December 3, 2014)

764. The Federal Emergency Management Agency: Floods, Failures, and Federalism by Chris Edwards (November 18, 2014)

801. The Case Against a U.S. Carbon Tax by Robert P. Murphy, Patrick J. Michaels, and Paul C. Knappenberger (October 17, 2016)

800. A Costly Commitment: Options for the Future of the U.S.-Taiwan Defense Relationship by Eric Gomez (September 28, 2016)

799. Dose of Reality: The Effect of State Marijuana Legalizations by Angela Dills, Sietse Goffard, and Jeffrey Miron (September 16, 2016)

798. Terrorism and Immigration: A Risk Analysis by Alex Nowrasteh (September 13, 2016)

797. Five Myths about Economic Inequality in America by Michael Tanner (September 7, 2016)

796. Freedom of Speech under Assault on Campus by Daniel Jacobson (August 30, 2016)

795. 25 Years of Reforms in Ex-Communist Countries Fast and Extensive Reforms Led to Higher Growth and More Political Freedomby Oleh Havrylysyn, Xiaofan Meng, and Marian L. Tupy (July 12, 2016)

794. Options for Federal Privatization and Reform Lessons from Abroad by Chris Edwards (June 28, 2016)

793. New York’s Bank: The National Monetary Commission and the Founding of the Fed by George Selgin (June 21, 2016)

792. The Problem with the Light Footprint: Shifting Tactics in Lieu of Strategyby Brad Stapleton (June 7, 2016)

791. Hate Speech Laws: Ratifying the Assassin’s Veto by Robert Corn-Revere (May 24, 2016)

790. A Walk Through the JOBS Act of 2012: Deregulation in the Wake of Financial Crisis by Thaya Brook Knight (May 3, 2016)

David T. Stevenson

The nearly decade-old Regional Greenhouse Gas Initiative (RGGI) was always meant to be a model for a national program to reduce power plant carbon dioxide (CO₂) emissions. The Environmental Protection Agency (EPA) explicitly cited it in this fashion in its now-stayed Clean Power Plan. Although the RGGI is often called a “cap and trade” program, its effect is the same as a direct tax or fee on emissions because RGGI allowance costs are passed on from electric generators to distribution companies to consumers. More recently, an influential group of former cabinet officials, known as the “Climate Leadership Council,” has recommended a direct tax on CO₂ emissions (Shultz and Summers 2017).

Positive RGGI program reviews have been from RGGI, Inc. (the program administrator) and the Acadia Center, which advocates for reduced emissions (see Stutt, Shattuck, and Kumar 2015). In this article, I investigate whether reported reductions in CO₂ emissions from electric power plants, along with associated gains in health benefits and other claims, were actually achieved by the RGGI program. Based on my findings, any form of carbon tax is not the policy to accomplish emission reductions. The key results are:

• There were no added emissions reductions or associated health benefits from the RGGI program.
• Spending of RGGI revenue on energy efficiency, wind, solar power, and low-income fuel assistance had minimal impact.
• RGGI allowance costs added to already high regional electric bills. The combined pricing impact resulted in a 13 percent drop in goods production and a 35 percent drop in the production of energy intensive goods. Comparison states increased goods production by 15 percent and only lost 4 percent of energy intensive manufacturing. Power imports from other states increased from 8 percent to 17 percent.

• The regional program shifted jobs to other states. A national carbon tax would shift jobs to other countries. A better policy to reduce CO₂ emissions is to encourage innovation rather than rely on taxes and regulation. The United States has already reduced emissions 12 percent from 2005 to 2015, more than any other developed country with a large economy, mainly through innovations in natural gas drilling techniques. There are many other opportunities to invest in innovation, for example, improved solar photovoltaic cells, more efficient batteries, small modular nuclear reactors, and nascent technologies that use fossil fuels without emitting CO₂.

Simon Lester, Inu Manak, and Daniel J. Ikenson

When the North American Free Trade Agreement (NAFTA) came into force in January 1994, it was a groundbreaking achievement. It eliminated nearly all tariffs among three significant trading partners and achieved liberalization on a wide range of other issues (some of which had never before been included in trade agreements). Now the United States, Canada, and Mexico are about to begin an historic renegotiation of NAFTA.

The proposal to renegotiate NAFTA may have been motivated by protectionist objectives. But there is potential to minimize or even avert protectionist outcomes. In the end, renegotiation presents the opportunity to modernize, fix, and expand the rules of NAFTA, and produce a “freer” free trade agreement, which would be good for the North American economy.

Ariane Tabatabai

Controversy has surrounded the Iran nuclear deal since it was signed two years ago. Although the main stipulations of the agreement have been successfully implemented—Iran has so far complied with the restrictions on its nuclear program in return for the lifting of economic sanctions—the agreement continues to generate harsh criticism in both Iran and the United States.

The promise of the deal includes not only rolling back Iran’s nuclear capabilities for the foreseeable future but also paving the way toward a more constructive diplomatic relationship between Washington and Tehran. Its survival, however, depends on complex and turbulent domestic politics in both countries.

Since he started his bid for office, President Donald Trump has been a forceful detractor of the agreement, repeatedly vowing to dismantle it. Today, his administration is conducting a review of its Iran policy, of which the nuclear deal is a critical component. He has already indicated that he wants to increase pressure on Iran, and his administration has upped the ante with the Islamic Republic, including by suggesting that America is looking to support elements pursuing a transition of power in that country.

But the nuclear deal affords the United States a number of opportunities, if the administration sustains it. The United States should clearly reaffirm its commitment to the deal; help reintegrate Iran into the international economy; keep official channels of communication open with Tehran; and engage, rather than isolate, the Islamic Republic.

Download or watch a video on Preserving the Iran Nuclear Deal

Introduction

On July 14, 2015, the United States and its partners—China, France, Germany, Russia, and the United Kingdom, collectively known as the P5+1—signed the Joint Comprehensive Plan of Action (JCPOA) with Iran. The JCPOA is a detailed document comprising over 150 pages of carefully curated diplomatic language. It aims to limit sensitive Iranian nuclear fuel cycle activities, while placing Iran’s entire nuclear program under intrusive monitoring by the International Atomic Energy Agency (IAEA), in exchange for sanctions relief. The agreement came at a time of upheaval in the Middle East and received harsh criticism from U.S. allies in the region.¹ U.S. critics of the deal also joined forces with Israel, Saudi Arabia, and some other Arab states in the Persian Gulf, to oppose the agreement.² The emerging Republican candidate, Donald Trump, denounced the deal as “the stupidest” one ever made.³ In Iran, too, the JCPOA faced intense pushback, even though it enjoyed broad support within the populace.⁴

Today, two years after the JCPOA’s signing, the deal remains as divisive in Tehran as it is in Washington. President Trump had promised to “dismantle” the deal once in office and to check Iran.⁵ That pledge was made, and later reiterated, despite the fact that, by the Trump administration’s own admis­sion, Iran has complied with the deal’s restric­tions so far.⁶ Although Trump has adopted more hawkish rhetoric and has sent mixed signals, his administration has essentially continued many aspects of President Barack Obama’s Iran policy, including the JCPOA.⁷ However, some of the tangential benefits of the deal—particularly the various channels of communication it had opened between high level officials in Washington and Tehran—no longer exist.⁸ In Iran, conservatives continue to criticize the deal, but most have accepted it as the law of the land. In the United States, even critics of the JCPOA have asked the new administration to avoid tearing it up.⁹ Two years after the deal was first signed, with the Trump administration’s Iran policy under review and President Hassan Rouhani starting his second—and final—term in office, this policy analysis takes stock of the JCPOA’s implementation process.

What the JCPOA Does and Does not Do

Limiting a Nuclear Program: Redlines and Provisions

The JCPOA is a complex document. Its language was carefully crafted to be acceptable to both sides and to allow them to successfully sell the agreement at home. It aims to close off the two pathways for Iran to acquire a nuclear weapon domestically: using highly enriched uranium or using weapons grade plutonium. The JCPOA severely restricts Iran’s potential uranium path to the bomb, while virtually closing off its plutonium one. It also strengthens the monitoring and verification regime in place, thus placing the Iranian nuclear program under the most intrusive inspections regime ever voluntarily agreed to by any party.¹⁰

Given the politicized and visible nature of certain components of Iran’s nuclear program, the negotiators had to carefully manage both those at the negotiating table and their constituents. Ultimately, they were able to sell the agreement by presenting it as respecting the country’s priorities, framed by Supreme Leader Ayatollah Ali Khamenei as several key redlines.¹¹ Those included ensuring the talks be exclusively about the nuclear program; allowing continued research and development; keeping all facilities open and running; and allowing Iran to work toward meeting its practical needs, such as the ability to fuel its nuclear reactors in the future.

For its part, Obama’s team had to navigate Congress, foreign negotiating partners, and the Iranians. To that end, Obama administration officials framed much of the discussion around several key ideas. First, the deal was not, as U.S. officials and negotiators often put it, built on trust but on verification.¹² Second, the United States would lift only nuclear related sanctions. Third, the Obama administration’s aim was to extend Iran’s so called breakout time—or the time it takes to produce enough fissile material to build a nuclear weapon. Ultimately, both the Obama administration and the Iranian leadership were able to sell the deal as having met their own respective requirements.

Under the JCPOA, the United States and its partners agreed to forgo the notion of “zero enrichment” and to allow Tehran to preserve its uranium enrichment program, while imposing several limits to cap its capabilities for a number of years. Iran scaled back its enrichment program by moving all such activities exclusively to the Natanz complex, a partially underground fuel enrichment facility in central Iran, while repurposing its Fordow facility, just north of Natanz in the city of Qom, to only conduct research and development. At Natanz, Iran limited its uranium enrichment to 5,060 first generation centrifuges, reducing by about half its operating centrifuges at the time. It also agreed to only use those centrifuges to enrich uranium up to 3.67 percent for 10 years, well below the 90 percent enrichment needed for a nuclear weapon. And for 15 years, Iran agreed not to surpass a stockpile of 300 kilograms of 3.67 percent enriched uranium hexafluoride, making it very difficult to surreptitiously enrich excess uranium. The country also agreed to limit research and development pertaining
to enrichment.

Although the JCPOA only scales back Tehran’s enrichment program, it effectively closes off its plutonium path to the bomb. Under the agreement, Iran reiterated its long standing position that it would not seek plutonium reprocessing capabilities, which would be vital to its ability to use plutonium in a nuclear weapon. It also agreed not to build any more heavy water reactors, instead exclusively acquiring light water reactors—which are not optimal for the production of plutonium for use in a nuclear weapon. The country is also redesigning the problematic Arak heavy water reactor, which was a source of concern to the international community because of its ability, once completed, to produce a considerable amount of weapons grade plutonium.¹³

These steps effectively extended Iran’s so called breakout time. To make it more difficult for Tehran to pursue weaponization, the IAEA now has unprecedented access to inspect and monitor virtually every single stage of the fuel cycle, from milling and mining to centrifuge workshops and all declared facilities.

In exchange for the steps Iran takes toward increasing transparency and scaling back key components of its fuel cycle activities, the P5+1 agreed to lift nuclear related sanctions. The deal also provided for Iran’s being able to procure dual use items—or goods that have both military and civilian applications—through a specific channel designated for increased transparency, as well as civilian aircraft, allowing the country to update its aging fleet.

What Are the Deal’s Shortcomings?

Despite these important steps, the JCPOA suffers from a number of shortcomings, stemming from domestic politics in the countries involved and their respective bottom lines, as previously outlined.

First, Iran’s ballistic missile program was declared off the table from the outset.¹⁴ As a result, one of the three key stages of building a bomb—the development of delivery vehicles—is not covered by the JCPOA. Critics have argued that other parts of Iran’s nefarious activities, including human rights violations and support for terrorism, should also have been addressed by the JCPOA. But the JCPOA’s limited scope was essential to reaching agreement.

Second, the sunset clause of the agreement is another shortcoming. Key provisions within the JCPOA are set to expire after a number of years—different lengths of time are associated with different items, as in the case of limitations on enrichment. As a result, once all of the JCPOA’s provisions expire in 25 years, Iran’s nuclear program will be considered as that of a normal non nuclear weapon state under the Nuclear Nonproliferation Treaty (NPT)—provided that the IAEA can successfully verify full compliance by Tehran. However, although many of the provisions of the deal will expire gradually, some important checks will remain permanently in place under the NPT and IAEA Comprehensive Safeguards Agreement (and Additional Protocol, which Tehran pledged to take steps to ratify through its legislative process). In other words, Iran’s nuclear activities will still be under close scrutiny by the IAEA, which will retain access to key sites, and Tehran will still be obliged to restrict its nuclear program to a civilian one under the NPT.

Third, during the talks, it was already clear that sanctions relief would be a key sticking point in attaining and implementing the deal.¹⁵ After it was signed, the JCPOA revealed the limitations of sanctions relief. Because the JCPOA singles out nuclear sanctions, it does not allow the Iranian economy to fully normalize and reintegrate into the international financial system. The remaining sanctions—imposed by the United States, primarily, for Iran’s human rights abuses and regional activities, including support for terrorism—combined with pending and proposed sanctions have stymied Iran’s economic recovery and discouraged businesses from investing in Iran. That situation has further undermined support for the deal in Iran.

Fourth, arguably the most significant shortcoming of the JCPOA stems from the fact that it merely caps Iranian fuel cycle activities rather than stopping them altogether. Indeed, it was clear to U.S. negotiators and their P5+1 partners that the zero enrichment policy pursued by the United States in the past was neither viable nor conducive to a negotiated settlement. Instead, the negotiators sought to place limits to extend Tehran’s breakout time and to tighten the verification and monitoring regime.

Some of these shortcomings have undercut support for the deal in Iran and the United States. But they also made the agreement possible and its implementation sustainable. Ultimately, both sides were able to argue that they gained more from the agreement than they conceded and to present it as a “good deal” to their respective constituents.

How Do Iranian Domestic Politics Play Into the JCPOA?

The Iranian Political Landscape

Contrary to Beltway conventional wisdom, the Iranian political landscape is fairly dynamic and complex. Far from being a unitary and monolithic actor, the Islamic Republic is deeply divided. One faction, supported by much of the populace, wants to open up the country and integrate it into the international community. The other strives to preserve the core values of the revolution.¹⁶

The first group, typically known as the reformist bloc, is led by former president Mohammad Khatami, Hassan Khomeini (the grandson of Ayatollah Ruhollah Khomeini), and the leaders of the Green Movement—a grassroots movement that emerged during the contested 2009 presidential elections. The bloc strives for more liberal policies at home and greater openness to the outside world. It has the support of many key constituencies in Iran, particularly youth, women, and minorities.

It is important not to mistake the reformists for liberals, however. Even though they tend to attract the more liberal and progressive factions of the Iranian electorate, the reformists still subscribe to the basic principles of the Islamic Revolution. Many reformists have been criticized for changing their positions on critical issues, such as civil rights, only after having partaken in a system that cracked down on them in the formative years of the revolution.

Next are the moderates or pragmatists, the bloc led by President Rouhani. They also favor international engagement and far reaching domestic reforms, as evidenced by the platform that candidate Rouhani ran on during the 2013 and 2017 presidential campaigns. The moderates have integrated many reformists, creating a de facto bloc against the conservatives in recent years. In fact, virtually all key reformist figures supported Rouhani’s candidacy in 2013 and 2017. And Rouhani himself has shifted further left since his first presidential bid.¹⁷ But although the moderates share the vision of the reformists for a more open Iran, they distinguish themselves thanks to the political capital they possess in the post 2009 era—because while key reformists were subsequently put under house arrest or sidelined, the moderates maintained their presence in the political landscape. Indeed, although many reformists have become toxic as a result of the Green Movement and are unable to run for office, the moderates are able to do so. The moderates enjoy wide public support, as demonstrated by the 2017 presidential elections, which led to a landslide victory for Rouhani, and by the 2016 parliamentary elections, in which they gained considerable ground, with 42 percent of the seats going to the moderates and roughly 30 percent to independents, including reformists.¹⁸

Lastly, the conservatives or “principalists” are the bloc striving to preserve the core values of the revolution. They strongly favor a more independent and self reliant Iran, are deeply suspicious of negotiating with the United States, and seek more restrictions on civil rights. Today, they are divided into two groups. The moderate conservatives adopt a tougher line than the pragmatists on most issues but still favor some flexibility where needed. They supported the nuclear talks. In contrast, the hard liners are the most ideologically driven part of the Iranian political landscape and are strongly opposed to the nuclear talks. They are typically represented by figures such as former president Mahmoud Ahmadinejad and chief nuclear negotiator Saeed Jalili, who saw the negotiations as one sided and was notorious for his delaying tactics.¹⁹

After a period of deep division, the principalists are now seeking to unify to oppose the moderate and reformist agenda more effectively. To that end, they have proposed the creation of a “shadow government” that would try to frustrate Rouhani’s vision.²⁰

However, it is important to note that support and opposition to the nuclear talks, and ultimately the JCPOA, also crossed party lines. Some hard liners favored them and some reformists rejected, or at least criticized, them. Khamenei, typically a hard liner, favored the nuclear talks and played a critical role in shielding the Rouhani government and negotiating team from hard line pushback. Likewise, key Revolutionary Guards commanders also supported the talks, despite being associated with the more conservative or hard line camp.²¹

The JCPOA and the Future of the Islamic Republic

Iranians’ perceptions of the JCPOA have evolved over the past two years. Initially, the populace enthusiastically welcomed the deal, which it saw as the key to its country’s economic and political reintegration into the global community. Within the regime, the nuclear talks enjoyed broad support, especially among its key figures. And once signed, the JCPOA received some criticism but was hailed as both necessary and satisfactory by the majority of the establishment.

Khamenei and Revolutionary Guards commanders cautiously praised the negotiators but also warned that America could not be trusted. Throughout the process, Khamenei was careful not to implicate himself too directly, even though he was made aware of every detail of it. As a senior Iranian negotiator noted, the supreme leader is not one to micromanage foreign policy issues, but in the case of the nuclear talks, he was very much involved every step of the way.²²

In the weeks and months after the deal was signed, Khamenei gradually distanced himself from the agreement. That move opened the door to substantial criticism by hard liners, who accused the Rouhani government of having negotiated with the United States for nothing.²³ Rouhani had made too many concessions and achieved too little, hard liners argued. And as most Iranians did not feel the trickle down effect of sanctions relief, the broader population also began to shift from its initial enthusiasm to a “wait and see” approach, before becoming more pessimistic that the deal would not lead to economic recovery.

Two years later, the JCPOA has lost some support, for several reasons. First, the Rouhani government initially oversold its ability to generate economic recovery after the deal and failed to manage expectations properly.²⁴ The slow pace of sanctions relief reinforced the idea that the United States is unlikely to change its policies toward Tehran, regardless of what Iranians do. The Department of the Treasury’s Office of Foreign Asset Control, for example, has been slow to issue licenses to companies like Boeing and Airbus, delaying planned deals to update Iran’s aging and unsafe commercial airline fleet.²⁵

Second, to make matters worse, some of the rhetoric and reports coming out of Washington only exacerbate the feeling in Iran that the United States is not pursuing the deal in good faith, instead looking for “excuses” to further isolate Iran. For example, President Trump’s visit to Riyadh in May 2017 and his statement there, largely focused on Iran, sent a clear message of animosity to Iranians, who were voting in the 2017 presidential elections at the time. The president stated, “Until the Iranian regime is willing to be a partner for peace, all nations of conscience must work together to isolate Iran, deny it funding for terrorism, and pray for the day when the Iranian people have the just and righteous government they deserve.”²⁶ Likewise, according to a report in the Wall Street Journal, “White House officials said they expect the U.S. won’t withdraw from the nuclear deal, but enforce it to the letter and possibly reinstate sanctions that were lifted as part of the accord under different reasons, such as human rights abuses or Iran’s ballistic missile tests.”²⁷ As a result, even though many in Iran do not see eye to eye with their government, and mock and criticize its anti American stance and rhetoric, they increasingly see sanctions as indiscriminate, targeting the entire population regardless of Iranian policy. And the “sticks and carrots” approach is merely seen as “sticks and more sticks” by Iranians. They blame the United States, not their own government, for antagonistic U.S. policies and rhetoric.²⁸

The Rouhani government has taken steps to remedy lingering economic grievances by highlighting the importance of cleaning up Iran’s financial and business sectors. As a result, it has announced plans to tackle regulatory reform, corruption, mismanagement, the lack of transparency, and the extensive political and economic influence of the Revolutionary Guards.²⁹ Rouhani has also argued for the “JCPOA 2,” which would allow the country to seek additional sanctions relief to further boost the economy.³⁰ But these are not quick fixes.

Despite the drop in enthusiasm, Iranians accept the JCPOA as the law of the land. Iranians of all stripes, including hard liners, recognize that even though the agreement is flawed, it is here to stay and should be implemented properly. Where conservatives differ from moderates and reformists today is on the future approach to the JCPOA.

Notwithstanding the fraught politics around it, the JCPOA has opened some venues for engagement and cooperation, welcomed by Iranians. Since 2015, the European Union, led by High Representative Federica Mogherini, has held a series of talks with Tehran on a number of vital issues of contention between the Islamic Republic and the international community, including its ballistic missile program, regional activities, support for terrorist groups throughout the Middle East, and human rights abuses.³¹ These talks have been approved, and even welcomed, by all quarters of the regime, including hard liners. For example, the hard line head of the Iranian judiciary, Sadeq Larijani, has been kept informed on the human rights discussions and has accepted them.³² This type of engagement, especially with buy in on this level, is critical in helping change Iranian behavior in various areas.

Policy Recommendations

The United States should take a number of steps to sustain and build on the JCPOA:

Continue implementation of the JCPOA. Continuing to implement the JCPOA is vital for the future of U.S. leadership and its ability to effectively pursue arms control and nonproliferation agreements. Failure to implement the JCPOA would send a signal to U.S. partners and adversaries alike that America cannot be relied on as a negotiating partner. Abandoning the deal would render sanctions ineffective as a tool of foreign policy, as sanctions cannot be viewed as an end but as a means for the United States to achieve a given policy objective. Maintaining the JCPOA also allows the United States to enforce the agreement more strongly. Indeed, if Washington is seen as upholding its end of the bargain and remaining consistent, it will have more leverage and support from its P5+1 partners, particularly the Europeans, to respond to any violations by Tehran.

Clearly reaffirm the U.S. commitment to the JCPOA and avoid muddying the waters.Reaffirming our commitment to the JCPOA would help reassure America’snegotiating partners. It would also help empower Rouhani and his team and undermine the hard liners’ message that the United States is not trustworthy. Clearly stating Washington’s intention to uphold the deal would also help alleviate the concerns of businesses and would incentivize Iranian policymakers to reform their financial infrastructure, clean up their regulatory landscape, and institute policies to deliver economic recovery. Iran could then be more compliant with international regulations, which would benefit the United States and its allies.

Help Iran reintegrate into the international economy. A more integrated Iran will have more incentive to minimize its nefarious activities. It would also help empower the more moderate factions within Iran, which have had to choose between the country’s economy and other struggles, such as human rights, over the past decade. Moreover, a more integrated Iran would make economic coercion, should it become necessary in the future, more effective.

Engage Iran, rather than isolate it. By engaging Iran, the United States can undermine the hard liners, empower the moderates, and secure U.S. interests. The United States should also encourage its Gulf Arab allies to engage in dialogue with Tehran to settle regional conflicts and decrease tensions.

Re-create official channels of communication to avoid misperception, which can in turn lead to miscalculation. Washington can use those channels, as former secretary of state John Kerry did, to deescalate and put an end to unwarranted crises that can torpedo the JCPOA and even drag the United States into conflict with Iran. Formalizing official channels of communication is easier now, because some officials on both sides who worked on the negotiations are still in government. It will be increasingly difficult to re create those channels of communication the longer the two sides are allowed to drift apart. The two sides have to maintain a working relationship as part of the JCPOA, and sustaining those channels will enable more effective implementation. Lastly, for the channels to be sustainable, it is critical that they involve career diplomats, at lower levels.

Support the work of the European Union and High Representative Mogherini. The European Union seeks to build on the achievements of the JCPOA and to engage Tehran on its more nefarious activities, including support for terrorist groups, its missile program, and its human rights violations. Mogherini and her team have direct access to Iranian leaders and have a level of trust in Iran that the United States lacks. This advantage affords them the ability to discuss a range of issues and to do so effectively. Washington should continue to work closely with Mogherini to find ways to engage Tehran more productively.

IdentifyareaswhereU.S.andIranianinterestsconverge. The United States should not try to contain Iran at any price and oppose Iranian policies at every turn. Instead, Washington should look for ways in which Tehran’s regional influence can be leveraged to advance U.S. interests. For example, Iran has a strong interest in a stable Afghanistan and may be willing to work with the United States, as it did in unseating the Taliban following the 9/11 attacks, to achieve a lasting political settlement there. In addition, Iran is fighting al Qaeda and the Islamic State in Iraq and Syria, which may suggest another area of cooperation for the United States. It is critical to assess and respond to Iranian activities on a case by case basis rather than to view them all through a single adversarial lens.

Conclusion

Two years after it was signed, the JCPOA remains one of the most controversial agreements in recent history. In Iran, despite losing some support from the population and political and security establishments, the deal is still viewed as the law of the land. In the United States, its future remains uncertain. On the one hand, the president and various members of his administration have made conflicting statements about the future of U.S. Iran policy and commitment to the JCPOA. On the other hand, even critics of the deal are pushing to preserve it. But simply keeping the JCPOA in place, without strengthening it and building on it, is unlikely to achieve U.S. objectives. Instead, stasis can be counterproductive.

Rouhani enjoys renewed political capital as a result of his landslide victory, and he has expressed interest in engaging the West and Iran’s neighbors to settle other contentious areas. The United States has an opportunity to capitalize on this renewed political momentum, and even though Rouhani’s ambitious agenda will inevitably be stymied by his opponents, Washington stands to gain from any overture and progress made with Tehran. Continued diplomacy would allow the United States to send a clear signal to the Iranian population and ruling elite that America is not “out to get them” and that their compliance with international norms and laws will be rewarded. Under this approach, Washington can have a larger impact than if it consistently keeps the pressure high. A commitment to diplomatic engagement would also strengthen U.S. credibility and leverage in the international community, which are vital if the United States wants to have the option of imposing multilateral sanctions on Iran if it does not uphold its end of the bargain.

Notes

1. Author interviews with Gulf Arab officials in Abu Dhabi, Doha, Dubai, Kuwait City, and Muscat, 2014-17; Ben Hubbard, “Arab World Split over Iran Nuclear Deal,” New York Times, July 14, 2015, https://www.nytimes.com/2015/07/15/world/middleeast/iran nuclear deal provokes sharp reactions across the arab world.html?_r=0; “The Complete Transcript of Netanyahu’s Address to Congress,” Washington Post, March 3, 2015, https://www.washingtonpost.com/news/post politics/wp/2015/03/03/full text netanyahus address to congress/?utm_term=.2f7788961e0b.
2. Cristina Marcos, “House Rejects Obama’s Iran Deal,” The Hill, September 11, 2015, http://the hill.com/blogs/floor action/house/253370 house rejects iran deal; Peter Baker, “G.O.P. Senators’ Letter to Iran about Nuclear Deal Angers White House,” New York Times, March 9, 2015, https://www.nytimes.com/2015/03/10/world/asia/white house faults gop senators letter to irans leaders.html; David Nakamura, Sean Sullivan, and David A. Fahrenthold, “Republicans Invite Netanyahu to Address Congress as Part of Spurning of Obama,” Washington Post, January 21, 2015, https://www.washingtonpost.com/politics/in state of the union obama takes credit as republicans push back/2015/01/21/dec51b64 a168 11e4 b146 577832eafcb4_story.html?utm_term=.8925dc4291a7.
3. “Full Transcript: Third 2016 Presidential Debate,” Politico, October 20, 2016,http://www.politico.com/story/2016/10/full transcript third 2016 presidential debate 230063.
4. Ariane Tabatabai, “Don’t Fear the Hardliners,” Foreign Policy, April 4, 2015, http://foreignpolicy.com/2015/04/04/dont fear the hardliners iran nuke deal zarif khamenei/.
5. Carol Morello, “Iran Nuclear Deal Could Collapse under Trump,” Washington Post, November 9, 2016, https://www.washingtonpost.com/world/national security/iran nuclear deal could collapse under trump/2016/11/09/f2d2bd02 a68c 11e6 ba59 a7d93165c6d4_story.html?utm_term=.f63c968c895f.
6. Evelyn Rupert, “Trump Admin: Iran in Compliance, but Nuclear Deal under Review,” The Hill, April 18, 2017, http://thehill.com/homenews/administration/329425 trump admin iran in compliance but nuclear deal under review.
7. Ariane Tabatabai, “Trump and the Iranian Elections,” Foreign Affairs, February 7, 2017, https://www.foreignaffairs.com/articles/iran/2017 02 07/trump and iranian elections; Gardiner Harris, “Tillerson Toughens Tone on Iran after U.S. Confirms Nuclear Deal Compliance,” New York Times, April 19, 2017,https://www.nytimes.com/2017/04/19/world/middleeast/trump administration grudg ingly confirms irans compliance with nuclear deal.html; Josh Lederman, “Trump Says Iran Violating ‘Spirit’ of Nuclear Deal,” Boston Globe, April 20, 2017, https://www.boston globe.com/news/nation/2017/04/20/trump says iran violating spirit nuclear deal/iV1GWDW6wera798CUqy5pI/story.html; Kevin Liptak, Jeremy Diamond, and Brad Lendon, “White House National Security Adviser: Iran Is ‘on Notice,’” CNN.com, February 2, 2017, http://www.cnn.com/2017/02/01/politics/michael flynn condemns iran actions/.
8. Ariane Tabatabai, “How to Ensure the Iran Nuclear Deal Survives the Next President,” New York Times, October 20, 2016, https://www.nytimes.com/2016/10/20/opinion/how to ensure the iran nuclear deal survives the next president.html.
9. Nahal Toosi, “Iran Deal Critics to Trump: Please Don’t Rip It Up,” Politico, November 16, 2016, http://www.politico.com/story/2016/11/don ald trump iran nuclear deal 231419.
10. See the Joint Comprehensive Plan of Action, July 14, 2015, https://www.state.gov/documents/organization/245317.pdf.
11. For more on Khamenei’s redlines, see Ariane Tabatabai, “Where Does Iran’s Supreme Leader Really Stand on Nuclear Negotiations?” Bulletin of the Atomic Scientists, February 13, 2015,For more on Khamenei’s redlines, see Ariane Tabatabai, “Where Does Iran’s Supreme Leader Really Stand on Nuclear Negotiations?” Bulletin of the Atomic Scientists, February 13, 2015, http://thebulletin.org/where does iran%E2%80%99s supreme leader really stand nuclear negotiations7987; Ariane Tabatabai, “Hitting the Sweet Spot: How Many Iranian Centrifuges?” Bulletin of the Atomic Scientists, October 27, 2014, http://thebulletin.org/hitting sweet spot how many iranian centrifuges7763. Ariane Tabatabai, “Hitting the Sweet Spot: How Many Iranian Centrifuges?” Bulletin of the Atomic Scientists, October 27, 2014, http://thebulletin.org/hitting sweet spot how many iranian centrifuges7763.
12. Michael R. Gordon and David E. Sanger, “Deal Reached on Iran Nuclear Program; Limits on Fuel Would Lessen with Time,” New York Times, July 2015,https://www.nytimes.com/2015/07/15/world/middleeast/iran nuclear deal is reached after long negotiations.html.
13. For more on the Arak heavy water reactor, see Ariane Tabatabai, “Can Nuclear Talks Overcome Arak?” Bulletin of the Atomic Scientists, September 23, 2014, http://thebulletin.org/can nuclear talks overcome arak7643.
14. For more on the politics surrounding the Iranian missile program during the nuclear talks, see Ariane Tabatabai, “The Missile Impasse,” Bulletin of the Atomic Scientists, July 11, 2015, http://thebulletin.org/missile impasse8500.
15. Author interviews with EU, U.S., and Iranian officials, New York, Washington, Tehran, Paris, London, Berlin, Brussels, Vienna, Geneva, Lausanne, 2014-17.
16. For a comprehensive analysis of the Iranian domestic political landscape, see “Iran after the Nuclear Deal,” Middle East Report no. 166, International Crisis Group, December 15, 2015, https://d2071andvip0wj.cloudfront.net/166 iran after the nuclear deal.pdf.
17. Mohammad Ali Kadivar, “Iranian President Rouhani Won Reelection. Here’s How Reformists Got Him There,” Washington Post Monkey Cage (blog), May 23, 2017, https://www.washingtonpost.com/news/monkey cage/wp/2017/05/23/iranian president rouhani won reelection heres how reformists got him there/?utm_term=.b52939392cf5.
18. Thomas Erdbrink, “Rouhani Wins Re Election in Iran by a Wide Margin,” New York Times, May 20, 2017; Thomas Erdbrink, “Iranian President and Moderates Make Strong Gains in Elections,” New York Times, February 29, 2016, https://www.nytimes.com/2016/03/01/world/middleeast/iran elections.html; “Iran Elections: Hardliners Lose Parliament to Rouhani Allies,” BBC News, April 30, 2016, http://www.bbc.com/news/world middle east 36178276.
19. Author interviews with EU and U.S. officials, Washington, New York, Brussels, Vienna, 2014-16.
20. For more on the proposed shadow government, see Ariane Tabatabai, “Iran after the Election,” Foreign Affairs, May 26, 2017, https://www.foreignaffairs.com/articles/iran/2017 05 26/iran after election.
21. For more on the Guards’ stance on the talks, see Ariane Tabatabai, “Where Does the Islamic Revolutionary Guard Corps Stand on Nuclear Negotiations?” Bulletin of the Atomic Scientists, March 11, 2015, http://thebulletin.org/where does islamic revolutionary guard corps stand nuclear negotiations8084.
22. Author interview with senior Iranian official, Vienna, June 2015.
23. For more on Khamenei’s evolved stance on the deal, see Ariane Tabatabai, “As the Iranian Nuclear Deal Loses a Crucial Backer, Is It in Danger of Disintegration?” Bulletin of the Atomic Scientists, August 3, 2016, http://thebulletin.org/iranian nuclear deal loses crucial backer it danger disintegration9700.
24. Zachary Laub, “The Impact of the Iran Nuclear Agreement,” Council on Foreign Relations, April 11, 2017, https://www.cfr.org/backgrounder/impact iran nuclear agreement; Scott Peterson, “In Iran Election, Lackluster Economy Opens Door to a Populist Push,” Christian Science Monitor, May 17, 2017, https://www.csmonitor.com/World/Middle East/2017/0517/In Iran election lacklus ter economy opens door to a populist push.
25. Rick Gladstone, “Trump Faces Test as Boeing Announces Deal to Sell Jetliners to Iran,” New York Times, April 4, 2017, https://www.nytimes.com/2017/04/04/world/middleeast/iran boeing 737 trump.html.
26. “Transcript of Trump’s Speech in Saudi Arabia,” CNN.com, May 21, 2017, http://www.cnn.com/2017/05/21/politics/trump saudi speech transcript/.
27. Jay Solomon and Carol E. Lee, “White House Intervened to Toughen Letter on Iran Nuclear Deal,” Wall Street Journal, April 25, 2017, https://www.wsj.com/articles/white house intervened to toughen letter on iran nuclear deal 1493151632.
28. Author interviews in Iran, 2009-17.
29. For more on the first quarterly report on the JCPOA implementation presented by the Ministry of Foreign Affairs to the Majles, see Ariane Tabatabai, “Iran Issues First Progress Report on Nuclear Deal,” Bulletin of the Atomic Scientists, April 19, 2016, http://thebulletin.org/iran issues first progress report nuclear deal9350.
30. Najmeh Bozorgmehr, “Iran: Inside the Battle to Succeed Supreme Leader Khamenei,” Financial Times, October 24, 2016, https://www.ft.com/content/5fbc8192 321a 11e6 bda0 04585c31b153.
31. Author interviews with EU and Iranian officials, Washington, New York, Brussels, 2016-17.
32. Ibid.

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Since monetary policy operates in an uncertain world, discretionary policymaking relying on macroeconomic models of the economy is a weak reed upon which to base policy. The complexity of economic systems and constant changes in the underlying data mean errors may occur in a discretionary regime that can lead to monetary and financial instability. The 2008 financial crisis is a case in point: central bankers and their expert staffs failed to anticipate the crisis, and may have worsened it by keeping policy rates too low for too long (Taylor 2012).

Moving to a rules-based regime would not eliminate radical uncertainty, but it could decrease institutional uncertainty-or what Robert Higgs (1997) has called “regime uncertainty”-and thus reduce the frequency of policy errors. Higgs focused on the uncertainty caused by fiscal and regulatory policies that attenuated private property rights by decreasing expected returns on capital. A discretionary monetary regime increases uncertainty about the future purchasing power of money and thereby undermines an important property right.

Radical uncertainty is a given, but institutional uncertainty can be reduced by adopting credible rules. As Karl Brunner (1980: 61) has pointed out,

We suffer neither under total ignorance nor do we enjoy full knowledge. Our life moves in a grey zone of partial knowledge and partial ignorance. More particularly, the products emerging from our professional work reveal a wide range of diffuse uncertainty about the detailed response structure of the economy. . . . A nonactivist [rules-based] regime emerges under the circumstances … as the safest strategy. It does not assure us that economic fluctuations will be avoided. But it will assure us that monetary policymaking does not impose additional uncertainties … on the market place.

Some congressional leaders think it’s time to create a rules-based monetary regime. The Financial CHOICE Act of 2017 (H.R 10), which recently passed the House, would make the Fed responsible for specifying a monetary rule and justifying to Congress any Fed deviations from it.¹

Whether the CHOICE Act passes or not, it is important to consider alternative monetary rules and to be prepared to make the case for rules over discretion when the opportunity for reform arises.

Various monetary rules will be examined, so will the difficulty of implementing them under the current environment in which unconventional Fed policy has plugged up the monetary transmission mechanism. Particular attention will be paid to rules designed to stabilize the path of nominal spending. The article ends with a call to establish a Centennial Monetary Commission to evaluate the Federal Reserve’s performance over its 100-plus years and to consider the ability of alternative rules to reduce regime uncertainty.

Notes:

¹ See Financial CHOICE Act of 2017 (H.R. 10): https://financialservices.house.gov/uploadedfiles/hr_10_the_financial_choice_act.pdf.

James A. Dorn is Vice President for Monetary Studies and a Senior Fellow at the Cato Institute.

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The recent rise in American economic nationalism has accompanied the view that past restrictions on foreign competition were successful in achieving stated policy objectives: decreased imports, increased jobs, industrial revival, open foreign markets, and economic prosperity more broadly. Politicians and pundits use such assertions to justify new nationalist economic proposals, but they ignore a vast repository of academic analyses and contemporaneous reporting that show that American trade protectionism—even in the periods most often cited as “successes”—not only has imposed immense economic costs on American consumers and the broader economy, but also has failed to achieve its primary policy aims and fostered political dysfunction along the way.

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A renewed focus on international trade’s disruptions to the U.S. economy, while worthwhile, has spawned troubling suggestions that the U.S. government should be more willing to experiment again with protectionism to help American workers and the economy. This paper should help to counter such ideas. History is replete with examples of the failure of American protectionism; unless our policymakers quickly relearn this history, we may be doomed to repeat it.

Benjamin Herscovitch

U.S. lawmakers and analysts see China’s efforts to control much of the South China Sea as a serious threat, endangering regional security, freedom of navigation, and the liberal world order. This paper finds that political leaders and experts exaggerate the dangers of China’s South China Sea policy.

As the world’s largest trading nation, China has a deep vested interest in ensuring that trade routes in the South China Sea remain open, and Beijing has no interest in military conflict with regional powers. Although China’s South China Sea policy is inconsistent with some of the norms and institutions of the rules-based liberal world order, Beijing does not seek to undermine this order as a whole and remains supportive of key elements of the international system.

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Charles Calomiris

Increasingly, financial regulation has adopted processes that are inconsistent with adherence to the rule of law. Appropriate regulatory process is fundamental to the ability of regulation to succeed because process defines the incentives of regulators, which are crucial to ensure that regulators act diligently in pursuit of bona fide objectives. Relying on flawed regulatory processes – especially those related to the use of “guidance,” which avoids transparency, accountability and predictability, and thereby increases regulatory risk – has resulted in poor execution of regulatory responsibilities, unnecessary regulatory costs and opportunities for politicized mischief. This article analyzes four examples of flawed process from recent regulatory constructs – the CFPB, the FSOC, Operation Choke Point, and stress testing – and offers potential solutions. In addition to solutions that address problems specific to each of the four examples, more broadly, regulatory practice should be grounded in formal rule making rather than the reliance on guidance.

Colin Grabow

Executive Summary

The Trump administration’s decision to abandon the Trans-Pacific Partnership (TPP) coincides with China’s interest in playing a more prominent role in advancing trade and economic integration in the Asia-Pacific region. Beijing’s willingness to leverage its growing clout to underwrite a number of high-profile economic initiatives in the region, however, has raised concerns in Washington that such efforts will come at U.S. expense.

Such worries are overwrought. Rather than sound the alarm over China’s latest moves, policymakers should be open to the possibility that Beijing is finally becoming the responsible stakeholder that many have long urged it to be. On the trade front, encouragement is to be found in senior Chinese officials’ rhetorical support for free trade and its institutions, while Chinese leadership’s support for the Regional Comprehensive Economic Partnership (RCEP) is a key steppingstone toward eventual realization of a Free Trade Area of the Asia-Pacific. Although in many ways inferior to the TPP, the RCEP’s standards could yet be improved, and even if left unchanged they still represent forward progress for free trade in the region.

Meanwhile, China’s backing of both the Asian Infrastructure Investment Bank and the One Belt, One Road (OBOR) initiative holds the possibility of much-needed improvements in infrastructure and connectivity that could bolster regional and global trade. With none of its own resources or prestige at stake, the United States stands to benefit considerably, and at little cost, from China’s efforts in this regard.

Moreover, zero-sum fears that China’s increasing prosperity and commensurate growth in its regional influence come at U.S. expense should be balanced against the dangers presented by a country that is, alternatively, isolated and economically flailing. Mired in its economic failures before opening up to reform in the late 1970s, China was dangerous to both its neighbors and itself, with the country engaging in several border wars as well as the disastrous Great Leap Forward and Cultural Revolution.

Rather than reflexively viewing China’s economic initiatives as an affront to U.S. interests, the Trump administration should attempt to harness China’s emerging taste for global economic leadership. Instead of focusing so intently on the trade disputes that divide us, the Trump administration should seek to conclude the bilateral investment treaty negotiation and consider the merits of initiating negotiations for a bilateral free trade agreement with China. Through such cooperation, the United States and China could become successful partners in the promotion of trade and prosperity in the increasingly vital Asia-Pacific region.

Introduction

A leading argument put forth by some U.S. supporters of the Trans-Pacific Partnership (TPP) was that failure to implement the agreement would redound to the benefit of China, effectively ceding economic and even political leadership in the Asia-Pacific region to Beijing. President Trump’s decision to withdraw from the agreement and instead to focus his administration’s trade efforts on the negotiation of bilateral deals and revision of past agreements means that such warnings will now be put to the test. By abandoning the TPP, the United States will likely watch from the sidelines as the rules and institutions shaping the region are determined.

Less clear, however, is whether China stands ready to fill the void left by Washington, and even whether a more active role by Beijing should be regarded as undesirable. Indeed, in the wake of recent rhetoric from Chinese President Xi Jinping in support of free trade, and signs of a greater willingness to help advance economic integration efforts in the region via the Regional Comprehensive Economic Partnership (RCEP) and various infrastructure-centered initiatives, the country could conceivably play a welcome and positive role during the U.S. absence from regional trade liberalization efforts.

Amid growing signs that China may be ready to become a more “responsible stakeholder,” the Trump administration would be well advised to keep sheathed its rhetorical and executive action swords. International trade is not a zero-sum game, and noncoercive efforts that expand commerce are to be properly viewed as win-win outcomes that benefit the United States and carry the region a step closer to realizing a Free Trade Area of the Asia-Pacific (FTAAP). Just as Chinese economic gains should not be viewed as coming at U.S. expense, similarly the United States gains no economic benefit when China stumbles. Even those with a deeply rooted skepticism of Beijing’s goals and intentions should concede that any concerns over an active and growing China are secondary to those of a China that is disengaged and economically troubled. History has repeatedly shown that the country is most dangerous not during times of prosperity and international integration but rather when it is isolated and impoverished.

Instead of worrying about Chinese aspirations to exert economic leadership in the region, Congress and the Trump administration should devote their energies to avoiding trade provocations with China and to addressing the various economic ills that have sapped U.S. economic dynamism and vitality. By avoiding such lose-lose entanglements, further advancing freer trade through new bilateral agreements, and making needed reforms at home, a reinvigorated United States can reemerge on the economic scene in the coming years ready to resume its traditional place as a leading force for expanded international trade and economic integration.

Encouraging Free Trade Rhetoric from China’s Leadership

At first glance, China may seem an unlikely candidate to play a leading role in the push for liberalized trade in the Asia-Pacific region. Although the country has made impressive strides since pro-market reforms were first introduced in the late 1970s, the economy remains rife with government intervention, and both U.S. officials and firms have expressed concern over an increase in regulatory barriers and discrimination against foreign companies.¹ Citing such protectionist backsliding and the continued state dominance of the Chinese economy, both the European Union and the United States have refused to accord China market economy status for purposes of applying antidumping measures under their World Trade Organization (WTO) obligations.

However, China has shown possible signs of a growing realization that its economic future lies in breaking down barriers to trade rather than raising them. Perhaps most notably, President Xi provided a needed defense of free trade and globalization during his speech at this year’s annual meeting of the World Economic Forum in Davos, Switzerland. Among his remarks, Xi said:

We must remain committed to developing global free trade and investment, promote trade and investment liberalization and facilitation through opening-up and say no to protectionism. Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war.²

Turning his attention to China’s domestic economy, the Chinese leader vowed to pursue unspecified “supply-side structural reforms,” measures to “enable the market to play a decisive role in resources allocation,” and various other actions designed to encourage investment in the country. “An open door allows both other countries to access the Chinese market and China itself to integrate with the world,” he added in a nod toward the mutual benefits of such measures. Meanwhile, at a World Economic Forum event in Dalian, China, in June, Chinese Premier Li Keqiang called free trade a “prerequisite for fair trade” (effectively turning the common refrain that free trade must be fair trade on its head) and called the imposition of unilateral rules “much less advisable than pursuing all-win outcomes.”³

Less widely reported, Vice Premier Zhang Gaoli (effectively China’s seventh-highest-ranking political figure) delivered a keynote speech at the Boao Forum in late March that featured repeated praise for free trade.⁴ Presumably taking his cues from President Xi, Zhang’s address included calls for reinforcing the multilateral trading system under the auspices of the WTO, making free-trade arrangements more open and inclusive; and he concluded by urging his audience to “work together to push forward economic globalization and free trade” to create a better future for Asia and the world.

Talk is cheap, and it is entirely possible that such rhetoric from senior Chinese leadership was meant to mollify foreign observers while plotting a very different course at home. However, reasons for encouragement do exist. The March 2017 launch of exploratory talks between Canada and China over a possible free trade agreement (FTA) is one positive signal, indicating both a willingness by Beijing to further open its economy and a tentative vote of confidence by Ottawa that China is serious about its desire for increased foreign trade and economic openness.⁵ Another seeming indication of China’s commitment is the March announcement by the governments of China and New Zealand that they are launching talks aimed at expanding an existing FTA between the two countries. (In addition to New Zealand, China has also signed FTAs with South Korea, Australia, Iceland, and Switzerland within the past five years and has ongoing negotiations for a trilateral FTA with Japan and South Korea.)⁶

A meeting among TPP countries, China, and South Korea in Chile in March also revealed a greater degree of enthusiasm by Beijing for trade liberalization. “The Chinese want to be the leaders, the benchmark. That was not like that before,” remarked Paulina Nazal, head of Chile’s international trade efforts.⁷

Meanwhile, as part of China’s blueprint for development of its domestic automobile industry, the country’s National Development and Reform Commission announced plans in April 2017 to raise the ownership limits on foreign carmakers, which had been limited to 50 percent under local joint-venture requirements.⁸ Reason for encouragement is also to be found in the agricultural sector, where the removal in recent years of price supports for corn, cotton, soybeans, and sugar has created additional room for imports to meet the country’s considerable appetite.⁹ Also of note, in July 2017, China announced that it will allow imports of rice from the United States for the first time ever.¹⁰ Such long-overdue measures are hopeful indications of the Chinese government’s recognition that successful domestic economic reform must include greater openness and increased foreign participation in the economy.

The Regional Comprehensive Economic Partnership Forges Ahead

China’s foremost international trade initiative, of course, is its participation in the Regional Comprehensive Economic Partnership. Comprising the 10 member states of the Association of Southeast Asian Nations (ASEAN) and the 6 countries with which the organization has existing free trade deals (Australia, China, India, Japan, South Korea, and New Zealand), the RCEP is, despite its ASEAN roots, widely described as a China-driven effort. That, in turn, has led many observers to characterize the RCEP as a Chinese-led alternative-a rival-to the TPP and a potential economic threat to the United States. However, that characterization is roundly rejected by the governments that are party to both the RCEP and the TPP and that see membership in both as their preference.

The RCEP should be seen for what it is: an agreement that reduces trade barriers, promotes economic growth, and does not preclude members from joining other agreements, including ones with the United States.¹¹ The RCEP would provide a much-needed boost to regional trade liberalization efforts in the wake of U.S. withdrawal from the TPP. The Asian Development Bank estimates the potential increase in global income from RCEP implementation to be in the neighborhood of $260 billion over 10 years, which is significant although smaller than the expected benefits from a TPP that includes the United States.¹² The Peterson Institute for International Economics (PIIE) estimates global income gains from such a TPP of $492 billion through 2030.¹³

Moreover, the RCEP could advance U.S. interests by further integrating Beijing into the rules-based international order, by providing additional counterinfluences to market-distorting policies, and by further incentivizing the reform and liberalization of China’s economy. As the PIIE’s Sean Miner has noted, China-like other countries-uses international agreements to “overcome vested interests and push for domestic reforms” and has used such deals in the past to push through economic reforms that were “strongly opposed by powerful groups that profited from the status quo.”¹⁴

The RCEP could also serve as a steppingstone toward an FTAAP, which many regard as the ultimate goal of U.S. trade policy architecture in the region. The connection between the RCEP and FTAAP has already been highlighted by China, with the need to advance both efforts noted by President Xi during his Davos speech. The Chinese leader also cited the need to advance both initiatives during a keynote address to the Asia Pacific Economic Cooperation forum held in Lima, Peru, in November 2016.¹⁵

The leaders of that forum have designated the RCEP as an officially sanctioned pathway to achieving the FTAAP, and a November 2016 analysis published by the organization cited the initiative as a “key pathway for broader economic integration.”¹⁶ Meanwhile, an October 2014 paper by Peter A. Petri and Ali Abdul-Raheem described both the RCEP and the TPP as “represent[ing] foundations for an FTAAP” and wrote that both agreements would “provide essential way-stations for economies on the path to region-wide integration.”¹⁷

RCEP critics have derided the agreement for its lack of ambition and relatively low standards, particularly compared with the TPP. This critique has merit, with the TPP covering a much broader set of topics (30 chapters versus roughly a dozen) and featuring a wider scope of tariff reduction and service-sector liberalization. It is unclear, however, that Beijing is a prime culprit for the lack of willingness to engage in deeper and more widespread tariff reductions. As PIIE’s Jacob Funk Kirkegaard points out, China actually desires further tariff liberalization in sectors such as manufacturing and light industry but has encountered resistance from a number of its trading partners in the RCEP who have seen their trade surpluses with China turn into deficits in recent years.¹⁸ That factor suggests that Americans who favor a more liberalized international trading regime should perhaps be fearful not of excessive Chinese clout in the RCEP but rather a lack of it.

Furthermore, with the RCEP yet to be concluded, its more modest standards and scope are far from set in stone, and the agreement’s ambitions could still be raised. Indeed, with the TPP’s future now clouded by the U.S. exit, it is conceivable that TPP members who are also participating in the RCEP may devote new energy to improving the deal as the best near-term prospect for liberalizing trade in the region. If the praise for free trade and economic integration from senior Chinese leaders is reflected at the negotiating table as talks progress, it could generate momentum for broadening and strengthening the RCEP’s standards.

Former president Barack Obama and others, meanwhile, have warned that, should the RCEP advance and the TPP stumble, it will allow “countries like China” to “write the rules of the road for trade in the 21st century.”¹⁹ Such language is commonly interpreted as an oblique reference to the FTAAP or other broader initiatives to advance trade in the Asia-Pacific region, and it assumes that either the RCEP or the TPP will be used as the starting point for such efforts.

This type of thinking, however, suffers from at least two possible flaws. First, despite the U.S. withdrawal from the TPP, the initiative is not moribund, with Japan and others attempting to rally the remaining members-the so-called TPP-11-to press ahead toward concluding the deal. Second, even if the TPP meets its demise, it is unclear why the RCEP would serve as the model or likely finishing point of any FTAAP or similar style agreement. Beyond the United States, numerous other countries-including Australia, Japan, New Zealand, and the Pacific Alliance countries-have signaled their interest in more expansive, higher-standards agreements, and such desires would almost certainly be reflected at the negotiating table. The RCEP might set a floor for future negotiations, but there is little reason to view it as some kind of ceiling.

Furthermore, the simultaneous pursuit of both the RCEP and the TPP could have a salutary impact on the advancement of free trade in the region. As a July 2017 report from the Center for Strategic and International Studies (CSIS) notes, a rivalry between the two agreements has the “potential to create a virtuous competition for trade liberalization and needed reform within China.”²⁰

China’s Infrastructure Push

Beyond its expressions of interest in leading regional efforts to liberalize trade, the Chinese government has also taken the initiative to begin the process of building the infrastructure linkages necessary for expanded trade and integration in Asia. To that end, China has taken what appears to be a largely two-pronged approach through the Asian Infrastructure Investment Bank (AIIB) and the One Belt, One Road (OBOR) initiative, both of which were proposed in 2013 (and the AIIB was officially established a year later).

China’s rationale for launching the AIIB was the need for financing to close a yawning infrastructure gap in the region. Addressing the “daunting infrastructure needs across Asia” is listed by the bank as one of its key objectives.²¹ Indeed, the Asian Development Bank claims that $1.5 trillion must be spent per year by developing countries in the region through 2030 to meet their infrastructure needs ($1.7 trillion if one includes the cost of climate change mitigation), compared with current expenditures of $881 billion.²² Less officially, Chinese frustration with its lack of influence at the World Bank and the organization’s funding priorities are suspected to have played key roles.

One Belt, One Road, meanwhile, is the name given to an effort to inject renewed life into ancient trading links between China and Eurasia. Consisting of the land-based Silk Road Economic Belt and the sea-based Maritime Silk Road, OBOR is essentially a series of infrastructure projects designed to build and expand rail, road, energy, and maritime linkages.

In the AIIB and OBOR, China’s motives go beyond those officially stated to include an expansion of regional influence and to create demand that might soak up the excess capacity in China’s economy. Whether those goals will be realized is unclear, but neither should be viewed as aggressive or otherwise problematic from a U.S. perspective. If China succeeds in expanding its influence in Central Asia, it is likely to do so at the expense of Russia-a trade many U.S. policymakers would likely be perfectly willing to make. That said, having a bigger economic footprint does not necessarily translate into greater political influence. China’s role as the top foreign investor in Vietnam, for example, has not prevented outbreaks of anti-Chinese protests in the country;²³ its attempted construction of a dam in Myanmar has actually proved a source of contention in bilateral relations;²⁴ and development of a Chinese-run port project in Sri Lanka has been met with violent demonstrations.²⁵ As author and China analyst Tom Miller notes, “China will struggle to convince its neighbors to embrace a new regional order centered on Beijing, precisely because they fear its immense economic power. No one wants to become a Chinese vassal.”²⁶

Meanwhile, Louis Kuijs, the head of Asia economics at Oxford Economics, notes that OBOR projects are unlikely to figure prominently in resolving China’s overcapacity problems because their magnitude is too great and the costs of transporting cement, steel, and other overproduced Chinese products to where they are needed will prove uneconomical.²⁷ Indeed, to the extent that the initiative should provoke worry, it is that the lack of market forces at work will result in projects that generate poor economic returns.²⁸ As a consequence, China could find itself facing even more debt, which is already one of the primary risks to the country’s-and, by extension, the world’s-economic outlook.

U.S. businesses, workers, and consumers, bearing no direct financial risk from OBOR or the AIIB, stand to benefit from those initiatives to the extent that they succeed in spurring more trade and greater prosperity in the region. Although the jury is out on how successful those Chinese-backed initiatives will prove to be, U.S. officials have reason to be at least cautiously optimistic. David Dollar, an economist and China expert at the Brookings Institution, has applauded the twin initiatives as providing the “hardware” of trade and investment that will serve as a counterpart to the “software,” which consists of regional trade agreements.²⁹ Pieter Bottelier, a visiting scholar of China studies at the Johns Hopkins School of Advanced International Studies, calls OBOR a “very positive initiative and a major vision of how China can collaborate with countries in its neighborhood.”³⁰ Moreover, McKinsey & Company’s Asia chair Kevin Sneader says that OBOR “has the potential to be perhaps the world’s largest platform for regional collaboration.”³¹

These individuals are hardly alone in their optimism. Michael Swaine, a China expert at the Carnegie Endowment for International Peace, calls himself a “big supporter” of OBOR, adding that it is “not threatening American interests” and “could be very beneficial” for both China and the countries involved.³² The July CSIS report, meanwhile, notes that OBOR “compliments [sic] many U.S. interests in the region.”³³ Citing the vast infrastructure needs of the Asia-Pacific region, meanwhile, Financial Times columnist Martin Wolf says that “additional Chinese resources should be helpful.”³⁴

More fundamentally, policymakers should recognize that, although China may not be operating directly out of the preferred U.S. playbook, its efforts could serve to advance the broader U.S. objectives of peace and prosperity in Asia. At the very least, Beijing should be given the opportunity to succeed before its efforts are placed under a cloud of suspicion. Those who insist on seeing ulterior motives in China’s economic initiatives should be wary of self-fulfilling prophecies and of provoking a breakdown in U.S.-China relations that observers almost universally agree would be wildly counterproductive.

Focusing on the AIIB, PIIE Senior Fellow and Director Emeritus C. Fred Bergsten effectively summarized the issue in a 2015 opinion piece:

As the incumbent power, the United States naturally wants China to support the international rules and institutions that it has led for 70 years. As the rising power, China naturally challenges a status quo it had no role in creating and wants to begin shaping a modified order itself.

The United States has correctly urged China to exercise leadership consistent with its expanding power and to provide more resources to support development and other global goals. When the Chinese move in those directions, as they are doing with the AIIB, it is short-sighted and hypocritical for the United States to seek to block them… . This U.S. hostility reinforces the Chinese view that U.S. strategy is to contain and suppress it, so increasing rather than decreasing the prospect of uncooperative Chinese behavior.³⁵

The United States should never simply take China at its word and assume the best of intentions, but neither should it adopt a default policy of opposition when Beijing seeks to act. China’s initiatives may prove to be economic folly or even part of some nefarious agenda, but policymakers should allow for the possibility that its actions will generate real benefits for the region. The ultimate goal of U.S. policy should not be power and influence for their own sake, but peace, stability, and prosperity.

The Dangers of an Isolated China

None of this is to deny that an economically ascendant, authoritarian China will pose geopolitical challenges for the United States. But whatever the downsides of a more assertive and engaged China, they pale in comparison to the economically and politically isolated version of the country that existed from the post-World War II era until the 1970s.

During that period, China proved to be a menace toward both its neighbors and its own population. On the foreign policy front, China engaged in border conflicts with India in 1962 (and further skirmishes in 1967) and the Soviet Union in 1969. It went to war with United Nations forces during the Korean War in the early 1950s. Within China, meanwhile, the repression and backwardness typical of communist countries were interspersed with the horrific paroxysms of violence and economic self-sabotage known as the Cultural Revolution and Great Leap Forward.

Since the formal adoption of Deng Xiaoping’s economic reform agenda in December 1978 and political rapprochement with the United States in 1979, however, China has become a much more cooperative and peaceful country. Aside from a conflict with Vietnam in early 1979-which began only weeks after economic reform was officially launched and just days before the reopening of embassies in the United States and China on March 1-and a brief clash in March 1988, also with Vietnam, over part of the Spratly Islands, the country’s record has been a largely peaceful one. Although Beijing continues to play a meddlesome and uncooperative role in the South China Sea, China has also shown its helpful side through assistance in the fight against Somali piracy and its status as the largest contributor of the UN Security Council’s five permanent members of troops to peacekeeping efforts.³⁶

At home, the recent death of democracy activist and Nobel Peace Prize winner Liu Xiaobo under government custody is a painful reminder that the Chinese people’s political and civil rights continue to be repressed, and its 1989 massacre of protesters at Tiananmen Square will forever be a stain on the regime. That said, the current restrictions on liberty do not equate to the horrors of previous decades, and average Chinese citizens have experienced a significant increase in their standard of living.

Isolating China politically would run the risk of returning to the strained ties of the pre-rapprochement era. Any policy that treats the United States-China economic relationship as a zero-sum game or views Chinese economic strength as a threat per se would almost certainly prove counterproductive. Rather than a threat, a vibrant Chinese economy is in the national interest of the United States, and any slowdown in bilateral trade or in China’s growth would have profoundly adverse consequences for the U.S. economy as well. As the United States’ largest trading partner, China is the third-largest market for exported U.S. goods, the top source of imports (whose typically low prices are a boon to U.S. consumers), the second-largest foreign purchaser of Treasury bonds, and a critical low-cost manufacturing platform that boosts the competitiveness of leading U.S.-based firms such as Apple.³⁷

Beyond direct costs, the impairment of China’s economic progress would exert considerable indirect costs as well. China is the leading trading partner not only of the United States but also of most, if not all, major Asia-Pacific economies, including Australia, Japan, South Korea, and Vietnam. Any significant reduction in Chinese growth would have adverse effects throughout the region and beyond. According to a 2016 International Monetary Fund working paper, a 10 percent drop in Chinese imports resulting from a 1 percent slowdown in gross domestic product beyond baseline growth for 2016-17 would “lead to a loss of about 1.2 percent GDP of export revenue in 2016 for all countries.”³⁸ Network effects, meanwhile, could increase the drop to “2.0 percent of GDP in 2017 before abating gradually by 2020 to about 0.2 percent of GDP.”

Policy Recommendations

While China has been promoting economic engagement in the Asia-Pacific region, the Trump administration has been moving in the opposite direction (for example, withdrawing the United States from the TPP). Although the most straightforward path to boosting U.S. competitiveness and matching China’s own initiatives would be to rejoin the agreement, statements from President Trump and senior administration officials suggest that this is an unlikely scenario. Nonetheless, a variety of options exist for the administration to repair some of the damage and at least partially recover the U.S. leadership position on trade that has been so casually discarded.

To start, U.S. thought leaders and officials given to deep suspicions should alter their thinking and approach to China. Although China is certainly not a steadfast ally of the United States, neither should it be regarded as a perpetual foe. Chinese and U.S. economic and geopolitical interests will sometimes align and sometimes diverge. Healthy skepticism is always warranted, but policymakers need to be careful that it does not degrade into paranoia and a default position that dark motives are behind all of Beijing’s moves.

To that end, the United States should be careful to avoid acting unilaterally or in rogue fashion in response to perceived economic transgressions by China. Rather, the United States should continue to rely on the rules of trade and the norms established under the WTO for resolving such disputes. That system, although not perfect, has worked remarkably well to prevent trade spats from getting out of control and for delivering justice under the rule of law. As a complainant, the United States has prevailed at the WTO in 91 percent of adjudicated issues.³⁹ Loudly blaming China for American economic ills and imposing punitive tariffs as retaliation-although perhaps politically attractive-will be not only ineffective but self-defeating as well.

Beyond avoiding unnecessary trade spats with China, the United States should also seize on already existing opportunities to actively improve the bilateral trade relationship. One idea is to conclude the long-running negotiation for a bilateral investment treaty. Enjoying the backing of the U.S.-China Business Council, the American Chamber of Commerce in China, and many other U.S. business groups, an agreement to conclude the bilateral investment treaty was said to be nearing its final stages in the last days of the Obama administration.⁴⁰ If the Trump administration were to pick up this effort (which is being negotiated-as the administration prefers-in a bilateral format) soon, on the heels of a May 2017 agreement between Washington and Beijing to liberalize trade in beef, chicken, financial services, banking, and other spheres, it could benefit from that success and find its way across the finish line. Doing so would help liberalize what Yukon Huang and David Stack call “one of the most restrictive investment regimes of any Organisation for Economic Co-operation and Development country for services” and would help generate real gains for U.S. firms in light of their comparative advantages in areas such as finance, communications, information technology, entertainment, and education.⁴¹

If the Trump administration chooses to be more ambitious, it could also opt to pursue a free trade agreement with Beijing. Although perhaps a fanciful notion to some, there may be scope for achieving a reasonably robust bilateral agreement. As Simon Lester and Huan Zhu suggest in a recent paper:

Without the TPP or other regional trade initiatives, and with no comprehensive talks going on at the WTO, the best way for the United States to promote market liberalization in China is to go directly to China and negotiate bilaterally on issues related to Chinese restrictions on trade and investment. In the past, there have been discussions between China and the United States on a number of issues, but most of these talks have been merely “dialogues” that did not lead to concrete results. What is needed instead is a formal negotiation that leads to enforceable commitments.⁴²

The United States should also take proactive measures to improve the trading environment more broadly and to restore some of its lost leadership. With the TPP seemingly off the table, Washington should make the most of second-best options, including the possible negotiation of bilateral trade agreements with TPP members with which the United States does not already have such deals, particularly Japan and Vietnam. Using the TPP as a template for negotiating these deals-as well as for updating the North American Free Trade Agreement with Canada and Mexico-would carry the dual possibilities of satisfying the needs of 21st-century trade agreements while making it more seamless for the United States to rejoin the TPP and help steer the partnership toward an FTAAP in the not-too-distant future.

Last, policymakers must realize that it is they rather than China or other foreign countries who will ultimately determine whether the United States finds itself on the path to economic prosperity. How much the U.S. economy grows will be determined far more by what happens in Washington than in Beijing. Instead of blaming foreign actors for U.S. economic ills, policymakers should leverage their position and power to restore any lost economic luster. It is not China that has burdened the United States with a byzantine tax code or any number of costly regulations that sap the country’s vitality and undermine its growth.⁴³ Republicans-the putative party of personal responsibility-in the White House and Congress should seek to put their own economic house in order before focusing on alleged troubles being inflicted by other countries.

Conclusion

China’s rise has prompted considerable anxiety over its growing economic strength. Indeed, a feeling appears to have taken hold among significant parts of the American electorate-as well as within the White House-that China’s increasing might has come at U.S. expense. That, in turn, has led to a knee-jerk reaction among some observers that China’s international economic initiatives such as the RCEP, the AIIB, and OBOR pose some kind of threat to U.S. interests or are at least causes for extra vigilance.

Rather than reflexively expressing suspicion or opposition to China’s moves, the possibility should at least be entertained that the world’s second-largest economy is beginning to shoulder some of the leadership burden for the advancement of free trade and deeper economic integration.

While the RCEP is no one’s free-trade ideal, it should nonetheless be valued as a steppingstone to a fully liberalized Asia-Pacific region, reducing trade barriers at a time when broader efforts to do so appear to be flagging. China’s rhetorical support for free trade should be similarly appreciated. Although the depth of this commitment is yet to be seen, such messaging by Beijing sends an important signal at a time when traditional leaders such as the United States have become derelict in their duties.

Presumably the United States will eventually come to its senses and rejoin the multilateral trade game. In the meantime, policymakers should avoid unnecessary trade spats, work toward liberalizing trade and investment through bilateral agreements, and stay focused on initiatives to keep the United States commercially engaged in Asia.

Notes

1. Christopher Wilson, “Statement by the United States at the WTO Trade Policy Review of the People’s Republic of China,” July 20, 2016, https://ustr.gov/about-us/policy-offices/press-office/speechestranscripts/2016/july/statement-united-states-wto-trade; Michael Martina, “U.S. Lobby Says China Protectionism Fueling Foreign Business Pessimism,” Reuters, January 18, 2017, http://www.reuters.com/article/us-china-usa-business-idUSKBN1520EY.
2. Xi Jinping, “Jointly Shoulder Responsibility of Our Times, Promote Global Growth,” keynote address at the World Economic Forum, Davos, Switzerland, January 17, 2017, https://america.cgtn.com/2017/01/17/full-text-of-xi-jinping-keynote-at-the-world-economic-forum.
3. Li Keqiang, speech at the opening ceremony of the Annual Meeting of the New Champions 2017, Dalian, China, June 27, 2017, http://news.xinhuanet.com/english/2017-06/28/c_136400996.htm.
4. Zhang Gaoli, “Work Together to Advance Economic Globalization and Create a Better Future for Asia and the World,” keynote address at the Boao Forum for Asia, Boao, Hainan Province, China, March 25, 2017, http://news.xinhuanet.com/english/china/2017-03/27/c_136162062.htm.
5. Josh Dehaas, “Canada Launches Consultations on Free Trade with China,” CTV News, March 3, 2017, http://www.ctvnews.ca/politics/canada-launches-consultations-on-free-trade-with-china-1.3310129.
6. “NZ-China FTA Upgrade” New Zealand Ministry of Foreign Affairs and Trade, Wellington, https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-force/nz-china-free-trade-agreement/.
7. Rosalba O’Brien and Antonio De la Jara, “Paths Open to New Pacific Trade Pact, Post-TPP-Chile Trade Head,” Reuters, March 10, 2017, http://uk.reuters.com/article/uk-trade-tpp-chile-idUKKBN16G2NM.
8. “China to Relax Foreign Car Venture Limit in Orderly Manner,” Bloomberg News, April 25, 2017, https://www.bloomberg.com/amp/news/articles/2017-04-25/china-to-relax-foreign-car-venture-stake-limit-in-orderly-manner.
9. Lucy Cramer, “China Cut Agricultural Subsidies and American Farmers Have a Lot to Gain,” Wall Street Journal, July 13, 2017, https://www.wsj.com/articles/u-s-farmers-have-a-lot-to-gain-from-chinas-flagging-production-1499932871.
10. Michael Hirtzer, “China Agrees to Allow Imports of U.S. Rice for First Time: USDA,” Reuters, July 20, 2017, https://www.reuters.com/article/us-usa-china-rice-idUSKBN1A523V.
11. Simon Lester, “Chinese Free Trade Is No Threat to American Free Trade,” Cato Institute Free Trade Bulletin no. 60, April 22, 2015, https://www.cato.org/publications/free-trade-bulletin/chinese-free-trade-no-threat-american-free-trade.
12. Ganeshan Wignaraja, “RCEP-A Life Raft for Trade Liberalization in Asia,” Asian Development Blog, April 20, 2016, https://blogs.adb.org/blog/rcep-life-raft-trade-liberalization-asia.
13. Peter A. Petri and Michael G. Plummer, “The Economic Effects of the Trans-Pacific Partnership: New Estimates,” Peterson Institute for International Economics Working Paper no. 16-2, January 2016, https://piie.com/publications/working-papers/economic-effects-trans-pacific-partnership-new-estimates.
14. Sean Miner, “Why China Wants a BIT with the United States,” Peterson Institute for International Economics, June 18, 2015, https://piie.com/blogs/trade-investment-policy-watch/why-china-wants-bit-united-states.
15. “China to Take a Lead Role in Asia-Pacific Trade Liberalization,” Fung Business Intelligence, Hong Kong, November 22, 2016, https://www.fbicgroup.com/sites/default/files/FTAAP%2020161122.pdf.
16. “Collective Strategic Study on Issues Related to the Realization of the FTAAP,” Asia-Pacific Economic Cooperation, November 2016, http://www.apec.org/~/media/Files/Groups/CTI/2016/Appendix%2006%20-%20FTAAP%20Study.pdf.
17. Peter A. Petri and Ali Abdul-Raheem, “Can RCEP and the TPP Be Pathways to FTAAP?” October 12, 2014, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2513893.
18. Srinivas Mazumdaru, “RCEP Free Trade Deal Is ‘No Substitute for the TPP,’” Deutsche Welle, December 2, 2016, http://www.dw.com/en/rcep-free-trade-deal-is-no-substitute-for-the-tpp/a-36621736.
19. Barack Obama, “The TPP Would Let America, Not China, Lead the Way on Global Trade,” Washington Post, May 2, 2016, https://www.washingtonpost.com/opinions/president-obama-the-tpp-would-let-america-not-china-lead-the-way-on-global-trade/2016/05/02/680540e4-0fd0-11e6-93ae-50921721165d_story.html?utm_term=.037bc3a6cb05.
20. Michael J. Green, Richard C. Bush, and Mira Rapp-Hooper, “Joint US-China Think Tank Project on the Future of US-China Relations: An American Perspective,” Center for Strategic and International Studies, July 2017, https://csis-prod.s3.amazonaws.com/s3fs-public/publication/170705_US_Report.pdf.
21. “Who We Are” Asian Infrastructure Investment Bank, https://www.aiib.org/en/about-aiib/.
22. Asian Development Bank, “Meeting Asia’s Infrastructure Needs,” February 2017, https://www.adb.org/publications/asia-infrastructure-needs.
23. Bach Duong, “Top FDI Source China Pours over $56 Billion into Vietnam with Nearly 5,000 Projects,” VN Express International, May 4, 2016, http://e.vnexpress.net/news/news/top-fdi-source-china-pours-over-56-billion-into-vietnam-with-nearly-5-000-projects-3397081.html; “Vietnam Anti-China Protest: Factories Burnt,” BBC, May 14, 2014, http://www.bbc.com/news/world-asia-27403851.
24. Mike Ives, “A Chinese-Backed Dam Project Leaves Myanmar in a Bind,” New York Times, March 31, 2017, https://www.nytimes.com/2017/03/31/world/asia/myanmar-china-myitsone-dam-project.html.
25. Wade Shepard, “Violent Protests against Chinese ‘Colony’ in Sri Lanka Rage On,” Forbes, January 8, 2017, https://www.forbes.com/sites/wadeshepard/2017/01/08/violent-protests-against-chinese-colony-in-hambantota-sri-lanka-rage-on/#6c8a7ab713dd.
26. Tom Miller, China’s Asian Dream: Empire Building along the New Silk Road (London: Zed Books, 2017). Digital.
27. Knowledge@Wharton, “Where Will China’s ‘One Belt, One Road’ Initiative Lead?” University of Pennsylvania, March 22, 2017, http://knowledge.wharton.upenn.edu/article/can-chinas-one-belt-one-road-initiative-match-the-hype/.
28. Don Weinland, “China Warned of Risk to Banks from One Belt, One Road Initiative,” Financial Times, January 26, 2017, https://www.ft.com/content/6076cf9a-e38e-11e6-8405-9e5580d6e5fb.
29. David Dollar, “China’s Rise as a Regional and Global Power-The AIIB and the ‘One Belt, One Road,’” Horizons, Summer 2015, http://www.cirsd.org/en/horizons/horizons-summer-2015—issue-no4/chinas-rise-as-a-regional-and-global-power—-the-aiib-and-the-%E2%80%98one-belt-one-road-.
30. Knowledge@Wharton, “Where Will China’s ‘One Belt, One Road’ Initiative Lead?”
31. Knowledge@Wharton, “Where Will China’s ‘One Belt, One Road’ Initiative Lead?”; Joe Ngai, Kevin Sneader, and Cecilia Ma Zecha, “China’s One Belt, One Road: Will It Reshape Global Trade?” McKinsey & Company, Hong Kong, July 2016, http://www.mckinsey.com/global-themes/china/chinas-one-belt-one-road-will-it-reshape-global-trade.
32. Yang Shilong and Zhang Zhihuan, “Interview: U.S. Expert Says Belt & Road Initiative Beneficial to America,” XinhuaNet, April 25, 2017, http://news.xinhuanet.com/english/2017-04/25/c_136235284.htm.
33. Green, Bush, and Rapp-Hooper, “Joint US-China Think Tank Project on the Future of US-China Relations.”
34. Martin Wolf, “Asia’s Dynamism at Risk in US and China’s Competing Visions for Global Trade,” Financial Times, May 3, 2017, https://www.ft.com/content/343e8300-0288-11e7-aa5b-6bb07f5c8e12.
35. C. Fred Bergsten, “US Should Work with the Asian Infrastructure Investment Bank,” Financial Times, March 15, 2015, https://www.ft.com/content/4937bbde-c9a8-11e4-a2d9-00144feab7de.
36. Andrew S. Erickson and Austin M. Strange, “Why China’s Gulf Piracy Fight Matters,” CNN, January 7, 2014, http://globalpublicsquare.blogs.cnn.com/2014/01/07/why-chinas-gulf-piracy-fight-matters/; Lucy Hornby, “China Expands UN Peacekeeping Role as US Influence Wanes,” Financial Times, November 23, 2016, https://www.ft.com/content/e8091efa-ad5f-11e6-9cb3-bb8207902122.
37. Alanna Petroff, “These Are America’s Biggest Trading Partners,” CNNMoney, December 15, 2016, http://money.cnn.com/2016/12/15/news/economy/us-trade-canada-china-mexico/; “Top Trading Partners-December 2013,” United States Census Bureau, https://www.census.gov/foreign-trade/statistics/highlights/top/top1312yr.html; “China-US Trade,” IGM Forum, June 19, 2012, http://www.igmchicago.org/surveys/china-us-trade; and “Major Foreign Holders of Treasury Securities,” Treasury Department, http://ticdata.treasury.gov/Publish/mfh.txt.
38. Alexei Kireyev and Andrei Leonidov, “China’s Imports Slowdown: Spillovers, Spillins, and Spillbacks,” International Monetary Fund, March 2016, https://www.imf.org/external/pubs/ft/wp/2016/wp1651.pdf.
39. Dan Ikenson, “US Trade Laws and the Sovereignty Canard,” Forbes, March 9, 2017, https://www.forbes.com/sites/danikenson/2017/03/09/u-s-trade-laws-and-the-sovereignty-canard.
40. Jack Caporal, “U.S.-China BIT Negotiations Intensify as Administration Aims to Cement Deal,” Inside U.S. Trade, November 4, 2016, https://insidetrade.com/daily-news/us-china-bit-negotiations-intensify-administration-aims-cement-deal.
41. Yukon Huang and David Stack, “Trump’s Unnecessary Trade War with China,” National Interest, April 23, 2017, http://nationalinterest.org/feature/trumps-unnecessary-trade-war-china-20308?page=show.
42. Simon Lester and Huan Zhu, “It’s Time to Negotiate a New Economic Relationship with China,” Cato Free Trade Bulletin no. 70, April 4, 2017, https://www.cato.org/publications/free-trade-bulletin/its-time-negotiate-new-economic-relationship-china.
43. Patrick McLaughlin, “What If the US Regulatory Burden Were Its Own Country?” Mercatus Center at George Mason University, April 26, 2016, https://www.mercatus.org/publication/what-if-us-regulatory-burden-were-its-own-country.

Colin Grabow is a trade policy analyst with Cato’s Herbert A. Stiefel Center for Trade Policy Studies.

Emma Ashford and John Glaser

Executive Summary

During the 2017 presidential campaign, then-candidate Donald Trump was open about his hostility toward Iran and his disdain for the Obama administration’s diplomacy with that country. Since January, the Trump administration has been engaged in an Iran policy review. News reports and leaks suggest the review is highly likely to recommend a more confrontational approach to Iran, whether within the framework of the Iranian nuclear deal or by withdrawing from it. This paper examines the costs of four confrontational policy approaches to Iran: sanctions, regional hostilities, “regime change from within,” and direct military action.

Increased economic sanctions are unlikely to succeed in producing policy change in the absence of a clear goal or multinational support. Indeed, sanctions on Iran are likely to meet with strong opposition from U.S. allies in Europe and Asia, who continue to support the nuclear deal. The second policy we examine — challenging Iranian proxies and influence throughout the Middle East — is likewise problematic. There is little coherent, effective opposition to Iran in the region, and this approach increases the risks of blowback to U.S. forces in the region, pulling the United States deeper into regional conflicts.

The third option, so-called regime change from within, is a strategy that relies on sanctions and on backing for internal Iranian opposition movements to push for the overthrow of the regime in Tehran. This approach is not feasible: regime change — whether covert or overt — rarely succeeds in producing a stable, friendly, democratic regime. The lack of any good candidates for U.S. support inside Iran compounds this problem. The final policy alternative we explore is direct military action against Iranian nuclear or military facilities. Such attacks are unlikely to produce positive outcomes, while creating the risk of substantial escalation. Worse, attacking Iran after the successful signing of the nuclear deal will only add to global suspicions that the United States engages in regime change without provocation and that it cannot be trusted to uphold its commitments.

We suggest an alternative strategy for the Trump administration: engagement. This approach would see America continue to uphold the nuclear deal and seek continued engagement with Iran on issues of mutual interest. Engagement offers a far better chance than confrontation and isolation to improve Iran’s foreign policy behavior and empower moderate groups inside Iran in the long term.

Introduction

In July 2015, the P5+1-the United States, United Kingdom, France, Russia, China, and Germany-reached a diplomatic agreement with Iran to roll back and significantly limit the Iranian nuclear program in exchange for the lifting of economic sanctions. The Joint Comprehensive Plan of Action (JCPOA) was the result of years of meticulous diplomatic negotiations and represented an historic compromise between two long-standing adversaries, the United States and Iran. At the time, the Obama administration presented the agreement as a strict nonproliferation agreement that would extend Iran’s so-called breakout time-the time it would take Iran to “sprint” to the creation of a useable nuclear weapon-from a few months to a year or longer. Many also hoped that the JCPOA could help to reduce bilateral tensions and quiet calls for U.S. military action against Iran for the foreseeable future. The unexpected election of Donald Trump in 2016 dashed these hopes. With renewed tensions and open debate within the Trump administration as it conducts a “comprehensive review of our Iran policy,” the future of the JCPOA and of U.S.-Iranian relations is uncertain. ¹ There are certainly many options for the Trump administration if it wishes to take a more confrontational approach to Iran, four of which are examined in this paper. Yet each is difficult, costly, and carries far higher risks than continuing a policy of engagement.

The JCPOA has been successful, placing strong restrictions on Iran’s ability to engage in even peaceful nuclear development. Iran removed 98 percent of its stockpile of enriched uranium, dismantled two-thirds of its uranium enrichment centrifuges, disassembled the core of its heavy water reactor (a potential source of weapons-grade plutonium), and converted two major enrichment sites into peaceful research facilities. In addition, Iran agreed to engage in uranium enrichment exclusively at a single facility-the Natanz complex-and to produce only low-enriched uranium for 10 years. Because uranium must be enriched to 90 percent for use in a nuclear weapon, Iran’s agreement to restrict enrichment to 3.67 percent constitutes a significant barrier to weapons development. Iran also agreed to limit its stockpile of low-enriched uranium to 300 kilograms for 15 years, making it extremely difficult to covertly enrich excess material. ²

To ensure compliance with the JCPOA’s restrictions, Iran agreed to submit what remained of its nuclear program to what Georgetown University’s Ariane Tabatabai describes as “the most intrusive inspections regime ever voluntarily agreed to by any party.” ³ International monitors perform daily inspections of all of Iran’s declared facilities, with some facilities subject to 24-hour video surveillance. As critics note, these inspections and many of the deal’s other restrictions eventually expire, phased out over the next 10 to 25 years. ⁴ As part of the deal, however, Iran rejoined the Nuclear Nonproliferation Treaty (NPT) and ratified its Additional Protocol, a provision that mandates inspections of Iran’s civilian nuclear facilities. In doing so, Iran made a commitment to never become a nuclear weapons state and agreed to monitoring under the NPT indefinitely, far beyond the life of the JCPOA.

Indeed, more than two years after the adoption of the JCPOA, Iran is in full compliance with the deal. Though there has been some debate about the interpretation of certain issues-Iranian missile testing and the extent of U.S. sanctions relief-the deal continues to be implemented by both sides. As of this writing, the International Atomic Energy Agency (IAEA) has reported eight times that Iran is meeting its obligations under the deal. ⁵ Even the Trump administration, despite public denigration of the agreement, has formally certified that Iran is fulfilling its JCPOA commitments. In exchange, economic sanctions related to Iran’s nuclear program have been lifted, including United Nations and European Union sanctions on Iran’s energy sector and a variety of U.S. secondary sanctions related to Iran’s financial and energy sectors. ⁶ In addition, Iran has regained access to wealth stored in offshore banks previously interdicted by sanctions. ⁷

Growing Opposition in Washington

Nonetheless, the change in presidential administration has altered the political climate surrounding the nuclear deal in Washington, D.C. There have been prominent calls from both within the Trump administration and outside it to kill the JCPOA. As a candidate, Donald Trump himself repeatedly boasted that his “number-one priority is to dismantle the disastrous deal with Iran,” which he described in his typical hyperbole as “the worst deal ever negotiated.” ⁸ The recertification process (required every 90 days) has become increasingly politicized as a result: in July 2017, some advisers persuaded the president to refuse certification of Iran’s compliance with the JCPOA, only for other advisers to succeed in persuading him, at the last minute, to accept the IAEA’s conclusions and certify compliance. ⁹ Trump told journalists following the episode that he intends not to repeat the incident, reportedly informing White House staff that “he wants to be in a place to decertify 90 days from now and it’s their job to put him there.” ¹⁰ As David S. Cohen, former deputy director of the Central Intelligence Agency (CIA), notes, President Trump’s “reported demand for intelligence to support his policy preference to withdraw from the Iran nuclear deal risks politicizing intelligence analysis, with potentially grave consequences.” ¹¹

Calls to end the deal have also come from outside the administration. In July, Sens. Tom Cotton (R-AR), Ted Cruz (R-TX), David Perdue (R-GA), and Marco Rubio (R-FL) wrote a letter to Secretary of State Rex Tillerson to “urge that you not certify . . . that Iran is complying with the terms of the [JCPOA].” ¹² John Bolton, United Nations ambassador under George W. Bush and an early candidate to be Trump’s secretary of state, called for bombing Iran’s nuclear facilities months before the JCPOA was signed. ¹³ In July 2017, he wrote, “withdrawing from the JCPOA as soon as possible should be the highest priority.” ¹⁴

Opponents of the deal have little factual basis for their arguments: the IAEA has repeatedly found Iran in compliance with the deal’s restrictions, and the Joint Commission of the JCPOA has not identified any violations. ¹⁵ Instead, opponents typically argue that Iran is violating the “spirit” of the deal, pointing to Iran’s ballistic missile tests or its support for violent groups throughout the Middle East. ¹⁶ Yet the JCPOA was narrowly written specifically to exclude non-nuclear questions; it was never intended to solve all problems in the U.S.-Iranian relationship. Ironically, if any JCPOA signatory is in violation of the deal, it may be the United States. ¹⁷ At the G-20 summit in July, President Trump reportedly urged fellow world leaders to stop doing business with Iran, an action that violates the American commitment under the JCPOA to “refrain from any policy specifically intended to directly and adversely affect the normalization of trade and economic relations with Iran.” ¹⁸

President Trump appears determined to undermine the JCPOA. The administration is considering using the deal’s “snap inspections” provision-which allows inspectors to demand access to undeclared sites in Iran reasonably suspected of illicit enrichment activity-to make Iran appear noncompliant. ¹⁹ In the absence of any clear evidence of illicit enrichment activity, Iran would likely decline the Trump administration’s demand to inspect undeclared military sites, allowing the White House to portray Iran as violating the deal. As Mark Fitzpatrick, executive director of the International Institute for Strategic Studies, notes, this approach is “the route that White House political operatives suggest as a way to meet President Trump’s pre-determination not to again certify that Iran is in compliance, even when the facts clearly say otherwise.” ²⁰ This approach also plainly misuses the relevant provisions of the JCPOA: as Daryl Kimball, director of the Arms Control Association put it, the Iran deal’s “special access provisions were designed to detect and deter cheating, not to enable [a] false pretext for unraveling the agreement.” ²¹ The administration appears to be simply “seeking trumped up reasons to sink [the] Iran deal.” ²²

The Trump administration’s approach to Iran approximates the Bush administration’s approach to Iraq in the lead up to the 2003 invasion. Fitzpatrick compares the two situations, noting that “unfounded assumptions, false claims, and ideologically-tinged judgements are driving a confrontational approach that could well lead to another war in the Middle East.” ²³ As in the case of Iraq, the risk exists for politicization of intelligence findings. As Steve Andreasen and Steve Simon, both former members of the National Security Council, describe in a recent op-ed in the New York Times: “It’s a good bet that [administration officials] will cherry-pick facts to give the president what he wants: an excuse to scuttle the Iran deal.” ²⁴

President Trump’s commitment to a harder line against Iran-independent of the nuclear deal-is obvious, though the Trump White House’s vicious internal power struggles suggest clear differences inside the administration on the best approach. In June, for example, the New York Times reported that the administration was ramping up a covert action program against Iran, and that “Mr. Trump has appointed to the National Security Council hawks eager to contain Iran and push regime change, the groundwork for which would most likely be laid through CIA covert action.” ²⁵ Yet Trump’s National Security Adviser H. R. McMaster fired the council’s former senior director for intelligence, Ezra Cohen-Watnick, in August. Cohen-Watnick had previously expressed to administration officials “that he wants to use American spies to help oust the Iranian government.” ²⁶ Along with Derek Harvey, who was the administration’s top Middle East official on the National Security Council, Cohen-Watnick had also advocated broadening U.S. involvement in the Syrian civil war as a means of pushing back against Iran. McMaster likewise fired Harvey in July 2017.

Prominent Iran hawks remain in the administration, and some go well beyond arguing for abrogating the JCPOA to make the case for a regime change policy toward Iran. In June, Tillerson testified before the House Foreign Relations Committee that the administration intended to “work toward support of those elements inside of Iran that would lead to a peaceful transition of that government,” ²⁷ though other high-level administration officials have denied this is current policy. ²⁸ While he was a member of Congress in 2016, Trump’s current CIA director, Mike Pompeo, publicly called for the United States to “change Iranian behavior, and, ultimately, the Iranian regime.” ²⁹ Senator Tom Cotton (R-AR)-known to be close to the Trump administration-likewise has stated that “the policy of the United States should be regime change in Iran.” ³⁰ Defense Secretary James Mattis as recently as June described Iran as “the most destabilizing influence in the Middle East.” ³¹

Outside the federal government, other hawkish voices have also made forceful calls for regime change. Soon after Trump was inaugurated, the well-connected conservative think-tank Foundation for the Defense of Democracies (FDD) submitted a memo to Trump’s National Security Council that argued for “coerced democratization” in Iran, a euphemism for regime change. ³² John Bolton said in a speech in July, “The behavior and the objectives of the regime are not going to change, and therefore the only solution is to change the regime itself.” ³³

The Costs of Confrontation

The debate on Iran in Washington today includes many options, some-though not all-of which begin with killing the JCPOA. Deliberately scuttling the JCPOA would have negative ramifications. The international community and Iran, recognizing U.S. intransigence, could conceivably continue to uphold the nuclear deal without the United States, isolating the United States from allies and handicapping its pursuit of unrelated diplomatic initiatives, notably the question of North Korea’s nuclear program. Alternatively, U.S. termination of the JCPOA could motivate Iran to unburden itself from the deal’s restrictions, expel international monitors, and begin once again to pursue a nuclear weapons capability in earnest. Either possibility puts the United States in a weaker, more dangerous position. Given the momentum in Washington behind pursuing a more hostile approach toward Iran, this policy analysis will explore the likely costs and consequences of four different approaches to confronting Iran, whether as alternatives to the JCPOA or supplementary to it.

The first approach we assess is applying economic pressure in the form of ratcheting up sanctions on Iran, including those the international community agreed to lift under the JCPOA. The second approach looks at the options for challenging Iranian influence in the Middle East, particularly its proxies in Iraq and Syria. The third approach considers the viability of what is called “regime change from within,” where the United States would support internal opposition groups in an effort to undermine or overthrow the government in Tehran. The fourth and final approach we evaluate is military action against Iran, most likely in the form of limited airstrikes against Iranian nuclear or other military facilities. We conclude by proposing a fifth strategy for the Trump administration: uphold U.S. commitments under the JCPOA, refrain from adding new sanctions, and engage with Tehran where U.S. and Iranian interests overlap. There is no silver bullet that can solve the problems in the U.S.-Iranian relationship, but continued engagement carries lower costs and a higher chance of success than any of the other approaches examined here.

Option One: Economic Sanctions

Opponents of the JCPOA frequently argue that they could negotiate a better deal through the aggressive use of U.S. sanctions. These sanctions would be extraterritorially applied, forcing European companies to adhere to U.S. law, in theory making Iran willing to concede more of its nuclear program or to make other security and governance concessions. For example, former Connecticut senator Joe Lieberman proposed in December that President Trump “designate the entire Iranian Revolutionary Guards Corps as a foreign terrorist organization … support legislation in Congress punishing sectors of the Iranian economy … propose measures to curb Iranian access to U.S. dollars … and then to walk away, with cause, from the JCPOA.” ³⁴ Such arguments are not restricted only to those who wish to abrogate the JCPOA. Various authors argue that while there are no grounds to “tear up” the deal, the president and Congress should nonetheless seek to impose new sanctions on Iran related to its regional activities and support for the Assad regime in Syria.

Indeed, Congress has already acted in this regard, passing an extensive sanctions bill in July 2017, including North Korean, Russian, and new Iranian sanctions. The bill, “Countering America’s Adversaries through Sanctions Act,” targets a number of new individuals and entities-particularly in relation to Iran’s ballistic missile program-and includes an arms embargo and several new reporting requirements. ³⁵ Congress made last minute changes to the bill to ensure that it did not technically violate the JCPOA, ³⁶ yet as Senator Bernie Sanders (I-VT) pointed out when justifying his vote against the bill: “I believe that these new sanctions could endanger the very important nuclear agreement that was signed between the United States, its partners, and Iran in 2015. That is not a risk worth taking.” ³⁷ Sanders is correct; new sanctions on Iran for its missile programs and human rights abuses raise tensions within the framework of the JCPOA while adhering to the narrowest possible definition of its terms. In response to the new sanctions bill and the threat of further sanctions, Iranian leaders voted to increase the state’s military budget and threatened to restart the nuclear program, highlighting the escalatory potential of new sanctions. ³⁸

Opponents of the JCPOA support the imposition of new sanctions, particularly the designation of the Islamic Revolutionary Guard Corps (IRGC) and IRGC-associated businesses, often with little regard for whether new sanctions could torpedo the deal or worsen relations. Council on Foreign Relations Senior Fellow Ray Takeyh has repeatedly said renewed sanctions are the first step in a broader strategy of pressure on Iran, arguing that “we must return to the days of warning off commerce and segregating Iran from global financial institutions. Designating the Revolutionary Guards as a terrorist organization and reimposing financial sanctions could go a long way toward crippling Iran’s economy.” ³⁹ Likewise, the editors of the conservative National Review advised the Trump White House to abrogate the deal through sanctions: “Better to declare an end to this diplomatic farce … and establish a robust sanctions regime that might actually force Tehran to change its ways.” ⁴⁰

Problem #1: No International Consensus

The central problem with this option-whether as a replacement for the JCPOA or in addition to it-is the utter lack of international support. Though often overlooked, the JCPOA is in reality a multinational arms control agreement, negotiated by the P5+1, the five permanent members of the United Nations Security Council, plus Germany. The other parties to the deal have been unequivocal in affirming that Iran is indeed abiding by its commitments under the deal. On August 3, a spokeswoman for European Union foreign policy chief Federica Mogherini told a press conference: “So far, we consider that all parties have been implementing their commitments under the deal.” ⁴¹ Sergei Lavrov, Russian foreign minister, likewise confirmed Iran’s compliance and questioned the Trump administration’s motives, saying in August that the Trump administration “continue[s] calling these agreements wrong and erroneous, and it’s a pity that such a successful treaty is now somewhat being cast into doubt.” ⁴²

European support for the deal is strong. As Carl Bildt, former prime minister of Sweden, noted in an opinion piece in August, canceling the deal would be a nonstarter in Europe: “Europe would certainly not go along with this, for one because it would risk undercutting the elaborate inspections systems that the agreement depends on. But primarily because Europe has seen that the deal actually works … and Europe has absolutely zero appetite for a new cascade of conflicts in a region on its doorstep.” ⁴³ As a result, European leaders are also keen to prevent the imposition of further non-nuclear U.S. sanctions that could potentially undermine the deal. Indeed, on July 11, Mogherini told reporters: “The nuclear deal doesn’t belong to one country; it belongs to the international community. We have the responsibility to make sure that this continues to be implemented.” ⁴⁴

It is unlikely that any additional U.S. sanctions would be successful without multinational support. The United States has long had an extensive array of sanctions focused on Iran, including on weapons procurement and development, U.S.-Iranian trade, and terrorist financing. Yet the long-term effect of these sanctions on the Iranian economy was relatively minimal prior to 2005. Technology sanctions have undoubtedly been successful in slowing progress on nuclear and missile-related projects but have done little to impact Iran’s import and development of conventional weapons. ⁴⁵

Two changes in the mid-2000s substantially increased the efficacy of sanctions on Iran. First, the Treasury department aggressively pursued a strategy of outreach, lobbying (and threatening) foreign banks to ensure that U.S. sanctions would be adhered to extraterritorially. Second, the European Union decided in 2012 to embargo Iranian oil exports. This decision was motivated by increasing concerns over Iran’s nuclear program, even though it was politically and economically costly for the Europeans. In 2010 alone, Iran’s exports to the EU totaled $19 billion, 90 percent of which were energy related. ⁴⁶ By March 2013, Iran’s oil exports had dropped from 2.5 million barrels per day to 1 million barrels per day, resulting in an Iranian budget deficit of $28 billion that year. ⁴⁷ While U.S. sanctions alone were relatively ineffectual, these punitive economic costs helped to drive Iran to the negotiating table.

Proponents of increased sanctions therefore typically advocate for more assertive enforcement of secondary sanctions penalties against European and Asian companies. A recent report from the Washington Institute for Near East Policy, for example, called for the United States to step up the extraterritorial enforcement of existing sanctions on terror financing and IRGC-affiliated companies, arguing that enforcement and public warnings could discourage European companies from re-entering the Iranian market. As Stuart Levey, at the time undersecretary for terrorism and financial intelligence, described the use of extraterritorial sanctions prior to the JCPOA: “Those who are tempted to deal with targeted high-risk actors are put on notice: if they continue this relationship, they may be next.” ⁴⁸ Yet the decision to sanction Iran was costly for European companies. A number of companies, most notably French energy company Total, which signed a $5 billion investment deal with Iran and with China’s National Petroleum in July to develop the South Pars gas field, have begun to re-enter the market following the successful conclusion of the JCPOA. ⁴⁹ In the absence of any concrete evidence of Iranian cheating on the deal, European and Asian governments are likely to push back strongly against new U.S. barriers to trade and investment in Iran, and on the excessive extraterritorial application of existing sanctions.

Problem #2: Sanctions Rarely Produce Policy Change

Another problem with sanctions is that they are rarely successful in producing policy change. Indeed, though targeted sanctions may impose costs on the targeted regime, it is less clear that these costs actually produce policy change. ⁵⁰ Proponents of increased sanctions point to high profile successes like the JCPOA, while skeptics point to the many cases, from Syria to Zimbabwe, where sanctions have failed to produce policy change. More broadly, academic studies have repeatedly shown sanctions to be ineffective in achieving policy change. As Arne Tostensen and Beate Bull note in the journal WorldPolitics, “The voluminous literature that has accumulated over the years tends to conclude that sanctions are rarely effective, even though exceptions have been documented.” ⁵¹ In one of the earliest broad-based studies of comprehensive sanctions, for example, researchers found an average sanctions success rate of only 34 percent. ⁵² Even the research on more recent “smart sanctions,” which are presumed to be more effective thanks to their “targeted” nature, shows that they are also largely ineffective. A wide-ranging study of United Nations targeted sanctions found them to be effective in only 10-20 percent of cases, ⁵³ while another survey of post-9/11 U.S. sanctions found them to be effective in only 36 percent of cases. ⁵⁴

Policy change is especially unlikely when sanctions do not have clear, attainable goals or when the issue is of prime national security importance to the target state. ⁵⁵ Sanctions focused on economic issues such as trade often seem to be qualitatively different than those focused on security. ⁵⁶ When University of Chicago’s Robert Pape examined sanctions as an alternative to the use of force, he found they had only been successful in around 5 percent of national security-related cases. ⁵⁷ Sanctions also tend to fail when they are unilateral; as the Washington Institute’s Katherine Bauer notes, even with the power of U.S. extraterritorial sanctions, “there are limits to U.S. jurisdiction and the ability to compel foreign compliance.” ⁵⁸ Further sanctions on Iran thus fall into a worst-case scenario: security-focused sanctions with no clear goals other than securing “a better deal” or weakening the Iranian regime. In the absence of strong support from European or other Security Council nations, there is very little chance that further sanctions will compel Iran’s leaders to capitulate.

Option Two: Challenging Iranian Influence in the Region

An alternative option is a deliberate strategy of challenging Iranian proxies throughout the Middle East. That option would not necessarily require the Trump administration to abrogate the JCPOA. Indeed, as Brookings Institution Senior Fellow Daniel Byman recently noted in congressional testimony: “Because the JCPOA … has put Iran’s nuclear program on the back burner, there is an opportunity to focus on Iran’s support for militant groups and other problems Iran causes in the region.” ⁵⁹ This approach runs counter to Washington’s current regional strategy: though there are arenas where the United States is engaged in hostilities with Iranian-associated proxies-such as U.S. support for the Saudi-led campaign in Yemen-America’s anti-ISIS campaign typically means that it is de facto fighting on the same side as Hezbollah and other Shi’a militias. The most moderate alternative proposals call for U.S. support for regional allies, such as military and diplomatic support for a peace settlement in Yemen designed to split the Houthi rebels from Tehran’s limited support. ⁶⁰ Other options include increased maritime presence to help disrupt Iranian arms shipments.⁶¹ Still others call for building the capacity of regional actors: one recent report from the Center for a New American Security suggests maintaining U.S. influence in Iraq and increasing U.S. logistical support for the conflict in Yemen, in hopes of marginalizing Iranian influence in those conflicts. ⁶²

However, there are also a variety of more aggressive proposals. Two senior former administration officials on the National Security Council, Derek Harvey and Ezra Cohen-Watnick, were reportedly in favor of direct U.S. military action against Iranian proxies in Syria. ⁶³ Escalating clashes between U.S. troops and militias in southern Syria in recent months, including U.S. airstrikes on several militias, suggest that such clashes will happen even in the absence of a formal policy change. Several recent policy papers also make the argument for a more formalized anti-Iran strategy in Syria, often using proxies to challenge Iranian-allied groups. The Washington Institute’s Nader Udowski, for example, argued in June 2017 for “a new U.S. policy, the chief component of which should be a strategy targeting Iran’s Quds force and its Shi’a militias.” ⁶⁴ Similarly, Max Peck of the Foundation for Defense of Democracies has argued that the Trump administration should seek to codify in law that the United States seeks the overthrow of the Assad regime in Syria, and “increase the costs of Iran’s engagement by maintaining the pressure on Assad . . . through its support for the armed opposition.” ⁶⁵

Perhaps the most bellicose option is actively increasing U.S. participation in the war in Syria and Iraq. A report from the Institute for the Study of War (ISW) called for the United States to “seize and secure a base in southeastern Syria … create a de facto safe zone … then recruit, train, equip, and partner with local Sunni Arab anti-ISIS forces.” The report called for American troops to “fight alongside” these forces. ⁶⁶ The goals would include not only “defeating al Qaeda, as well as ISIS,” but also “expelling Iranian military forces and most of Iran’s proxy forces from Syria.” This strategy extends to Iraq: as a follow-on report argued, America should also “take urgent measures to strengthen Iraqi Prime Minister Abadi,” and work to minimize Iranian influence in Iraq. ⁶⁷ Though the extent of American military involvement varies widely across these proposals, they all share a common theme: direct or indirect military action against Iranian proxies in Syria, Iraq, Yemen, and elsewhere.

Problem #1: An Anti-Iran Axis?

The central problem with this approach is that there is no coherent anti-Iranian axis in the Middle East to rely upon in a campaign to challenge Iranian influence in the region. Indeed, observers have often described the region using sectarian narratives-portraying conservative Sunni states in conflict with Iran’s more revolutionary Shi’a axis-that are largely exaggerated.

For example, despite Saudi efforts to form a united regional front against Iran, the conflicts of the Arab Spring have frequently seen the states of the Gulf Cooperation Council (GCC) act against each other’s interests. ⁶⁸ In Syria, the conflict between Saudi and Qatari proxies helped to radicalize and doom the anti-Assad opposition, while a Qatari-Emirati rivalry fueled the Libyan conflict. Today’s GCC crisis only serves to highlight this problem: though clearly motivated by a desire to rein in Qatar’s independent foreign policy, the Saudi and Emirati embargo has in reality driven Qatar closer to Iran and Turkey, undermining a common GCC front. ⁶⁹

Other regional attempts to form anti-Iranian movements have likewise failed. A widely-publicized Saudi Arabian attempt in December 2015 to create an Islamic Military Alliance to fight terrorism-which pointedly included no Shi’a majority states-has largely failed to develop since that time. ⁷⁰ Nor is there any guarantee that regional partners will actually promote U.S. interests if the United States increases its support; the actions of allies in the region have all too often served to destabilize and worsen conflicts in Syria, Yemen, and elsewhere, rather than improve them.

Indeed, the lack of a solid anti-Iran coalition among existing U.S. partners-capable of achieving America’s often expansive foreign policy goals-is a key reason why the most extreme options for regional confrontation with Iran often involve fabricating an effective anti-Iranian bloc from whole cloth, whether that is the creation of a “credible and moderate Syrian opposition,” a regional “multinational Joint Task Force with Arab partners targeted at countering … the IRGC,” or “a new Syrian Sunni Arab partner . . . to conduct population-centric counterinsurgency.” ⁷¹ Each of these options is likely to fail. Previous U.S. efforts to create regional coalitions to fight terror groups have been largely unsuccessful. The 2014 collapse of the Iraqi army in the face of ISIS advances is also a salutary lesson; years of training commitments and substantial blood and treasure on the part of the U.S. military were not enough to overcome deeper societal problems like corruption. ⁷² Without coherent, effective local proxies, and given the major political differences that divide U.S. regional allies, any attempt to build an anti-Iranian force or coalition in the region is likely to falter.

Problem #2: Blowback, Leading to Ever Deeper U.S. Involvement

A strategy of regional pushback against Iran is also likely to pull the United States more deeply into a variety of regional conflicts and increase the risks of blowback to U.S. troops in the region. The United States is already heavily overcommitted in the Middle East, with tens of thousands of troops engaged in conflicts in Iraq, Syria, Afghanistan, Libya, and Yemen, and stationed at permanent bases elsewhere throughout the region. Indeed, despite the Obama administration’s attempts to draw down American commitments to Middle Eastern conflicts, the number of troops engaged in fighting Middle East conflicts has been increasing again since 2014. ⁷³ A stepped-up campaign against Iranian proxies throughout the region will require further troop increases, both in direct combat roles and to train and support local forces.

It is these troops who will bear the brunt of any Iranian military response to this strategy. Several hundred U.S. troops were killed by Iranian-associated groups in Iraq during the post-invasion occupation, a number likely to rise in any new conflict with these groups. ⁷⁴ And while Hezbollah has been largely occupied in recent years with fighting on behalf of the Assad regime, if faced with a concerted campaign against it by U.S.-allied forces, it is likely to respond with the kind of asymmetric attacks that have characterized their long-running conflict with Israel. ⁷⁵ Indeed, one potential response to a concerted attack on Iranian proxies throughout the region is retributive attacks on Israel; during the 2006 war, Hezbollah enjoyed substantial success against Israeli forces, disabling a number of tanks and even an Israeli warship. ⁷⁶ The potential for Iranian retaliation against U.S. troops, regional partners, or shipping in the region suggests that a strategy of regional confrontation with Iran will not make the region safer or more stable, but will instead introduce additional conflict and uncertainty.

Option Three: “Regime Change from Within”

Another possible option for dealing with Iran is an explicit U.S. policy of regime change. This is not a new idea; for decades, hawks in Washington have called for regime change in Tehran. Justifications have ranged from the 1979 hostage crisis to Iran’s nuclear program in the mid-2000s to the anti-regime protests known as the Green Revolution after 2009. ⁷⁷ Yet the failure of U.S. regime change campaigns in both Iraq and Libya to produce a stable, democratic state has led most proponents of regime change to back away from overt military options and instead suggest that the Trump administration pursue “coerced democratization” or “regime change from within.” In this approach, the United States would pressure the Iranian regime and simultaneously back groups that oppose it-whether the exiled extremist National Council of Resistance of Iran (NCRI), pro-democracy Green Revolution factions, or ethnic minorities within Iran-a strategy advocates often compare to Reagan’s support for civil society groups in the Soviet Union. As Reuel Gerecht and Ray Takeyh argue in a Washington Post op-ed: “Today, the Islamist regime resembles the Soviet Union of the 1970s … if Washington were serious about doing to Iran what it helped to do to the U.S.S.R., it would seek to weaken the theocracy by pressing it on all fronts.” ⁷⁸

Another proponent of “coerced democratization,” the Foundation for Defense of Democracies’ Mark Dubowitz, urged President Trump to “go on the offensive against the Iranian regime” by “weakening the Iranian regime’s finances” through “massive economic sanctions,” while also “undermin[ing] Iran’s rulers by strengthening pro-democracy forces” inside Iran. ⁷⁹ This option appears to be gaining traction in the Trump administration’s ongoing Iran policy review and has received public support from Tillerson. CIA Director Mike Pompeo also favored such an approach during his time in Congress. Yet there are important reasons to doubt that such a strategy would actually yield constructive results in Iran or benefit U.S. national interests.

Problem #1: Regime Change Rarely Works

Regime change often fails, particularly when it is covert. According to one study of covert regime change operations by the United States during the Cold War, such efforts succeeded only one-third of the time. ⁸⁰ Indeed, as an administration official said in August, “With Iran, they are looking at regime change but coming up empty. There are no good plans, no decapitation strikes possible.” ⁸¹ Arming or funding for local insurgencies also rarely succeeds; a leaked CIA report commissioned in 2012 found that most past attempts to covertly arm insurgencies had minimal impact on long-term outcomes and often backfired.⁸²

Even when successful in unseating one government and establishing another in its place, foreign-imposed regime change “generally does not improve relations between interveners and targets. Rather, it often makes them worse,” according to Georgetown University’s Alexander B. Downes and Boston College’s Lindsay A. O’Rourke. ⁸³ Changing the leadership of a state typically fails to alter that country’s perception of its interests, and foreign-imposed regimes tend to diverge from the preferences of the intervener as they begin to face domestic political pressures. Contrary to the depiction of many regime change advocates, the Iranian regime enjoys substantial public support, and the population would not welcome a U.S.-imposed government. Any new regime that tried to implement policies that reflect U.S. interests instead of Iranian interests would “attract the ire of domestic actors,” leading to an unstable government viewed as illegitimate by the population. ⁸⁴

Research shows that “when a country overthrows another’s government, it increases the likelihood of civil wars and usually doesn’t establish a democracy.” ⁸⁵ The recent experiences of the United States in Iraq, Afghanistan, and Libya only confirm this finding. Sixteen years of U.S. military presence have done little to stabilize war-torn Afghanistan. ⁸⁶ The war in Iraq essentially destroyed the Iraqi state, killing hundreds of thousands of Iraqis and displacing millions more. More than 4,400 U.S. troops were killed in combat, and more than 30,000 were wounded, with direct costs estimated to exceed $2 trillion and indirect costs as high as $4 trillion. ⁸⁷ A widespread insurgency and civil war led to the rise of the Islamic State, prompting further U.S. intervention to fight against the group. In Libya, the U.S. choice to overthrow the regime of Muammar Gaddafi on humanitarian grounds resulted in a lengthy civil war and the deaths of more Libyans than would likely have perished without the intervention. ⁸⁸ The likelihood of successful regime change and a subsequent stable, democratic state in Iran are vanishingly small.

Problem #2: A Lack of Good Candidates

Though regime change proponents highlight a variety of groups inside Iran as potential candidates for U.S. support, none are truly viable. The exiled opposition group Mujahideen-e-Khalq (MEK) (or its political wing, the NCRI) is one such example. The MEK began in the 1960s and 1970s as a paramilitary Marxist-Islamic resistance group opposed to the former Shah of Iran, the authoritarian ruler put in power following a 1953 coup sponsored by the United States and Great Britain. The group allied with Saddam Hussein during the 1980s Iran-Iraq War, and analysts widely agree that it is an undemocratic group that has no popular support inside Iran. ⁸⁹ Indeed, the MEK has largely tried to win external support for its agenda of regime change in Iran. Until 2012, it was even designated a terrorist organization by the U.S. State Department and had lobbied hard over the years to win support from prominent current and former U.S. officials to have that designation removed. ⁹⁰ It has won primarily the support of those who favor a hardline approach to Iran, such as former CIA directors James Woolsey and Porter Goss, former New York City Mayor Rudolph Giuliani, former governors Howard Dean and Ed Rendell, former U.N. Ambassador John Bolton, and former House Speaker and close Trump confidant Newt Gingrich. Yet in the absence of popular support outside certain Washington circles, backing the group in a bid to overthrow the Iranian regime would likely fail.⁹¹

Regime change advocates also suggest supporting the so-called Green Movement that emerged amid the protests over the contested Iranian presidential elections in 2009. Unfortunately, according to Ariane Tabatabai and Madison Schramm, the Green Movement “essentially faded away a few months after the elections” and “was never a cohesive faction.” ⁹² Green Movement leaders Mir Hossein Mousavi and Mehdi Karroubi remain under house arrest in Iran today, and have made clear that their goal was to dispute the 2009 election results, not to overthrow the government. In fact, the best hope for the Green Movement is to avoid association with the United States; whatever popular support it continues to have would quickly evaporate with any whiff of U.S.-backing for regime change. As Michael Axworthy of the University of Exeter writes, “Given the long history of foreign meddling in the country (the CIA-inspired coup that removed Prime Minister Mohammad Mosaddeq in 1953 is just one example), any suspicion of foreign backing is political poison in Iran.” ⁹³

The third option-seeking to stoke discontent among Iran’s minority populations-is similarly infeasible. Iran’s ethnic minorities include Kurds (10 percent), Baluchis (2 percent), Arabs (2 percent), and Azeri Turks (16 percent). ⁹⁴ But Iran is not a country beset by ethnic, cultural, and religious cleavages in the way the former Yugoslavia was. Neighboring Iraq, with its mix of Shia, Sunni, and Kurds, was a comparatively disjointed state held together by a powerful centralized dictatorship. Iran is very different. Any strategy that seeks to foment political upheaval in Iran via these various minority groups ignores the fundamental cohesion that characterizes Iran as a national unit. ⁹⁵ If anything, such an approach would be more likely to bolster Iranian nationalism than to subvert it. As Vali Nasr, dean of the Johns Hopkins School of Advanced International Studies and an Iranian-American, told the New Yorker in 2008, “Iran is an old country-like France and Germany-and its citizens are just as nationalistic. The U.S. is overestimating ethnic tension in Iran … working with the minorities will backfire, and alienate the majority of the population.” ⁹⁶

Option 4: Direct Military Action

Direct military action against Iran is the least likely of the options being considered under the Trump administration’s policy review. Indeed, the focus on nonmilitary options among Iran hawks is likely a response to the widespread distaste among the American public for engaging in another open-ended regime change war in the Middle East. Yet some have argued that the Trump administration should “rebuild military leverage over Iran,” including “contingency plans to neutralize Iran’s nuclear facilities,” engage in regional military exercises, and direct the U.S. navy to “fully and responsibly utilize rules of engagement to defend themselves and the Persian Gulf against rising Iranian harassment.”⁹⁷

There are various contingencies in which U.S. policymakers may face a decision on the use of military force against Iran, whether it is a purposeful strike against Iran’s nuclear facilities in the wake of U.S. withdrawal from the JCPOA, or a more gradual escalation following military confrontations in Syria, the Gulf, or elsewhere. As the Trump administration considers these options, however, it would do well to remember that the lack of good military options was the key reason behind the Bush and Obama administrations’ decision to pursue diplomacy with Tehran in the first place.

Problem #1: An Illegal War?

The United States should only undertake military action against another state if its core security interests are threatened. Yet there is no plausible near-term scenario in which Iran poses a direct threat to the U.S. homeland. Nor do Iranian actions in the Middle East pose a significant threat to U.S. interests in the region. Taking military action against Iran to thwart the purported threat of its nuclear program would harken back to the preventive war doctrine adopted by the Bush administration after the September 11th terrorist attacks and codified in the 2002 National Security Strategy. ⁹⁸ Though proponents of military action often describe such action as “preemptive,” one RAND report notes that “generations of scholars and policymakers have defined preemption more restrictively,” limiting it to cases of imminent threat. ⁹⁹ This is a crucial difference; as the authors highlight, international law holds that truly preemptive attacks are an acceptable use of force in self-defense, while preventive attacks are not. As the historian and former Kennedy administration adviser Arthur Schlesinger Jr. put it when criticizing the Bush administration’s case for war against Iraq, this doctrine of preventive war “is alarmingly similar to the policy that imperial Japan employed at Pearl Harbor, on a date which, as an earlier American president said it would, lives in infamy. Franklin D. Roosevelt was right, but today it is we Americans who live in infamy.” ¹⁰⁰ With no imminent threat from Iran, there is no legal justification for direct military action.

At the very least, the Trump administration is constitutionally obligated to seek approval from Congress for any military action against Iran. Trump himself may disagree. He previously declined to seek or secure congressional authority for his missile strike on a Syrian military base controlled by the Assad regime in April 2017 and has repeatedly made public statements arguing that military action should be kept secret to preserve the tactical advantage of a surprise attack. If Trump does seek congressional approval for military strikes on Iran, he is likely to face strong opposition from many Democratic members of Congress and at least some Republicans. Senator Chris Murphy (D-CT) argued in February that “Trump and his most radical advisers are begging for war with Iran. This would be a disaster of epic scale, perhaps eclipsing the nightmare of the Iraq war.” ¹⁰¹ Congressional Democrats, already concerned about the administration’s domestic policy proposals, are unlikely to cut him a blank check on Iran.

Problem #2: Escalation Is Inevitable

Even small-scale military attacks on Iran-whether targeted strikes on nuclear facilities or clashes with Iranian forces in the Gulf or elsewhere-are likely to lead to escalation. In March 2012, the Pentagon held a classified war simulation “to assess the repercussions” of an Israeli attack on Iran’s nuclear facilities. The results showed that such a targeted strike would provoke immediate Iranian retaliation against U.S. military bases and naval assets in the region, drawing the United States into “a wider regional war.” ¹⁰² General James Mattis, now Trump’s secretary of defense, was then head of Central Command and supervised the war game. The New York Times reported that Mattis told aides a strike “would be likely to have dire consequences across the region and for U.S. forces there.” Following a similar war game in 2004, retired Air Force Colonel Sam Gardiner concluded, “There is no military solution for the issues of Iran.” ¹⁰³

It is not clear that a narrow or targeted strike is even possible. To strike Iran’s nuclear facilities, the United States would also need to bomb Iran’s air defense systems and command and control facilities, which itself carries risks of escalation. Writing in 2006, retired General Thomas McInerney suggested one such plan for attacking Iran’s nuclear facilities, requiring a massive commitment of 700 aircraft, 500 cruise missiles, and 28,000 bunker-buster bombs in the initial 36-48 hours. ¹⁰⁴ Moreover, airstrikes of this kind, to accomplish any long-term objective, could not be limited to a single one-off mission. As explained in a 2012 study by the Iran Project, a nongovernmental organization founded to improve official contacts between the American and Iranian governments, for targeted strikes to “fulfill the stated objective of ensuring that Iran never acquires a nuclear bomb, the United States would need to conduct a significantly expanded air and sea war over a prolonged period of time, likely several years.” ¹⁰⁵

Under bombardment from the world’s most dominant military superpower and uncertain of U.S. intentions, Iran would be likely to engage in retaliatory strikes against U.S. bases and military assets in Iraq, Syria, Bahrain, Qatar, and the United Arab Emirates. Iran’s Shahab-3 intermediate range ballistic missile can hit targets up to 2,000 kilometers away, while its Soumar cruise missile can potentially hit targets up to 2,500 kilometers away, meaning all U.S. forward-deployed bases in the Middle East and at least some bases in Europe are within range for conventional retaliation. ¹⁰⁶ Likewise, the potential for asymmetric retaliation should not be underestimated. As Afshon Ostavar of the Naval Postgraduate School notes, “While Iran’s neighbors have poured billions of dollars into conventional weaponry, Iran has invested in comparatively cheap proxy forces that have proven effective in numerous theaters.” ¹⁰⁷ Proxy groups such as Hezbollah or even Iran’s Quds force, a special unit of the IRGC, could engage in terrorist attacks against U.S. forces or allies in the region.

Anything beyond a limited military strike would have even more dire and counterproductive consequences. Taking military action to topple the Iranian regime, for example, would require a massive, lengthy, and costly military commitment. America’s experience in Iraq should be instructive in this context: Bush administration officials and their allies in the think-tank community and news media made bold predictions about the ease with which America would win the war, that Iraq would be reborn as a functioning democracy, and that the costs to the United States in lives and dollars would be minimal. These predictions proved wrong. In addition to bolstering Iran’s strategic position, the war helped to destabilize the region and to exacerbate America’s terrorism problem. A 2006 National Intelligence Estimate concluded that “the American invasion and occupation of Iraq … helped spawn a new generation of Islamic radicalism.” ¹⁰⁸ The war had “become the ‘cause celèbre’ for jihadists, breeding a deep resentment of U.S. involvement in the Muslim world and cultivating supporters for the global jihadist movement.” ¹⁰⁹

A large-scale ground war in Iran would be immensely damaging. Comparisons to Iraq are illuminating. The U.S. invasion was initially successful against a relatively ineffectual Iraqi military with approximately 389,000 men under arms. But U.S. forces have struggled in the years since to control territory, build a functioning Iraqi state, and deal with mass insurgency among the population of around 37 million. In comparison, Iran has a larger (about 523,000 active duty) and more effective military, a bigger population (80.3 million), and territory more than three times the size of Iraq. ¹¹⁰ A study by the Iran Project concluded: “If the United States decided to seek a more ambitious objective, such as regime change in Iran or undermining Iran’s influence in the region, then an even greater commitment of force would be required to occupy all or part of the country… . Given Iran’s large size and population, and the strength of Iranian nationalism, we estimate that the occupation of Iran would require a commitment of resources and personnel” greater than the costs of the wars in Afghanistan and Iraq combined. ¹¹¹

Problem #3: Unintended (Nuclear) Consequences

A direct military attack on Iran, whatever the specific goals, is likely to be counterproductive in terms of nuclear nonproliferation. Military action short of regime change cannot eliminate Iran’s nuclear program or the knowledge behind its existence. ¹¹² Given U.S. interventions in recent years, even targeted strikes may be seen by Tehran as a precursor to more intensive military action that must be deterred. A 2010 Defense Intelligence Agency study concluded that the main goal of Iran’s military strategy is regime survival, with a key focus on deterrence. ¹¹³ As Kenneth Pollack, a former CIA and National Security Council analyst, noted in 2006: “The Iraq example coupled with the North Korea example probably is part of the motivation for some in Iran to get a nuclear weapon.” ¹¹⁴ The 2011 U.S. intervention in Libya only intensifies this dilemma for Iran; Muammar Gaddafi voluntarily gave up his nascent nuclear program before being removed by a joint American-European intervention. Thus, while targeted strikes could delay Iran’s ability to develop nuclear weapons by destroying infrastructure, they would probably incentivize Iran to redouble its enrichment efforts under the conviction that only a nuclear deterrent can ensure its future survival.

This logic also implies broader strategic costs to an attack on Iran: it would exacerbate the problem of nuclear proliferation more generally. As the current Director of National Intelligence Dan Coats recently acknowledged at the Aspen Security Forum, U.S. actions against Saddam Hussein’s Iraq and Muammar Gadhafi’s Libya have made it clear to other states, like North Korea, that a nuclear deterrent may be the best way to ensure regime survival in the context of a war-prone United States. ¹¹⁵ North Korea itself confirmed this logic, releasing a statement after a 2016 nuclear test arguing that “the Saddam Hussein regime in Iraq and the Gaddafi regime in Libya could not escape the fate of destruction after … giving up nuclear programs of their own accord.” ¹¹⁶ As Nobel laureate Thomas Schelling has famously pointed out, American nonproliferation policies are ironically a prime driver of nuclear proliferation.¹¹⁷ If, after successfully negotiating a nuclear deal, the United States then engages in an aggressive war against Iran despite Tehran’s full compliance with the JCPOA, other potential proliferators would have no reason at all to believe that the United States can be trusted to negotiate in good faith.

Conclusion

Though the Trump administration’s Iran policy review appears predestined to produce a more belligerent approach towards Iran, each of the options explored in this paper has significant flaws. Indeed, each option is unlikely to achieve its stated objectives, while at the same time creating an unacceptably high risk of exacerbating the very problems the Trump administration seeks to resolve. At a fundamental level, a more assertive U.S. policy towards Iran-whatever the details-will inevitably intensify Iranian fears about the country’s national security, worsening the very behaviors that the United States seeks to forestall. Even adopting one of these more hostile approaches to Iran while nominally upholding the JCPOA presents greater problems than embracing the nuclear deal and using it as a vehicle for further engagement designed to temper Iranian behavior.

As this paper highlights, it is doubtful that ratcheting up economic sanctions will alter Iranian policies in a more constructive direction, especially in the absence of international cooperation. Likewise, by pushing back harder against Iranian influence throughout the Middle East, the United States would incur substantial long-term costs in exchange for negligible gains in regional security. Moreover, a more aggressive approach could lead to unintended military escalation. Supporting internal opposition groups to pressure the regime or foment domestic upheaval is a hopeless strategy, given Iran’s domestic political realities and America’s long history of failed regime change endeavors. Finally, direct military action would have little public support, no legal basis, and most likely produce profoundly negative consequences for regional security and American interests.

Such actions would effectively return U.S.-Iranian relations to the cycle of enmity in which they were trapped prior to the negotiation of the JCPOA, with the nuclear issue dominating as a justification for continued hostility. Indeed, prior to the JCPOA, American allies in the region, particularly Saudi Arabia and Israel, often used the issue of Iran’s nuclear program to steer American policy toward Iran in a more confrontational direction. In private conservations with U.S. officials early in the Obama administration, then-king Abdullah bin Abdulaziz al-Saud pushed U.S. military action against the Iranian regime. ¹¹⁸ From 2010 to 2012, there were reports that Israel was close to initiating military strikes against Iranian nuclear facilities, knowing it would likely trigger U.S. involvement. Israeli Prime Minister Benjamin Netanyahu’s cabinet officials reportedly blocked him from taking this step. ¹¹⁹

Maintaining and strengthening the JCPOA will help to minimize the future potential for such pressure. Though he fought hard to subvert the JCPOA, for example, Netanyahu has been relatively silent since its adoption. Carmi Gillon, former head of the Israeli security agency Shabak, wrote in July that, thanks to the JCPOA “the threat of an Iranian nuclear weapon is more remote than it has been in decades.” Gillon added, “the majority of my colleagues in the Israeli military and intelligence communities supported the deal once it was reached, [and] many of those who had major reservations now acknowledge that it has had a positive impact on Israel’s security and must be fully maintained by the United States and the other signatory nations.” ¹²⁰

If the United States is to avoid returning to high levels of tension and conflict in the U.S.-Iranian relationship, it must avoid the more belligerent options explored in this paper. The alternative-the option most likely to produce a positive outcome for all parties-is to uphold the JCPOA, carefully enforce its terms and conditions, and build on it to further engage Iran where its interests overlap with the United States. Pursuing greater diplomacy and engagement with Iran is, ironically, low-hanging fruit at this time. Iranian President Hassan Rouhani, who in his first term helped shepherd the JCPOA to fruition, won reelection this year by a wide margin, receiving 57 percent of the vote (compared to 38.5 percent for his chief opponent). ¹²¹ The idea of greater engagement with the West was a key component of Rouhani’s electoral platform; both centrists like Rouhani and reformers like former President Mohammed Khatami have argued in favor of what they describe as “JCPOA 2.0,” a series of internal policy compromises that will allow Iran to continue to engage with the West and begin to reintegrate into the global economy. ¹²²

The key to reaping the benefits of a more conciliatory approach is recognizing that Iran is not a unitary actor. Iranian politics, though not fully democratic, are dynamic and competitive, and include various factions, from conservative hardliners to moderate reformists. The nuclear deal is widely popular in Iran, but antagonism from the Trump administration will bolster the prominence of Iranian hardliners who felt Tehran capitulated too much in the negotiations and who use fears of U.S. duplicity to undermine the idea of constructive engagement with Washington.¹²³ Similarly, perceptions that the United States is failing to live up to its side of the bargain-or is taking new steps that may undermine Iranian security-weaken political support for pragmatic reformists who see value in making concessions to the West in exchange for sanctions relief and integration with the outside world. Ultimately, unlike the more aggressive policy options explored in this paper, further engagement with Iran when possible will strengthen Iran’s more moderate political factions and weaken hardliners, providing a more hopeful future for U.S.-Iranian relations.

Notes

1. Secretary of State Rex Tillerson noted at an April 2017 press conference: “The Trump administration is currently conducting a comprehensive review of our Iran policy. Once we have finalized our conclusions, we will meet the challenges Iran poses with clarity and conviction.” Transcript of news conference available at https://www.state.gov/secretary/remarks/2017/04/270341.htm.
2. Joint Comprehensive Plan of Action, Vienna, July 14, 2015, https://www.state.gov/documents/organization/245317.pdf.
3. Ariane Tabatabai, “Preserving the Iran Nuclear Deal: Perils and Prospects,” Cato Institute Policy Analysis no. 818, August 15, 2017.
4. Robert Einhorn and Richard Nephew, “The Iran Nuclear Deal: Prelude to Proliferation in the Middle East?” Brookings Institution Arms Control and Nonproliferation Series Paper no. 11, May 2016.
5. Amir Handjani, “Commentary: Trump’s Recent Gamble on Iran,” Reuters, August 1, 2017, https://www.reuters.com/article/us-handjani-iran-commentary-idUSKBN1AH4NT. Also see “IAEA and Iran-IAEA Reports,” International Atomic Energy Agency website, https://www.iaea.org/newscenter/focus/iran/iaea-and-iran-iaea-reports.
6. Somini Sengupta, “U.N. Moves to Lift Iran Sanctions after Nuclear Deal, Setting Up a Clash in Congress,” New York Times, July 20, 2015, https://www.nytimes.com/2015/07/21/world/middleeast/security-council-following-iran-nuclear-pact-votes-to-lift-sanctions.html; European Union, “Information Note on EU Sanctions to Be Lifted under Joint Comprehensive Plan of Action,” Brussels, January 23, 2016, http://eeas.europa.eu/archives/docs/top_stories/pdf/iran_implementation/information_note_eu_sanctions_jcpoa_en.pdf; and Department of the Treasury, “Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day,” December 15, 2016, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf.
7. David E. Sanger, “Iran Complies with Nuclear Deal; Sanctions Are Lifted,” New York Times, January 26, 2016, https://www.nytimes.com/2016/01/17/world/middleeast/iran-sanctions-lifted-nuclear-deal.html. It is worth noting that not all U.S. or UN sanctions on Iran have been lifted; many designations related to Iran’s human rights abuses, missile testing, and support for terrorist groups were explicitly excluded from the JCPOA and remain in force.
8. Sarah Begley, “Read Donald Trump’s Speech to AIPAC,” Time.com, March 21, 2016, http://time.com/4267058/donald-trump-aipac-speech-transcript/; and Davan Maharaj, “Today: Why Trump Has Stuck with ‘the Worst Deal Ever’,” Los Angeles Times, April 20, 2017, http://www.latimes.com/newsletters/la-me-todays-headlines-20170420-story.html.
9. Peter Baker, “Trump Recertifies Iran Nuclear Deal, but Only Reluctantly,” New York Times, July 17, 2017, https://nytimes.com/2017/07/17/us/politics/trump-iran-nuclear-deal-recertify.html?referer; and Eli Lake, “Trump Just Came Very Close to Killing the Iran Deal,” Bloomberg View, July 18, 2017, https://www.bloomberg.com/view/articles/2017-07-18/trump-just-came-very-close-to-killing-the-iran-deal.
10. Jana White et al., “Trump Assigns White House Team to Target Iran Nuclear Deal, Sidelining State Department,” Foreign Policy, July 21, 2017, http://foreignpolicy.com/2017/07/21/trump-assigns-white-house-team-to-target-iran-nuclear-deal-sidelining-state-department/.
11. David S. Cohen, “Trump Is Trying to Politicize Intelligence to Support His Iran Policy. That’s Dangerous.” Washington Post, August 4, 2017,
    https://www.washingtonpost.com/opinions/trump-is-trying-to-politicize-intelligence-to-support-his-iran-policy-thats-dangerous/2017/08/04/ffb192e0-77b6-11e7-8f39-eeb7d3a2d304_story.html?utm_term=.11cc3d884f85.
12. Tom Cotton, “Cotton and Colleagues Urge Tillerson Not to Certify Iran Compliance with the JCPOA,” news release, July 11, 2017, https://www.cotton.senate.gov/?p=press_release&id=744.
13. Josh Dawsey et al., “Trump Shames Sessions amid Shake-up Speculation,” Politico, July 24, 2017, http://www.politico.com/story/2017/07/24/trump-sessions-cabinet-shame-240911; and John R. Bolton, “To Stop Iran’s Bomb, Bomb Iran,” New York Times, March 26, 2015, https://www.nytimes.com/2015/03/26/opinion/to-stop-irans-bomb-bomb-iran.html.
14. John R. Bolton, “Trump Must Withdraw from Iran Nuclear Deal-Now,” TheHill.com, July 16, 2017, http://thehill.com/blogs/pundits-blog/foreign-policy/342237-opinion-trump-must-withdraw-from-iran-nuclear-deal-now.
15. Mark Fitzpatrick, “Three Strikes against Claims that Iran Is Violating the Nuclear Accord,” International Institute for Strategic Studies, July 27, 2017, http://www.iiss.org/en/iiss%20voices/blogsections/iiss-voices-2017-adeb/july-eb75/three-strikes-against-claims-that-iran-is-violating-the-nuclear-accord-f965.
16. Abigail Williams, “Trump Accuses Iran of Violating the ‘Spirit’ of Nuclear Deal,” NBCNews.com, April 21, 2017, http://www.nbcnews.com/politics/white-house/trump-charges-iran-violating-spirit-nuclear-deal-n749131.
17. Nilo Tabrizy, “Iran Says U.S. Is Not Complying with the Nuclear Deal,” New York Times, July 19, 2017, https://www.nytimes.com/video/world/middleeast/100000005277964/us-iran-nuclear-deal-sanctions.html.
18. Joint Comprehensive Plan of Action, Vienna, July 14, 2015, https://www.state.gov/documents/organization/245317.pdf.
19. Josh Lederman and Matthew Lee, “U.S. Seeks to Test Iran Deal with More Inspections,” Associated Press, July 27, 2017, https://apnews.com/721fdd1bf86d4c9aa8b3b18c603ea60e/AP-sources:-US-seeks-to-test-Iran-deal-with-more-inspections.
20. Mark Fitzpatrick, “Don’t Repeat the Iraq War False WMD Claims with Iran,” International Institute for Strategic Studies, August 1, 2017, http://www.iiss.org/en/iiss%20voices/blogsections/iiss-voices-2017-adeb/august-2b48/dont-repeat-the-iraq-war-false-wmd-claims-with-iran-ee85.
21. Daryl G. Kimball, Twitter post, July 27, 2017, 4:32 a.m., https://twitter.com/DarylGKimball/status/890535433607815168.
22. Ibid.
23. Fitzpatrick, “Don’t Repeat the Iraq War False WMD Claims with Iran.”
24. Steve Andreasen and Steven Simon, “Is Trump Scheming to Kill the Iran Deal?” New York Times, August 2, 2017, https://www.nytimes.com/2017/08/02/opinion/trump-killing-iran-nuclear-deal.html?ref=opinion&_r=1.
25. Matthew Rosenberg and Adam Goldman, “C.I.A. Names the ‘Dark Prince’ to Run Iran Operations, Signaling a Tougher Stance,” New York Times, June 2, 2017, https://www.nytimes.com/2017/06/02/world/middleeast/cia-iran-dark-prince-michael-dandrea.html.
26. Eliana Johnson et al., “McMaster Dismisses another Flynn Hire from National Security Council,” Politico, August 2, 2017, http://www.politico.com/story/2017/08/02/mcmaster-national-security-council-241264.
27. Eric Pelofsky, “Tillerson’s ‘Peaceful’ Regime Change for Iran: Really? And What Comes Next?” Just Security, June 26, 2017, https://www.justsecurity.org/42531/tillersons-peaceful-regime-change-position-iran-really-and-next/.
28. Michael Crowley, “Trump Allies Push White House to Consider Regime Change in Tehran,” Politico, June 25, 2017, http://www.politico.com/story/2017/06/25/trump-iran-foreign-policy-regime-change-239930. Crowley reports: “National Security Council spokesman Michael Anton said that manipulating Iran’s internal politics is not currently a U.S. goal-nor among the ‘objectives’ set in the initial stage of the White House’s routine Iran policy review.”
29. Rep. Mike Pompeo (R-Kan.), “One Year Later, Obama’s Iran Nuclear Deal Puts Us at Increased Risk,” FoxNews.com, July 14, 2016, http://www.foxnews.com/opinion/2016/07/14/rep-mike-pompeo-one-year-later-obama-s-iran-nuclear-deal-puts-us-at-increased-risk.html.
30. Sean Higgins, “Tom Cotton Wants ‘Regime Change’ in Iran to Be Official US Policy,” Washington Examiner, June 25, 2017, http://www.washingtonexaminer.com/tom-cotton-wants-regime-change-in-iran-to-be-official-us-policy/article/2627035.
31. Teddy Fischer, “Full Transcript: Defense Secretary James Mattis’ Interview with The Islander,” Islander, June 20, 2017, http://mihsislander.org/2017/06/full-transcript-james-mattis-interview/.
32. Crowley, “Trump Allies Push White House.”
33. John R. Bolton, “Iran: Regime Change Is Within Reach,” Gatestone Institute, July 3, 2017, https://www.gatestoneinstitute.org/10620/iran-regime-change.
34. Joseph I. Lieberman, “How We Must Get Tougher on Iran,” Hartford Courant, December 11, 2016, http://www.courant.com/opinion/op-ed/iran-comment-20161209-story.html.
35. H.R.3364 - Countering America’s Adversaries Through Sanctions Act, https://www.congress.gov/bill/115th-congress/house-bill/3364/text?r=1#toc-HDF13D34A07124A16A0831FCDB8942928.
36. Julian Pecquet, “Senate Tones Down Iran Sanctions Bill after Input from Obama Team,” Al Monitor, May 25, 2017, http://www.al-monitor.com/pulse/originals/2017/05/senate-tone-down-iran-sanctions-bill-obama-team.html.
37. Bernie Sanders, “Sanders Statement on Iran and Russia Sanctions,” news release, June 15, 2017, https://www.sanders.senate.gov/newsroom/press-releases/sanders-statement-on-iran-and-russia-sanctions.
38. Thomas Erdbrink, “Iranian Parliament, Facing U.S. Sanctions, Votes to Raise Military Spending,” New York Times, August 13, 2017, https://www.nytimes.com/2017/08/13/world/middleeast/iranian-parliament-facing-us-sanctions-vote-to-raise-defense-spending.html; and Thomas Erdbrink, “Iran’s President Threatens to Restart Nuclear Program,” New York Times, August 15, 2017, https://www.nytimes.com/2017/08/15/world/middleeast/iran-nuclear-hassan-rouhani-us.html.
39. Ray Takeyh, “Taking on Iran,” National Review, December 31, 2016, https://www.nationalreview.com/magazine/2016-12-31-0000/donald-trump-iran-policy.
40. The Editors, “Certifiable Madness,” National Review (online), July 19, 2017, http://www.nationalreview.com/article/449636/iran-nuclear-deal-recertification.
41. Agence France-Presse, “EU Says All Parties Sticking to Iran Nuclear Deal,” Al Monitor, August 3, 2017, http://www.al-monitor.com/pulse/afp/2017/08/iran-us-sanctions-eu.html.
42. “Russia Says ‘a Pity’ U.S. Casts Doubt on Iran Nuclear Deal,” August 11, 2017, https://www.reuters.com/article/us-iran-nuclear-russia-usa/russia-says-a-pity-u-s-casts-doubt-on-iran-nuclear-deal-idUSKBN1AR1AU.
43. Carl Bildt, “If Trump Blows Up the Iran Deal, He’ll Cause a Meltdown in Europe, Too,” Washington Post, August 1, 2017, https://www.washingtonpost.com/news/global-opinions/wp/2017/08/01/if-trump-blows-up-the-iran-deal-hell-cause-a-meltdown-in-europe-too/?tid=ss_tw-bottom&utm_term=.2ccafdaaae51.
44. Staff, “Rouhani: We Must Not Get Caught in U.S. ‘Trap’,” Al Monitor, July 19, 2017, http://www.al-monitor.com/pulse/originals/2017/07/iran-rouhani-reaction-us-sanctions-trump-jcpoa-trap.html#ixzz4qVnbU2P9.
45. Akbar Torbat, “Impact of the U.S. Trade and Financial Sanctions on Iran,” World Economy 28, no. 3 (March 2005): 407-34; and Kenneth Katzman, “Iran Sanctions,” CRS Report RS20871, Congressional Research Service, October 11, 2013, p. 50.
46. Greg Bruno and Toni Johnson, “The Lengthening List of Iran Sanctions,” Council on Foreign Relations report, July 31, 2012.
47. Anthony Cordesman et al., The U.S. and Iran: Sanctions, Energy, Arms Control and Regime Change (Washington: Center for Strategic and International Studies, 2013).
48. Michael Jacobson, “Sanctions against Iran: A Promising Struggle,” Washington Quarterly 31, no. 3 (2008): 69-88.
49. Erin Cunningham, “The United States and Europe Are on a Collision Course over Iran,” Washington Post, July 14, 2017, https://www.washingtonpost.com/world/middle_east/the-united-states-and-europe-are-on-a-collision-course-over-iran/2017/07/14/e7b70108-657c-11e7-94ab-5b1f0ff459df_story.html.
50. Indeed, at least one survey found that even the economic impact of targeted sanctions tended to be limited. These countries did no worse than comparable countries in terms of GDP growth or other key economic measures, though investment prospects did seem to drop. See Elizabeth Rosenberg et al., The New Tools of Economic Warfare: Effects and Effectiveness of Contemporary U.S. Financial Sanctions (Washington: Center for a New American Security, April 2016), https://s3.amazonaws.com/files.cnas.org/documents/CNASReport-EconomicWarfare-160408v02.pdf.
51. Arne Tostensen and Beate Bull, “Are Smart Sanctions Feasible?” World Politics 54, no. 3 (2002): 377.
52. Gary Hufbauer et al., Economic Sanctions Reconsidered, 2nd ed. (Washington: Peterson Institute for International Economics, 1990).
53. Thomas Biersteker et al., Targeted Sanctions: The Impacts and Effectiveness of United NationsAction (New York: Cambridge University Press, 2016), p. 236.
54. Rosenberg et al., “The New Tools of Economic Warfare.”
55. Biersteker, Tourinho, and Eckert, Targeted Sanctions, p. 243.
56. The late 1990s saw substantial high-profile academic debate on the topic, though there were few empirical findings. See Robert Pape, “Why Economic Sanctions Do Not Work,” International Security 22, no. 2 (1997): 90-136; David Baldwin and Robert Pape, “Correspondence: Evaluating Economic Sanctions,” International Security 23, no. 2 (1998): 189-98; and David Baldwin, “The Sanctions Debate and the Logic of Choice,” International Security 24, no. 3 (1999/2000): 80-107, among others.
57. Pape, “Why Economic Sanctions Do Not Work,” p. 106.
58. Katherine Bauer, Blumenstein-Katz Family Fellow, The Washington Institute for Near East Policy, “Iran on Notice,” Testimony before the House Committee on Foreign Affairs, 114th Cong., 1st sess., February 16, 2017, http://www.washingtoninstitute.org/uploads/Documents/testimony/BauerTestimony_20170216-final4.pdf.
59. Daniel L. Byman, senior fellow, Center for Middle East Policy at the Brookings Institution, “Nuclear Deal Fallout: The Global Threat of Iran,” Testimony before the House Committee on Foreign Affairs Subcommittee on Terrorism, Nonproliferation, and Trade, 114th Cong., 1st sess., May 24, 2017, https://www.brookings.edu/wp-content/uploads/2017/05/the-global-threat-of-iran.pdf.
60. Katherine Zimmerman, “Pushing Back on Iran: Options in Yemen,” American Enterprise Institute Critical Threats Project, February 7, 2017, https://www.criticalthreats.org/analysis/pushing-back-on-iran-policy-options-in-yemen.
61. Avner Golov et al., “After the Joint Comprehensive Plan of Action: A Game Plan for the United States,” Center for a New American Security, October 19, 2015, https://www.cnas.org/publications/reports/after-the-joint-comprehensive-plan-of-action-a-game-plan-for-the-united-states.
62. Colin H. Kahl et al., “A Strategy for Ending the Syrian Civil War,” Center for a New American Security, June 7, 2017, https://www.cnas.org/publications/reports/a-strategy-for-ending-the-syrian-civil-war.
63. Kate Brannen et al., “White House Officials Push for Widening War in Syria over Pentagon Objections,” Foreign Policy, June 16, 2017, http://foreignpolicy.com/2017/06/16/white-house-officials-push-for-widening-war-in-syria-over-pentagon-objections/.
64. Nader Uskowi, “A New Battlespace in Syria: Prospects for U.S. Policy,” Washington Institute for Near East Policy, June 20, 2017, http://www.washingtoninstitute.org/policy-analysis/view/a-new-battlespace-in-syria-prospects-for-u.s.-policy.
65. Max Peck, “Doubling Down on Damascus: Iran’s Military Surge to Save the Assad Regime,” Foundation for Defense of Democracies, January 2016, http://www.defenddemocracy.org/content/uploads/documents/Doubling_Down_on_Damascus.pdf.
66. Jennifer Cafarella et al., “America’s Way Ahead in Syria,” Institute for the Study of War and American Enterprise Institute Critical Threats Project, March 2017, https://www.criticalthreats.org/wp-content/uploads/2017/03/ISW-CTP-Recommended-Course-of-Action-in-Syria-and-Iraq-March-2017.pdf.
67. Frederick W. Kagan et al., “Competing Visions for Syria and Iraq: The Myth of an Anti-ISIS Grand Coalition,” Institute for the Study of War and American Enterprise Institute Critical Threats Project, January 2016, http://www.understandingwar.org/sites/default/files/PLANEX%20Report%202%20FINALFINAL.pdf.
68. Marc Lynch, The New Arab Wars: Uprisings and Anarchy in the Middle East (New York: Public Affairs, 2016).
69. Ishaan Tharoor, “The Persian Gulf Crisis over Qatar, Explained,” Washington Post, June 6, 2017, https://www.washingtonpost.com/news/worldviews/wp/2017/06/06/the-persian-gulf-crisis-over-qatar-explained/.
70. Embassy of the Kingdom of Saudi Arabia in the United States, “Joint Statement on the Formation of the Islamic Military Alliance to Fight Terrorism,” December 15, 2015, http://embassies.mofa.gov.sa/sites/usa/EN/PublicAffairs/Statements/Pages/Joint-Statement-on-the-Formation-of-the-Islamic-Military-Alliance.aspx.
71. Byman, “Nuclear Deal Fallout”; Golov et al., “After the Joint Comprehensive Plan of Action”; and Cafarella et al., “America’s Way Ahead in Syria.”
72. David C. Hendrickson and Robert W. Tucker, “Revisions in Need of Revising: What Went Wrong in the Iraq War,” Survival 47, no. 2 (2005): 7-32; and Jonathan Marcus, “Factors behind the Precipitate Collapse of Iraq’s Army,” BBC News, June 13, 2014,http://www.bbc.com/news/world-middle-east-27838435.
73. Although comprehensive figures are difficult to come by, the International Institute for Strategic Studies estimates that there are around 7,000 U.S. service members in Afghanistan; 5,000 in Iraq; 2,000 in Jordan; 13,000 in Kuwait; 5,000 in Bahrain; 8,000 in Qatar; 400 in Saudi Arabia; and 5,000 in the United Arab Emirates. Data are from the International Institute for Strategic Studies, The Military Balance, 2016 (New York: Routledge, 2016).
74. Marcus Weisgerber, “How Many U.S. Troops Were Killed by Iranian IEDs in Iraq?” Defense One, September 8, 2015, www.defenseone.com/news/2015/09/how-many-us-troops-were-killed-iranian-ieds-iraq/120524/.
75. Daniel L. Byman, senior fellow, Center for Middle East Policy at the Brookings Institution, “Hezbollah’s Growing Threat against U.S. National Security Interests in the Middle East,” Testimony before the House Committee on Foreign Affairs’ Subcommittee on the Middle East and North Africa, 113th Cong., 2nd sess., March 22, 2016, https://www.brookings.edu/testimonies/hezbollahs-growing-threat-against-u-s-national-security-interests-in-the-middle-east/.
76. Kevin Peraino et al., “Eye for an Eye,” Newsweek, August 14, 2006.
77. Michael Rubin, “Iran: The Case for ‘Regime Change’,” Commentary, April 1, 2010, https://www.commentarymagazine.com/articles/iran-the-case-for-regime-change/.
78. Reuel Gerecht and Ray Takeyh, “How Trump Can Help Cripple the Iranian Regime,” Washington Post, April 7, 2017, https://www.washingtonpost.com/news/global-opinions/wp/2017/04/07/how-trump-can-help-cripple-the-iranian-regime/.
79. Mark Dubowitz, “Confront Iran the Reagan Way,” Wall Street Journal, July 4, 2017, https://www.wsj.com/articles/confront-iran-the-reagan-way-1499197879.
80. Alexander B. Downes and Lindsey A. O’Rourke, “The Trump Administration Wants Regime Change in Iran. But Regime Change Usually Doesn’t Work,” Washington Post, July 31, 2017, https://www.washingtonpost.com/news/monkey-cage/wp/2017/07/31/some-in-d-c-want-regime-change-in-iran-good-luck-with-that/?nid&utm_term=.b3fb2d355551.
81. Laura Rozen, “Iran Hawks, Bannon Loyalists Booted in White House Purge,” Al Monitor, August 3, 2017, http://www.al-monitor.com/pulse/en/originals/2017/08/white-house-iran-hawks-bannon-purge-ezra-cohen-watnick.amp.html.
82. Mark Mazzetti, “C.I.A. Study of Covert Aid Fueled Skepticism about Helping Syrian Rebels,” New York Times, October 14, 2014, https://www.nytimes.com/2014/10/15/us/politics/cia-study-says-arming-rebels-seldom-works.html.
83. Alexander B. Downes and Lindsey A. O’Rourke, “You Can’t Always Get What You Want: Why Foreign-Imposed Regime Change Seldom Improves Interstate Relations,” International Security 41, no. 2 (Fall 2016): 43-89.
84. Ibid.
85. Downes and O’Rourke, “The Trump Administration Wants Regime Change in Iran. But Regime Change Usually Doesn’t Work”; Goran Peic and Dan Reiter, “Foreign-Imposed Regime Change, State Power and Civil War Onset, 1920-2004,” British Journal of Political Science 41, no. 3 (July 2011): 453-57; and Alexander B. Downes and Jonathan Monten, “Forced to Be Free?: Why Foreign-Imposed Regime Change Rarely Leads to Democratization,” International Security 37, no. 4 (Spring 2013): 90-131.
86. Sameer Lalwani, “Four Ways Forward in Afghanistan,” Foreign Affairs (online), May 25, 2017, https://www.foreignaffairs.com/articles/afghanistan/2017-05-25/four-ways-forward-afghanistan.
87. Daniel Trotta, “Iraq War Cost More than $2 Trillion: Study,” Reuters, March 14, 2013, https://www.reuters.com/article/us-iraq-war-anniversary-idUSBRE92D0PG20130314.
88. Alan J. Kuperman, “A Model Humanitarian Intervention? Reassessing NATO’s Libya Campaign,” International Security 38, no. 1 (Summer 2013): 105-36.
89. Kenneth M. Pollack et al., “Which Path to Persia? Options for a New American Strategy toward Iran,” Brookings Institution Analysis Paper no. 20, June 2009, p. 118.
90. Scott Shane, “Iranian Dissidents Convince U.S. to Drop Terror Label,” New York Times, September 21, 2012, http://www.nytimes.com/2012/09/22/world/middleeast/iranian-opposition-group-mek-wins-removal-from-us-terrorist-list.html.
91. Michael Axworthy, “Regime Change in Iran Would Be a Disaster for Everyone,” Foreign Policy (online), July 18, 2017, http://foreignpolicy.com/2017/07/18/regime-change-in-iran-would-be-a-disaster-for-everyone-trump-tillerson/; and Madison Schramm and Ariane M. Tabatabai, “Why Regime Change in Iran Wouldn’t Work,” Foreign Affairs (online), July 20, 2017, https://www.foreignaffairs.com/articles/persian-gulf/2017-07-20/why-regime-change-iran-wouldnt-work?cid=int-lea&pgtype=hpg.
92. Schramm and Tabatabai, “Why Regime Change in Iran Wouldn’t Work.”
93. Axworthy, “Regime Change in Iran Would Be a Disaster for Everyone.”
94. Ibid.
95. David Yaghoubian, Ethnicity, Identity, and the Development of Nationalism in Iran (Syracuse, NY: Syracuse University Press, 2014); and Ali M. Ansari, The Politics of Nationalism in Modern Iran (New York: Cambridge University Press, 2012).
96. Seymour M. Hersh, “Preparing the Battlefield,” New Yorker, July 7, 2008, https://www.newyorker.com/magazine/2008/07/07/preparing-the-battlefield.
97. Eric Edelman and Charles Wald, “How Trump Should Handle Iran,” Politico, July 25, 2017, http://www.politico.com/agenda/story/2017/07/25/how-trump-should-handle-iran-000483.
98. See the National Security Strategy of the United States of America, September 2002, https://www.state.gov/documents/organization/63562.pdf.
99. Karl P. Mueller et al., Striking First: Preemptive and Preventive Attack in U.S. National SecurityPolicy (Santa Monica, CA: Rand Corporation, 2006), https://www.rand.org/content/dam/rand/pubs/monographs/2006/RAND_MG403.pdf.
100. Arthur Schlesinger Jr., “Good Foreign Policy a Casualty of War,” Los Angeles Times, March 23, 2003, http://articles.latimes.com/2003/mar/23/news/war-opschlesinger23.
101. Chris Murphy, “Trump’s Reckless Path toward War with Iran,” Hartford Courant, February 3, 2017, http://www.courant.com/opinion/op-ed/hc-op-murphy-trumps-reckless-iran-policy-0206-20170203-story.html.
102. Mark Mazzetti and Thom Shanker, “U.S. War Game Sees Perils of Israeli Strike against Iran,” New York Times, March 19, 2012, http://www.nytimes.com/2012/03/20/world/middleeast/united-states-war-game-sees-dire-results-of-an-israeli-attack-on-iran.html.
103. James Fallows, “Will Iran Be Next?” Atlantic, December 2004, p. 108.
104. Thomas McInerney, “Target: Iran,” Weekly Standard, April 24, 2006, http://www.weeklystandard.com/target-iran/article/13242.
105. Austin Long et al., “Weighing the Benefits and Costs of Military Action against Iran,” The Iran Project, New York, 2012, https://www.wilsoncenter.org/sites/default/files/IranReport_091112_FINAL.pdf.
106. “Missile Threat,” Center for Strategic and International Studies Missile Defense Project, https://missilethreat.csis.org/country/iran/.
107. Afshon Ostovar, “If Trump Wants a Fight in the Middle East Iran Will Give Him One,” Foreign Policy (online), June 2, 2017, http://foreignpolicy.com/2017/06/02/if-trump-wants-a-fight-in-the-middle-east-iran-will-give-him-one/.
108. Declassified key judgments from the National Intelligence Estimate, “Trends in Global Terrorism: Implications for the United States,” Office of the Director of National Intelligence, April 2006, http://www.governmentattic.org/5docs/NIE-2006-02R.pdf.
109. Ibid.
110. Population data are from CIA, “World Factbook,” https://www.cia.gov/library/publications/resources/the-world-factbook; military data are from the International Institute for Strategic Studies, The Military Balance, 2002-2003 (New York: Routledge, 2003) and The Military Balance, 2016 (New York: Routledge, 2016).
111. Long et al., “Weighing the Benefits and Costs of Military Action against Iran.”
112. Matthew Kroenig, “Time to Attack Iran,” Foreign Affairs 91, no. 1 (January/February 2012), https://www.foreignaffairs.com/articles/middle-east/2012-01-01/time-attack-iran.
113. Defense Intelligence Agency, “Unclassified Report on Military Power of Iran,” April 2010, http://www.politico.com/static/PPM145_link_042010.html.
114. Anne Gearan, “Analysis: Iraq War Ties U.S. Hands on Iran,” Associated Press, June 2, 2006.
115. Jon Schwartz, “Trump Intel Chief: North Korea Learned from Libya War to ‘Never’ Give Up Nukes,” Intercept, July 29, 2017, https://theintercept.com/2017/07/29/dan-coats-north-korea-nukes-nuclear-libya-regime-change/.
116. Agence France-Presse, “North Korea Cites Muammar Gaddafi’s ‘Destruction’ in Nuclear Test Defence,” Telegraph, January 9, 2016, http://www.telegraph.co.uk/news/worldnews/asia/northkorea/12090658/North-Korea-cites-Muammar-Gaddafis-destruction-in-nuclear-test-defence.html.
117. See remarks of Thomas Schelling, “An Astonishing Sixty Years,” Woodrow Wilson Center Director’s Forum, September 21, 2006.
118. Ross Colvin, “ ‘Cut off Head of Snake’ Saudis Told U.S. on Iran,” Reuters, November 28, 2010, https://www.reuters.com/article/us-wikileaks-iran-saudis-idUSTRE6AS02B20101129.
119. Jodi Rudoren, “Israel Came Close to Attacking Iran, Ex-Defense Minister Says,” New York Times, August 21, 2015, https://www.nytimes.com/2015/08/22/world/middleeast/israel-came-close-to-attacking-iran-ex-defense-minister-says.html?mcubz=3&_r=0.
120. Carmi Gillon, “The Iran Nuclear Deal Has Been a Blessing for Israel,” Foreign Policy (online), July 13, 2017, http://foreignpolicy.com/2017/07/13/the-iran-nuclear-deal-has-been-a-blessing-for-israel-jcpoa/.
121. Thomas Erdbrink, “Rouhani Wins Re-election in Iran by a Wide Margin,” New York Times, May 20, 2017, https://www.nytimes.com/2017/05/20/world/middleeast/iran-election-hassan-rouhani.html?mcubz=3.
122. Mohammad Ayatollahi Tabaar, interview by Zachary Laub, “Why Iran’s Elections Matter,” Council on Foreign Relations, February 24, 2016, https://www.cfr.org/interview/why-irans-elections-matter.
123. Ariane Tabatabai, “Trump Plays into Hands of Iranian Hardliners,” Bulletin of the Atomic Scientists, May 10, 2017, http://thebulletin.org/trump-plays-hands-iranian-hardliners10761.

Vanessa Brown Calder

Local zoning and land-use regulations have increased substantially over the decades. These constraints on land development within cities and suburbs aim to achieve various safety, environmental, and aesthetic goals. But the regulations have also tended to reduce the supply of housing, including multifamily and low-income housing. With reduced supply, many U.S. cities suffer from housing affordability problems.

This study uses regression analysis to examine the link between housing prices and zoning and land-use controls. State and local governments across the country impose substantially different amounts of regulation on land development. The study uses a data set of court decisions on land use and zoning that captures the growth in regulation over time and the large variability between the states. The statistical results show that rising land-use regulation is associated with rising real average home prices in 44 states and that rising zoning regulation is associated with rising real average home prices in 36 states. In general, the states that have increased the amount of rules and restrictions on land use the most have higher housing prices.

The federal government spent almost $200 billion to subsidize renting and buying homes in 2015. These subsidies treat a symptom of the underlying problem. But the results of this study indicate that state and local governments can tackle housing affordability problems directly by overhauling their development rules. For example, housing is much more expensive in the Northeast than in the Southeast, and that difference is partly explained by more regulation in the former region. Interestingly, the data show that relatively more federal housing aid flows to states with more restrictive zoning and land-use rules, perhaps because those states have higher housing costs. Federal aid thus creates a disincentive for the states to solve their own housing affordability problems by reducing regulation.

Randal O'Toole

With annual subsidies of $50 billion covering 76 percent of its costs, public transit may be the most heavily subsidized consumer-based industry in the country. Since 1970, the industry has received well over $1 trillion (adjusted for inflation) in subsidies, yet the number of transit trips taken by the average urban resident has declined from about 50 per year in 1970 to 39 per year today.

Total transit ridership, not just per capita, is declining today, having seen a 4.4 percent drop nationwide from 2014 to 2016 and a 3.0 percent drop in the first seven months of 2017 versus the same months of 2016. Many major transit systems have suffered catastrophic declines in the past few years: since 2009, for example, transit ridership has declined by 27 to 37 percent in the Bakersfield, Detroit, Fresno, Memphis, Richmond, Toledo, and Wichita urban areas.

Four trends that are likely to become even more pronounced in the future place the entire industry in jeopardy: low energy prices; growing maintenance backlogs, especially for rail transit systems; unfunded pension and health care obligations; and ride-hailing services.

The last is the most serious threat, as some predict that within five years those ride-hailing services will begin using driverless cars, which will reduce their fares to rates competitive with transit, but with far more convenient service. This makes it likely that outside of a few very dense areas, such as New York City, transit will be extinct by the year 2030, leaving behind a huge burden of debt and unfunded obligations to former transit employees.

Despite these trends, the transit industry’s main response is to seek greater subsidies to build, maintain, and operate transit, often relying on rail transit and similar modes that were obsolete many years ago and won’t be able to compete against driverless ride-hailing services. Instead, transit agencies should begin to prepare for an orderly phase-out of publicly funded transit services as affordable, shared driverless cars become available in the next decade. This means the industry should stop building new rail lines; replace most existing rail lines with buses as they wear out; pay down debts and unfunded obligations; and target any further subsidies to low-income people rather than continue a futile crusade to attract higher-income people out of their cars.

Alex Nowrasteh

The Trump administration wants to increase the size of the U.S. Border Patrol by hiring 5,000 more agents beyond the approximately 20,000 current agents, in addition to filling roughly 1,500 job vacancies. Congress will likely lower the hiring standards for some applicants to help reach the president’s staffing goals. Reports allege that corruption and misconduct are serious personnel problems at Border Patrol, but little direct evidence is available to evaluate the extent of such problems.

However, data from the Office of Personnel Management reveal that Border Patrol agents are more likely to be terminated for discipline or performance reasons than officers in other large federal law enforcement agencies (those with 5,000 or more officers). From 2006 to 2016, Border Patrol agents were twice as likely to be terminated for disciplinary infractions or poor performance as Immigration and Customs Enforcement agents and 49 percent more likely than Customs and Border Protection officers who work in the Office of Field Operations. Border Patrol agents were 54 percent more likely than guards at the Bureau of Prisons to be terminated for disciplinary infractions or poor performance, 6 times as likely as Federal Bureau of Investigation agents, 7.1 times as likely as Drug Enforcement Administration agents, and 12.9 times as likely as Secret Service agents.

INTRODUCTION

The Trump administration wants to hire 5,000 new U.S. Border Patrol agents to augment the roughly 20,000 current agents, in addition to filling about 1,500 job vacancies.¹ Congress will likely lower some hiring standards to help reach that staffing goal.² Border Patrol corruption and misconduct are likely serious problems, but there is little publicly available direct evidence of the extent of those problems.³

It is virtually impossible to assess the extent of corruption or misconduct in U.S. Customs and Border Protection (CBP), a subsidiary of the Department of Homeland Security that includes the Border Patrol, because most publicly available information is incomplete or inconsistent. This gap in knowledge is significant because corruption and misconduct erode public trust and can expose the country to serious threats. “Corruption” is the criminal misuse or abuse of an employee’s position; “misconduct” is delinquent behavior that can be, but does not have to be, related to the execution of official duties.

As evidence of poor data, consider a 2012 Government Accountability Office (GAO) report that showed 5,746 allegations of corruption and misconduct against Border Patrol agents and CBP Office of Field Operations (CBP-OFO) officers in 2010.⁴ However, testimony from the Department of Homeland Security Office of the Inspector General (DHS-OIG) shows 4,714 complaints against all CBP employees in the same year.⁵ These numbers show that the GAO found more allegations against the Border Patrol and the CBP-OFO, two components of the CBP, than the in-house watchdog of the DHS-OIG recorded against all of CBP.

Despite the high number of allegations recorded by the GAO, a mere 349 complaints were filed against all Border Patrol agents stationed in the southwest border sectors of the United States in 2010, according to the government’s answer to a Freedom of Information Act request (FOIA) filed by the American Immigration Council (see Table 1).⁶ Another FOIA filed by the same organization uncovered 2,178 complaints of misconduct from January 4, 2012, to October 22, 2015.⁷ A report by the American Civil Liberties Union of Arizona found only 142 civil rights complaints against Border Patrol agents in two of the nine southwest border sectors from 2011 to 2014.⁸ Corruption conviction data are just as incomplete or inconsistent. The answer to a FOIA filed by the Immigration Reform Law Institute revealed that just 158 CBP employees that 358 convictions were a result of investigations in CBP.⁹ The latter number includes both CBP employees and people from outside the agency who participated in their corruption or misconduct. To add more confusion, the GAO reported 2,314 indictments or arrests of CBP employees for corruption or misconduct from 2005 through 2012.¹⁰

Table 1

Source: U.S. Government Accountability Office (GAO), “Border Security: Additional Actions Needed to Strengthen CBP Efforts to Mitigate Risk of Employee Corruption and Misconduct,” GAO-13-59 December 2012, pp. 12-13; Charles K. Edwards, acting inspector general, U.S. Department of Homeland Security, Testimony before the Subcommittee on Government Organization, Efficiency, and Financial Management, House Committee on Oversight and Government Reform, 112th Cong., 2nd sess., August 1, 2012, https://www.oig.dhs.gov/assets/TM/OIGtm_CKE_080112.pdf.

One way to address this confusion is to look at U.S. Office of Personnel Management (OPM) data that indicate serious discipline or performance issues in CBP and Border Patrol. Although the termination rate for performance or discipline is not a direct measure of corruption or misconduct, it does include former employees who were fired for those and other reasons if the government records it properly. Terminations for discipline and performance issues indicate personnel problems at Border Patrol that are related to and even extend beyond misconduct and corruption.

DISCIPLINE AND PERFORMANCE TERMINATIONS IN THE BORDER PATROL

OPM records the total number of federal employees per agency, their specific occupations, the number of separations for each year, and the reason for each separation.¹¹ Termination for disciplinary or performance issues is “based on misconduct, delinquency, suitability, unsatisfactory performance, or failure to qualify for conversion to a career appointment. [This] [i]ncludes those who resign upon receiving notice of action based on performance or misconduct.”¹²

Figure 1
Discipline or performance termination rate for federal law enforcement officers, 2006-2016

Sources: Office of Personnel Management, “FedScope Separations Cube, Fiscal 2006-2016”; and Office of Personnel Management, “FedScope Employment Cube, Fiscal Years 2006-2016.”
Note: BOP = Bureau of Prisons; BP = Border Patrol; CBP-OFO = Customs and Border Protection Office of Field Operations; DEA = Drug Enforcement Administration; FBI = Federal Bureau of Investigation; ICE = Immigration and Customs Enforcement.

The Border Patrol agent termination rate for discipline or performance is much higher than for law enforcement officers at other large federal law enforcement agencies (Figure 1).¹³ From 2006 through 2016, Border Patrol agents were twice as likely to be terminated for discipline or performance as Immigration and Customs Enforcement (ICE) agents and 49 percent more likely than CBP-OFO officers. Border Patrol agents were 54 percent more likely than guards at the Bureau of Prisons to be terminated for discipline or performance, 6 times as likely as Federal Bureau of Investigation (FBI) agents, 7.1 times as likely as Drug Enforcement Administration (DEA) agents, and 12.9 times as likely as Secret Service agents. The 2006-2016 termination rate for Border Patrol agents was 2.2 times greater than the rate for all other federal law enforcement officers. The termination rate for Border Patrol agents was 2.8 times greater than the rate for federal law enforcement officers who do not enforce immigration laws.

With the exception of 2011, in all years between 2006 and 2016 Border Patrol agents were more likely to be terminated for discipline and performance issues than were law enforcement officers from the other federal law enforcement agencies (Figure 2). Although the initial increase in the Border Patrol termination rate coincides with the surge in the number of new agents, it fell after 2007 and then rose after 2011. Yet, the number of agents continued to climb through much of that period (Figure 3). The termination rate peaked at 1.73 percent in 2007, dipped to 0.20 percent in 2011, and then surged to 0.57 percent in 2015 before coming back down to 0.24 percent in 2016.

Only 33.9 percent of all CBP employees were Border Patrol agents from 2006 to 2016, but they account for 49.4 percent of all CBP terminations for discipline and performance.¹⁴ The Border Patrol’s termination rate may actually undercount the extent of personnel problems. From 2006 to 2016, only 26 percent of CBP employees convicted or charged with corruption were actually terminated while 67 percent resigned according to data released by the Immigration Reform Law Institute.¹⁵

Figure 2
Termination rate for federal law enforcement officers by component or agency, 2006-2016

Sources: Office of Personnel Management, “FedScope Separations Cube, Fiscal Years 2006-2016”; and Office of Personnel Management, “FedScope Employment Cube, Fiscal Years 2006-2016.”
Note: CBP-OFO = Customs and Border Protection Office of Field Operations.

Figure 3
Number of Border Patrol agents and termination rate, 2006-2016

Source: Office of Personnel Management, “FedScope Separations Cube, Fiscal Years 2006-2016”; and Office of Personnel Management, “FedScope Employment Cube, Fiscal Years 2006-2016.”

OPM rules specify that government employees who resign upon receiving notice of legal action based on performance or misconduct are to be recorded as terminations.¹⁶ It is unclear whether the Immigration Reform Law Institute data are complete, whether they accurately describe how the employment of those CBP employees ended, or both. Adding further confusion, in 2015 CBP reported 7,920 disciplinary outcomes for CBP employees but only 3.4 percent were terminated and 83 employees resigned or retired before disciplinary action.¹⁷

The Border Patrol termination rate in-creased 2.4 fold from 2006 to 2008, while the number of agents climbed by only 41 percent. Meanwhile, the termination rate for CBP-OFO officers almost doubled while their numbers increased by only 9.7 percent. From 2006 to 2016, the termination rate for Border Patrol agents and CBP-OFO officers is highly correlated. Because Border Patrol and CBP-OFO were components of the same agency, it is likely that the same factors that influenced the termination rates for Border Patrol agents also influenced the termination rates for CBP-OFO officers.

THE SOURCE OF THE BORDER PATROL’S PERSONNEL PROBLEMS

The high termination rate at the CBP and the Border Patrol indicates serious personnel problems, which could be caused by the same institutional deficiencies that incentivize corruption and misconduct. The first potential deficiency is that understaffed and disorganized internal affairs departments have overlapping investigatory authority and document cases poorly. If that is the case at the CBP, it is difficult to both monitor agents and to quantify the extent of misconduct and corruption. The second potential deficiency is the rapid and recent expansion of Border Patrol agents.¹⁸ Initially, a high relative termination rate can be a sign of effective internal affairs, but the Border Patrol has had high termination rates for years. An effective internal affairs operation boosts terminations in the short run through better detection of performance and discipline problems, but the rates should eventually fall as internal affairs begins to deter such behavior.

At CBP, three different offices in DHS share competing and overlapping internal investigative authority, and this poor organization hampers internal affairs investigations. The Office of the Inspector General of the Department of Homeland Security (DHS-OIG), which oversees the entire department, has the power to investigate any case involving a CBP employee. If DHS-OIG declines to investigate, then the Immigration and Customs Enforcement Office of Professional Responsibility (ICE-OPR) can review the case and investigate. If both DHS-OIG and ICE-OPR decline to pursue a case, then CBP’s own internal affairs body-the Office of Professional Responsibility (CBP-OPR)-can investigate.¹⁹ And before August 2014, CBP-OPR could only review cases for administrative violations and did not have the authority to investigate criminal misconduct.²⁰

These three offices also do not consistently share information or necessarily cooperate with independent investigatory agencies such as the FBI.²¹ Ronald Hosko, former assistant director of the FBI’s criminal investigative division (which also investigates government corruption), described DHS-OIG as “a troubled place” that regarded “sharing information as misconduct.” He added that DHS-OIG “fought us at every turn. I believe it was a deliberate attempt by senior people in DHS and in the inspector general’s shop to avoid cooperating with the FBI.”²²

CBP’s Joint Intake Case Management System (JICMS) is supposed to be a central clearinghouse for allegations of misconduct and corruption, but it does not include all allegations made by the DHS-OIG, FBI, ICE, or other law enforcement agencies because these agencies track their cases in different databases.²³ Additionally, JICMS did not identify excessive use of force allegations and other types of misconduct.²⁴ CBP further complicates this mess by distinguishing between “mission-compromising” and “non-mission-compromising” corruption.²⁵ The former includes drug and immigrant smuggling and the latter includes sexually assaulting detainees and murder.²⁶ CBP also changed the definition of “complaints” in a way that reduces the number of excessive force complaints against Border Patrol officers.²⁷

Corrupted investigators could also make the data suspect. After the release of the previously mentioned GAO report, at least four corruption investigators in DHS-OIG’s McAllen Field Office in Texas were convicted of falsifying documents related to criminal investigations of CBP corruption.²⁸ And additional evidence shows that CBP-OPR agents coached Border Patrol agents accused of misconduct on how to avoid prosecution.²⁹ How many others have escaped detection and how many cases they may have disrupted over the years may never be known. James Tomsheck, former head of CBP-OPR, said that it is “conservative to estimate that 5 percent of the [Border Patrol] force” is corrupt.³⁰

Many argue that misconduct and corruption in CBP and Border Patrol originated with the rapid hiring of new Border Patrol agents as the patrol doubled its size between 2002 and 2010.³¹ The number of CBP-OFO officers barely expanded, but their termination rate is highly correlated with that of Border Patrol agents. That correlation suggests that the rapid hiring of Border Patrol agents is not responsible for the high termination rate.

At the same time as the hiring surge, Congress reorganized numerous federal agencies in response to 9/11. The Border Patrol was designated as a component agency inside CBP, which was a new agency within the newly created cabinet-level Department of Homeland Security.³² Previously, the Border Patrol had been part of the Immigration and Naturalization Service. The reorganization left the CBP with no internal affairs investigators because they had been transferred to ICE in 2003.³³ CBP is the largest law enforcement agency in the United States but it has struggled to rebuild its internal affairs capacity since the reorganization.

In fact, CBP-OPR is tiny relative to other law enforcement internal affairs agencies.³⁴ In 2015, it had 218 internal affairs investigators for a workforce of about 60,000 employees, including over 47,000 law enforcement officers, a ratio of 271 to 1.³⁵ By contrast, the New York Police Department (NYPD) has one internal affairs investigator for about every 65 sworn officers, and the older internal affairs division at Customs before the 2003 reorganization had one internal affairs investigator for every 136 employees.³⁶ The CBP Integrity Advisory Panel, a body that made recommendations in 2016 to ensure agency accountability, said that CBP should have approximately 550 to 565 full-time internal affairs investigators.³⁷ It would require 729 internal affairs investigators if it were to have the same ratio of law enforcement officers to investigators as the NYPD.

IMPROVING BORDER PATROL DISCIPLINE AND PERFORMANCE

Border Patrol agents have unique powers that other law enforcement agents do not, such as the power to conduct checkpoint stops without reasonable suspicion and to act without fulfilling warrant requirements within 100 miles of any land or maritime border.³⁸ Therefore, Border Patrol agents should be more tightly monitored to reduce discipline and performance problems as well as to better measure, and eventually reduce, misconduct and corruption. The following reform recommendations will help achieve these goals.

Establish a Border Patrol Hiring Freeze

Congress should not increase the number of Border Patrol agents until CBP has fully implemented every recommendation of the CBP Integrity Advisory Panel. The most critical recommendation is hiring enough CBP-OPR investigators so that the office is both entirely operational and has substantially reduced its backlog of cases.³⁹ As previously mentioned, of the about 60,000 CBP employees, about 47,000 of them are law enforcement officers. CBP-OPR should have at least the same degree of internal affairs oversight as the NYPD, which would require 729 full-time investigators or 1 for every 65 CBP law enforcement officers.⁴⁰ The Trump administration’s 2018 budget request asks for an additional 60 (35 full-time equivalent) CBP-OPR investigators, which is not enough to correct the ratio, especially if the proposed 5,000 additional Border Patrol agents are hired alongside them.⁴¹

Reorganize Internal Affairs at DHS

All three internal affairs offices that can investigate the CBP and the Border Patrol-DHS-OIG, ICE-OPR, and CBP-OPR-need to have clear jurisdictions. Specifically, they must be either reorganized or combined to form a more effective internal affairs group. The Homeland Security Studies and Analysis Institute wrote: “The reliance upon external organizations for CBP’s internal corruption investigations contravenes the conventional federal law enforcement model for internal affairs. That model calls for the placement of the internal investigative functions within the agency that bears the strongest institutional interest in deterring and detecting corrupt behavior. The Secret Service, Transportation Security Administration, Coast Guard, and ICE maintain internal criminal investigative capabilities within their respective organizations. CBP, which operates in a high threat and corruption prone border environment, requires these same capabilities.”⁴²

Increase CBP-OPR Accountability and Improve Border Patrol Culture

CBP-OPR should be reorganized, fully staffed, and incentivized so that it can deter and detect misconduct and corruption.⁴³ To ease CBP-OPR’s vital task, Border Patrol agents need to cooperate with investigators rather than cover up or manage misconduct outside of official channels.⁴⁴ This requires breaking the “code of silence” or “Green Code”-the unofficial agency norm of refusing to do or say anything that could incriminate another Border Patrol agent.⁴⁵ Border Patrol agents who fail to report misconduct or corruption should be terminated, while those who do report it should be rewarded. Mandatory body cameras for all Border Patrol agents would help create a culture of honesty.

Increase GAO Audits

The GAO should frequently audit CBP-OPR to guarantee that its officials are faithfully performing their duties. In addition, the GAO should employ a Forensic Audits and Investigative Services (FAIS) team that focuses on fraud, waste, and abuse to expose Border Patrol corruption and misconduct.⁴⁶ FAIS should undertake undercover special investigations to help identify misconduct and corruption. Also, the GAO should produce security and vulnerability assessments of CBP and Border Patrol practices to reduce the risk of corruption and misconduct.⁴⁷ The mere knowledge that FAIS is watching the CBP and the Border Patrol will boost discipline, improve performance, and reduce corruption.

Improve Data

The public should have access to clear and consistently collected data on terminations for discipline, performance, corruption, and misconduct in all federal agencies. The government should publish clear information on misconduct and corruption in CBP and all of its components at regular intervals that includes the number and nature of complaints, investigations, arrests, indictments, terminations, convictions, and all other relevant information that concerns CBP employees. The collection and reporting of these data should be centralized at one office in CBP. Furthermore, OPM should certify that all CBP employees who resign upon receiving notice of action based on performance, discipline, or misconduct are actually recorded as terminations for performance or discipline.

Strengthen Post-Hire Investigations and Polygraph Tests

This process should be identical to the five-year period reinvestigations performed on employees of the FBI, Central Intelligence Agency, Defense Information Agency, and National Security Agency, and should include all on-board CBP employees. Polygraph tests are not inherently effective at detecting liars but the tests do create stress that can expose misconduct or corruption and, in some cases, lead to confessions.⁴⁸ CBP officials testified in 2010 that they do reinvestigate employees once every five years but that budget shortfalls created a backlog of an estimated 19,000 reinvestigations by the end of that year.⁴⁹ The CBP should conduct such reinvestigations in a timely and consistent manner.

Impose a 24-Month Evaluation Period for New Border Patrol Agents

Border Patrol agents currently have a 12-month evaluation period during which they can be terminated should disciplinary, performance, or other integrity concerns arise. However, only about 6 of those 12 months cover a new Border Patrol agent in field training while the other 6 months cover classroom training.⁵⁰ New Border Patrol agents gain full civil service protections after 12 months. That period is too short for supervisors to identify potential integrity issues. The Homeland Security Advisory Committee notes that “one of the most effective anti-corruption measures is to weed out relatively new law enforcement officers before they become problems.”⁵¹ OPM has the authority to extend the evaluation period to 24 months for sensitive law enforcement and national security positions and it should do so for Border Patrol agents and other law enforcement officers in the CBP.⁵² Extending the evaluation period to 24 months before the attachment of full civil service protections allows for observation of about 18 months of fieldwork so that supervisors can better weed out troublesome agents.

Investigate Misconduct Allegations in a Timely Manner

Complex disciplinary and investigation processes at the CBP mean that allegations can languish for long periods of time before they are resolved-151.6 days from incident to decision in 2010.⁵³ The time from the incident to its resolution should be shortened through streamlined organization and the hiring of more investigators.⁵⁴ CBP employees suspected of corruption should be rotated out of critical security positions until the incident is resolved.

Increase Public Oversight

Many local police departments have civilian review boards to oversee complaints against individual officers. Border Patrol operates continuously in local communities, so those residents should have a direct say in reviewing complaints made by other residents against agents stationed in their communities. Furthermore, all Border Patrol labor contracts should be made public and scrutinized for provisions that inhibit prevention, detection, and punishment of corruption and misconduct. Last, Congress should reduce, curtail, or rescind the Border Patrol’s power to conduct checkpoint stops and conduct searches without warrants within 100 miles of any land or maritime border.⁵⁵

Table 2
Office of Personnel Management employment codes for federal law enforcement officers

Source: Office of Personnel Management, “Handbook of Occupational Groups and Families,” May 2009, https://www.opm
.gov/policy-data-oversight/classification-qualifications/classifying-general-schedule-positions/.

CONCLUSION

The termination rate of Border Patrol agents for discipline and performance is greater than for law enforcement officers at other federal law enforcement agencies. Even worse, the termination rate for discipline and performance reported in this analysis may be an underrepresentation of personnel problems at Border Patrol. A high relative termination rate could be a sign of effective internal affairs but not in the case of Border Patrol, which is inadequately overseen. If the recommendations made here are enacted, Border Patrol termination rates should rise initially before falling, as deterrence replaces detection as the primary means of reducing personnel problems. Congress should seek to remedy these serious personnel problems in the federal government’s largest law enforcement agency before hiring new agents or further lowering hiring standards.

NOTES

1. Department of Homeland Security (DHS) Office of Inspector General, “Special Report: Challenges Facing DHS in Its Attempt to Hire 15,000 Border Patrol Agents and Immigration Officers,” OIG-17-98-SR, July 27, 2017, p. 2; Stephen Dinan, “Panel Advances Polygraph Waiver for Border Patrol, Could Speed Hiring for Thousands of Agents,” Washington Times, May 17, 2017, http://www.washingtontimes.com/news/2017/may/17/panel-advances-polygraph-waiver-border-patrol-coul/; Kevin K. McAleenan,”Request for Approval: Executive Order Hiring Surge Plan,” Memorandum for the Deputy Secretary, U.S. Customs and Border Protection, February 17, 2017, p. 6.
2. Eric Katz, “Senate Panel Clears Reform to Speed Hiring of Some Border Agents,” Government Executive, May 17, 2017, http://www.govexec.com/management/2017/05/senate-panel-clears-reform-onboard-some-border-agents-more-quickly/137930/.
3. Andrew Becker, “Crossing the Line: Corruption at the Border,” The Center for Investigative Reporting, August 14, 2014, http://bordercorruption.apps.cironline.org/.
4. U.S. Government Accountability Office (GAO), “Border Security: Additional Actions Needed to Strengthen CBP Efforts to Mitigate Risk of Employee Corruption and Misconduct,” GAO-13-59, December 2012, p. 9. CBP-OFO officers enforce immigration and customs rules at ports of entry. Border Patrol enforces those rules between ports of entry.
5. GAO, “Border Security,” pp. 12-13; Charles K. Edwards, acting inspector general, U.S. Department of Homeland Security, Testimony before the Subcommittee on Government Organization, Efficiency, and Financial Management, House Committee on Oversight and Government Reform, 112th Cong., 2nd sess., August 1, 2012, https://www.oig.dhs.gov/assets/TM/OIGtm_CKE_080112.pdf.
6. Daniel E. Martinez, Guillermo Cantor, and Walter A. Ewing, “No Action Taken: Lack of CBP Accountability in Responding to Complaints of Abuse,” Special Report, American Immigration Council, May 2014, p. 4.
7. Guillermo Cantor and Walter A. Ewing, “Still No Action Taken: Complaints against Border Patrol Agents Continue to Go Unanswered,” Special Report, American Immigration Council, August 2017, p. 7.
8. James Lyall, Jane Yakowitz Bambauer, and Derek E, Bambauer, “Record of Abuse: Lawlessness and Impunity in Border Patrol’s Interior Enforcement Operations,” American Civil Liberties Union of Arizona, October 2015, p. 5.
9. Lana Shadwick, “New Data Challenge Left’s ‘Lawless’ Border Patrol Conspiracy Theory,” Breit-
   bart, December 29, 2016, http://www.breitbart.com/texas/2016/12/29/new-data-challenge-lefts-lawless-border-patrol-conspiracy-theory/.
10. Edwards, Testimony before the Subcommittee on Government Organization, Efficiency, and Financial Management.
11. GAO, “Border Security,” p. 10.
12. A “separation” is when a federal worker’s employment with the government ends. OPM records a cause for each separation. Such causes include retirement, resignation, termination for discipline or performance, and others. For simplicity’s sake, this analysis uses the word “termination” to mean a separation for discipline or performance.
13. Office of Personnel Management, “FedScope Separations Cube, Fiscal Year 2015,” p. 14.
14. “Large” is defined as an agency that had at least 5,000 law enforcement officers at any time during 2015.
15. Author’s calculations, based on data in Office of Personnel Management, “FedScope Separations Cube, Fiscal Years 2006-2016”; and Office of Personnel Management, “FedScope Employment Cube, Fiscal Years 2006-2016.”
16. Author’s calculations, based on data in Shadwick, “New Data Challenge Left’s ‘Lawless’ Border Patrol Conspiracy Theory.”
17. Office of Personnel Management, “FedScope Separations Cube, Fiscal Year 2015,” p. 14.
18. Author’s calculations, based on data in Office of Human Resources Management, “CBP Discipline Overview: Fiscal Year 2015,” May 4, 2017, pp. 2, 5.
19. The hiring surge for Border Patrol agents after 9/11 required the lowering of standards and could be responsible for many corruption and misconduct problems since then. However, there is little compelling evidence that more recent hires are actually more likely to be convicted of misconduct or corruption and much evidence that the Border Patrol has always been afflicted with high rates of employee misconduct. Homeland Security Studies and Analysis Institute, “U.S. Customs and Border Protection (CBP) Workforce Integrity Study,” December 15, 2011, p. 28; Stephen Engelberg and Deborah Sontag, “Blind Eye: How the Immigration System Handles Discipline-A Special Report. Behind One Agency’s Walls: Misbehaving and Moving Up,” New York Times, December 21, 1994, http://www.nytimes.com/1994/12/21/us/blind-eye-immigration-system-handles-discipline-special-report-behind-one-agency.html?pagewanted=all&pagewanted=print.
20. CBP-OPR was known as CBP Internal Affairs until 2016. For simplicity’s sake, this analysis refers to it as CBP-OPR even when discussing events that occurred when it was known as CBP Internal Affairs.
21. Homeland Security Advisory Council (HSAC), “Interim Report of the CBP Integrity Advisory Panel,” June 29, 2015, p. 7; Homeland Security Studies and Analysis Institute, “U.S. Customs and Border Protection (CBP) Workforce Integrity Study,” p. 15.
22. HSAC, “Interim Report,” p. 10; Garrett M. Graff, “The Green Monster,” Politico Magazine, November/December 2014, http://www.politico.com/magazine/story/2014/10/border-patrol-the-green-monster-112220?paginate=false; Mark Binelli, “10 Shots across the Border,” New York Times Magazine, March 3, 2016, https://www.nytimes.com/2016/03/06/magazine/10-shots-across-the-border.html.
23. Binelli, “10 Shots across the Border.”
24. DHS Office of Inspector General, “CBP Use of Force Training and Actions to Address Use of Force Incidents (Redacted),” OIG-13-114 (Revised), September 2013, p. 6.
25. Ibid., pp. 5-6.
26. Graff, “The Green Monster”; Binelli, “10 Shots across the Border.”
27. Ibid.
28. Office for Civil Rights and Civil Liberties, “Quarterly Report to Congress, Third and Fourth Quarters, FY 2014,” Department of Homeland Security, February 23, 2014, p. 4.
29. GAO, “Border Security”; and “Former Special Agent in Charge of the Department of Homeland Security’s Office of Inspector General Sentenced to More Than Three Years in Prison,” Department of Justice, Office of Public Affairs, December 15, 2014, https://www.justice.gov/opa/pr/former-special-agent-charge-department-homeland-securitys-office-inspector-general-sentenced.
30. Andrew Becker, “2010 Border Patrol Fatal Shooting Comes under Renewed Scrutiny,” Huffington Post, October 4, 2014, http://www.huffingtonpost.com/andrew-becker/2010-border-patrol-fatal-_b_5643247.html.
31. Jeremy Raff, “The Border Patrol’s Corruption Problem,” Atlantic, May 5, 2017, https://www.theatlantic.com/politics/archive/2017/05/not-one-bad-apple/525327/.
32. Joshua Breisblatt, “Spike in Corruption Followed Last Hiring Surge at CBP and ICE,” American Immigration Council, April 25, 2017, http://immigrationimpact.com/2017/04/25/spike-corruption-followed-last-hiring-surge-cbp-ice/; “U.S. Border Patrol Fiscal Year Staffing Statistics (FY 1992-FY 2016),” U.S. Customs and Border Protection, January 3, 2017, https://www.cbp.gov/document/stats/us-border-patrol-fiscal-year-staffing-statistics-fy-1992-fy-2016.
33. GAO, “Border Security,” p. 2; Alan D. Bersin, commissioner, U.S. Customs and Border Protection, U.S. Department of Homeland Security, Testimony before the Ad Hoc Subcommittee on Disaster Recovery and Intergovernmental Affairs of the Senate Homeland Security and Governmental Affairs Committee, 112th Cong., 1st sess., June 9, 2011, https://www.hsgac.senate.gov/subcommittees/disaster-recovery-and-intergovernmental-affairs/hearings/border-corruption-assessing-customs-and-border-protection-and-the-department-of-homeland-security-inspector-generals-office-collaboration-in-the-fight-to-prevent-corruption; and Chad C. Haddal, “Border Security: The Role of the U.S. Border Patrol,” CRS Report for Congress no. 7-5700, Congressional Research Service, August 11, 2010, p. 2.
34. HSAC, “Interim Report,” pp. 6-7.
35. HSAC, “Interim Report,” pp. 6-7, 9; and DHS Office of Inspector General, “CBP Needs Better Data to Justify Its Criminal Investigator Staffing,” OIG-16-75, April 29, 2016, p. 1.
36. DHS Office of Inspector General, “Investigation of DHS Employee Corruption Cases,” Fiscal Year 2015 Report to Congress, November 23, 2015, p. 13.
37. DHS Office of Inspector General, “Investigation of DHS Employee Corruption Cases,” Fiscal Year 2015 Report to Congress, November 23, 2015, p. 13; HSAC, “Interim Report,” p. 8n11; and Homeland Security Studies and Analysis Institute, “U.S. Customs and Border Protection (CBP) Workforce Integrity Study,” p. 17n42.
38. Homeland Security Advisory Council (HSAC), “Final Report of the CBP Integrity Advisory Panel,” March 15, 2016, p. 11.
39. Lori Johnson, “Preserving the Excessive Force Doctrine at Our Nation’s Borders,” Holy Cross Journal of Law and Public Policy 14, no. 89 (2010).
40. HSAC, “Final Report,” p. 11.
41. Ibid., pp. 11-12.
42. Department of Homeland Security, “Congressional Budget Justification,” FY2018, vol. I, p. CBP-O&S-10.
43. Homeland Security Studies and Analysis Institute, “U.S. Customs and Border Protection (CBP) Workforce Integrity Study,” pp. 14-15.
44. HSAC, “Final Report,” pp. 15-18.
45. Graff, “The Green Monster”; Binelli, “10 Shots across the Border”; and Full Measure Staff, “Crossing the Line,” Full Measure News, November 20, 2016, http://fullmeasure.news/news/cover-story/crossing-the-line.
46. Homeland Security Studies and Analysis Institute, “U.S. Customs and Border Protection (CBP) Workforce Integrity Study,” pp. 8-9; Jorge A. Vargas, “U.S. Border Patrol Abuses, Undocumented Mexican Workers, and International Human Rights,” San Diego International Law Journal 2, no. 1 (2001); and Andrew Becker, “Border Agency Report Reveals Internal Struggles with Corruption,” The Center for Investigative Reporting, January 29, 2013, https://www.revealnews.org/article/border-agency-report-reveals-internal-struggles-with-corruption.
47. Government Accountability Office, “GAO’s Forensic Audits and Investigative Service Team,” GAO WatchBlog, April 24, 2014, https://blog.gao.gov/2014/04/24/introduction-to-gaos-forensic-audits-and-investigative-service-team/.
48. Ibid.
49. HSAC, “Final Report,” p. 19.
50. Committee on Homeland Security and Governmental Affairs, Anti-Border Corruption Act of 2010, S. Rep. No. 111-338 (2010).
51. Richard M. Stana, director, Homeland Security and Justice Issues, Testimony before the Subcommittee on Management, Investigations, and Oversight of the House of Representatives Homeland Security Committee, 110th Cong., 1st sess., June 19, 2007, http://www.gao.gov/new.items/d07997t.pdf.
52. HSAC, “Final Report,” p. 17.
53. Ibid.
54. Homeland Security Studies and Analysis Institute, “U.S. Customs and Border Protection (CBP) Workforce Integrity Study,” pp. 10-11, 12.
55. Ibid., pp. 10-11, 72.
56. Jesus A. Osete, “The Praetorians: An Analysis of U.S. Border Patrol Checkpoints Following Martinez-Fuerte,” Washington University LawReview 93, no. 3 (2016).

Simon Lester and Huan Zhu

On November 8, President Trump will visit China for the first time. In conjunction with the trip, Secretary of Commerce Wilbur Ross is leading a trade mission designed to “promote U.S. exports” and “address trade policy issues with high-level Chinese officials.”¹

This visit could have an important impact on the U.S.-China trade relationship over the rest of President Trump’s time in office. Past efforts by the Trump administration to deal with trade tensions have mainly focused on smaller trade irritants. Trump’s visit to China is an opportunity to begin to address many of the larger U.S.-China trade conflicts.

Just prior to President Trump’s meeting with China’s President Xi in April 2017, which led to a “100-Day Action Plan” on trade under the framework of the U.S.-China Comprehensive Economic Dialogue, we published a Free Trade Bulletin making the case for a comprehensive Free Trade Agreement (FTA) as a way to address U.S.-China trade issues.²

We recognize that there is little political support for such an initiative at the moment. However, the alternative approaches that the Trump administration has tried so far are all insufficient. Unilateral threats from the United States are unlikely to accomplish much because domestic political constraints will prevent China from granting concessions for which it gets nothing in exchange. And the dialogue that led to the action plan has not produced significant results.

In our view, the failure of the action plan supports our earlier argument that a comprehensive FTA is the best approach to achieving a broad market opening in China. A number of the more difficult trade issues — intellectual property protection and technology transfer requirements, for example — require detailed rules and effective oversight of implementation. Only a binding set of rules, with an enforcement mechanism, can create the predictable and stable framework that U.S. businesses need.

In this paper, we explore in depth one particular issue covered by the action plan — access to the Chinese beef market — and use it to illustrate the need for an FTA. Removing the Chinese ban on U.S. beef was touted as a major achievement of the plan, but the reality is that there are many remaining obstacles facing U.S. beef exports. We describe below the high tariffs and regulatory barriers that remain and show that they can be addressed most effectively through a comprehensive FTA. If the United States really wants to address Chinese tariffs, nontariff barriers to trade in goods and services, and investment restrictions, it needs to push for the same kind of comprehensive FTA it has negotiated with other key trading partners. The upcoming visit by President Trump and Secretary Ross to China is the perfect opportunity to begin this process.

THE 100-DAY ACTION PLAN
The 100-Day Action Plan was instituted in April 2017, and in May treasury secretary Steve Mnuchin, commerce secretary Wilbur Ross, and Chinese vice premier Wang Yang announced an agreement on the initial list of items to be covered by the plan. President Trump touted the agreement by tweeting, “China just agreed that the U.S. will be allowed to sell beef, and other major products, into China once again. It is REAL news!” Secretary Ross called the deal “a new high” in the U.S.-China relationship, “pretty much a Herculean accomplishment,” and “more than has been done in the whole history of U.S.-China relations on trade.”³

The plan makes progress in a few areas, but the above statements exaggerate its impact. The plan covers 10 items, which address particular concerns of either the United States or China. Of the 10 items, 5 were concerns raised by the United States and 5 by China, ranging from trade in goods (beef, poultry, biotechnology products, liquid natural gas exports), to financial services, to symbolic gestures (America’s recognition of China’s “One Belt, One Road Initiative”). All the issues described in the plan have been addressed to some extent, but the plan’s obligations were so vague and general that nominal fulfillment was easy and the actual impact on the market is difficult to assess.⁴

And the attempt to discuss larger and deeper issues at the follow-up meeting in July yielded no more than a phytosanitary protocol on trade in rice. The item on the list that seemed the most promising was opening China’s market to U.S. beef. This development was touted by Secretary Ross as a great win, as he celebrated “a $2.5 billion market … being opened up for U.S. beef.”⁵

China fulfilled its commitment by signing a protocol with the U.S. Department of Agriculture, and the first shipment of beef was sent to China in June.⁶

The reality of U.S. beef exports to China is complicated, however, and the market may not be as open as some people hope. In the next section, we offer some background on the Chinese beef market, and the barriers U.S. producers still face there, in order to illustrate the limited impact of these kinds of narrow efforts at addressing U.S.-China trade conflicts.

CHINA’S BEEF MARKET
Traditionally, China has not been a big consumer of beef — pork and chicken were more common choices. However, due in part to strong economic growth, China’s beef consumption has grown in recent decades; beef consumption has risen from 0.652 kilograms per capita in 1990 to 3.817 kilograms in 2015.⁷

Over time, domestic production could no longer meet demand, and beef imports began to increase. Table 1 shows beef imports into China since 1998, by country. As shown in the table, China imported just $16 million worth of beef from all trading partners in 1998. That number jumped to $61 million in 2003, but imports declined in 2004 after an outbreak of bovine spongiform encephalopathy (BSE), also known as mad cow disease, in 2003. Imports increased again in 2009 and have continued to grow. In 2016, China’s total beef imports exceeded $2.5 billion.

Figure 1 shows the share of imports into the Chinese market held by the major beef-exporting countries since 1998. U.S. exports dominated the market at the beginning of the period but almost completely disappeared after 2004 because of a Chinese ban on U.S. beef after the BSE outbreak. Since then, other countries have controlled the import market.

Figure 2 shows the early U.S. dominance of the Chinese import market (which was relatively small in terms of value at the time) and its quick decline after the BSE outbreak. Figure 3 shows the recent surge of beef imports into China from other countries as Chinese demand for beef increased.

What these figures show is the United States losing its market share over the years and other countries stepping in to take advantage of the increased Chinese demand. In 2003, U.S. beef had 75 percent of the Chinese import market (Australia was a distant second, at around 13 percent). However, as noted, the United States lost this market dominance when China banned U.S. beef due to the BSE outbreak in 2003. (Many other countries, including Australia, Japan, Russia, and South Korea, also banned or restricted some or all U.S. beef imports.⁸) The BSE outbreak had a more long-term impact on U.S. beef exports to China than it did on exports to other markets. While many countries halted U.S. beef imports at the start of the outbreak, China was particularly slow to reopen its market to U.S. beef.⁹ Instead, it turned to other major beef producers, including Australia, Brazil, New Zealand, and Uruguay, and these countries became China’s main suppliers.

By 2016, China’s largest import source for beef was Brazil, which quickly rose to being the number-one exporter to China (a 29 percent market share for imports) after China lifted a three-year ban on Brazilian beef in 2015.¹⁰ (This situation is likely to change due to a Brazilian beef scandal in March 2017.) Following Brazil are Australia and Uruguay, each holding 22 percent of the beef market; New Zealand and Argentina hold 13 percent and 9 percent, respectively; and Canada follows with 3 percent.

THE LIMITED IMPACT OF THE BEEF DEAL
There is little doubt the U.S.-China beef deal will boost U.S. exports to some extent. The U.S. has gained market access for all beef products, including chilled and frozen beef products, as well as scalded, heat-treated, and smoked beef. Many nations have more limited access. For instance, for various reasons Uruguay can only export frozen beef to China; Canada and Brazil can only export frozen deboned beef; and Argentina can only export cooked beef meat and offal and frozen deboned beef.¹¹

Nevertheless, even with the ban lifted, it will take some time for the U.S.-China beef agreement to have an impact, and the effect on U.S. exports may be smaller than some have predicted. One reason is that Chinese consumers have been buying U.S. beef through a gray market despite the official ban, using Hong Kong as a transshipment point. The new legal U.S. beef exports to China may simply substitute for some of the current sales to Hong Kong.¹²

But more important, even with China’s market now open, U.S. beef is at a competitive disadvantage compared to beef from other countries. Because there is no FTA between the United States and China, Chinese beef tariffs are applied to U.S. products at the World Trade Organization’s mostfavored-nation rate. As a result, American beef faces a 12 percent to 25 percent tariff rate (depending on the specific product).¹³ In comparison, Australian beef currently faces a 4.8 percent to 17.5 percent tariff rate as a result of the China-Australia FTA. That tariff will be phased out sometime between 2019 and 2024 (depending on the product in question).¹⁴ New Zealand exporters already face zero tariffs because of the China-New Zealand FTA.¹⁵

In addition, Uruguay began negotiations on an FTA with China in 2016, and there is some potential for a broader Mercosur-China trade negotiation.¹⁶ Canada has also announced that it will launch an FTA negotiation with China.¹⁷ These FTAs, once concluded and implemented, will make it even more difficult for U.S. beef to compete with products from its main competitors.

U.S. beef exporters face nontariff obstacles as well, including restrictions on hormone-treated beef products. Some growth hormones are widely used in American feedlots.¹⁸ However, China adopted a regulation in 2002 that banned the synthetic hormones that are legal in the United States and also tightened the rules for beef treated with natural hormones.¹⁹ These restrictions limit the amount of U.S. beef eligible to be sold in China. (The U.S. Meat Export Federation estimates that roughly 3 percent of current production would meet China’s requirements.)²⁰ In contrast, South American countries do not use hormone treatments for their cattle.²¹

Finally, in order to be sold in China, U.S. beef must meet certain traceability requirements: beef products must be uniquely identified and controlled, and cattle must be traceable at each stage of production that has occurred within the United States.²² Right now, only 15 percent of U.S. producers meet these traceability requirements.²³ In comparison, Australia, New Zealand, Uruguay, and Argentina all have mandatory traceability systems. Brazil does not have a nationwide traceability system but makes traceability mandatory for beef-export production.²⁴

In sum, the U.S. beef industry will see some increased export sales to China as a result of the 100-Day Action Plan. But it will also face an uphill battle for market share due to the remaining barriers.

NEGOTIATING AN FTA
After the 100-Day Action Plan, the United States and China were supposed to start the negotiation of a one-year plan during the first Comprehensive Economic Dialogue on July 19, 2017. Unfortunately, that meeting did not yield any breakthroughs. The visit by President Trump and Secretary Ross to China in November will provide another opportunity for progress.

While it is helpful to address smaller lingering issues, such as those in the 100-Day Action Plan, putting these unconnected issues in simple and short declarations within a brief, unenforceable document does not constitute a broader trade strategy. Instead, the United States should consider negotiating a deep and comprehensive FTA with China.

An FTA negotiation will be an opportunity to address Chinese tariffs on beef and other products and to take on nontariff barriers as well. An FTA provides a stable and predictable legal framework, including an enforcement mechanism. It also offers a forum for future discussion of trade issues, including sensitive conversations about regulatory differences. For example, in the FTA negotiations (or subsequent discussions after completion of an FTA), the United States could try to convince China to drop its ban on hormone-treated beef.

Aside from beef, an FTA negotiation would create a starting point for the United States to bring China’s laws and regulatory practices more in line with international norms on other issues, such as intellectual property protection, stateowned enterprises, technology transfer, cybersecurity, and cross-border data transfers. Intellectual property and technology transfer have been particular areas of concern, and in September, the Office of the U.S. Trade Representative initiated an investigation under Section 301 of the Trade Act of 1974 into these issues. There is no doubt that negotiations here would be difficult. However, just sitting down to talk in a serious manner could help each side better understand the other’s perspective. And if an agreement could be reached in this area, it would pave the way for more trade and investment and lead to greatly improved relations between the two countries.

CONCLUSION
While the 100-Day Action Plan did constitute progress, China and the United States appear to be at an impasse again on trade, making the next steps unclear. The Trump administration needs to develop a more comprehensive approach to trade liberalization with China in order to accomplish something more substantial. The beef deal offers an illustration of the limited market impact of small deals. More fundamental and systemic issues, such as tariffs and the wide range of nontariff barriers, play a large role in international trade and cannot be resolved with quick meetings and dialogues.

In beef and other sectors, if the United States wants to achieve liberalization of the Chinese market, it needs to consider deeper engagement, and it must be willing to negotiate. An FTA negotiation presents an opportunity for the two nations to sit down and discuss tariffs and nontariff issues, exchange views, and make compromises. Some countries have already done this with China, and more are following their lead. When the rest of the world is negotiating trade agreements, American businesses will be better off if the United States is in the game rather than sitting on the sidelines.

NOTES

1. Department of Commerce Trade Mission to China, Export. gov, https://www.export.gov/Chinamission2017.

2. Simon Lester and Huan Zhu, “It’s Time to Negotiate a New Economic Relationship with China,” Cato Institute Free Trade Bulletin no. 70, April 4, 2017, https://www.cato.org/publications/free-tradebulletin/its-time-negotiate-new-economic-relationship-china.

3. Damian Paletta and Simon Denyer, “Trump, China Reach Preliminary Trade Agreements on Beef, Poultry,” Washington Post, May 11, 2017, https://www.washingtonpost.com/news/wonk/wp/2017/05/11/trump-china-reach-preliminary-trade-agreements-on-beef-poultry/.

4. Aaron Kruse, “100-Day Deal Deadline Scorecard,” AmCham China, July 13, 2017, https://www.amchamchina.org/news/100-day-deal-deadline-scorecard.

5. Paletta and Denyer, “Trump, China Reach Preliminary Trade Agreements on Beef, Poultry.”

6. “China Takes Delivery of First Shipments of American Beef in 14 Years,” Reuters, June 23, 2017, https://www.reuters.com/article/us-china-usa-beef/china-takes-delivery-of-first-shipments-ofamerican-beef-in-14-years-idUSKBN19E15G.

7. Data are derived from the Organisation for Economic Cooperation and Development Database, “Meat Consumption,” https://data.oecd.org/agroutput/meat-consumption.htm.

8. “Countries Move to Ban U.S. Beef,” CNN, December 23, 2006, http://www.cnn.com/2003/BUSINESS/12/23/japan.madcow.reax/; “US Beef Imports Banned in BSE Alert,” Daily Mail, http://www.dailymail.co.uk/news/article-204628/US-beef-imports-bannedBSE-alert.html.

9. Mexico allowed these imports within the year; beef exports to Japan and South Korea resumed in 2006 and 2007, respectively, and Brazil, Israel, and Saudi Arabia lifted their beef bans in 2016. See United States Department of Agriculture, “Trade,” April 26, 2017, https://www.ers.usda.gov/topics/animal-products/cattlebeef/trade/; United States Trade Representative, “USTR Success Stories: Opening Markets for U.S. Agricultural Exports,” March, 2017, https://ustr.gov/about-us/policy-offices/press-office/factsheets/2017/march/ustr-success-stories-opening-markets-us.

10. “China-People’s Republic of, Livestock and Products SemiAnnual, Chinese Consumers Substitute Burgers for Bacon in 2017,” U.S. Department of Agriculture, February 27, 2017, https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Livestock%20and%20Products%20Semi-annual_Beijing_China%20-%20Peoples%20Republic%20of_2-27-2017.pdf.

11. “List of Countries or Regions that Meet the Requirements of the Assessment Review,” General Administration of Quality Supervision, Inspection, and Quarantine of the People’s Republic of China, updated August 23, 2017, http://jckspaqj.aqsiq.gov.cn/xz/spxz/201303/t20130329_349307.htm.

12. Tom Hancock, “Trade Deal Whets China’s Appetite for US Beef,” Financial Times, May 31, 2017, https://www.ft.com/content/acd521ae-404d-11e7-9d56-25f963e998b2.

13. “Duties by Country 2017,” U.S. Meat Export Federation, https://www.usmef.org/downloads/Duties-by-Country-2017.pdf.

14. Australian Department of Foreign Affairs and Trade, China-Australia Free Trade Agreement, http://dfat.gov.au/trade/agreements/chafta/official-documents/pages/official-documents.aspx.

15. New Zealand Ministry of Foreign Affairs & Trade, New Zealand-China FTA Agreement, https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-force/nz-chinafree-trade-agreement/text-of-the-new-zealand-china-fta-agreement/.

16. “Uruguay Seeks to Advance FTA Talks with China,” China Daily, February 3, 2017, http://www.chinadaily.com.cn/business/2017-02/03/content_28092515.htm.

17. Marie-Danielle Smith, “Free Trade with China to Be Decided This Fall,” National Post, September 7, 2017, https://www.pressreader.com/canada/national-post-nationaledition/20170907/281642485324206.

18. The FDA allows two types of synthetic hormones, trenbolone acetate and zeranol, as well as the naturally occurring hormones estradiol, progesterone, and testosterone, to be used in cattle. See U.S. Food & Drug Administration, “Steroid Hormone Implants Used for Growth in Food-Producing Animals,” https://www.fda.gov/animalveterinary/safetyhealth/productsafetyinformation/ucm055436.htm.

19. “Veterinary Drug Maximum Residue Limits in Food of Animal Origin,” China Department of Agriculture, no. 235 Notice, December 24, 2002, http://www.lnciq.gov.cn/nsjg/sjch/ywcs/201202/P020120202420005927252.doc.

20. The information is from personal email exchanges between the authors and analysts with the U.S. Meat Export Federation, based on USMEF trade hearings and various industry estimates.

21. Michael J. McConnell and Kenneth Mathews, “Global Market Opportunities Drive Beef Production Decisions in Argentina and Uruguay,” April 1, 2008, U.S. Department of Agriculture Economic Research Service, https://www.ers.usda.gov/amber-waves/2008/april/global-market-opportunities-drive-beef-productiondecisions-in-argentina-and-uruguay/; “Growth-promoting implants, fed antibiotics and beta-agonists are not being embraced in South America as a result of widespread consumer concern.” Jason Ahola, “What U.S. Should Know about South American Beef Production,” Progressive Cattleman, February 24, 2014, http://www.progressivecattle.com/topics/management/6095-what-usshould-know-about-south-american-beef-production.

22. Cattle born in the United States must be identified before leaving the place of birth. If imported from Canada or Mexico, they must be traceable to the first place of residence. If imported from Canada or Mexico directly for slaughter, they must be traceable to the port of entry to the United States. “Export Verification (EV) Program: Specified Product Requirements for Bovine — People’s Republic of China,” U.S. Department of Agriculture, https://www.ams.usda.gov/sites/default/files/media/QAD1030AAEVProgramforthePeoplesRepublicofChina.pdf.

23. Megan Durisin and Jeff Wilson, “U.S. Beef Exports to China Closer to Restarting,” Bloomberg, June 12, 2017, https://www.bloomberg.com/news/articles/2017-06-12/u-s-beef-exports-tochina-closer-to-restart-as-rules-published; “Economics and Trade Bulletin, Highlights of This Month’s Edition,” U.S.-China Economic and Security Review Commission, June 2, 2017, https://www.uscc.gov/sites/default/files/trade_bulletins/June%202017%20Trade%20Bulletin.pdf.

24. “Beef Traceability: A Look at Programs around the World,” Cattle Business Weekly, September 21, 2016, https://cattlebusinessweekly.com/Content/Headlines/-Headlines/Article/Beef-TraceabilityA-look-at-programs-around-the-world/1/1/8350.

Chris Edwards and Vanessa Brown Calder

The federal government subsidizes housing through numerous tax and spending programs. One of the more inefficient programs is the Low Income Housing Tax Credit (LIHTC). The program provides $9 billion a year in tax credits to support housing construction. The federal government distributes the credits to the states, which in turn award them to developers to cover part of the costs of constructing apartment buildings and other projects. In return, developers must cap rents for the units they set aside for low-income tenants.

The benefits of the LIHTC are supposed to flow through to tenants in the form of lower rents, but studies suggest that investors, developers, and financial companies gain most of the benefits. The program has complex administration, is prone to abuse, and produces costly low-income housing.

The Trump administration and Republicans in Congress are considering major tax reforms aimed at reducing tax rates and ending unjustified tax breaks. They should consider repealing the LIHTC. It complicates the tax code and is a poorly targeted solution to housing affordability problems.

Instead of federal subsidies, a better way to reduce housing costs would be through state and local policy reforms. The states should reduce the burden of building and zoning regulations to increase the supply of housing, including multifamily housing for low-income tenants.

How the LIHTC Works

Congress enacted the Low-Income Housing Tax Credit as part of the Tax Reform Act of 1986. That law aimed at simplifying the tax code and eliminating special breaks, but creating the LIHTC did the opposite.¹

Under the program, the federal government allots $9 billion a year in tax credits to state housing agencies based on state populations.² Then the agencies distribute credits to selected housing developers based on a complex and bureaucratic process. Developers who receive credits nearly always sell them to large banks and other investors, often using syndication firms as intermediaries. This provides cash to developers for construction and gives investors equity in the projects, as well as credits to use on their tax returns over a 10-year period.

The LIHTC program includes two credits: a 4 percent credit for housing projects that use tax-exempt bonds, and a 9 percent credit for projects that do not use tax-exempt bonds. The former projects are generally renovations, while the latter are generally new construction. About 70 percent of LIHTC projects use the 9 percent credit.³

The 4 percent credit provides a 30 percent subsidy, while the 9 percent credit provides a 70 percent subsidy.⁴ Consider a housing project that costs $10 million to build and receives the 9 percent credit. Investors would get tax credits of $900,000 a year for 10 years, totaling $9 million. Those credits would be worth about $7 million on a present-value basis, or about 70 percent of construction costs.⁵ The government essentially covers 70 percent of the costs of the project by allowing the investors to reduce their income taxes by a present value of $7 million.

About 95 percent of the credits are taken on corporate income tax returns, and 5 percent are taken on individual returns.⁶ Thus, the LIHTC is a special-interest tax break mainly for corporations.

Complex and Costly Process

The Congressional Research Service says that the “process of allocating, awarding, and then claiming the LIHTC is complex and lengthy.”⁷ The credit is so complex that it has spawned state bureaucracies and an industry of law and accounting firms to administer it. It is so complex that the Novogradac accounting firm’s annual guide to the credit spans more than 1,400 pages.⁸ The firm also publishes an 80-page monthly Journal of Tax Credits that focuses on the LIHTC and a few other credits.

Let’s look more closely at the LIHTC process. The first step is for state housing agencies to prepare annual plans for using their credits, called Qualified Allocation Plans (QAPs), which they submit to the federal government. QAPs can run more than 80 pages of dense rules that micromanage LIHTC projects regarding tenant mix, project locations, environmental and historic preservation features, and other criteria. Virginia’s QAP specifies such items as “ceramic floor tiling required for bathrooms with roll-in showers” and “composite material required at some portions of exterior doors.”⁹ It also includes detailed rules on how community rooms in LIHTC buildings may be used.

The second step is for developers to submit proposals to the states to receive credits that conform to both state QAPs and federal tax rules. Developers must set aside a certain share of housing units that are rent-capped and are for tenants below certain income levels. Income and rent limits are calculated using formulas that vary by specific location, family size, and other parameters.

Developers must meet either a 20-50 test or a 40-60 test. Under the first test, at least 20 percent of units must be rent-capped and have tenants with incomes below 50 percent of the area’s median. Under the second test, at least 40 percent of units must be rent-capped and have tenants with income below 60 percent of the area’s median.¹⁰

The third step is for developers to finance and construct LIHTC projects. These processes are more costly than for market-based housing projects. The financial structures of LIHTC deals are usually more complex than for market-based deals, and they often receive subsidies from numerous federal and state programs, each of which has different regulations. Fifteen states have their own LIHTCs on top of the federal credits.¹¹

Experts agree that these LIHTC complexities increase project costs and delays.¹² A study on the costs of affordable housing projects by the state of Washington found, for example, that “it generally takes twice as long to assemble the financing as market-rate projects, and contributes to increased legal and other transaction costs.”¹³ A Government Accountability Office (GAO) study found that the syndication process consumes 10 to 27 percent of the equity on LIHTC projects.¹⁴

Smart Growth Seattle noted that “affordable housing projects have many unique costs, and often cost more because of financing, construction, and labor requirements. Affordable housing projects can be more expensive than market-rate due to some of these unique costs.”¹⁵ The head of that group, who is an expert on affordable housing, estimates that the per unit costs of LIHTC projects “can be more than double that of market rate housing.”¹⁶ He points to a 112-unit LIHTC complex in Seattle completed last year that cost $45 million, or $400,000 per unit.

Minnesota is a rare state that is trying to tackle the cost-bloat problem in LIHTC housing. It models the elements of proposed projects to find the excesses. Recent LIHTC projects in the Twin Cities cost $253,136 per unit, which was 29 percent more than for non-LIHTC projects in the cities.¹⁷ Both the “hard” costs (construction) and the “soft” costs (financing, services, etc.) of projects are higher in LIHTC projects, according to the Minnesota data.

One of the problems in LIHTC development is that “many affordable housing deals are financed on a ‘cost-plus’ basis … which reduces the direct incentive to lower costs.”¹⁸ Instead, there are incentives to increase costs because LIHTC allocations to developers are based on estimated costs. Developers have an incentive to inflate their estimates, and then as projects proceed there is little reason to revise costs downward.¹⁹ After all, the higher the reported costs, the more tax credits are received.

The study by the state of Washington found that “because of the way the federal program is structured, once a federal Low-Income Housing Tax Credit allocation and investor has been secured, there are limited incentives to reduce development costs because doing so would mean not using the full appropriated federal Low-Income Housing Tax Credits issued for the project.”²⁰

A statistical analysis by economist Michael Eriksen suggests that LIHTC construction costs are about 20 percent more per square foot than for medium-quality market-based projects.²¹ He thinks that developers using tax credits “substitute away … from land acquisition and future maintenance expenditures” in favor of higher construction costs.²²

Governments are also a source of high costs. State QAP requirements raise LIHTC construction costs and “may prohibit innovative building techniques.”²³ Local design requirements may also raise costs. Another issue is that state agencies overseeing LIHTC projects have some discretion over the cost items that are eligible for tax credits, and those agencies have little incentive to reduce costs.²⁴ To state officials, these are federal subsidies that do not burden state budgets.

The fourth step in the LIHTC process comes after housing projects are completed. Building owners must generally adhere to rent caps and tenant-income limits for 30 years. Owners are required to perform extensive recordkeeping on the residents of each unit for such items as income, assets, family composition, and other characteristics. The LIHTC requires annual income recertification of tenants for some types of projects.²⁵

Failure of project owners to comply with program regulations during the first 15 years can result in the recapture or retraction of tax-credit benefits, while failure during the second 15 years can result in legal action by state governments.²⁶

The extensive construction and occupancy rules and regulations of LIHTC properties require substantial administrative, auditing, and compliance efforts. State compliance manuals for LIHTC building owners can run more than 100 pages.²⁷

State governments have bureaucracies dedicated to the LIHTC. California spends $8.2 million a year on its LIHTC administration.²⁸ Kansas spends $1.5 million.²⁹ Oregon spends $1.7 million.³⁰ Based on budget data from a sample of states, we estimate that LIHTC administration costs state governments more than $100 million a year.

The Internal Revenue Service (IRS) also has a complex job administering the credit. The agency’s guide for examiners of LIHTC projects is 350 pages long.³¹

The largest administrative costs for the LIHTC are likely in the private sector-for building owners and for all the accountants, lawyers, lobbyists, and consultants that specialize in the LIHTC. Consider the Novogradac firm. The LIHTC has fueled its growth to become the 30th-largest accounting firm in the nation, with more than 500 employees.³²

For the U.S. economy, the excessive construction and administration costs of LIHTC projects are deadweight losses. The program is aimed at helping needy people, but the salaries of the lawyers, accountants, and administrators handling LIHTC activities are overhead costs for that help.

Benefits to Investors and Middlemen

State housing agencies award the federal tax credits to selected developers, who then nearly always sell them to investors either directly or through syndication. Investors receive equity in the projects and can use the tax credits for 10 years. Syndication diversifies risks for investors across multiple projects and provides opportunities for smaller investors.³³

As noted, the 4 and 9 percent credits offset about 30 and 70 percent of project costs, respectively. However, the LIHTC can be boosted in value by 30 percent for projects in areas that are distressed or particularly costly. So on some projects, LIHTC developers can receive a subsidy equal in present-value terms to up to 91 percent of construction costs.³⁴

State housing agencies have some discretion in choosing the projects that receive the 30 percent boost. That is a problem: GAO data suggest that numerous states are abusing the boost by providing it to too many projects.³⁵ To state officials, the 30 percent boost affects the federal budget, not their state budget, so they try to maximize its use.

Note that investors receive benefits from LIHTC deals other than the tax credits. The projects typically generate operating losses, which flow through to investors’ tax returns and offset their taxes on other income. Also, investors may gain on the disposition on their ownership shares, usually after year 15.

Major banks are the largest investors in LIHTC projects. That is partly because the projects help them fulfill requirements of the Community Reinvestment Act (CRA).³⁶ In one recent year, 85 percent of total LIHTC equity investment was by banks, with the five largest U.S. banks accounting for half of the total.³⁷ The CRA is a major driver of LIHTC investment.

So does the LIHTC mainly benefit investors and businesses or low-income tenants? In a report on the LIHTC, the Congressional Budget Office (CBO) said, “the tax credit may allow investors to capture much of the benefits for themselves rather than their tenants.”³⁸ Similarly, economists Edward Glaeser and Joseph Gyourko have argued that the “LIHTC is not very effective along any important dimension-other than to benefit developers and their investors.”³⁹

Some statistical studies support that view. A study by Gregory Burge found that “the LIHTC program may significantly benefit project developers and owners, with approximately one-third of the programs’ cost going to low-income households in the form of rent savings.”⁴⁰ Thus, “the LIHTC program is an inefficient mechanism for generating benefits to low-income households.”⁴¹ Economist Ed Olsen notes that LIHTC projects often receive other government aid, and so tenants may only capture about 24 percent of overall project subsidies.⁴²

An analysis by Missouri’s state auditor of the state’s own LIHTC found that it was “costly and inefficient.”⁴³ The auditor estimated that “only $0.35 of every tax credit dollar issued is actually used to build low income housing.”⁴⁴

All the subsidies might be useful if it meant major improvements in housing affordability. But rents in LIHTC units can sometimes be no lower than rents in nearby market-based housing. One study analyzed 330 Metropolitan Statistical Areas and found that maximum LIHTC rents were often more than, or similar to, unsubsidized rents.⁴⁵

Prone to Fraud and Abuse

The LIHTC is a ripe target for fraud and abuse, which is perpetrated by tenants, developers, and government officials. Tenants abuse the program by occupying housing units to which they are not eligible, often by claiming a false income level on disclosure forms.

Developers abuse the program by inflating their reported construction costs to receive excess tax credits. National Public Radio (NPR) profiled a Miami business, Biscayne Housing, which partnered with one of the nation’s top affordable-housing developers.⁴⁶ The companies stole $34 million from 14 LIHTC projects by submitting inflated construction cost data to the state.

Another Miami company, which was owned by the major developer Pinnacle Housing, stole $4 million from four LIHTC projects by the same method.⁴⁷ Similarly, partners in an Oklahoma housing company were convicted of using “millions of dollars of false construction invoices to inflate federal low-income housing tax credits.”⁴⁸

Los Angeles was hit by a major LIHTC scandal last year. Describing the federal indictment, the Los Angeles Times said, “Advanced Development and Investment Inc. [ADI] engaged in a conspiracy to fraudulently obtain more than $50 million in loan proceeds for affordable housing projects … others submitted fraudulent invoices that ‘significantly overstated’ the true costs of framing, plumbing, drywall and other construction work at affordable-housing projects built with taxpayer support.”⁴⁹

As with the Miami cases, the corrupt Los Angeles developer was not a fly-by-night outfit, but a long-time player in government housing programs. The Times noted, “ADI built 50 affordable-housing projects across California over nearly two decades.”⁵⁰

Government officials abuse the LIHTC program for personal gain. Because the states receive a limited amount of valued credits that are handed out in a discretionary manner to developers, it creates an open invitation to corruption. In the California ADI scandal, the state treasurer helped steer millions of dollars in tax credits to multiple chosen developers that donated tens of thousands of dollars to his campaign for governor.⁵¹

The scale of the abuse was huge. The Los Angeles Times found that “ADI subcontractors provided more than $400,000 in campaign contributions to politicians across the state, including at least $165,000 in Los Angeles. Four subcontractors told theTimes they felt pressured to donate by ADI. In Glendale’s 2009 City Council election, nearly one of every four dollars received by the top four candidates-more than $100,000-came from ADI subcontractors, those subcontractors’ employees and the employees’ relatives … Glendale provided ADI more than $33 million to help build four affordable-housing projects. Officials there believe roughly half that amount was lost because of fraud.”⁵²

In 2010, the LIHTC was at the center of the largest public corruption case ever broken in Dallas.⁵³ Fourteen people were convicted of bribery, extortion, and related crimes, including developers, a state representative, the Dallas mayor pro tem (a senior city councilor), and the city planning commissioner.⁵⁴ It is a complex story, but the core corruption involved the mayor pro tem and the planning commissioner shaking down developers for bribes in return for approving housing tax credits and zoning changes. The mayor pro tem, Don Hill, was sentenced to 18 years in prison, while the planning commissioner, D’Angelo Lee, received 14 years.

The Dallas LIHTC program “… required city council approval of all projects, awarded points based on letters of support from politicians and community groups and prohibited building more than one housing project within one mile of another in the same calendar year. In practice, the rules meant that if two developers wound up competing on the same turf, the guy with a good friend at City Hall would have a huge advantage.”⁵⁵ Low-income housing tax credits have a high value, there is a limited quantity of them, and they are handed out in a discretionary manner-those features of the program attract corruption.

Lack of oversight has also made the LIHTC program susceptible to abuse. The NPR investigation found that “little public accounting of the costs exists, even among government officials and regulators charged with monitoring the program.”⁵⁶ The IRS hands out the LIHTC benefits, but its oversight “has been minimal,” said the GAO in 2015.⁵⁷ The IRS has audited just 13 percent of the state housing agencies that hand out the tax credits.⁵⁸

The IRS seems to do little auditing of the LIHTC, and its limited efforts are disorganized, as suggested by the GAO.⁵⁹ Indeed, the IRS appears to be overwhelmed by the effort that would be needed to properly enforce all the complex rules of the LIHTC. As one example, the states seem to be abusing their discretionary authority to deliver 30 percent boosts to the credits, as noted, but there seems to be little IRS oversight of this provision.⁶⁰

Economist Len Burman notes the Catch-22 in overseeing the complex LIHTC: “Adequate monitoring by state housing agencies and the IRS would be expensive, but without such monitoring, credits might be allocated to fraudulent claimants, to those who do not comply with the income or rent restrictions of the law, or to investors who earn above-normal rates of return.”⁶¹

NPR interviewed Assistant U.S. Attorney Michael Sherwin, who has spent years investigating LIHTC. “It’s really a program of trust,” he said.⁶² He has prosecuted LIHTC scams in Florida, but he believes that the problems are nationwide. “This program has been described as a subterranean ATM, and only the developers know the PIN,” Sherwin noted.⁶³

LIHTC versus Other Housing Aid

Politically, the LIHTC has been a successful program, even though economists and government watchdog agencies have found that it is less efficient than other housing subsidy approaches. The LIHTC attempts to boost housing supply, but experts find that demand-side housing aid, such as vouchers, is superior.

From a tenant’s perspective, LIHTC housing benefits are tied to one location, whereas demand-side aid such as housing vouchers allow choices about where to live. Also, the LIHTC projects have tended to serve more higher-income tenants than other housing programs, and are thus less targeted to the most needy families.⁶⁴

Perhaps the largest disadvantage of the LIHTC compared to other housing programs is the high cost. The GAO found that LIHTC units cost 19 to 44 percent more than units subsidized using housing vouchers.⁶⁵

Other federal analyses have come to similar conclusions. The CBO found that “the government can provide assistance of equal value to tenants through housing vouchers at a fraction of the cost of credits.”⁶⁶ The agency noted, “overhead and administrative costs appear to be much greater if a low-income housing unit is subsidized with tax credits than if it is subsidized with a voucher, thereby exacerbating the inefficiency.”⁶⁷

Academic studies support these conclusions. In a study of six metropolitan areas, Lan Deng found that LIHTC aid was more expensive than housing vouchers in all locations.⁶⁸ In Miami, for example, tax credit housing units were 66 percent more expensive than units aided with housing vouchers.

An indicator of the LIHTC’s inefficiency is that the projects often need other federal and state subsidies to achieve the affordable rents policymakers are seeking. The CBO said, “people with very low income often cannot afford even the reduced rents in the set-aside units of LIHTC projects without additional subsidies.”⁶⁹ The GAO has found that 40 percent of tenants in LIHTC buildings received housing vouchers. One study found that when all the subsidies for LIHTC projects are added up, it amounts to an average 96 percent of the costs per unit.⁷⁰

Given the inefficiency of the LIHTC compared to other aid programs, why do policymakers support it? One reason is that because it is in the tax code, it escapes the scrutiny that appropriated spending gets. The efforts to restrain discretionary spending in recent years have bypassed the LIHTC because it is a tax credit enacted in permanent law.

In general, the LIHTC receives support from Republicans because it is a tax break, and it receives support from Democrats because it is a welfare program. A study by Len Burman and Marvin Phaup noted that the LIHTC gains support because of the “obfuscation of its provenance and funding,” meaning that “both taxes and spending appear lower, which offers obvious political advantages.”⁷¹

The LIHTC’s political popularity also rests on its large coalition of beneficiaries, which include real estate developers, financial intermediaries, law and consulting firms, and state and local housing agencies. Anti-poverty groups also support the LIHTC, even though demand-side housing aid is superior.

This broad coalition keeps the pressure on Congress to support and expand the program. A Senate Finance Committee hearing in August on the LIHTC, for example, was not focused on cutting or repealing the program, but rather on a bipartisan proposal to expand it.

LIHTC Housing versus Market Housing

Affordable housing proponents say that the LIHTC is needed because markets would fail to supply low-income housing. However, in past decades markets did supply vast quantities of housing for people with moderate incomes.⁷² Meanwhile, governments often undermine the provision of low-cost housing with excessive regulations that block projects and raise costs.

Since 1986, many housing projects have been built using the LIHTC subsidy, but that does not prove that the program has been effective. The government provision of subsidized housing has likely displaced some market-based housing, an effect called “crowding out.”

A number of statistical studies have found substantial crowding out of market-based housing from the LIHTC. A 2005 study by Todd Sinai and Joel Waldfogel estimated that 30 to 70 percent of housing produced under LIHTC and other housing subsidy programs would have been produced even without the programs.⁷³

A 2002 study by Stephen Malpezzi and Kerry Vandell found “no significant relationship between the number of LIHTC units … built in a given state and the size of the current housing stock” in the state.⁷⁴ That suggests “a high rate of substitution” between LIHTC units and market-rate units, according to the authors.⁷⁵

A 2010 study by Michael Eriksen and Stuart Rosenthal found that “displacement of private rental housing construction as a result of the LIHTC program is substantial.”⁷⁶ Their most robust estimate found that “nearly 100 percent of LIHTC development is offset by a reduction in the number of newly built unsubsidized rental units.”⁷⁷

The CBO has said, “the low-income housing credit, like other supply subsidy mechanisms, is unlikely to increase substantially the supply of affordable housing. Subsidized housing largely replaces other housing that would have been available through the private, unsubsidized housing market.”⁷⁸

It is unfortunate that LIHTC housing does appear to be crowding out market-based housing. LIHTC housing is excessively costly to finance and build, and it generates bureaucracy and fraud, which undermine economic growth and good governance.

Another disadvantage of LIHTC housing is that it creates long-term problems regarding maintenance. The LIHTC subsidizes housing construction, but all housing needs ongoing maintenance and capital upgrades down the road. In market-based housing, owners can raise rents to cover the costs of upgrades and fix-ups. But LIHTC properties have rent caps and income limits in place for 30 years, which constrains owners’ ability to make needed investments, and it reduces their incentive to do so.⁷⁹ Regarding the LIHTC, the CBO said, “rent controls remove the incentive to keep units in good repair because there is an excess supply of tenants at the restricted rent levels.”⁸⁰

A related issue is that LIHTC properties face regulatory hurdles to the refinancing that is often needed to raise cash for upgrades.⁸¹ One “solution” to the problem is more subsidies: building owners that used the LIHTC for construction can apply for aid down the road for rehabilitation. They double-dip on subsidies, using the 9 percent credit for construction and then the 4 percent credit later on for rehabilitation.

The maintenance and upgrade problem is becoming more of a concern because the LIHTC has existed long enough for many properties to have degraded with age. The bottom line is that because LIHTC properties are not in the regular marketplace, normal market solutions to maintenance and upgrades are not available.

Policy Options

President Trump and Republicans in Congress are considering legislation to cut tax rates and trim unneeded tax breaks. They should put the LIHTC on the chopping block, as it is a complex and inefficient way of promoting affordable housing. The evidence suggests that the LIHTC benefits businesses and investors more than the low-income population it is aimed at serving.

The LIHTC is supposed to increase the supply of affordable housing. But a better way for policymakers to pursue that goal is to reduce government-imposed barriers to construction. They should reassess zoning rules, land-use regulations, and permitting requirements that may act as a barrier to housing construction and raise costs. It does not make sense for the federal government to subsidize housing affordability while local governments neutralize their efforts with artificial barriers to housing supply.

Regulations on urban land use often stem from well-meaning efforts to promote safety, environmental, and aesthetic goals. But a side effect of the growing web of rules in some cities has been to deter the construction of multifamily and low-income housing. Local regulations may also stymie the development of innovative housing options suitable for low-income tenants, such as tiny homes and microhousing.⁸² With reduced housing supply, many cities suffer from housing affordability problems.

Land-use and zoning rules are mainly the purview of local governments, so affordability can be tackled locally without federal subsidies. Edward Glaeser and Joseph Gyuorko argue, “building small numbers of subsidized housing units is likely to have a trivial impact on average housing prices … However, reducing the implied zoning tax on new construction could well have a massive impact on housing prices.”⁸³ By “zoning tax” they mean unneeded rules that raise the costs of projects.

Numerous studies have examined the impact of local regulations on housing supplies and costs.⁸⁴ A 2009 study by Jenny Schuetz found that communities in Massachusetts “with more restrictive zoning issue significantly fewer building permits for multifamily housing.”⁸⁵ Edward Glaeser and coauthors estimated that restrictive regulations roughly double the price of one-bedroom apartments in some high-cost cities such as San Jose, San Francisco, and Manhattan.⁸⁶ As housing expert Edward Pinto argues, affordable housing resulting from reductions in regulatory barriers “is economical by design, making it naturally affordable, not expensive housing made affordable by subsidy.”⁸⁷

In sum, the LIHTC program is a corporate tax break that is ripe for repeal as federal policymakers look to simplify the tax code. LIHTC projects are complex, expensive, and they encourage local government corruption.

Housing affordability is a serious problem in many cities, but regulatory reform is a better way to address the challenge. Such reforms can be pursued by state and local governments without federal tax subsidies.

Notes

1. The 1986 tax law eliminated some special tax breaks for low-income housing but adopted similar incentives through the LIHTC.
2. To be precise, the federal government allots the 9 percent credits to the states based on population, but the 4 percent credits are separately limited based on tax-exempt bond availability.
3. Cohn Reznick, “The Low-Income Housing Tax Credit Program at Year 25: An Expanded Look at Its Performance,” December 2012, p. 68. To be more specific, the 9 percent projects account for about 70 percent of the net equity.
4. The U.S. Treasury regularly adjusts the specific amount of the 4 percent credit to deliver a 30 percent subsidy. The 9 percent credit now has a floor on the subsidy amount.
5. Mark P. Keightley, “An Introduction to the Low-Income Housing Tax Credit,” Congressional Research Service, May 31, 2017, p. 2.
6. Budget of the U.S. Government, Fiscal Year 2018, Analytical Perspectives (Washington: Government Printing Office, 2017). One reason why most LIHTC investors are corporations and not individuals is that the latter are restricted in their ability to use the passive losses on their tax returns.
7. Mark P. Keightley, “An Introduction to the Low-Income Housing Tax Credit,” Congressional Research Service, May 31, 2017, p. 2.
8. Novogradac and Company, “Low-Income Housing Tax Credit Handbook,” 2017.
9. Virginia Housing Development Authority, “Q.A.P. Workshop,” 2017.
10. For the rent-capped units, the rents are capped at 30 percent of either the 50 or 60 percent median income levels.
11. Novogradac and Company, “State Tax Credit Information,” 2017.
12. Joint Center for Housing Studies of Harvard University, “Long-Term Low Income Housing Tax Credit Policy Questions,” November 2010, p. 13. For discussion of how affordable housing supply “is shaped by a number of procedures, regulations, and policies instituted at all levels of the system and at all points in the development process-each with associated costs,” see Urban Land Institute, “Bending the Cost Curve on Affordable Rental Development: Understanding the Drivers of Cost,” 2013, p. 3.
13. State of Washington, Department of Commerce, “Affordable Housing Cost Study,” September 2009, p. iii.
14. Government Accountability Office, “Tax Credits: Opportunities to Improve Oversight of the Low-Income Housing Program,” GAO/GGD/RCED-97-55, March 1997, p. 82.
15. Quoted in Roger Valdez, “How Trump Might Drain the Low Income Housing Tax Credit Swamp,” Forbes, November 29, 2016.
16. Roger Valdez, “How Trump Might Drain the Low Income Housing Tax Credit Swamp,” Forbes, November 29, 2016.
17. Minnesota Housing, “2017 Cost Containment Report,” September 15, 2016.
18. Urban Land Institute, “Bending the Cost Curve on Affordable Rental Development: Understanding the Drivers of Cost,” 2013, p. 6.
19. Urban Land Institute, “Bending the Cost Curve on Affordable Rental Development: Understanding the Drivers of Cost,” 2013, p. 6.
20. State of Washington, Department of Commerce, “Affordable Housing Cost Study,” September 2009, p. 13.
21. Michael Eriksen, “The Market Price of Low-Income Housing Tax Credits,” Journal of Urban Economics 66, no. 2 (2009): 141-49.
22. Michael Eriksen, “The Market Price of Low-Income Housing Tax Credits,” Journal of Urban Economics 66, no. 2 (2009): 141-42.
23. Urban Land Institute, “Bending the Cost Curve on Affordable Rental Development: Understanding the Drivers of Cost,” 2013, p. 5.
24. That is the message we get from Government Accountability Project, “Low-Income Housing Tax Credit,” GAO-17-784T, August 1, 2017.
25. Projects that have 100 percent low-income units may not need to do annual income checks on their tenants.
26. Office of the Comptroller of the Currency, “Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks,” April 2014. After 15 years, the IRS no longer monitors compliance on LIHTC projects, and compliance duties shift fully to the states.
27. The California Tax Credit Allocation Committee’s Compliance Online Reference Manual is 109 pages. See www.treasurer.ca.gov/ctcac/compliance/manual/manual.pdf.
28. State of California, “Enacted Budget 2017-2018,” Section 0968, California Tax Credit Allocation Committee.
29. Kansas Housing Resources Corporation, “Financial Statements for Year Ended June 30, 2016,” p. 58.
30. State of Oregon, “Summary of 2017-19 Governor’s Budget,” Oregon Housing and Community Services, p. 23.
31. Internal Revenue Service, IRC Section 42, “Audit Technique Guide,” August 11, 2015.
32. Novogradac and Company, “Novogradac and Company LLP Earns another ‘Best of the Best’ Honor from Inside Public Accounting,” August 26, 2016.
33. For background on syndicators, see Government Accountability Office, “Low-Income Housing Tax Credit: The Role of Syndicators,” GAO-17-285R, February 16, 2017.
34. Michael Eriksen, “The Market Price of Low-Income Housing Tax Credits,” Journal of Urban Economics 66, no. 2 (2009): 144.
35. Government Accountability Project, “Low-Income Housing Tax Credit,” GAO-17-784T, August 1, 2017, pp. 7, 8.
36. A survey of banks found that the CRA was the main reason for LIHTC investment. Cohn Reznick, “The Community Reinvestment Act and Its Effect on Housing Tax Credit Pricing,” 2013, p. 3.
37. Cohn Reznick, “The Community Reinvestment Act and Its Effect on Housing Tax Credit Pricing,” 2013, pp. 3, 15.
38. Congressional Budget Office, “The Cost Effectiveness of the Low-Income Housing Tax Credit Compared with Housing Vouchers,” April 1992, p. 2. This report is dated, but the program works basically the same way now as it did then.
39. Edward L. Glaeser and Joseph Gyourko, Rethinking Federal Housing Policy (Washington: AEI Press, 2008), p. 11.
40. Gregory S. Burge, “Do Tenants Capture the Benefits from the Low-Income Housing Tax Credit Program?” in Real Estate Economics (Blackwell Publishing Inc., December 2010), p. 95.
41. Gregory S. Burge, “Do Tenants Capture the Benefits from the Low-Income Housing Tax Credit Program?” in Real Estate Economics (Blackwell Publishing Inc., December 2010), p. 95.
42. Ed Olsen, “Does Housing Affordability Argue for Subsidizing the Construction of Tax Credit Projects?” 2017. Presented at a conference at the American Enterprise Institute, April 6, 2017.
43. Missouri State Auditor, “Tax Credit: Analysis of Low Income Housing Tax Credit Program,” April 2008, p. 3.
44. Missouri State Auditor, “Tax Credit: Analysis of Low Income Housing Tax Credit Program,” April 2008, p. 3. Part of the reason for the inefficiency was the interaction of the state credit with the federal credit.
45. Nathaniel Baum-Snow and Justin Marion, “The Effects of Low-Income Housing Tax Credit Developments on Neighborhoods,” Journal of Public Economics 93, no. 5-6 (2009): 654-66.
46. Laura Sullivan, “Affordable Housing Program Costs More, Shelters Fewer,” National Public Radio, May 9, 2017.
47. Laura Sullivan, “Affordable Housing Program Costs More, Shelters Fewer,” National Public Radio, May 9, 2017.
48. “Two Men Sentenced in Housing Fraud,” Norman Transcript, December 17, 2011.
49. David Zahniser and Shashank Bengali, “L.A. Developers Accused of Stealing Millions in Affordable-Housing Scheme,” Los Angeles Times, February 6, 2016. And see David Zahniser, “L.A. Reaches Settlement with Developer Accused of Fraud,” LosAngelesTimes, July 30, 2014.
50. David Zahniser and Shashank Bengali, “L.A. Developers Accused of Stealing Millions in Affordable-Housing Scheme,” Los Angeles Times, February 6, 2016.
51. Chrisian Britschgi, “California Gubernatorial Candidate Steered Low-Income Housing Funds to Campaign Contributors,” Reason.com, August 15, 2017.
52. David Zahniser and Shashank Bengali, “L.A. Developers Accused of Stealing Millions in Affordable-Housing Scheme,” Los Angeles Times, February 6, 2016.
53. Sam Merten, “Bill Fisher Handed the FBI a Chance to Clean Up City Hall. Does that Make Fisher Mr. Clean?” Dallas Observer, January 27, 2011.
54. Jason Trahan, “Bit Player Jibreel Rashad Sentenced to 57 Months for Role in Dallas City Hall Corruption Case,” Dallas Morning News, June 16, 2010.
55. Sam Merten, “Bill Fisher Handed the FBI a Chance to Clean Up City Hall. Does That Make Fisher Mr. Clean?” Dallas Observer, January 27, 2011.
56. Laura Sullivan, “Affordable Housing Program Costs More, Shelters Fewer,” National Public Radio, May 9, 2017.
57. Government Accountability Office, “Low-Income Housing Tax Credit,” GAO-15-330, July 2015, p. 18.
58. Government Accountability Office, “Low-Income Housing Tax Credit,” GAO-15-330, July 2015, p. 19.
59. Government Accountability Office, “Low-Income Housing Tax Credit,” GAO-15-330, July 2015, pp. 18-25.
60. Government Accountability Project, “Low-Income Housing Tax Credit,” GAO-17-784T, August 1, 2017, pp. 7, 8.
61. Leonard Burman, “Low-Income Housing Credit,” in The Encyclopedia of Taxation and Tax Policy, ed. Joseph Cordes et al. (Washington: The Urban Institute Press, 1999): pp. 263-65.
62. Laura Sullivan, “Affordable Housing Program Costs More, Shelters Fewer,” National Public Radio, May 9, 2017.
63. Laura Sullivan, “Affordable Housing Program Costs More, Shelters Fewer,” National Public Radio, May 9, 2017.
64. See, for example, Governmental Accountability Office, “Federal Housing Assistance; Comparing the Characteristics and Costs of Housing Programs,” GAO-02-76, January 2002.
65. Government Accountability Office, “Federal Housing Assistance; Comparing the Characteristics and Costs of Housing Programs,” GAO-02-76, January 2002, p. 18. The GAO also found that LIHTC units typically cost more than units funded by other supply-side aid programs.
66. Congressional Budget Office, “The Cost Effectiveness of the Low-Income Housing Tax Credit Compared with Housing Vouchers,” April 1992, p. 2.
67. Congressional Budget Office, “The Cost Effectiveness of the Low-Income Housing Tax Credit Compared with Housing Vouchers,” April 1992, p. 3.
68. Lan Deng, “The Cost-Effectiveness of the Low-Income Housing Tax Credit Relative to Vouchers: Evidence from Six Metropolitan Areas,” Housing Policy Debate 16, no. 3-4 (2005): 469-511.
69. Congressional Budget Office, “Options for Reducing the Deficit: 2017 to 2026,” Option 32, December 8, 2016.
70. Benson F. Roberts and F. Barton Harvey III, “Comment on Jean L. Cummings and Denise DiPasquale’s ‘The Low-Income Housing Tax Credit: An Analysis of the First Ten Years,’” Housing Policy Debate 10 no. 2 (1999): 309-20.
71. Leonard Burman and Marvin Phaup, “Tax Expenditures, the Size and Efficiency of Government, and Implications for Budget Reform,” National Bureau of Economic Research Working Paper no. 17268, August 2011, pp. 2-3.
72. Howard Husock, “Public Housing and Rental Subsidies,” DownsizingGovernment.org, Cato Institute, February 23, 2017.
73. Todd Sinai and Joel Waldfogel, “Do Low-Income Housing Subsidies Increase the Occupied Housing Stock?” Journal of Public Economics 89 (December 2005).
74. Stephen Malpezzi and Kerry Vandell, “Does the Low-Income Housing Tax Credit Program Increase the Supply of Housing?” Journal of Housing Economics 11, no. 4 (December 2002): 360.
75. Stephen Malpezzi and Kerry Vandell, “Does the Low-Income Housing Tax Credit Program Increase the Supply of Housing?” Journal of Housing Economics 11, no. 4 (December 2002): 360-80.
76. Michael D. Eriksen and Stuart S. Rosenthal, “Crowd Out Effects of Place-Based Subsidized Rental Housing: New Evidence from the LIHTC Program,” Journal of Public Economics 94 (December 2010), p. 964.
77. Michael D. Eriksen and Stuart S. Rosenthal, “Crowd Out Effects of Place-Based Subsidized Rental Housing: New Evidence from the LIHTC Program,” Journal of Public Economics 94 (December 2010), Abstract.
78. Congressional Budget Office, “The Cost Effectiveness of the Low-Income Housing Tax Credit Compared with Housing Vouchers,” April 1992, p. 8.
79. Joint Center for Housing Studies of Harvard University, “Long-Term Low Income Housing Tax Credit Policy Questions,” November 2010, p. 24.
80. Congressional Budget Office, “The Cost Effectiveness of the Low-Income Housing Tax Credit Compared with Housing Vouchers,” April 1992, p. 2.
81. Department of Housing and Urban Development, “HOME and the Low-Income Housing Tax Credit Guidebook,” January 2013, p. 83.
82. Vanessa Brown Calder, “Micro-Housing, Meet Modern Zoning,” Cato at Liberty, September 14, 2016.
83. Edward Glaeser and Joseph Gyourko, “The Impact of Building Restrictions on Housing Affordability,” Economic Policy Review 9, no. 2 (2003): 35.
84. Vanessa Brown Calder summarizes the literature and provides her own cross-state analysis, which finds that the growth in zoning and land-use regulations is associated with a rise in housing costs. See Vanessa Brown Calder, “Zoning, Land-Use Planning, and Housing Affordability,” Cato Institute Policy Analysis no. 823, October 18, 2017.
85. Jenny Schuetz, “No Renters in My Suburban Backyard: Land Use Regulation and Rental Housing,” Journal of Policy Analysis and Management 28, no. 2 (2009): 296-320.
86. Edward L. Glaeser, Joseph Gyourko, and Raven Saks, “Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices, The Journal of Law and Economics 48 (October 2005): 331-69.
87. Edward J. Pinto, “Market Prices Are the Only Way to Get Home Prices and Rents Back in Line,” American Enterprise Institute, July 18, 2016.

Shirley Svorny

One of the most promising areas of medical innovation is the expansion of telemedicine, where medical professionals treat patients across great distances using electronic communications. A significant barrier to telemedicine is the requirement that physicians obtain licenses from each state in which their current or potential patients are, or may be, located.

The best option is to eliminate government licensing of medical professionals altogether. Eliminating licensing would eliminate these barriers without compromising quality. State medical licensing boards often place the interests of physicians ahead of patient safety. Health insurers, medical malpractice liability insurers, hospitals, and others — many of whom are liable when a physician injures a patient, and all of whom seek to protect their reputations — would continue to protect patients by doing periodic, substantive reviews of physician skills and qualifications.

A second-best way to eliminate barriers to affordable, quality care would be for Congress to redefine the location of the interaction between patients and physicians from that of the patient to that of the physician. Digital patients would be no different from patients who travel across state lines or national borders for care. A physician would need only one license, and would be responsible for only one set of licensing laws governing the practice of medicine — that of his or her home state.

A third option is for individual states to open their markets to physicians licensed in other states, or to join other states in reciprocal agreements to honor each other’s licenses.

Finally, the federal government could offer national telemedicine licenses, an option that would require a new federal agency, additional costs, and — like existing state licensing boards — would be vulnerable to capture by physician groups that seek to erect barriers to telemedicine.

One supposed reform — the Interstate Medical Licensure Compact — does not increase license portability. Under the Compact, physicians who wish to treat patients in other states still must obtain separate licenses from each of those states. The Compact merely attempts to streamline the process of applying for multiple licenses. State medical boards designed the Compact to protect the status quo.

Fifty years in farming had given Tom Soukup a few brushes with his own mortality, but after a cow pinned him against a wall, death felt closer than ever. He lay on the muddy ground and began to pray, every gasp feeling like a stab to the chest.

Although the nearest clinic was only a 10-minute drive from Soukup’s South Dakota ranch, the doctor on duty did not have much experience treating such injuries. He had rarely inserted chest tubes and wanted guidance from another physician without having to consult a medical reference book.

So the clinic in tiny Wagner connected by video to doctors in Sioux Falls, who talked him through the steps to stop the bleeding and drain the blood collecting inside the 72-year-old man back in March 2010.

It’s a system that’s gaining wider use across the rural U.S., where there are often few primary care doctors and even fewer emergency rooms. Although so-called telemedicine has been around for at least two decades, the practice fast is becoming a standard feature in many small communities, even as other public services such as police and fire protection decline. ¹

Argus Leader, Sioux Falls, June 8, 2014

Introduction

One of the most promising areas of medical innovation is the expansion of telemedicine, where medical professionals treat patients across great distances using electronic communications. Telemedicine enables patients to seek care from providers whom they would otherwise need to travel to see, including top specialists who may be located thousands of miles away, and it offers life-saving assistance in emergencies. Telemedicine can enhance the productivity of physicians and even patients, such as when workers avoid lost work time by substituting convenient, on-demand video interactions with a physician for a routine office visit. While telemedicine is growing in use and acceptance, state licensing laws keep it from reaching its full potential. This paper examines policy options that would allow interstate telemedicine to flourish. ²

The main barrier to telemedicine is the requirement that physicians obtain licenses from each and every state in which their current or potential patients are, or may be, located. The best option is to eliminate state licensure of medical professionals altogether. Eliminating licensing would eliminate these barriers without compromising quality. Even without government licensing, health insurers, medical malpractice liability insurers, hospitals, and others — many of whom are liable when a physician injures a patient, and all of whom seek to protect their reputations — would continue to protect patients by doing periodic, substantive reviews of physician skills and qualifications.³ In contrast, state medical-licensing boards often place the interests of physicians ahead of patient safety. Alternatively, individual states could open their markets to physicians licensed in other states. In 2016 the Florida Senate scaled back a proposal that would have made Florida the first state to move on this front. ⁴

Given the lack of progress at the state level, a second-best, and perhaps quicker, way to eliminate barriers to affordable, quality care would be for Congress to redefine the location of the interaction between patients and physicians from that of the patient to that of the physician. Digital patients would be no different from patients who travel across state lines or national borders for care. A physician would need only one license, and would be responsible for only one set of licensing laws governing the practice of medicine — that of his or her home state.

Finally, the federal government could offer national telemedicine licenses, an option that would require a new federal agency, additional costs, and — like existing state licensing boards — would be vulnerable to capture by physician groups that seek to erect barriers to telemedicine.

One supposed reform — the Interstate Medical Licensure Compact — offers little to move interstate telemedicine forward. The federal government funded the Interstate Medical Licensure Compact with the goal of enhancing license portability — the ability to practice in multiple states based on one’s home-state license. Yet the Compact does not increase license portability. Under the Compact, physicians who wish to treat patients in other states still must obtain separate licenses from each of those states. The Compact only attempts to streamline the process of applying for multiple licenses. State medical boards designed the Interstate Medical Licensure Compact not to disrupt the status quo, but to protect it.

Telemedicine Today

Telemedicine can be as simple as a video or telephone consultation with a physician or nurse, or as sophisticated as using “robots” — roving computers with cameras, microphones, and speakers — in emergency departments and intensive-care units to offer patients remote access to specialists in cardiology, mental health, neonatology, neurology, pediatrics, and other areas of medicine. ⁵ Store-and-forward telemedicine — where providers send scanned images and information to distant experts for remote evaluation — is useful in radiology, pathology, dermatology, ophthalmology, and other specialties. Remote reading is available around the clock. ⁶

The list of areas where telemedicine can improve outcomes is long and is expanding rapidly. It includes emergency stroke intervention, ⁷ military applications (where it can eliminate risky patient evacuations), ⁸ diabetic monitoring and care, ⁹ replacing on-call physicians, ¹⁰ delivering care to Parkinson’s patients, ¹¹ mental health services, ¹² and many other situations. Broader use of telemedicine is likely to improve outcomes for patients with rare diseases by allowing physicians who specialize in those diseases to treat a cohort of similar patients across the country or around the world.

The potential for telemedicine to reduce the cost of health care by monitoring individuals living with common chronic diseases is substantial, as chronic disease is expensive to treat and poor compliance with physician recommendations is the norm. ¹³ Studies of the impact of the use of telemedicine to treat chronic conditions find lower mortality, reduced hospital admissions, lower costs, and increased patient satisfaction. ¹⁴

Telemedicine can even assist school districts when it comes to the cost of school nurses. A program in South Dakota uses telemedicine to resolve the high cost of having a nurse at every school. ¹⁵

Telemedicine has been a boon to rural communities. In emergent care, telemedicine provides immediate access to specialists, allowing patients in remote areas to receive prompt treatment. In nonemergent situations, it offers day-to-day and specialty care without long commutes. ¹⁶ Getting physicians to move to rural areas is a perennial problem. Telemedicine is giving rural residents broader and more convenient access to physicians. Where it was once common for residents of a rural Alaska town to fly to a nearby community to see a physician, now a cart equipped with a webcam and scopes eliminates the trip. ¹⁷

A Substitute for Traditional Office Visits

Telemedicine offers a convenient substitute for traditional office visits. ¹⁸ Video or phone appointments save time and money for consumers and providers. Based on its experience, Kaiser Permanente estimates that about a quarter of its current appointments could take place via telemedicine rather than in-person office visits. Kaiser’s tally of the benefits includes reduced commutes (saving time and reducing carbon emissions), reduced medical facility construction, expanded access to timely care, and increased workplace productivity. ¹⁹

Capital is flowing into innovative telemedicine efforts. ²⁰ Companies such as American Well supply Web and mobile platforms for video visits. American Well partners with health plans and pharmacies (including CVS, the largest U.S. chain) to facilitate access to on-demand video visits. American Well also offers administrative, security, and recordkeeping support services.

UnitedHealthcare, the largest U.S. private insurer, has contracted with Doctors on Demand, NowClinic, and American Well to offer “on-demand online access to a physician via mobile phone, tablet or computer 24 hours a day,” and has added a “network of care providers offering video-based virtual visits.” ²¹ Wellpoint’s Anthem Blue Cross offers its LiveHealth Online services to its insureds. ²²

Telemedicine can make health care more convenient and affordable, even for consumers whose insurance companies do not cover virtual doctor visits. Large, direct-to-consumer service providers include American Well, MDLIVE, Doctor on Demand, and Teladoc.

Access to virtual doctor visits has the added benefit of improving labor productivity by eliminating commute and wait times and the related costs associated with missing work. Seventy percent of large employers surveyed by the National Business Group on Health in 2016 reported offering telehealth benefits. This is up from 48 percent in 2015. The National Business Group on Health expects telehealth benefits to be nearly universal by 2019. ²³

Towers Watson, a business management consulting firm, estimates that an average employer would profit from including telemedicine in employee benefits if more than 7 percent of those insured were to use it. With savings on emergency room, primary care, and urgent care visits, Towers Watson estimates that employers as a whole could save $6 billion annually. ²⁴

Telemedicine offers health care professionals flexibility to choose the hours they wish to work. Providers can work from home via a home-based telemedicine station. ²⁵ Physicians, pharmacists, advanced practice nurses, or other providers need not be located in the specific area they serve.

Telemedicine reduces waiting times for care. Users of teleneurology for strokes can bring a remote physician to examine a patient within 3 to 6 minutes. ²⁶ According to Dr. Todd Samuels, a board-certified neurologist, he can “provide much more timely care as a teleneurologist than … as a bedside neurologist.” ²⁷ Remote consultants can serve multiple facilities and distant communities 24 hours a day, 7 days a week. Teladoc reports a median physician response time of less than 10 minutes. ²⁸

Quality Concerns

One concern is that teleprofessionals could fail to refer patients to a nearby physician when a virtual exam is not sufficient. Yet telemedicine providers face the same incentives not to miss diagnoses that in-person physicians do. The threat of liability is a powerful force for quality assurance. Telemedicine providers who fail to refer when appropriate or who make other mistakes will find themselves subject to liability claims and higher medical malpractice liability insurance premiums.

Medical malpractice liability insurers likewise face the same incentives to monitor and promote the quality of care by telemedicine providers as they do with other providers they insure. Malpractice insurers educate providers on how to reduce the risk of patient injury by practicing safer medicine. ²⁹ They also reward providers who comply with quality programs by offering them lower insurance rates. Finally, it is not uncommon for carriers to write specific standards into medical professional liability insurance contracts with the providers they insure, and to insist on compliance in exchange for insurance coverage. ³⁰

Brand-name reputation offers further patient protection. Companies invest substantial resources in promoting their brands. Teladoc advertises that all of its doctors are board-certified in their medical specialties, that its physician credentialing process meets National Committee for Quality Assurance standards, and that the company has been on the receiving end of “zero malpractice claims.” ³¹ Many telemedicine providers further reassure patients by seeking accreditation from the American Telemedicine Association. ³² Telemedicine providers face enormous financial incentives to avoid tarnishing these reputations by providing substandard care.

Government Encouragement of Telemedicine

The federal government encourages telemedicine in various ways. ³³ The Federal Communications Commission’s (FCC) Rural Health Care Program offers subsidies to assist rural health care professionals secure telecommunications and broadband services. ³⁴ In 2014, the FCC established the Connect2HealthFCC Task Force to “consider ways to accelerate the adoption of health care technologies by leveraging broadband and other next-gen communications services.” ³⁵ The Federal Telemedicine Working Group (FedTel) includes representatives from federal agencies that are involved in promoting telehealth. ³⁶ The Patient Protection and Affordable Care Act (Obamacare) includes several provisions to promote telemedicine. ³⁷

The federal Health Resources and Services Administration issues grants whose stated purpose is to promote medical-license portability across states. These grants were designed to fund collaboration among state licensing boards to minimize the burden of “requirements that … [a physician] be licensed in each state where he or she may provide telemedicine services on a regular basis.” ³⁸ As discussed below, grant recipients have not addressed the regulatory burden in a substantive way.

The federal government has slowly expanded Medicare reimbursement for telemedicine services, adding home care and monitoring for chronic conditions via telemedicine to the set of covered procedures. ³⁹ At present, Medicare only pays for telemedicine provided in rural areas. One concern is that telemedicine would make it too easy for enrollees to access care, and thereby increase Medicare spending. ⁴⁰

At the state level, almost all states cover telemedicine through their Medicaid programs, although coverage varies across states and many states follow Medicare’s policy of limiting reimbursement to rural areas. A majority of the states require private insurance companies to cover telemedicine services. ⁴¹ When it comes to store-and-forward telemedicine (such as when an image is sent out for consultation), all states offer Medicaid reimbursement. When the service does not involve a direct interaction between a provider and patient (examples include teleradiology, telepathology, ECG interpretation, tele-ultrasound, and echocardiography) the services are reimbursed as if they were offered directly. ⁴²

Barriers to Intrastate Telemedicine

Ironically, at the same time the federal government subsidizes telemedicine, state governments inhibit the practice by imposing barriers to market entry. Insofar as telemedicine represents a competitive threat to existing providers, it is not surprising that physicians would turn to state legislatures and licensing boards to restrict the practice. Yet these restrictions harm patients by increasing medical prices and reducing access to care.

Even when a physician and patient are in the same state, government-imposed barriers prevent telemedicine from making medical care better and more affordable. Some states impose such burdensome rules on
physician-patient encounters that the rules make telemedicine more difficult than in-person encounters. ⁴³ These rules include informed consent requirements as well as requirements that a telepresenter — a health professional — be present with the patient.

One example of an intrastate barrier involved Teladoc, a company that provides over-the-phone consultations with licensed physicians for less than the cost of a traditional office visit. ⁴⁴ In 2011, the Texas Medical Board (TMB) — a state regulatory body composed of members of the regulated industry (physicians) — notified Teladoc that its doctors must conduct an in-person physical exam before prescribing certain drugs through virtual encounters, and threatened disciplinary action against Teladoc physicians who did not comply. Teladoc challenged the legality of the rule in Texas courts. The TMB responded with an emergency rule limiting telemedicine, but a court injunction prevented it from taking effect. In May 2017, the Texas legislature resolved the impasse with legislation that made Texas one of the last states to acknowledge that a physician-patient relationship can be established without an in-person physical exam. The legislation also made it clear that the TMB may not impose a higher standard of care on telemedicine than is imposed on in-person care. ⁴⁵

At one point, in 2016, Teladoc tried a different tactic, filing an antitrust lawsuit in the U.S. District Court. Teladoc alleged the TMB’s requirements were an effort to limit competition from telemedicine providers. The TMB claimed it enjoys state action immunity. State action immunity is a legal defense that has traditionally protected state medical boards from antitrust enforcement, even when actions to limit competition benefit board members. Yet the U.S. Supreme Court recently ruled that state licensing boards composed of market participants, and not subject to active supervision by the state, enjoy no such immunity. Citing that ruling, a federal district court rejected the TMB’s motion to dismiss the antitrust complaint. Before the TMB withdrew its appeal of that district court ruling, the U.S. Federal Trade Commission, which has sided with Teladoc, told the appeals court, “There is no evidence that any disinterested state official reviewed the TMB rules at issue to determine whether they promote state regulatory policy rather than TMB doctors’ private interests in excluding telehealth — and its lower prices — from the Texas market.” ⁴⁶

Barriers to Interstate Telemedicine

Interstate telemedicine, for both serious emergencies and simple office visits, would expand access to care, especially in smaller states. As it does in other industries, cross-state competition would improve medical services and reduce costs to consumers. Yet states impose even greater barriers to telemedicine when a physician and patient are in different states.

Each state requires any physician who provides services to a patient in that state to obtain a medical license from that state, regardless of where the physician is located. ⁴⁷ Physicians who wish to practice beyond the borders of their home state must therefore obtain and maintain medical licenses from every state in which their potential patients reside. Even then, physicians can’t treat patients if the patient travels to a state where the physician does not have a license. These requirements impose substantial time and money costs that keep medical prices artificially high by preventing entry and competition in the market for physician services.

All states require physicians to meet the same basic standards for obtaining a license: a degree from an accredited medical school, residency training, a passing score on a standardized test, an acceptable malpractice history, and licensing fees. However, states complicate the process with varying requirements, such as additional testing or coursework. ⁴⁸ Given the complexities of applying for licenses in multiple states simultaneously, many physicians turn to private companies that assist with the process, including the Physician Licensing Service, MedLicense.com, and the Florida Medical Licensing Service.

Once licensed, physicians who wish to practice beyond the borders of their home state must comply with clinical practice rules and regulations that differ across states. ⁴⁹ This is another deterrent to entry. Because state medical licensing laws restrict cross-state practice, it is often easier for medical centers or academic institutions in the U.S. to expand internationally than to other states. ⁵⁰

Apart from generally suppressing telemedicine, state-specific (and monopolistic) licensing creates disparities. Large and densely populated states are home to more specialists. Patients in those states therefore have more opportunities to consult with specialists via telemedicine than patients in smaller, less densely populated states.

Restricting telemedicine imposes the most harm on low-income patients. Wealthy patients can get around the restrictions by paying the artificially high prices for medical care that persist in the absence of competition, or by traveling to the states or countries where the leading specialists practice. The cost of barriers to market entry fall hardest on poor patients, the uninsured, and those who rely on state Medicaid programs, who do not have the means to travel to top specialists. ⁵¹

Options to Reduce Interstate Barriers to Telemedicine

Proposals to reduce government-imposed barriers to telemedicine have circulated since the late 1990s. ⁵² There are various policy options at the state and federal levels. ⁵³

Eliminate Medical Licensing

The best option for consumers is to eliminate state licensing of clinicians. The existing barriers to telemedicine are just one example of the problems created by medical licensing. ⁵⁴ In the simplest case, states would eliminate state medical boards and licensing of medical professionals entirely.

Eliminating government licensing of clinicians would not compromise safety, because licensing does not promote safety. The lion’s share of consumer protections that we can observe comes from private actors, not state licensing boards. Hospitals, health insurers, medical malpractice liability insurers, and others evaluate the physicians they allow to practice, reimburse, and indemnify. Unlike state licensing boards, these entities are liable if a patient suffers an injury due to their negligence or that of the physician. ⁵⁵

Indeed, state licensing boards are not benign actors. Their activities have a negative impact on health care access and costs. Existing barriers to telemedicine are but one example of how physicians use licensing rules to preserve their market share and keep prices artificially high by blocking competition and innovation. Another example is how the physician lobby uses state licensing boards’ regulation of the scopes of practice of advanced practice nurses to inhibit the growth of retail clinics and other lower-cost ways of delivering care. ⁵⁶

If anything, licensing gives patients a false sense of security. State medical boards are reluctant to pull licenses and thus allow, for example, physicians with drug and alcohol problems to continue to practice before completing programs designed to deal with their addictions. According to the nonprofit consumer advocacy group Public Citizen, state medical licensing boards are underdisciplining physicians, such as by failing to sanction many physicians with malpractice judgments against them. ⁵⁷

The elimination of the state licensing boards would not end physician discipline. Medical malpractice claims brought by patients would still move through the court system. The offices of most state attorneys general have specialty groups that prosecute criminal behavior by physicians, just as they prosecute other criminal activity. ⁵⁸ Providers, such as hospitals, insurance networks, and group practices, would continue their efforts to deny privileges, block reimbursement, and dissociate with poor-performing physicians. Medical malpractice liability insurers would continue to work with their physician customers to improve the quality of care, and to encourage safer care by charging higher premiums to, or imposing practice limitations on, problem physicians. ⁵⁹

Allow Medical Professionals to Practice Telemedicine Nationwide on the Basis of Their Home-State License

If eliminating state licensing of medical professionals is not currently feasible, a second-best option is to allow medical professionals to practice telemedicine in any state on the basis of their home-state license. This could come about if each state passes legislation, or if the federal government intervenes to define the location of the practice of medicine as that of the provider.

Unilateral State Action. Individual states could eliminate barriers to interstate medical practice by allowing physicians who are licensed in other states to offer telemedicine services in their state. ⁶⁰ Medical professionals would be subject to the rules and regulations of their home state.

In 2016, the Florida House of Representatives approved a bill (HB 7087) allowing physicians licensed in other states to offer telemedicine services in Florida. The original language of the bill required out-of-state physicians to register in Florida and included prohibitions against opening an office in Florida or treating Florida residents in person without a Florida license. Had this provision become law, Florida would have been the first state to allow its residents full access to interstate telemedicine services. The Florida Senate eliminated the provision. ⁶¹

Federal Action to Define the Location of Care. Proponents of congressional action argue that some form of federal action is necessary, at least for telemedicine, because states have shown an unwillingness to resolve the barriers to interstate practice. Existing state laws, as well as the Interstate Medical Licensure Compact (discussed below), define the locus of care as that of the patient, and therefore require the physician to obtain a license from the state where the patient is located. A change in the definition of the locus of care to that of the physician would eliminate the need for physicians to obtain licenses from any state other than the state(s) where they already practice.

Congress could enact a federal law that, for the purposes of telemedicine services, defines the location of care as that of the physician. Such a change would treat patients who receive telemedicine services from out-of-state physicians like patients who travel across state lines for medical care. ⁶²

This simple action would sweep away the major barrier that licensing laws place in the way of interstate telemedicine. Physicians would still need to keep up with changes in licensing requirements in their own states, but would no longer bear the burden of tracking and complying with changes in licensing requirements across multiple states. The costly and time-consuming process of maintaining licenses in multiple states would no longer bar entry into the market for telemedicine services.

This proposal, which at its core simply allows patients to rely on out-of-state quality certification, has precedent in current law. Since 2011, the Centers for Medicare and Medicaid Services (CMS) has allowed hospitals interacting with physicians located elsewhere via telemedicine to rely on the credentialing and privileging of the hospital at which the telemedicine doctor is located. ⁶³

The Veterans Administration, U.S. military, and Public Health Service already allow physicians to practice in any of their facilities on the basis of the physician’s home-state license. ⁶⁴ And there is support in Congress for a bill that would allow physicians to provide telemedicine services to Medicare recipients under the license of their home state. ⁶⁵

One concern about defining the location of care as that of the physician is that states might compete for licensing fees by lowering patient protections. States could face incentives to reduce licensing requirements or malpractice rules below what is necessary to protect patients. At the same time, however, interstate competition via telemedicine is likely to reduce the value of a license in a state known for weak protections.

Indeed, like out-of-state hospital credentialing and privileging, single-state licensing can make it easier to monitor and discipline physicians. A single-state licensing board in the home state of the physician can more easily compile complaints related to a physician’s services and sanction errant physicians than multiple medical boards, each of which sees only pieces of the puzzle.

Mutual Recognition. A third option to deal with licensing roadblocks to telemedicine is for states to set up mutual-recognition arrangements with other states. A few states allow physicians licensed in nearby states to practice without a separate license. The National Council of State Boards of Nursing’s Nurse Licensure Compact and the newly introduced Advanced Practice Registered Nurse Compact are mutual-recognition agreements that allow nurses to practice in any of the participating states on the basis of their home-state license. ⁶⁶

Recognition agreements, such as the Nurse Licensure Compact, still require individual practitioners to operate under the laws of the various states in which they practice. This becomes a serious problem for multistate teleproviders. Changing the locus of the practice of medicine avoids this problem, and requires only one legislature to act, rather than 50.

Federal Licensing. Since the late 1990s, telemedicine advocates have called for federal licensing. ⁶⁷ Options include a parallel system that licenses physicians only for telemedicine (leaving state medical boards intact), or a system that displaces state-based licensing entirely.

Federal licensing would require the establishment of federal rules and federal agencies to enforce them. Even if the federal government were to license physicians to practice telemedicine only, it could add yet another layer of administration and costs. And just as physicians have used state licensing to limit competition, incumbents could use a national licensing apparatus to limit, rather than expand, access to health care. ⁶⁸ Indeed, the creation of a new federal (tele)medical licensing agency would create a permanent, taxpayer-funded agency that advocates for ever more restrictive regulations and ever higher barriers to market entry.

Feasibility

A federal law changing the locus of care to that of the physician may be the most politically feasible option for removing licensing-imposed barriers to telemedicine. Unlike repealing licensing, state laws recognizing out-of-state licenses, and mutual-recognition agreements, it would require only one (federal) law, rather than 50 separate state laws. Unlike federal licensing, it would require no new federal agencies or spending, and create no new barriers to telemedicine. It would also build on existing efforts in Medicare, the Veterans Administration, and elsewhere to recognize out-of-state licenses. It is also less likely to engender significant opposition than other approaches.

Licensing fees are a significant source of state revenue. There are about one million doctors in the United States, and each pays periodic licensing fees. Initial licensing fees range from $200 to $1,000. Renewal fees run about $200 a year. Physicians must pay these fees in each state in which they maintain a license. Any reform allowing physicians to practice in additional states without obtaining licenses from those states would result in a loss of licensing-fee revenues. ⁶⁹ The gains in health care affordability would certainly dwarf those lost revenues. Nevertheless, states are unlikely to support any reforms that reduce state revenues (e.g., eliminating licensing, recognizing other out-of-state or international licenses), or to support federal licensing, which could ultimately displace state licensing entirely.

Physician groups will also tend to oppose pro-competitive reforms. ⁷⁰ Anything that tears down barriers to competition presents a threat to physicians’ existing revenue streams. Compared to state-level reforms, however, federal legislation changing the locus of care could engender less opposition from physicians. When a state allows competition from out-of-state physicians, in-state physicians see only the downside — greater competition. The market for their services does not expand. Even in a mutual-recognition agreement, the market for their services expands to just one, or maybe a few, states. Federal legislation changing the locus of care would present a much greater upside for physicians — the market for their services would expand to all 50 states. And unlike federal licensing, it would not require physicians to clear additional hurdles. These factors would minimize opposition to liberalization among incumbent physicians.

Policy-Related Legal Issues

There are two legal issues raised by these policy proposals. The first has to do with the constitutionality of federal intervention. The second deals with the question of which courts would have jurisdiction and which state’s rules would apply in disputes where patients and physicians live in different states.

The Constitutionality of Federal Intervention. Licensing and regulating the practice of medicine has traditionally been a power exercised by states. The Tenth Amendment to the U.S. Constitution provides, “The powers not delegated to the United States by the Constitution” — such as licensing — “nor prohibited by it to the States, are reserved to the States respectively, or to the people.” ⁷¹ Some may therefore conclude that the federal government has no authority to override state laws defining the locus of care for purposes of regulating medicine.

Nevertheless, the U.S. Constitution does delegate to Congress the power “to regulate Commerce … among the several States.”⁷² This encompasses the power to tear down trade barriers between the states, which state restrictions on telemedicine have undoubtedly become. Existing state laws defining the locus of care as that of the patient — that is, the nonregulated entity — are clearly a barrier to trade with licensed physicians. ⁷³ Surveying the legal case history, including recent cases related to the Affordable Care Act, Bill Marino, Roshen Prasad, and Amar Gupta argue that telemedicine licensure reform would overcome any constitutional challenges. ⁷⁴

Medical Malpractice Jurisdiction. Which state has jurisdiction in a malpractice case where an out-of-state telemedicine provider allegedly injures a patient? To date, courts have had little opportunity to address this issue with regard to telemedicine because few malpractice cases so far have involved telemedicine, and most of those have been about internet prescribing. ⁷⁵

Nevertheless, the “long-arm” revolution in tort law frequently allows patients to file malpractice claims in their own state against out-of-state providers, even if the patient traveled to another state to receive care from the provider. ⁷⁶ The case for such jurisdiction is particularly strong with telemedicine, where any injury the patient suffers would undoubtedly occur in the patient’s home state. ⁷⁷

The Interstate Medical Licensure Compact

One supposed attempt at reform, the so-called Interstate Medical Licensure Compact, neither creates portable or interstate licensure, nor eliminates barriers to telemedicine. Under the Compact, physicians must still obtain a license from every state in which their patients might find themselves needing medical care. The Compact only attempts to expedite the process of applying for multiple, nonportable licenses. Licenses are no more interstate or portable under the Compact than without it. To call it an Interstate Medical Licensing Compact is false advertising. ⁷⁸

In states that adopt the Compact, medical-specialty-board certified (or eligible)physicians with clean records can apply for licenses from other Compact states through their home state. ⁷⁹ Once the home state has completed a criminal background check and verified a physician’s qualifications, the state sends an “attestation of eligibility” to the Interstate Medical Licensure Compact Commission. ⁸⁰ The physician then sends the Commission the licensing fees required by each Compact state selected by the physician, and the Commission forwards these fees and information about the physician to other Compact member states. In addition, physicians pay $700 to the Compact Commission, of which $400 remains with Commission and $300 is forwarded to the home state for its work in vetting the applicant. At that point, the Compact states issue the applicant expedited licenses (because the physician’s home state has already done most of the work). Although a number of states have joined the compact, issues related to the required Federal Bureau of Investigation background check are derailing efforts to move forward. ⁸¹

The legislation passed by the Interstate Medical Licensure Compact’s member states includes two key components: “expedited” licensing and a physician database that would facilitate the sharing of information about physician discipline and ongoing investigations among member states. ⁸² However, comments by Dr. Jon Thomas, chair of the Interstate Medical Licensure Commission, challenge the assumption that the process of securing multiple licenses can be “expedited.” He explained that Minnesota has modified its state’s process so that, if there are no issues that trigger an evaluation (IMLC-eligible physicians would not trigger an evaluation), a license can be issued within a week.

The physician database, the part of the Compact which was, ostensibly, to address the difficulty of board oversight with multiple states licensing the same physicians, is nowhere near ready. The IMLC Commission started taking applications for licenses in April 2017 but, according to Dr. Thomas, the Commission does not have the funds and is “just starting to talk about” the database. Katherine Thomas, President of the Board of Directors of the National Council of State Boards of Nursing, noted that establishing a database “is a big challenge” and is expensive. And the Nurse database is mainly to “flag people who are under significant investigation for significant issues so if they move to another state to seek a geographic cure we have a way to know that.” ⁸³

The National Practitioner Data Base (NPDB) already tracks physicians for that purpose, in an attempt to trace individuals who have been sanctioned by a state board, had their hospital privileges revoked, have a history of medical malpractice cases, etc. To add value, the IMLC database would have to capture information that has not yet led to reportable sanctions and member states would have to report promptly (a problem with the NPDB) and follow up promptly. ⁸⁴

By contrast, changing the locus of care to that of the physician would create a single location for complaints and information about physicians without creating a new reporting requirement for states.

The Compact has already received significant federal funding. ⁸⁵ The Federation of State Medical Boards received funding for the Compact from the federal Health Resources and Services Administration’s Licensure Portability Grant Program. ⁸⁶ Paradoxically, the License Portability Grant Program’s literature specifically decries the existing duplicative licensing process as an “unnecessary licensure barrier to cross-state practice” that fails to address “workforce needs and improve access to health care services,” yet the Compact keeps the duplicative licensing process intact. ⁸⁷ Indeed, the Federation of State Medical Boards has received additional federal funds to “implement the administrative and technical infrastructure of the new Interstate Medical Licensure Compact” and to “support educational outreach to expand participation in the Compact by other states.” ⁸⁸

Such federal subsidies raise other important issues. First, if federal subsidies allow the Compact to underprice private companies that assist physicians in securing multiple licenses, the result would be to replace the existing process with a more expensive, taxpayer-subsidized one. Second, if federal subsidies to the Compact Commission make that process for applying for multiple licenses more attractive than seeking private services, the requirement that physicians be certified by a medical-specialty board effectively confers a government-created competitive advantage on the American Board of Medical Specialties and its member boards. ⁸⁹ To the extent the Compact grants medical-specialty boards an advantage that increases their power, the Compact would seem to contribute to the cartelization of medicine rather than disrupt it through innovations such as telemedicine.

In all, the Interstate Medical Licensure Compact does not disrupt the status quo so much as preserve it. It protects the interests of the state medical boards. Under the Compact, the Federation of State Medical Boards’ member boards continue to hold monopolies over market entry in their respective states. The federation stands to gain financially as the Interstate Medical Licensure Compact makes use of the Federation’s Uniform Application. The Compact also funnels applicants through the Federation Credential Verification System, although multiple private credential verification companies exist. The Compact makes it seem as if action has been taken, quieting critics who have called for federal licensure to promote interstate telemedicine.

Conclusion

Aside from the ideal of eliminating government licensing of clinicians, or the second-best option of relying on states to open their borders to physicians licensed in other states, the most feasible option for expanding telemedicine is for Congress to define the location of the practice of telemedicine as that of the physician, treating digital patients like patients who physically make a trip across state or national borders to secure medical care.

Under such a law, a physician would need only one license to engage in the practice of telemedicine, and would be responsible for only one set of licensing rules — those of the state in which the physician practices. Existing telemedicine providers would be able to recruit physicians in greater numbers and to provide higher-quality and lower-cost services to far more patients. The ability of patients in emergent situations or with rare illnesses to obtain care from top specialists would expand dramatically. New entrants into a national market for telemedicine would drive down prices for both telemedicine and in-person medical services.

Such a law would remove existing barriers to telemedicine by allowing licensed physicians to offer telemedical services in all states. It would parallel the decision by the Centers for Medicare and Medicaid Services to allow hospitals interacting with physicians located elsewhere via telemedicine to rely on the credentialing and privileging of the hospital at which the telemedicine doctor is located, and efforts by the Veterans Administration, U.S. armed forces, and the Public Health Service to allow physicians to practice in any location on the basis of the physician’s home-state license. It would eliminate the costly efforts to secure licenses in multiple states to practice telemedicine. State medical boards would continue to issue licenses, but a state’s licensing laws would no longer constrain its residents from obtaining telemedicine services from providers in other states.

A single-state licensing system would create a single repository of complaints and information about disciplinary actions against a physician in the state in which the physician is licensed.

The Interstate Medical Licensure Compact does not solve anything. It does not create license portability. Physicians must still secure a license in every state in which their patients live or wish to receive treatment. The Compact protects the status quo — specifically the power of the state medical boards and the revenues that flow to them from physicians who must seek multiple licenses to practice telemedicine.

Notes

1. Regina Garcia Cano, “Telemedicine Gains Increasing Relevance in S.D.,” Argus Leader (Sioux Falls), June 8, 2014, http://www.argusleader.com/story/news/2014/06/08/telemedicine-gains-increasing-relevance-sd/10193077/.
2. For a perspective on how to promote international telemedicine, see Simon Lester, “Expanding Trade in Medical Care through Telemedicine,” Cato Institute Policy Analysis no. 769, March 24, 2015, https://object.cato.org/sites/cato.org/files/pubs/pdf/pa769_2.pdf.
3. Shirley Svorny, “Medical Licensing: An Obstacle to Affordable, Quality Care,” Cato Institute Policy Analysis no. 621, September 17, 2008, http://object.cato.org/sites/cato.org/files/pubs/pdf/pa-621.pdf; and Shirley Svorny, “Could Mandatory Caps on Medical Malpractice Damages Harm Consumers?” Cato Institute Policy Analysis no. 685, October 20, 2011, https://www.cato.org/publications/policy-analysis/could-mandatory-caps-medical-malpractice-damages-harm-consumers.
4. News Service of Florida, “Telehealth Bill Bounces Back to House,” March 7, 2016, http://health.wusf.usf.edu/post/telehealth-bill-bounces-back-house#stream/0.
5. Julia Boorstin, “Paging Dr. Robot: Telemedicine a Game Changer, So-called Robot Doctors Are Allowing Patients in More Remote Areas to Get Lifesaving Care,” NBC Nightly News, September 2, 2013, http://www.nbcnews.com/video/nightly-news/52908303#52908303; and Judy Woodruff, “Telemedicine Puts a Doctor Virtually at Your Bedside,” PBS NewsHour, July 13, 2015, http://www.pbs.org/newshour/bb/telemedicine-puts-doctor-virtually-bedside/.
6. DarkDaily.com, “ ‘Nighthawk’ Radiology Services Expand to Hospital Pharmacies: Could Pathology Laboratories Be Next?” July 16, 2015, http://www.darkdaily.com/nighthawk-radiology-services-expand-to-hospital-pharmacies-could-pathology-laboratories-be-next-706#axzz4C9v3CDi6.
7. Partners TeleStroke Center, “What Is TeleStroke?” https://telestroke.massgeneral.org/telestroke.aspx; and Michael Kulcsar, Siobhan Gilchrist, and Mary G. George, “Improving Stroke Outcomes in Rural Areas through Telestroke Programs: An Examination of Barriers, Facilitators, and State Policies,” Telemedicine and e-Health 20, no. 1 (January 2014): 3–10.
8. D. E. Calcagni, C. A. Clyburn, G. Tomkins, G. R. Gilbert, T. J. Cramer, R. K. Lea, S. G. Ehnes, and R. Zajtchuk, “Operation Joint Endeavor in Bosnia: Telemedicine Systems and Case Reports,” Telemedicine Journal 2, no. 3 (Fall 1996): 211–24, http://www.ncbi.nlm.nih.gov/pubmed/10165544.
9. Shantanu Nundy, Jonathan J. Dick, Chia-Hung Chou, Robert S. Nocon, Marshall H. Chin, and Monica E. Peek, “Mobile Phone Diabetes Project Led to Improved Glycemic Control and Net Savings for Chicago Plan Participants,” Health Affairs 33, no. 2 (February 2014): 265–72.
10. David C. Grabowski and James A. O’Malley, “Use of Telemedicine Can Reduce Hospitalizations of Nursing Home Residents and Generate Savings for Medicare,” Health Affairs 33, no. 2 (February 2014): 244–50.
11. National Parkinson Foundation, “Telemedicine and Virtual Care,” https://web.archive.org/web/20170311155437/http://www.parkinson.org/expert-care-research/telemedicine-virtual-care; and Nancy Shute, “The Parkinson’s Doctor Will Video Chat With You Now,” National Public Radio, June 2011, http://www.npr.org/2011/06/27/137089619/the-parkinsons-doctor-will-video-chat-with-you-now.
12. Donald M. Hilty, Daphne C. Ferrer, Michelle Burke Parish, Barb Johnston, Edward J. Callahan, and Peter M. Yellowlees, “The Effectiveness of Telemental Health: A 2013 Review,” Telemedicine and E-Health 19, no. 6 (June 2013): 444–54. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3662387/.
13. Devon M. Herrick, “Convenient Care and Telemedicine,” NCPA Policy Report no. 305, November 2007, http://www.ncpa.org/pdfs/st305.pdf.
14. Richard Wootton, “Twenty Years of Telemedicine in Chronic Disease Management — an Evidence Synthesis,” Journal of Telemedicine and Telecare 18, no. 4 (2012): 211-20; Andrew Broderick and Valerie Steinmetz, Centura Health at Home: Home Telehealth as the Standard of Care. Case Studies in Telehealth Adoption (New York: The Commonwealth Fund, January 2013), http://www.commonwealthfund.org/~/media/files/publications/case-study/2013/jan/1655_broderick_telehealth_adoption_centura_case_study.pdf; and Center for Connected Health Policy, “Remote Patient Monitoring,” http://cchpca.org/remote-patient-monitoring.
15. Neil Versel, “As School Nurses Disappear, Telemedicine Fills In the Gaps,” MedCity News, May 18, 2016, http://medcitynews.com/2016/05/school-nurses-telemedicine/?rf=1; Associated Press, “Avera to use Telemedicine in Sioux Falls Schools,” Daily Republic (Mitchell, SD), November 12, 2014, http://www.mitchellrepublic.com/content/avera-use-telemedicine-sioux-falls-schools.
16. Bonnie Darves, “Telemedicine: Changing the Landscape of Rural Physician Practice,” New England Journal of Medicine Career Center, May 17, 2013, http://www.nejmcareercenter.org/article/telemedicine-changing-the-landscape-of-rural-physician-practice/; Rural Assistance Center, “Telehealth Use in Rural Healthcare,” Federal Office of Rural Health Policy, Health Resources and Services Administration, U.S. Department of Health and Human Services, May 8, 2014, https://www.raconline.org/topics/telehealth; Boorstin, “Paging Dr. Robot”; Kulcsar et al., “Improving Stroke Outcomes in Rural Areas through Telestroke Programs.”
17. James Brooks, “Program Expands Southeast Scope,” JuneauEmpire.com, July 28, 2015, http://juneauempire.com/local/2015-07-29/program-expands-southeast-scope.
18. See, for example, American Well’s website at https://amwell.com/. The American Well site lists the services it offers through a question-and-answer format: “What conditions are appropriate for an online [urgent care] doctor visit?” The answer: “cough, sinus infection, sore throat, back pain, bronchitis, vomiting, diarrhea, sprains/strains, fever, pinkeye, cold and flu, skin conditions, UTI, headache, influenza, rashes.” Then, “What conditions do our [online] therapists treat?” The answer: “anger management, anxiety, ADHD / ADD, depression, divorce, eating disorders, LGBT counseling, bereavement, postpartum depression, OCD, trauma/PTSD, couples therapy, panic attacks, substance abuse, sleep disorders, stress and more.” Finally, as part of its nutrition counseling services: “Here are some common concerns that can be addressed online: weight loss, digestive disorders, food allergies, gluten free diets, pregnancy diet, breastfeeding tips, pediatric nutrition, high cholesterol, sports nutrition, vegetarian/vegan diets, vitamins and supplements, high blood pressure, diabetes, gestational diabetes, paleo diet, meal planning.”
19. Kaiser Permanente, “Operationalizing Telemedicine in Managed Care: Lessons from Kaiser Permanente, Half Day Course,” 2015 Annual Meeting American Telemedicine Association, May 3, 2015, http://studylib.net/doc/11559436/operationalizing-telemedicine-in-managed-care--lessons-fr; and Darius Tahir, “Innovations: Kaiser Tests Video Visits to Cut Waits,” Modern Healthcare, February 21, 2015, http://www.modernhealthcare.com/article/20150221/MAGAZINE/302219977.
20. Beth Pinsker, “Coming Soon to a Screen Near You: Doctors,” Reuters, August 12, 2015, http://www.reuters.com/article/us-usa-health-telemedicine-idUSKCN0QH1S820150812.
21. UnitedHealthcare, “UnitedHealthcare Covers Virtual Care Physician Visits, Expanding Consumers’ Access to Affordable Health Care Options,” April 30, 2015, https://www.stage-app.uhc.com/news-room/2015-news-release-archive/unitedhealthcare-covers-virtual-care-physician-visits.
22. Anthony Brino, “More Insurers See Case for Telemedicine,” Healthcare Payer News, August 7, 2014, http://www.healthcarefinancenews.com/news/more-insurers-see-case-telemedicine#.VhbI_vlViko. See LiveHealth Online, “Choose a State,” https://www.livehealthonline.com/availability.
23. Jonah Comstock, “Survey: 9 in 10 Large Employers Will Offer Telehealth Next Year,” MobiHealthNews, August 10, 2016, http://www.mobihealthnews.com/content/survey-9-10-large-employers-will-offer-telehealth-next-year.
24. Jonah Comstock, “Video Visits, Telemedicine Today Are Like Retail Clinics Were in the 1990s,” MobiHealthNews, November 4, 2014, http://mobihealthnews.com/37913/video-visits-telemedicine-today-are-like-retail-clinics-were-in-the-1990s/.
25. Dan Verel, “Pipeline RX Takes Telemedicine to Hospital Pharmacies,” MedCity News, December 8, 2014, http://medcitynews.com/2014/12/pipeline-rx-takes-telemedicine-hospital-pharmacies/.
26. Woodruff, “Telemedicine Puts a Doctor Virtually at Your Bedside.”
27. American Telemedicine Association, Telemedicine Case Studies, “Patient Profile: Teleneurology Provides Swift, Lifesaving Treatment,” https://thesource.americantelemed.org/resources/telemedicine-case-studies.
28. See the Teladoc website at https://www.teladoc.com/about-our-company/.
29. Laura Landro, “Clues to Better Healthcare from Old Malpractice Lawsuits,” Wall Street Journal, May 9, 2016, http://www.wsj.com/articles/clues-to-better-health-care-from-old-malpractice-lawsuits-1462813546.
30. Svorny, “Could Mandatory Caps on Medical Malpractice Damages Harm Consumers?”
31. Teladoc, “Teladoc Physician Credentialing,” January 2016, http://communications.teladoc.com/resources/Key-Differences-Employers.pdf; Teladoc Securities and Exchange Commission Form 10-K for the year ended December 21, 2016, http://d18rn0p25nwr6d.cloudfront.net/CIK-0001477449/96d1a2e4-f16c-4827-b470-eba3ae1b3d24.pdf
32. American Telemedicine Association, “Telemedicine Accreditation” http://www.americantelemed.org/main/ata-accreditation (viewed 8/30/2017).
33. EfficientGov, “USDA Awards $20M for Telehealth Programs,” January 13, 2015, https://efficientgov.com/blog/2015/01/13/usda-awards-20m-telehealth-programs/.
34. Federal Communications Commission, “Rural Health Care Program,” https://www.fcc.gov/encyclopedia/rural-health-care.
35. Federal Communications Commission, “FCC Chairman Announces New CONNECT2HEALTHCC Taskforce,” March 4, 2014, https://www.fcc.gov/document/fcc-chairman-announces-new-connect2health-task-force.
36. Charles R. Doarn, et al, “Federal Efforts to Define and Advance Telehealth — A Work in Progress,” Telemedicine Journal and E-Health,” Vol. 20, No. 5, pp. 409-418, May 1, 2014, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4011485/.
37. Diane E. Hoffman and Virginia Rowthorn, “Legal Impediments to the Diffusion of Telemedicine,” Journal of Health Care Law and Policy 14, no. 1 (2011): 7–8, http://digitalcommons.law.umaryland.edu/fac_pubs/1195/.
38. Health Resources and Services Administration, “Licensure, Licensure Portability,” http://bhpr.hrsa.gov/grants/licensure/ (no longer available online). The grant program “Funds state professional licensing boards to work with licensing boards in other states to develop and implement policies that reduce barriers to telemedicine and other practices that are limited by requirements that physicians be licensed in each state where he or she may provide telemedicine services on a regular basis. [italics added] This is particularly a problem for physicians who are providing highly specialized services around the country for rare conditions (e.g., genetic counseling).”
39. U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, “Telehealth Services,” https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/TelehealthSrvcsfctsht.pdf; Eric Wicklund, “CMS Boosts Telehealth in 2015 Physician Pay Schedule,” mHealthNews, November 3, 2014, http://www.mobihealthnews.com/news/cms-boosts-telehealth-2015-physician-pay-schedule; and Aditi Pai, “More Telehealth Makes the Cut for Medicare Coverage Next Year,” MobiHealthNews, November 4, 2014, http://mobihealthnews.com/37893/more-telehealth-makes-the-cut-for-medicare-coverage-next-year/.
40. Phil Galewitz, “Cost Fears Keep Medicare Telemedicine from Expanding,” Daily Herald (Chicago), June 28, 2015, http://www.dailyherald.com/article/20150628/business/150629224/. Most people would not find this an acceptable way to ration health care. See also, Rachel Z. Arndt, “Senate Bill Would Let Medicare Test Telehealth Expansion,” Modern Healthcare, April 3, 2017, http://www.modernhealthcare.com/article/20170403/NEWS/170409995.
41. Center for Connected Health Policy, “State Telehealth Laws and Reimbursement Policies: A Comprehensive Scan of the 50 States and District of Columbia,” The National Telehealth Policy Resource Center, April 2017, http://www.cchpca.org/sites/default/files/resources/50%20STATE%20PDF%20FILE%20APRIL%202017%20FINAL%20PASSWORD%20PROTECT.pdf.
42. U.S. Department of Veteran Affairs, VA Telehealth Services, “Store-and-Forward Telehealth,” http://www.telehealth.va.gov/sft/; American Telemedicine Association, “Store-and-Forward,” November 7, 2013.
43. Latoya Thomas and Gary Capistrant, State Telemedicine Gaps Analysis, Physician Practice Standards and Licensure (Washington: American Telemedicine Association, 2015), http://utn.org/resources/downloads/50-state-telemedicine-gaps-analysis-physician-practice-standards-licensure.pdf.
44. Edgar Walters, “Teladoc Scores Victory in Clash With Medical Board,” Texas Tribune, May 30, 2015, http://www.texastribune.org/2015/05/30/teladoc-scores-early-victory-against-medical-board/; Dionne Lomax and Kate Stewart, “Injunction Blocks Implementation of Texas Telemedicine Regulations,” National Law Review Health Law and Policy Matters (blog), June 4, 2015, http://www.natlawreview.com/article/injunction-blocks-implementation-texas-telemedicine-regulations.
45. Eric Wicklund, “With New Texas Law, Telemedicine Passes an Important Milestone,” mHealth Intellegence, May 31, 2017, http://mhealthintelligence.com/news/with-new-texas-law-telemedicine-passes-an-important-milestone.
46. Federal Trade Commission, “Brief for the United States and the Federal Trade Commission as Amici Curiae,” in Teladoc, Incorporated, et al., v. Texas Medical Board et al., September 14, 2016, https://www.ftc.gov/system/files/documents/amicus_briefs/teladoc-incorporated-et-al-v-texas-medical-board-et-al/teladoc_doj-ftc_amicus_brief.pdf.
47. Most states allow physician-to-physician consultation across state borders, but that exception has limitations and is not sufficient to allow the general practice of telemedicine. A few states have reciprocal agreements with neighboring states that allow doctors licensed in each state to practice in the other. See Thomas and Capistrant, State Telemedicine Gaps Analysis.”
48. See, for example, Robert Kocher, “Doctors without State Borders: Practicing Across State Lines,” Health Affairs (blog), February 18, 2014, http://healthaffairs.org/blog/2014/02/18/doctors-without-state-borders-practicing-across-state-lines/.
49. Thomas and Capistrant, State Telemedicine Gaps Analysis.” In an interview with Kofi Jones, vice president of public relations and government affairs at American Well, Jones said that she has “30 binders in her office filled with state-by-state regulations and legislation.” See Mattie Quinn, “Telemedicine Advances Faster than States Can Keep Up,”Governing, February 2016, http://www.governing.com/topics/health-human-services/gov-telemedicine-state-laws.html.
50. Beth Kutscher, “The Long Reach of Medicine,” Modern Healthcare, October 20, 2012, http://www.modernhealthcare.com/article/20121020/MAGAZINE/310209954.
51. Sara Rosenbaum, “Perspective: Medicaid Payments and Access to Care,” New England Journal of Medicine 371, no. 25 (December 18, 2014): 2345–47, http://www.nejm.org/doi/pdf/10.1056/NEJMp1412488.
52. See, for example, Raymond W. Pong and John C. Hogenbirk, “Licensing Physicians for Telehealth Practice: Issues and Policy Options,” Health Law Review 8, No. 1 (1999): 3–14, https://www.researchgate.net/publication/235929514_Licensing_Physicians_for_Telehealth_Practice_Issues_and_Policy_Options.
53. Mary K. Wakefield, “Telehealth Licensure Report, Special Report to the Senate Appropriations Committee,” Health Resources and Services Administration, U.S. Department of Health and Human Services, 2010, https://web.archive.org/web/20131204111506/https://www.hrsa.gov/healthit/telehealth/licenserpt10.pdf.
54. As I have argued elsewhere, consumers would be best served were states to eliminate medical boards and the licensing of medical professionals entirely. See, for example, Svorny, “Medical Licensing: An Obstacle to Affordable, Quality Care”; “End State Licensing of Physicians,” The Hill, August 7, 2015, http://thehill.com/blogs/congress-blog/healthcare/250457-end-state-licensing-of-physicians; and “Should We Reconsider Licensing Physicians?” Contemporary Policy Issues 10, no. 1 (1992): 31–38.
55. Many entities use credential verification organizations (CVOs), such as McKesson, which lists the services it provides on its website. See McKesson, “Medical Credentials Verification Organization (CVO),” http://www.mckesson.com/population-health-management/solutions/credentials-verification-organization-cvo/. The (private) National Center for Quality Assurance accredits CVOs. See National Center for Quality Assurance, “Credential Verification Organization Certification,” August 31, 2015, http://www.ncqa.org/programs/certification/credentials-verification-organization-cvo.
56. Joanne Spetz, Stephen T. Parente, Robert J. Town, and Dawn Bazarko, “Scope-of-Practice Laws for Nurse Practitioners Limit Cost Savings That Can Be Achieved in Retail Clinics,” Health Affairs. 32, no. 11 (November 2013): 1977–84, https://web.archive.org/web/20150317002053/http://content.healthaffairs.org/content/32/11/1977.abstract.
57. Public Citizen’s website includes links to studies since 1999. See Public Citizen, “State Medical Board Disciplinary Actions,” https://web.archive.org/web/20170112084930/http://www.citizen.org/statemedicalboardsdisciplinaryactions. See also, Sidney M. Wolfe, Cynthia Williams, and Alex Zaslow, “Public Citizen’s Health Research Group Ranking of the Rate of State Medical Boards’ Serious Disciplinary Actions, 2009–2011,” May 17, 2012, http://www.citizen.org/documents/2034.pdf; Public Citizen, “New Public Citizen Study Questions Ability of State Medical Boards to Protect Patients from Dangerous Doctors,” March 15, 2011, http://www.citizen.org/pressroom/pressroomredirect.cfm?ID=3294; Alan Levine, Robert Oshel, and Sidney Wolfe, “State Medical Boards Fail to Discipline Doctors with Hospital Actions against Them,” March 2011, http://www.citizen.org/documents/1937.pdf (in this case, the actual physician discipline came from hospitals); and Rachel Rabkin Peachman, “What You Don’t Know About Your Doctor Could Hurt You,” Consumer Reports, April 20, 2016, http://www.consumerreports.org/cro/health/doctors-and-hospitals/what-you-dont-know-about-your-doctor-could-hurt-you/index.htm.
58. In 2013, troubled by the failure of the Medical Board of California to discipline physicians, California legislators proposed shifting the Board’s disciplinary function to the Office of the Attorney General. See California Healthline Daily Edition, “Bill Would Strip Medical Board of Power to Investigate Physicians,” April 23, 2013, https://californiahealthline.org/morning-breakout/bill-would-strip-medical-board-of-power-to-investigate-physicians/.
59. Svorny, “Could Mandatory Caps on Medical Malpractice Damages Harm Consumers?”
60. Although it often said that the European Union has adopted this approach, it is not that simple. Automatic recognition of qualifications is not the same as being licensed to practice. See European Union, “Modernization of the Professional Qualifications Directive — Frequently Asked Questions,” October 9, 2013, http://europa.eu/rapid/press-release_MEMO-13-867_en.htm; and Bettina Engelmann, “Recognition Procedures for Foreign-trained Doctors in Germany,” presentation at the International Workshop on Practices for Recognizing Qualifications of Migrant Health Professionals,” Hamburg, February 2009, http://ec.europa.eu/health/archive/ph_systems/docs/turantur_en.pdf.
61. Lynne Jeter, “Florida Passes Telehealth Legislation,” Orlando Medical News, April 11, 2016, http://orlandomedicalnews.com/florida-passes-telehealth-legislation-cms-358.
62. See, for example, Pong and Hogenbirk, “Licensing Physicians for Telehealth Practice: Issues and Policy Options”; Brian Darer, “Telemedicine: A State-Based Answer to Health Care in America,” Virginia Journal of Law and Technology 3, no. 4 (Spring 1998), https://litigation-essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cite&docid=3+Va.+J.L.+%26+Tech.+4&srctype=smi&srcid=3B15&key=7396623107b977b9fa9e0afef4e0b3e6; and Jane Orient, “Letter to U.S. Senate: Oppose Interstate Medical Licensing Compact,” American Association of Physicians and Surgeons, January 26, 2015, https://aapsonline.org/letter-to-u-s-senate-oppose-interstate-medical-licensing-compact/. Gary Capistrant, Chief Policy Officer of the American Telemedicine Association, was quoted as saying: “What the ATA wants … is for the regulations of the state where the physician is located to govern his or her use of telehealth. Medicine is where the provider is. Where the patient is is not where the practice of medicine occurs.” See Ken Terry, “Interstate Licensing Bill for Telemedicine Gathers Support,” Medscape.com, August 18, 2015, http://www.medscape.com/viewarticle/849633.
63. Department of Health and Human Services, Centers for Medicare and Medicaid Services, “Medicare and Medicaid Programs: Changes Affecting Hospital and Critical Access Hospital Conditions of Participation: Telemedicine Credentialing and Privileging,” Federal Register 76, no. 87, pp. 25550–65, May 5, 2011, http://www.gpo.gov/fdsys/pkg/FR-2011-05-05/html/2011-10875.htm.
64. Telehealth Resource Centers, “Licensure and Scope of Practice,” http://www.telehealthresourcecenter.org/toolbox-module/licensure-and-scope-practice.
65. Terry, “Interstate Licensing Bill for Telemedicine Gathers Support.”
66. National Council of State Boards of Nursing, “Licensure Compacts,” https://www.ncsbn.org/compacts.htm.
67. See, for example, Elizabeth Joy Matak, “Telemedicine: Medical Treatment via Telecommunications Will Save Lives, but Can Congress Answer the Call? Federal Preemption of State Licensure Requirements under Congressional Commerce Clause Authority and Spending Power,” Vermont Law Review 22, no. 1 (Fall 1997): 231–55.
68. Svorny, “Medical Licensing: An Obstacle to Affordable, Quality Care.”
69. Jonathan D. Linkous, “Legal Impediments to Telemedicine State Licensure,” statement at Roundtable on Legal Impediments to Telemedicine, Law and Health Care Program, University of Maryland School of Law, April 16, 2010, (available from author). Some boards are funded directly by physician fees. In other states, fee revenues go to the state general fund and annual board funding is set as part of the state budgetary process. See Shirley Svorny, “State Medical Boards: Institutional Structure and Board Policies,” Federation Bulletin 84, no. 2 (1997): 27–32, http://www.csun.edu/~vcecn007/publications/JMLD_StateMedicalBoards_1997.pdf.
70. Shirley Svorny, “Licensing Doctors: Do Economists Agree? Econ Journal Watch 1, no. 2 (August 2004): 279–305, http://www.csun.edu/~vcecn007/publications/SvornyDoEconomistsAugust2004.pdf; and David Hyman and Shirley Svorny, “If Professions Are Just ‘Cartels by another Name,’ What Should We Do about It?” University of Pennsylvania Law Review Online 163, no. 1, (2014): 101–21, http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1137&context=penn_law_review_online.
71. U.S. Constitution, Tenth Amendment.
72. U.S. Constitution, Article 1, Section 8.
73. See Matak, “Telemedicine: Medical Treatment via Telecommunications Will Save Lives, but Can Congress Answer the Call?”; Lars Noah, “Ambivalent Commitments to Federalism in Controlling the Practice of Medicine,” Kansas Law Review 53, issue 1 (2004): 149–94; Sarah E. Born, “Telemedicine in Massachusetts: A Better Way to Regulate,” New England Law Review 42, issue 1 (2007):194–224; Amar Gupta and Deth Sao, “The Constitutionality of Current Legal Barriers to Telemedicine in the United States: Analysis and Future Directions of Its Relationship to National and International Health Care Reform,” Health Matrix: Journal of Law-Medicine 21, no. 2 (2011): 385–442.
74. “Congress can confidently pursue telemedicine licensure reform knowing that it will overcome any constitutional challenges and find secure support in the Commerce Clause, Necessary and Proper Clause, or Congress’ power to spend conditionally on the general welfare.” Bill Marino, Roshen Prasad, and Amar Gupta, “A Case for Federal Regulation of Telemedicine in the Wake of the Affordable Care Act,” Columbia Science and Technology Law Review 16 (May 17, 2015): 274–346.
75. Virginia Rowthorn, “Legal Impediments to the Diffusion of Telemedicine,” Journal of Health Care Law and Policy 14, No. 1 (2011): 1–53, http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=2194&context=fac_pubs.
76. See Walter Olson, The Litigation Explosion (New York: Truman Talley Books-Dutton, 1991), ch. 9, http://www.pointoflaw.com/books/tle_chap9.pdf; and Vedder, Price, Kaufman & Kammholz, P.C., “Long-Arm Statues: A Fifty-State Survey,” 2003, http://euro.ecom.cmu.edu/program/law/08-732/Jurisdiction/LongArmSurvey.pdf.
77. See Charles M. Key, “Personal Jurisdiction and Choice of Law in Interstate Medical Practice Not Settled Issues,” ABA Health eSource 7, no. 10 (June 2011), https://www.americanbar.org/content/newsletter/publications/aba_health_esource_home/aba_health_law_esource_1106_key.html, where he cites cases where injured patients have successfully sued out-of-state providers, but notes that this is a developing area of law.
78. The framers of the Compact chose two web addresses, licenseportability.org and licenseportability.com, even though license portability is not a component of the Compact. Perhaps as a result of criticism, by 2017, the web pages, licenseportability.org and licenseportability.com, were dropped in favor of www.imlcc.org, and all references to portability are gone. Original documents refer to portability. For example, although the webpage, licenseportability.org, has been shuttered, the link to this document remains (as of July 9, 2017): http://www.licenseportability.org/assets/pdf/Interstate-Medical-Licensure-Compact-(FINAL).pdf. An earlier version of the website described the Compact as “an expedited licensure process for eligible physicians that improves license portability and increases patient access to care” [italics added.]. See Shirley Svorny, “Interstate Medical Licensure Compact Won’t Help,” Clarion-Ledger (Jackson, MS), February 27, 2016, http://www.clarionledger.com/story/opinion/columnists/2016/02/26/svorny-interstate-medical-licensure-compact-wont-help/80998064/; and Shirley Svorny, “Ted Cruz Should Make the Case for Telemedicine,” Time, February 9, 2016, http://time.com/4210508/ted-cruz-telemedicine/. On July 2, 2016, only one statement remained referencing portability: Frequently Asked Questions: “How will the Commission be funded? How much will it cost?” The answer: “The Compact Commission is enabled to seek grants and secure outside funding, through private grants, or federal appropriations in support of license portability.” This statement no longer appears on the IMLCC webpage, but it appears on the webpage of the Alaska State Legislature, http://www.akleg.gov/basis/get_documents.asp?session=29&docid=29238, and elsewhere. See: Thomas Sullivan, “Interstate Medical Licensure Compact — Expands to 17 States,” Policy and Medicine, June 24, 2016, http://www.policymed.com/2016/06/interstate-medical-licensure-compact-expands-to-17-states.html.
79. Physicians may be “board eligible” for five to seven years (depending on the specialty) after they complete training but before they achieve initial certification. See ABMS, “ABMS Board Eligibility Policy: Policy and FAQs,” September 30, 2014, http://www.abms.org/board-certification/board-eligibility/. Physicians who do not meet the Compact standards may still apply the traditional way to multiple boards. See Federation of State Medical Boards, “Model Language, Interstate Medical Licensure Compact,” http://www.licenseportability.org/assets/pdf/Interstate-Medical-Licensure-Compact-(FINAL).pdf.
80. A summary of the Interstate Medical Licensure Compact process appears on the American Academy of Pediatrics’ website. See American Academy of Pediatrics, “Advocacy Action Guide for AAP Chapters,” https://www.aap.org/en-us/advocacy-and-policy/state-advocacy/Documents/Interstate%20Medical%20Licensure%20Compact-Advocacy%20Action%20Guide%20for%20AAP%20Chapters.pdf.
81. For current state status, see: Interstate Medical Licensure Compact, “The IMLC,” www.imlcc.org.
82. Currently the IMLCC webpage says: “… the Compact strengthens public protection by enhancing the ability of states to share investigative and disciplinary information.” See “Facts about the IMLCC,” Interstate Medical Licensure Compact, http://www.imlcc.org/facts-about-the-imlcc/.
83. Jon Thomas and Katherine Thomas, Federal Trade Commission Economic Liberty Task Force Roundtable “Streamlining Licensing across State Lines: Initiatives to Enhance Occupational License Portability,” July 27, 2017.
84. U.S. Department of Health and Human Service, Health Resources and Services Administration, “NPDB Timeline,” http://www.npdb.hrsa.gov/topNavigation/timeline.jsp.
85. Previously, the Federation of State Medical Boards’ “Interstate Medical Licensure Compact FAQ” on the now defunct web page, http://www.licenseportability.org/faq.html, said “Under the terms of the proposed Compact, the Commission may assess processing fees [on physicians] for expedited licensure, ultimately off-setting any burden on the member states. Additionally, the Compact Commission is enabled to seek grants and secure outside funding, through private grants, or federal appropriations in support of license portability.”
86. The Federation of State Medical Boards received three grants from the Health Resources Service Administration; the first was in 2006. See: Federation of State Medical Licensing Boards, “Federation of State Medical Boards Receives Grant to Facilitate Medical Licensure Portability,” September 13, 2012, https://www.fsmb.org/Media/Default/PDF/Publications/nr-lp-grant.pdf.
87. U.S. Department of Health and Human Services, “Licensure Portability Grant Program,” HRSA-15-138, https://www.hrsa.gov/ruralhealth/programopportunities/fundingopportunities/?id=91349861-3c0a-4776-b9d2-77dd77f46ed0.
88. In June 2016, the Federation of State Medical Boards announced a grant from the U.S. Health Resources and Services Administration to “help the Compact become operational and … [to] support educational outreach to expand participation in the Compact by other states.” The irony is that the announcement says, “The Compact is expected to expand access to health care, especially to those in rural and underserved areas of the country, and facilitate the use of telemedicine technologies in the delivery of health care.” Without license portability, and with only a potentially costly plan that may or may not expedite the initial licensure process, this expectation makes no sense. See Federation of State Medical Boards, “Federal Grant Awarded to Support State Medical Boards in Implementing Interstate Medical Licensure Compact,” June 17, 2016, https://www.fsmb.org/Media/Default/PDF/Publications/Compact_HRSA_Grant_June2016.pdf.
89. This concern has been raised by the Association of American Physicians and Surgeons multiple times. The organization’s main concern is that it will cement specialty-board Maintenance of Certification (MOC) programs they deem to be “of minimal or no value.” According to the AAPS, “there is near unanimity that MOC’s only effect is to drain physicians’ time and money.” AAPS, “Letter to U.S. Senate: oppose Interstate Medical Licensing Compact,” January 26, 2015, https://aapsonline.org/letter-to-u-s-senate-oppose-interstate-medical-licensing-compact/.

Swaminathan S. Anklesaria Aiyar

Three years ago, French economist Thomas Piketty wrote the bestseller Capital in the 21st Century.¹ He argued that capitalist economies have a natural tendency to concentrate wealth in the hands of the few.

Recently, Piketty and Lucas Chancel produced a new working paper, “Indian Income Inequality, 1922-2014: From British Raj to Billionaire Raj?”² They suggest that inequality in India is the highest since 1922, when income tax was introduced, and that the richest 1 percent of Indians receive 22 percent of all income. They estimate that inequality rose from 1922 to 1939-1940, and then declined sharply from Independence in 1947 to the early 1980s. This was a socialist era marked by very high tax rates, mass nationalization, and pervasive industrial and trade controls. Inequality, say Piketty and Chancel, rose after the mid-1980s and accelerated in the era of economic liberalization that started in 1991, gathering momentum in the 2000s.

There are two main problems with this analysis. One is its statistical flaws. The second is its failure to distinguish between different types of equality and inequality. These shortcomings lead Piketty to imply that the socialist era, but not the era of liberalization, was excellent for the common man. That is simply wrong.

Geanluca Lorenzon

Brazil is in the midst of one of the biggest corruption scandals in history. In the last three years, hundreds of businesspeople and politicians — including former president Luiz Inácio “Lula” da Silva — have been investigated and prosecuted for taking part in a massive bribery scheme involving state-owned companies. Although graft and influence peddling are not a new phenomenon in Brazil, bringing powerful individuals to justice certainly is.

Several reforms explain this transition to a more robust legal system. These include the introduction of plea bargaining in organized crime investigations; the creation of two public institutions to oversee the judiciary and the Public Ministry (the country’s top prosecutorial body), respectively; a competitive selection process based on merit for prosecutors and judges; and greater autonomy for the Federal Public Ministry and the Federal Police. A merit-based selection system for judicial appointments introduced in the 1988 constitution and greater access to public office by individuals with no previous political connections have also played a significant role in strengthening the country’s judicial institutions.

Brazil’s judiciary still has palpable problems, particularly its excessive cost and a bloated workload. In addition, judges enjoy certain prerogatives that are frequently abused. However, despite these shortcomings, the effectiveness of the judicial system has improved enormously since the 1990s, especially in fighting corruption.

Brazil’s recent experience holds lessons for other countries, especially in Latin America, where corruption, abuse of power, and impunity have been endemic features of public life.

INTRODUCTION

Do politicians get away with murder? In Brazil, they once did. In December 1963, Arnon de Mello — father of former president Fernando Collor de Mello — murdered a colleague on the floor of the Brazilian Senate.¹ He was arrested, tried, found not guilty, and immediately released. Fifty years later, things have changed. Brazil’s Federal Police (PF) arrested the leader of the governing party’s bloc in the Senate, Sen. Delcidio do Amaral, after charging him with obstruction of justice.² This was not an isolated case. Former president Luiz Inácio “Lula” da Silva (known as Lula), who is still one of the most powerful people in Brazil, was sentenced to almost 10 years in prison for money laundering.³ What changed?

In recent years, Brazil has transitioned to a more robust judiciary system dedicated to fighting corruption. The Federal Police, the Federal Public Ministry (MPF), and the Federal Public Prosecutor’s Office (which is a separate division that handles cases with jurisdiction before the Supreme Court) have also transformed themselves into more effective institutions that promote equality before the law and prosecute powerful individuals when warranted.

This phenomenon is largely a product of Operation Lava Jato (Car Wash), an ongoing criminal investigation into institutionalized corruption. Launched in 2014, it has looked into wrongdoing by prominent politicians, businessmen, and state-controlled companies. The corruption brought to light by the investigation has received worldwide attention. The Associated Press called it “the biggest corruption scandal in the country’s history,”⁴ while Transparency International named it one of the most symbolic corruption cases in history.⁵

The operation started as an investigation of a small car wash gas station in the country’s capital. That investigation eventually led to the discovery of a huge network of bribery and corruption that involved many political actors of the ruling class in Brazil. From former presidents (such as Fernando Henrique Cardoso, Lula da Silva, and Dilma Rousseff) to leaders of the opposition and ruling parties in Congress (including the speaker of the House of Deputies and the president of the Senate), party chairmen, and even high court judges, the systemic web of corruption took Brazil into a frenzy of scandals that have come to light and are now under investigation and prosecution. Despite a history of negligence and overlooking criminal activities committed by politicians, the Brazilian legal system is now bringing people with money and political power to justice.

Operation Car Wash discovered an enormous network of corruption among Brazil’s leading construction companies and state-owned enterprises, specifically Petrobras (the national oil corporation), the Brazilian National Development Bank, and Eletrobras (a major electric public utilities company). Investigators unlocked a scheme of bribery in exchange for contracts that resulted in kickbacks ranging from 1 percent to 5 percent of every contract. So far, federal prosecutors are seeking to recover in court $12 billion from those implicated.⁶

The scandal gave rise to other investigations as well, such as the discovery of irregular campaign donations for leading candidates in Brazilian elections in the last few decades. The Superior Tribunal on Electoral Affairs of Brazil narrowly voted down a case that could have annulled the last presidential election and revoked the mandate of current president Michel Temer, on the grounds of undeclared donations to the campaign of impeached president Dilma Rousseff — who preceded Temer in office, and with whom Temer ran on the same ticket as her vice president. The runner-up in that race, Sen. Aecio Neves, is also implicated — allegedly having received money from the same companies that donated to Rousseff and Temer. All this has taken place while Brazil has suffered from its deepest economic crisis since the 1930s.

Six main factors made Operation Car Wash possible and successful:

1. The plea bargain option;
2. Merit-based selection for the judiciary introduced in the 1988 constitution;
3. A strong system of incentives to choose qualified public servants;
4. The 45th amendment to the constitution and the creation of the National Council of Justice and the National Council of the Public Ministry;
5. Qualified Supreme Court appointments; and
6. The autonomy of the Federal Police and Federal Public Ministry.

Those changes in the legal system in recent years have increasingly affected the incentives and behavior of both individuals and institutions.

FACTOR 1: THE PLEA BARGAIN OPTION

Although plea bargaining is a common courtroom practice in common law jurisdictions, it is rare in countries with civil law systems, in which judges play a greater role in the conduct, discovery, instruction, and deliberation stages of a trial.⁷ Until recently, the idea that the prosecution and the defense could sit and negotiate a sentencing deal was unheard of in Brazil.⁸ Today, the country has a more modest version of the plea bargain, called delação premiada— which literally translates to “awarded delation.”

Plea bargaining was first introduced into Brazil’s legal system in 1990 as a reaction to a series of heinous crimes, including rape, kidnapping, and murder.⁹ Numerous pieces of legislation in 1995,¹⁰ 1998,¹¹ 2006,¹² and 2011¹³ expanded its reach. Most important, in 2013, the Congress passed the “Law against Organized Crime,” which outlines the procedure and criteria for its application. The act defined “organized crime” as criminal acts committed by four or more people. To make enforcement possible, the act established a results-based system of incentives to encourage people to provide information that can lead to the conviction of other criminal suspects.

For a plea deal to be valid, the information provided by the defendant must achieve one of the following: identify the other participants of the criminal organization and criminal offenses committed by them, disclose the hierarchical structure and division of tasks within the criminal organization, prevent criminal offenses arising from the activities of the criminal organization, recover total or partial gains from offenses committed by the criminal organization, and find the victim with his or her physical safety preserved.¹⁴

This set of requirements is designed to increase the system’s effectiveness. The benefits of collaboration to a defendant include the possibility of reducing a prison sentence by up to two-thirds, replacing the sentence with a deprivation of civil rights, or even having a pardon promptly granted if the collaboration is considered to be of major importance.¹⁵

Most, if not all, collaborations include disclosure of evidence, because witness accounts are not sufficient for a conviction.¹⁶ Evidence is required because individual testimony in Brazil is regarded as highly unreliable.¹⁷ Defendants and victims are not even required to testify truthfully before a judge, and other witnesses’ testimony is often deemed unreliable, so judges tend not to convict someone purely on the basis of witness testimony. Compared with the U.S. legal system, which emphasizes cross-examination and imposes penalties for perjury, Brazil’s system incentivizes testimonial falsehoods, which makes oral testimony unreliable.

Plea bargaining has helped transform the incentives for presenting testimony. Before plea bargaining was introduced, defendants could easily lie or obfuscate the truth because they faced no negative repercussions for doing so. Now, there are incentives not only to be truthful at trial, but also to effectively collaborate during the investigation phase, when evidence is gathered and presented before a judge. This change is the biggest in the system, and it made Operation Car Wash possible. Without plea bargains, many of the investigations undertaken during the operation would simply not have occurred. As of May 2017, 155 such agreements had reached a settlement.¹⁸

For example, a plea deal by former Petrobras director Paulo Roberto Costa revealed important information about the methods of a criminal operation.¹⁹ It also provided evidence that connected politicians to the scheme.²⁰ As a result, Sen. Delcídio do Amaral was arrested after attempting to obstruct an investigation.²¹ However, the senator himself agreed to a plea deal: he provided information linking President Rousseff and former president Lula to corruption that resulted in legal charges.²²

Operation Car Wash could never have gotten as far as it did without the incentives established by the system of plea bargaining.²³ Most of the major scandals that have recently rocked Brazil were uncovered thanks to these agreements.

The plea bargain option represents an important step toward creating a more resourceful and time-efficient judiciary. It also presents a real prospect of improving a severely overloaded justice system. According to recent estimates, there are currently two pending lawsuits for each Brazilian²⁴— a major bottleneck that hinders the timeliness and effectiveness of judiciary.²⁵ Additionally, the Federal Public Ministry estimates that Brazil recovered $225 million in corruption cases through collaboration agreements.²⁶

The system of plea bargaining transformed the incentive structure within Brazil’s judicial system by influencing the actions of defendants during criminal lawsuits. Prior to the implementation of this instrument, defendants faced incentives not only to suppress relevant information, but also to obstruct justice. Today, incentives effectively encourage collaboration with the justice system, prevent impunity, and bring criminal suspects to trial regardless of social status.

FACTOR 2: A MERIT-BASED SELECTION SYSTEM AND GREATER ACCESS TO PUBLIC OFFICE

Historically, the exercise of power in Brazil has been associated with a traditional political establishment that was long considered to be out of touch with the majority of the people.²⁷ However, new criteria set by the 1988 constitution significantly reduced reliance on political connections to gain access to public office in the judiciary. These changes were bolstered by the growing number of people pursuing careers in the legal profession, which in turn is a result of Brazil’s economic transformation since the early 1990s. The demographic group that has benefited the most from these developments is the middle class, which has expanded significantly in the past two decades, becoming the largest segment of the population in 2009.²⁸ The middle class has grown from comprising approximately a third of the population to the majority — from 63 million people in 2005 to 103 million in 2011, which represents 55 percent of families in Brazil.

The growth of the middle class also increased the number of students attending university. With more people now able to afford a higher level of education, there are more students and hence more law students. As the middle class grows, so do higher education and the legal profession (see Figure 1).

After passing the bar exam, the path to becoming a judge or prosecutor begins with a mandatory three years of practicing law.²⁹ After that, there are two distinct ways to obtain a permanent judicial post. The more common path, through which 80 percent of judges are chosen, involves a rigorous process of open, public, and objective selection. This method gives greater opportunities to members of the middle class with no previous political connections.

The other path, known as o quinto— which literally translates as “the fifth” because 20 percent of judges for higher courts are selected this way — can be heavily influenced by political connections.

This selection process is outlined in a constitutional clause, which instructs the Order of Attorneys of Brazil (the Brazilian bar association) and the Public Prosecutor’s Office to each create a list with six nominees and submit it to the court with a vacant judicial seat.³⁰ The court then creates a new list with three nominees drawn from the previous lists. The court’s list is then sent to the chief of the respective executive office — for instance, the governor for state judges — who will choose someone from that list to fill the position. Nominees on each list need major support from the institutions that put their names forward. In the last phase, when the chief of the executive office makes a choice, political influence plays an even stronger role. Hence, to earn this promotion, candidates must face tough political competition within the institution to which they belong and wield enough influence to be selected by the relevant executive officer.

However, since a greater number of candidates come from the first path, that process has significantly altered the Brazilian judicial system because it facilitates the hiring of judges and prosecutors who do not have strong political backgrounds. Moreover, the public selection process incorporates a system of incentives outlined by the Brazilian constitution.³¹ The process follows several constitutional principles of administrative law, including impartiality and equality.³²

The prerequisites for the selection process are a law degree, passing the Brazilian bar exam followed by at least three years of practice, Brazilian citizenship, compliance with military and electoral obligations, and no criminal record. The process itself is set forth by public notice and is divided into a five-step process of elimination.³³ The first two steps are tests used to evaluate a broad range of legal knowledge. The third step evaluates the candidate’s mental and physical condition and medical records. The fourth step is an oral exam. The fifth and final step consists of a point-scoring system based on credentials, publications, and other qualifications of the candidate. The procedure explicitly disregards the candidate’s political background and focuses instead on practical qualifications. Additionally, the system establishes different merit goals as incentives throughout that person’s career.

An approved candidate will be offered a position as a substitute judge in a small county, with the possibility of advancing to intermediate-sized counties and then, potentially, larger-sized counties. Ultimately, the judge may become a Justice of Appeal, known as a desembargador. (Supreme Court judges are selected according to different criteria, as explained later.)

The merit-based selection system established in the 1988 constitution has increasingly allowed ordinary people without political influence to reach top positions in the Brazilian judiciary. Once in office, the individuals selected can exercise their duties without fear or favor.

One relevant figure selected in this way is the young federal judge Sergio Moro, who is the leading face of Operation Car Wash. Only 45 years old, Moro has handled most of the initial cases that have resulted from this operation (that is, before the appeals process). The media usually describe him as tough, rigorous,
and technical.

FACTOR 3: A STRONG SYSTEM OF INCENTIVES TO CHOOSE QUALIFIED PUBLIC SERVANTS

The incentives to select well-qualified public servants, specifically those in powerful decisionmaking positions such as judges and prosecutors, have become more robust in the past two decades. This has both positive and negative impacts on many people’s decisions to pursue a career in public service.

A Highly Competitive Career Path

According to a report by the Brazilian bar association, Brazil has more law schools — more than 1,400 — than the rest of the world combined.³⁴ The country has over 900,000 lawyers — and many more law graduates — often competing for top legal positions.³⁵ The supply of candidates to become judges and prosecutors remains high because public law remains a very attractive career option for high school graduates. Nonetheless, increased law school enrollment does not necessarily create more lawyers. Over the past decade, the percentage of law graduates who passed the bar exam has fluctuated between 10 percent³⁶ and 25 percent.³⁷

The typical career goal for members of this large demographic is to be a judge or a prosecutor. Both professions have a legal right to the same salaries: an entry-level prosecutor must be paid the same as an entry-level judge. With 100 to 250 candidates seeking a single position, competition is stiff.³⁸

Public Law Careers: High Salaries, Tenures, and Honors

Public law jobs are among the highest paid in Brazil. A judge, by the start of his or her career, earns a base annual salary of about $76,160. Compared with the average annual income in Brazil of around $7,200, this is a significant sum.³⁹ The income of Brazilian judges is further increased by bonuses and various other perks, with total compensation sometimes reaching up to $226,000 a year.⁴⁰ Unfortunately, bonuses are often awarded for dubious reasons. For example, judges receive around $13,200 a year for housing assistance, even though they already have among the highest salaries in the country.⁴¹

Tenure is another important benefit. After a probationary term of two years, tenure makes it extremely difficult to fire judges, a system which guarantees them stability and increasing salaries for most of their lives.

Negative Impacts

Tenure also generates bad incentives because it allows judges to behave improperly with impunity. Only in the most severe cases are tenured judges forced into compulsory retirement — with full pay for life. For instance, in the north of Brazil, a judge was caught sexually assaulting his female assistants in their workplace.⁴² As a result, he was forced to retire but will receive full payment of his salary for the rest of his life. Even at the end of his life, his payment will not stop: If his wife survives him, she will receive the money until her own death.

Given the high salaries and bonuses paid to judges and prosecutors, Brazil’s judiciary is very expensive. In 2014, the National Council of Justice estimated that the entire Brazilian judiciary cost approximately $30 billion, equivalent to 1.2 percent of the country’s gross domestic product (GDP).⁴³ Personnel expenses represent 89.5 percent of the total cost.⁴⁴ Western European countries such as France, Germany, Italy, Portugal, and the United Kingdom spend no more than 0.4 percent of GDP on their respective justice systems (see Figure 2).⁴⁵ The figure for the United States is approximately 0.13 percent of GDP.

Another bad incentive concerns fiscal policy, because Brazil’s judiciary is responsible for its own budget.⁴⁶ The federal Supreme Court (STF) approves its own budget, and the presidents of state tribunals vote on state courts’ budgets. Thus, the judiciary may increase its budget if it considers it necessary, and the legislature merely ratifies it.⁴⁷

Although very expensive and not always effective, Brazil’s newly improved judiciary still makes for an attractive career option, regardless of political connections.

FACTOR 4: THE 45TH AMENDMENT TO THE CONSTITUTION AND INSTITUTIONAL OVERSIGHT

In 2004, the Brazilian Congress approved the 45th amendment to the 1988 constitution, which came to be known as the “Judicial Reform.”⁴⁸ The amendment brought a series of changes to the judiciary’s functions, including stricter requirements on hearings before the Supreme Court, measures to turn the Court’s decisions into precedent (unusual in a civil law system), and the creation of two institutions charged with oversight: the National Council of Justice (CNJ) and the National Council of the Public Ministry (CNMP).

The CNJ’s mission is to protect the autonomy of the judiciary. Its goal is to enhance the effectiveness of the Brazilian judicial system, primarily through improved supervision, administrative controls, and transparency. To that end, it enforces the Statute of the Magistrates, a code of rules that sets duties and rights for every Brazilian judge, oversees the functioning of the judicial system, hears complaints, establishes disciplinary proceedings, and promotes measures to increase courts’ effectiveness.⁴⁹ The CNMP is tasked with administrative, financial, and disciplinary supervision of the Public Ministry (MP), the country’s top prosecutorial body. The MP is divided between the Federal Public Ministry (MPF) and the state Public Ministries. Specifically, the CNMP has the authority to review the legality of MP staff actions, make administrative decisions, respond to complaints against MP staff, review disciplinary proceedings, and develop an annual report on the status of the MP.⁵⁰

Both the CNJ and CNMP have strengthened the judiciary by incentivizing greater effectiveness, rigorously supervising the judiciary, and implementing independent oversight to combat internal corruption. The CNJ also publishes comprehensive reports on the efficiency of the judiciary, such as the Justice in Numbers Report, and sets goals for state courts, such as general timelines and quantitative deliverables for measuring effectiveness.⁵¹

The CNJ has substantially helped the judiciary become more expeditious in its decisionmaking. For instance, the Brazilian Supreme Court is one of the busiest courts in the world, with as many as 100,000 new cases per year.⁵² However, the number of pending cases began to drop after the 45th amendment was ratified in 2006 (see Figure 3).⁵³

The initial sharp rise in litigation is partly due to the 1988 constitution, which empowered ordinary Brazilians to defend their rights before the judiciary. As a result, an overwhelming number of new cases reached the Supreme Court. While Brazil’s population grew by 30 percent over the ensuing 25 years, the number of cases grew by 27,000 percent during the same period.⁵⁴ Although the number of cases is still high, the 45th amendment is widely credited with helping to significantly reduce the number of Supreme Court cases, as it made settlement before reaching the STF more likely.⁵⁵ The number of cases before the STF with decisions pending continues to fall, reaching its lowest number in a decade in 2015, with only 53,950 cases undecided (see Figure 4).⁵⁶

However, the CNJ’s corruption oversight remains weak. While it has become more effective, it still has a long way to go. Since its founding, the CNJ has filed 7,200 disciplinary complaints but resolved only 78.⁵⁷ Worse, disciplining members of the judiciary remains extremely difficult, because the CNJ still maintains a close relationship with judges and remains hesitant to charge them. For example, Justice Nancy Andrighi, the head of the CNJ, has been criticized by her colleagues for a speech in which she came out strongly against nepotism and for opening an investigation of a fellow judge over charges of corruption.⁵⁸ In another case, a small-county judge took two arbitrary measures — regarding the disruption of the WhatsApp mobile messaging app in Brazil and the arrest of Facebook’s vice president for Latin America — before the CNJ started investigating him.⁵⁹

FACTOR 5: QUALIFIED SUPREME COURT APPOINTMENTS

The Brazilian Supreme Court is composed of 11 justices appointed by the president and confirmed by the Senate, in a process similar to that in the United States. The chief justice is selected by a vote by his or her colleagues for a term of two years. Unlike the judicial systems of many of its neighbors in South America, the appointment process has enabled the Brazilian Supreme Court to retain ideological stability throughout the past couple of decades, enforcing checks and balances instead of being subjected to changes in the political winds depending on which party is in power.

It is important to note that the Brazilian Workers’ Party, which held power from 2003 to 2016, has longstanding alliances with other Latin American left-wing parties. This ideological alignment proved advantageous when several of those allied parties held power around the same time, most notably Hugo Chavez in Venezuela, Nestor Kirchner and his wife Cristina Fernandez in Argentina, and Evo Morales in Bolivia. However, in those countries, violations of the rule of law became commonplace. In contrast, Brazil’s democratic institutions have proven remarkably resilient, even after Workers’ Party governments appointed nine justices to the Supreme Court. Of these nine justices, eight have extensive and accomplished legal careers (the exception being Justice Dias Toffoli, a former election lawyer for the Workers’ Party⁶⁰ who had previously failed a judicial selection⁶¹).

The Supreme Court’s independence was evident in the 2005 corruption scandal known as the Mensalão, which translates roughly as “big monthly payment.”⁶² Despite special judicial privileges granted to senior public officials by the constitution, the STF convicted top political figures on corruption charges, including some with close links to former president Lula da Silva. Notably, the Workers’ Party had appointed many of the justices.⁶³ The Court’s independence was also evident in the denial of several requests made by President Rousseff, Lula da Silva’s successor, to stop impeachment proceedings against her.⁶⁴ Despite her protests, the process moved along and Rousseff was impeached in April 2016.⁶⁵

It is worth noting that the STF is constitutionally protected against any interference from the executive or the legislature. For instance, the Supreme Court could nullify a constitutional amendment that alters its independence or prerogatives. Unlike many neighboring countries, Brazil has maintained a strong separation of powers between the judiciary and the other branches of government. Every administration following the 1988 constitution has respected that separation.

FACTOR 6: AUTONOMY OF THE FEDERAL POLICE AND FEDERAL PUBLIC MINISTRY

The autonomy and independence of the Federal Public Ministry is a recent accomplishment. The Public Ministry officially gained autonomy from the executive branch following implementation of the 1988 constitution — an important step for a country with a history of abusive behavior by the executive. Nonetheless, through the 1990s, Brazilian prosecutors general routinely refused to bring charges against senior officials of the executive branch. Today, by contrast, the MPF has earned praise for the significant degree of independence it has achieved.⁶⁶ Although the president enjoys full discretion in appointing the prosecutor general, for more than a decade the president chose — from the list submitted by all federal prosecutors — the candidate who received the most votes from colleagues.⁶⁷

The prosecutor general recently stated that laws against corruption and the Organization for Economic Co-operation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions are the main factors behind the criminal investigations and indictments made by MPF.⁶⁸ The convention sets standards and procedures to combat systemic bribery, especially in developing countries such as Brazil. In the same interview, the prosecutor general publicly responded to Lula da Silva’s complaint of ingratitude, stating that he owes nothing to the executive, thereby signaling the MPF’s independence.⁶⁹

In October 2014, the Federal Police also gained greater independence from the Ministry of Justice, via executive order no. 657, informally known as the MP da Autonomia (Provisional Measure of Autonomy). This measure requires that the PF director must have served previously as a federal police officer, thus giving the institution greater independence to choose its own leadership.⁷⁰ Police officers lobbied the presidency hard for this change.⁷¹

Investigation methods have also improved greatly. The MPF and PF have had several joint task forces throughout Brazil carrying out important investigations as part of Operation Car Wash, after the director of the PF said his agency would not lag behind the MPF in investigating the scandal.⁷² Those task forces have focused on coordinated crimes that could be linked together. The MPF and PF’s work has brought them international recognition and greater prestige.⁷³

By dedicating people and resources to investigating related crimes instead of investigating them separately, the PF and the MPF were able to better focus their efforts and better utilize their personnel with the experience and technical expertise needed to go after criminal organizations. Although common in other countries, this type of investigation management is another recent development in Brazil, starting with 18 task forces in 2003 and growing to 550 by 2016 (see Figure 5).⁷⁴

The management of resources has improved substantially, as the results achieved by the PF and MPF have bolstered the image and prestige of both institutions. The success of the task forces has provided an incentive for their operating procedure to become standard for corruption investigations.⁷⁵

CONCLUSION

The judiciary in Brazil is far from perfect, but its effectiveness has improved enormously since the early 1990s. The legal, social, and institutional changes reviewed in this paper show how creating the right set of incentives can strengthen the judiciary of an emerging country, even one with a history of corruption and of politicians used to acting with impunity.

Brazil has developed a strong system of incentives to select qualified people who are able and willing to confront the political and business establishment, including in some of the biggest corruption cases in the country’s history. Other countries could learn from Brazil’s much improved process for selecting good judges and prosecutors, while avoiding some of the mistakes the country still needs to correct in the future.

NOTES

This paper was originally submitted for publication on April 1, 2017.

1. “Arnon de Mello, Senator profile,” Senado da República, http://www25.senado.leg.br/web/senadores/senador/-/perfil/1479.
2. “Injunction no. 4039,” Supremo Tribunal Federal, November 25, 2015, http://www.stf.jus.br/arquivo/cms/noticiaNoticiaStf/anexo/Acao_Cautelar_4039.pdf. As explained later in this paper, Sen. do Amaral entered a plea deal that exempted him from further prosecution in the case in which he was involved.
3. Ernesto Londoño, “Ex-President of Brazil Sentenced to Nearly 10 Years in Prison for Corruption,” New York Times, July 12, 2017, https://www.nytimes.com/2017/07/12/world/americas/brazil-lula-da-silva-corruption.html.
4. “Politicians Face Investigation in Brazil’s Biggest Ever Corruption Scandal,” Associated Press/Guardian, March 7, 2015, http://www.theguardian.com/world/2015/mar/07/brazilian-court-approves-investigation-into-politicians-in-petrobras-scandal.
5. “Transparency International to Pursue Social Sanctions on 9 Grand Corruption Cases,” Trans-parency International, February 10, 2016,
   http://www.transparency.org/news/pressrelease/transparency_international_to_pursue_social_sanctions_on_9_grand_corruption.
6. “A Lava Jato em Números,” Ministério Público Federal da República Federativa do Brasil, http://lavajato.mpf.mp.br/atuacao-na-1a-instancia/resultados/a-lava-jato-em-numeros.
7. Antoine Garapon and Ioannis Papapoulos, Julgar Nos Estados Unidos E Na França (Rio de
   Janeiro: Lumen Juris, 2008).
8. It is important to note that plea bargaining does not fully exist in Brazil. It was proposed in the project for a new penal code in 2012, but a special commission excluded it, saying “it was not the moment yet.” “Projeto de Lei do Senado no. 236,” Special Commission for the New Penal Code, December 17, 2013, http://www.senado.leg.br/atividade/rotinas/materia/getPDF.asp?t=143412&tp=1.
9. “Act no. 8072,” Presidência da República, July 25, 1990, http://www.planalto.gov.br/ccivil_03/leis/L8072.htm.
10. For accounting crimes, such as tax fraud and tax evasion, and crimes committed by a professional criminal organization.
11. “Act no. 9613,” Presidência da República, March 3, 1998, http://www.planalto.gov.br/ccivil_03/leis/L9613.htm.
12. “Lei de Drogas Act no. 11343,” Presidência da República, August 23, 2006, http://www.planalto.gov.br/ccivil_03/_ato2004-2006/2006/lei/l11343.htm.
13. “Act no. 12.529,” Presidência da República, November 30, 2011, http://www.planalto.gov.br/ccivil_03/_ato2011-2014/2011/Lei/L12529.htm.
14. Translated from the following: I - a identificação dos demais coautores e partícipes da organização criminosa e das infrações penais por eles praticadas; II - a revelação da estrutura hierárquica e da divisão de tarefas da organização criminosa; III - a prevenção de infrações penais decorrentes das atividades da organização criminosa; IV - a recuperação total ou parcial do produto ou do proveito das infrações penais praticadas pela organização criminosa; V - a localização de eventual vítima com a sua integridade física preservada.“Act no. 12.850,” Presidência da República, August 2, 2013, http://www.planalto.gov.br/ccivil_03/_ato2011-2014/2013/lei/l12850.htm.
15. Ibid.
16. Someone cannot be found guilty solely on oral evidence obtained through a plea deal. Other evidence must be presented for a defendant to receive a guilty verdict by a judge.
17. See Bruno Cruz da Silva vs Ministério Público do Estado do Rio Grande do Sul, 70068866466/CNJ: 0096840-09.2016.8.21.7000 (2016).
18. “A Lava Jato em Números.”
19. “Termo de Colaboração no. 1,” Polícia Federal 2014, http://media.folha.uol.com.br/poder/ 2015/03/11/termo-de-colaboracao-001.pdf.
20. “Termo de Colaboração no. 11/12,” http://politica.estadao.com.br/blogs/fausto-macedo/wp-content/uploads/sites/41/2016/01/dep-cervero-t.pdf.
21. “Açao Cautelar 4039,” Supremo Tribunal Federal, November 25, 2015, http://www.stf.jus.br/arquivo/cms/noticiaNoticiaStf/anexo/Acao_Cautelar_4039.pdf.
22. “Procedimiento Oculto e em Segredo de Justiça, PET 5952,” Ministério Público Federal, February 22, 2016, http://veja.abril.com.br/complemento/brasil/pdf/delacao-delcidio.pdf.
23. “Colaboração premiada,” MPF Combate à Corrupção, http://lavajato.mpf.mp.br/atuacao-na-1a-instancia/investigacao/colaboracao-premiada.
24. Maria Tereza Sadek, “Acesso à Justiça: um direito e seus obstáculos,” Revista USP 101 (2014): 55-66, http://www.revistas.usp.br/revusp/article/download/87814/90736.
25. Conselho Nacional de Justiça, “Dados Estatísticos,” http://www.cnj.jus.br/programas-e-acoes/politica-nacional-de-priorizacao-do-1-grau-de-jurisdicao/dados-estatisticos-priorizacao; and Conselho Nacional de Justiça, “Justiça em Números,” http://www.cnj.jus.br/relatorio-justica-em-numeros/#p=justicaemnumeros.
26. Deltan Dallagnol, “As luzes da delação premiada,” Época, July 4, 2015, http://epoca.globo.com/tempo/noticia/2015/07/luzes-da-delacao-premiada.html.
27. Bruno Garschagen, Pare de Acreditar no Governo (Rio de Janeiro: Record, 2015).
28. Statistics are from the Center for Social Policies of Getulio Vargas Foundation (FGV), obtained by the Instituto Brasileiro de Geografia e Estatística, http://www.cps.fgv.br/cps/pesquisas/Politicas_sociais_alunos/2012/Site/11_1BES_Nova%20Classe_Media.pdf.
29. “Resolução no. 1079/2015-COMAG,” Diário de Justiça do Estado do Rio Grande do Sul, 2015, http://www.jusbrasil.com.br/diarios/DJRS/ 2015/06/08.
30. Brazilian Federal Constitution of 1988, Article 94.
31. Brazilian Federal Constitution of 1988, Article 37, sec. 2, http://www.planalto.gov.br/ccivil_03/Constituicao/ConstituicaoCompilado.htm.
32. Supreme Court ruling: ADI 498, Rel. Min. Carlos Velloso (DJ de 9-8-1996) e ADI 208, Rel. Min. Moreira Alves (DJ de 19-12-2002).
33. “Resolução no. 1079/2015-COMAG,” Diário de Justiça do Estado do Rio Grande do Sul, 2015, http://www.jusbrasil.com.br/diarios/DJRS/ 2015/06/08.
34. “Brasil, sozinho, tem mais faculdades de Direito que todos os países,” Order of Attorneys of Brazil (OAB), October 14, 2010, http://www.oab.org.br/noticia/20734/brasil-sozinho-tem-mais-faculdades-de-direito-que-todos-os-paises.
35. OAB, “Quadro de Advogados,” http://www.oab.org.br/institucionalconselhofederal/quadroadvogados.
36. “Exame de Ordem em Números,” 2014, http://fgvprojetos.fgv.br/sites/fgvprojetos.fgv.br/files/relatorio_2_edicao_final.pdf.
37. OAB, “Desempenho no Exame de Ordem,” October 2014, http://www.oab.org.br/content/pdf/examedeordem/exame_de_ordem_desempenho_ies_campus.pdf.
38. Tribunal de Justiça do Rio Grande do Sul, “Concurso de Juiz de Direito Substituto tem cerca de 100 candidatos por vaga,” February 20, 2009, http://tj-rs.jusbrasil.com.br/noticias/833447/concurso-de-juiz-de-direito-substituto-tem-cerca-de-100-candidatos-por-vaga. Four thousand
    candidates competed for 16 places. Tribunal
    Regional Federal da 4ª Região, “Concurso Público
    Sevidores,” 2017, http://www2.trf4.jus.br/trf4/controlador.php?acao=pagina_visualizar&id_pagina=125.
39. Wage data obtained from the Brazilian Institute of Geography and Statistics (IBGE). Trading Economics, “Brazil Real Average Monthly Income,” http://www.tradingeconomics.com/brazil/wages.
40. Simon Romero, “Brazil, Where a Judge Made $361,500 in a Month, Fumes over Pay,” New York Times, February 10, 2013, http://www.nytimes.com/2013/02/11/world/americas/brazil-seethes-over-public-officials-super-salaries.html?_r=0.
41. National Council of Justice (CNJ), Resolution 199, 2014, http://www.cnj.jus.br/images/imprensa/Resolu%C3%A7%C3%A3o_n__199-GP-2014.pdf.
42. “Juiz do AM acusado de pedofilia pede aposentadoria,” Revista Consultor Jurídico, July 12, 2009, http://www.conjur.com.br/2009-jul-12/juiz-trabalho-acusado-pedofilia-aposentadoria-tj-am.
43. 2014 is the most recent official estimate
    available.
44. National Council of Justice (CNJ), Justiça em Números, 2015.
45. European Judicial Systems, European Commission for the Efficiency of Justice (CEPEJ), https://public.tableau.com/views/2010-2012-2014Data/Tables?:embed=y&:display_count=yes&:toolbar=no&:showVizHome=no.
46. Brazilian Federal Constitution of 1988, Article 99, http://www.planalto.gov.br/ccivil_03/Constituicao/ConstituicaoCompilado.htm.
47. The finances of the judiciary must conform with the annual budget presented by the executive branch and passed by the Congress. However, due to political favors, the executive and the legislative branches tend to be “generous” with the judiciary.
48. This amendment also greatly expanded the jurisdiction of the Brazilian Labor Justice, a separate branch of the judiciary. The expansion is not related to the thesis presented in this paper.
49. Conselho Nacional de Justiça, http://www.cnj.jus.br/sobre-o-cnj/quem-somos-visitas-e-contatos.
50. Conselho Nacional do Ministério Público “Apresentação,” June 20, 2017, http://www.cnmp.mp.br/portal/institucional/o-cnmp/apresentacao.
51. CNJ, Justiça em Números, 2015, http://www.cnj.jus.br/relatorio-justica-em-numeros/ #p=justicaemnumeros.
52. “When Less Is More,” The Economist, May 21, 2009, http://www.economist.com/node/13707663.
53. Fundação Getúlio Vargas, Supremo em Números, http://www.fgv.br/supremoemnumeros/.
54. CNJ, Justiça em Números, 2014, http://www.cnj.jus.br/relatorio-justica-em-numeros/ #p=justicaemnumeros.
55. Brazil, 45th Amendment, December 30, 2014, http://www.planalto.gov.br/ccivil_03/Constituicao/Emendas/Emc/emc45.htm. This amendment established institutes that increased the binding force of decisions by the tribunals over lower-level jurisdictions. MG/LF, Repercussão geral e súmulas vinculantes diminuem o número de processos no STF, STF’s newsletter, October 4, 2008, http://www.stf.jus.br/portal/cms/verNoticiaDetalhe.asp?idConteudo=97176&caixaBusca=N.
56. The eleven-justice Supreme Court is able to rule on thousands of cases every year because of its internal division of labor. Each justice has his or her own cabinet, which includes “auxiliary judges.” These are usually judges from state and federal courts picked by a justice to serve temporarily as his or her clerks on the Supreme Court. The auxiliary judges decide most of the cases on the basis of previous votes and opinions of their respective justice. Moreover, each case is assigned to an individual justice, called the rapporteur, who summarizes the case, casts the first vote, and makes recommendations to the rest of the Court. The other justices can follow the rapporteur’s recommendation or give a different decision. In over 95 percent of the cases, a majority of the court agrees with the rapporteur’s recommendation. See Damares Medina, “Como funciona o STF,” Damares Medina Advocacia, November 16, 2015, http://damaresmedina.com.br/como-funciona-o-stf; and Lilian Venturini, “Quem são e o que fazem os juízes auxiliares do Supremo,” Nexo, January 27, 2017, https://www.nexojornal.com.br/expresso/2017/01/25/Quem-s%C3%A3o-e-o-que-fazem-os-ju%C3%ADzes-auxiliares-do-Supremo.
57. Débora Zampier, “Reforma constitucional que criou CNJ completa 10 anos,” Agência CNJ de Notícias, December 22, 2014, http://www.cnj.jus.br/noticias/cnj/62361-reforma-constitucional-que-criou-cnj-completa-10-anos.
58. Severino Motta, “Se eleição fosse hoje, Nancy não se elegeria presidente do STJ,” Radar Online, April 29, 2016, http://veja.abril.com.br/blog/radar-on-line/judiciario/se-eleicao-fosse-hoje-nancy-nao-se-elegeria-presidente-do-stj/.
59. “CNJ investiga se juiz que bloqueou WhatsApp cometeu abuso de autoridade,” RevistaConsultorJurídico, May 3, 2016, http://www.conjur.com.br/2016-mai-03/cnj-abre-investigacao-conduta-juiz-bloqueou-whatsapp?utm_source=dlvr.it&utm_medium=facebook.
60. Dias Toffoli, curriculum vitae, May 11, 2016, http://www.stf.jus.br/arquivo/cms/sobreStfComposicaoComposicaoPlenariaApresentacao/anexo/cv_dias_toffoli_11maio2016.pdf.
61. Rodrigo Haidar, “Toffoli, candidato ao STF, não passou em concurso para juiz,” Revista Consultor Jurídico, June 8, 2008, http://www.conjur.com.br/2008-jun-05/toffoli_candidato_stf_nao_passou_concurso_juiz.
62. The Mensalão was the biggest scandal of the Lula da Silva administration. An investigation into the Brazilian Postal Service uncovered large monthly payments made by the executive to federal legislators to get them to vote in accordance with the wishes of the executive branch.
63. “Criminal Case no. 470,” Supremo Tribunal Federal, 2012, http://www.stf.jus.br/arquivo/cms/noticianoticiastf/anexo/relatoriomensalao.pdf.
64. Partido Comunista do Brasil vs. Câmara dosDeputados, “ADPF no. 378/2015,” Supremo Tribunal Federal, 2015, http://www.stf.jus.br/arquivo/cms/noticiaNoticiaStf/anexo/adpf378.pdf.
65. Despite some claims to the contrary, Rousseff’s impeachment was not a coup. The impeachment process and the “responsibility” crimes for which a Brazilian president can be impeached are outlined in articles 85 and 86 of the constitution. One of those impeachable offenses is violation of the budgetary law. The independent Federal Accounts Court found that the Rousseff administration had broken the law by fiddling with the budget. In fairness, previous presidents had committed the same crime-although not to the same extent as Rousseff-without facing political consequences. Impeaching Rousseff was certainly a political decision, but the process was legally sound, as demonstrated by the Supreme Court’s finding of no fault in the way it was conducted. It is important to note that, at the time, eight of the eleven justices on the Supreme Court had been appointed by Rousseff and her Workers’ Party predecessor, Lula da Silva. See Diogo Costa and Magno Karl, “Dilma Rousseff’s Impeachment Wouldn’t Be a Coup,” Forbes, April 28, 2016, https://www.forbes.com/sites/realspin/2016/04/28/dilma-rousseffs-impeachment-wouldnt-be-a-coup/.
66. Secretariat of Social Communication, Prosecutor General’s Office, Roberto Gurgel destaca independência, modernização e união do MP, MPF’s newsletter, August 15, 2011, http://noticias.pgr.mpf.mp.br/noticias/noticias-do-site/copy_of_geral/roberto-gurgel-destaca-independencia-modernizacao-e-uniao-do-ministerio-publico.
67. Juliana Dal Piva, “A eleição de Janot foi uma resposta da classe,” Estadão, August 30, 2015, http://politica.estadao.com.br/noticias/geral,a-eleicao-de-janot-foi-uma-resposta-da-classe,1753037. This tradition was recently broken by President Michel Temmer, who picked the candidate with the second most votes from the list submitted to him.
68. Estadão Conteúdo, “ ‘Isso é problema dele, não meu,’ afirma Janot sobre Lula ministro,” Zero Hora, March 16, 2016, http://zh.clicrbs.com.br/rs/noticias/noticia/2016/03/isso-e-problema-dele-nao-meu-afirma-janot-sobre-lula-ministro-5112913.html.
69. Rede TV, “Janot responde à crítica de Lula dizendo que estudou para ser procurador,” March 18, 2016, http://www.redetv.uol.com.br/atardeesua/videos/ultimos-programas/janot-responde-a-critica-de-lula-dizendo-que-estudou-para-ser-procurador4.
70. “Act no. 13.047,” Presidência da República, December 2, 2014, http://www.planalto.gov.br/ccivil_03/_Ato2011-2014/2014/Lei/L13047.htm.
71. Mario Coelho, “Dilma edita MP que agrada delegados da PF,” Congresso em Foco, October 14, 2014, http://congressoemfoco.uol.com.br/noticias/dilma-edita-mp-que-agrada-delegados-da-pf/.
72. Jailton de Carvalho, “Polícia Federal cria força-tarefa para investigar parlamentares,” O Globo, March 6, 2016, http://oglobo.globo.com/brasil/policia-federal-cria-forca-tarefa-para-investigar-parlamentares-15521143.
73. Receita Federal, “Brasil se destaca em operação
    internacional coordenada pela Organização Mundial das Aduanas,” press release, December 17, 2015, http://idg.receita.fazenda.gov.br/noticias/ascom/2015/dezembro/brasil-se-destaca-em-operacao-internacional-coordenada-pela-organizacao-mundial-das-aduanas.
74. Policia Federal do Brasil, Estatística
    de Operações, http://www.pf.gov.br/agencia/estatisticas.
75. The official task force dedicated to the Operation Car Wash within the PF ended its work in accordance with its schedule, officially shutting down on July 6, 2017. The focus now is inside the MPF, where the task force dedicated to the operation is still expanding, with an expected 200 percent increase in the prosecutors’ budget for 2018. See Rafael Moraes Moura, “MPF triplica orçamento da Lava Jato e aprova alta salarial de 16%,” Exame, July 25, 2017, http://exame.abril.com.br/brasil/conselho-do-mpf-amplia-orcamento-para-lava-jato-em-2018/.

Danielle Keats Citron

Popular tech companies—Google, Facebook, Twitter, and others—have strongly protected free speech online, a policy widely associated with the legal norms of the United States. American tech companies, however, operate globally, and their platforms are subject to regulation by the European Union, whose member states offer less protection to expression than does the United States. European regulators are pressuring tech companies to control and suppress extreme speech. The regulators’ clear warning is that, if the companies do not comply “voluntarily,” they will face harsher laws and potential liability. This regulatory effort runs the risk of censorship creep, whereby a wide array of protected speech, including political criticism and newsworthy content, may end up being removed from online platforms on a global scale.

European regulators cannot be expected to pull back and adopt U.S. norms for speech. The tech company leaders may, however, reduce the risks to free speech by insisting on clear definitions of “hate speech,” holding regulators accountable before the public, fostering detailed transparency of government actions, and appointing ombudsmen.

Introduction

For much of its history, Silicon Valley has been a full-throated champion of First Amendment values. When online platforms banned certain types of speech in terms-of-service (TOS) agreements, they proceeded cautiously, with a preference for an American-style approach to free expression. More recently, tech companies have tailored their speech policies to European norms rather than American ones. Ordinary market forces were not behind this shift. Instead, threatened legislation prompted the change.

In the wake of terrorist attacks in late 2015, European Union (EU) regulators warned tech companies that they would face prohibitively expensive fines and potential criminal penalties unless extremist and hateful content was swiftly removed. In response, the dominant social media platforms have altered their speech policies to ban extremist content in ways that risk censorship creep. Already, European lawmakers have pressed companies to ban “fake news” to help combat extremist expression.¹ No doubt, they will press for the removal of far more, including political dissent and cultural commentary. The impact will be far reaching. Because TOS agreements apply everywhere that platforms are accessed, the changes will affect free expression on a global scale.

This study offers potential safeguards to prevent censorship creep. Companies can and should adopt prophylactic protections designed to contain government overreach and censorship creep for the good of free expression. Censorship creep can be contained with definitional clarity, robust accountability, detailed transparency, and ombudsman oversight. The proposals that follow may be attractive to tech executives and the informed public interested in curtailing government overreach and conveying their commitment to users’ free expression. As Apple’s struggle with the U.S. government over encryption illustrated, tech companies enjoy public support when they defend fundamental freedoms.

From Free Speech Champions to Coerced Censors

A decade ago, Sen. Joseph Lieberman (D-CT) publicly chastised YouTube for refusing to remove terrorist training videos. The senator’s pressure failed to produce results because the company prioritized the protection of users’ free speech over its popularity on Capitol Hill.² Crucially, the company knew that there was little that Congress could actually do given the First Amendment’s robust protections against most viewpoint-based regulation. Long after the showdown with Senator Lieberman, American-style free speech values continued to guide tech companies’ policies about what expression was permissible on their platforms. TOS agreements typically protected users’ ability to express unpopular views while prohibiting targeted abuse that silenced individuals.³

Of late, however, Silicon Valley’s commitment to free speech has eroded. The catalyst was a spate of terrorist attacks in Paris and Brussels in late 2015. European regulators blamed Silicon Valley for giving extremist groups access to potential recruits. They warned that unless online platforms guaranteed the swift removal of extremist or hateful speech, they would face prohibitively expensive fines and criminal penalties.⁴ The regulators’ threats were not idle: in the EU, unlike in the United States, there isn’t a heavy presumption against speech restrictions.

To stave off threatened European regulation, tech companies have retreated from a strong free speech stance. In May 2016, Facebook, Microsoft, Twitter, and YouTube (referred to in the rest of the paper as “the Companies”) signed an agreement with the European Commission to “prohibit the promotion of incitement to violence and hateful conduct.”⁵ The agreement defined “hateful conduct” as speech inciting violence or hatred against protected groups. Under the agreement, the Companies pledged to remove reported hate speech that violated TOS within 24 hours. The European Commission was given the right to review the companies’ compliance with the agreement.

On December 5, 2016, the day before the European Commission issued a report sharply criticizing compliance with the hate-speech agreement, the Companies announced plans for an industry database of “hashes”—unique digital signatures—of extremist material banned on their platforms. The hash technology would enable the immediate flagging and removal of prohibited content on participating companies’ platforms. According to the announcement, other companies will be given access to the database as soon as it is operational.⁶ The European Commission hailed the industry database as the “next logical step” in a “public-private partnership” to combat extremism.⁷

This industry database indicates how much the debate has moved toward government oversight of digital speech. Just months before, executives in the tech industry dismissed calls for such a database on the grounds that “violent extremist material” was a malleable term and governments would surely pressure companies to include hashes that would silence far more than terrorist propaganda. To address such free speech concerns, the Companies have explained that content will be hashed only if it involves “the most extreme and egregious terrorist images and videos … content most likely to violate all of our respective companies’ content policies.”⁸ Hashed material will not be deleted from participants’ sites immediately. Instead, each company will review content included in the database under its own policies.⁹

Following the announcement of the hate speech agreement and the industry database, the demands of European leaders have only escalated. After a series of terrorist attacks in London in 2017, British Prime Minister Teresa May and French President Emmanuel Macron threatened steep fines for failure to remove extremist propaganda from online platforms.¹⁰ Shortly thereafter, Google announced a four-part plan to address terrorist propaganda that included the increased use of technology to identify terrorist-related videos, the hiring of additional content moderators, the removal of advertising on objectionable videos, and the directing of potential terrorist recruits to counter-radicalization videos.¹¹ Facebook responded with a pledge to increase its use of artificial intelligence to stop the spread of terrorist propaganda and to hire 3,000 more people to review speech reported as TOS violations.¹²

The Companies have not chosen this path for efficiency’s sake or to satisfy the concerns of advertisers and advocates. Instead, European regulators have extracted private speech commitments by threatening to pass new laws making platforms liable for extremist speech. Unlike in the United States, there isn’t a heavy presumption against speech restrictions in the EU, although laws penalizing speech must satisfy a proportionality analysis.¹³ No matter how often EU lawmakers describe the recent changes to private speech practices as “voluntary,” the fact is that they were the product of government coercion. And such coercion may be expanding. Apart from such incentives for increased regulation, the Companies probably still prefer freedom of speech. How can they act on that commitment even as the EU seeks more coercion?

Censorship Creep at a Global Scale

To be sure, companies’ changed policies may have some important benefits. With less terrorist propaganda and hate speech online, there might be fewer people joining ISIS (the Islamic State of Iraq and Syria) fighters in Syria or planting bombs in markets and restaurants. But the policy changes pose a risk of censorship creep as well.

Definitional ambiguity is part of the problem. “Hateful conduct” and “violent extremist material” are vague terms that can be stretched to include political dissent and cultural commentary. They could be extended to a government official’s tweets, posts critiquing a politician, or a civil rights activist’s profile.¹⁴ Violent extremist material could be interpreted to cover violent content of all kinds, including news reports, and not just gruesome beheading videos.

Censorship creep isn’t merely a theoretical possibility—it is already happening. European regulators’ calls to remove “illegal hate speech” have quickly ballooned to cover expression that does not violate existing EU law, including bogus news stories. Commenting on the hate-speech agreement, European Justice Commissioner Věra Jurová criticized the Companies for failing to remove “online radicalization, terrorist propaganda, and fake news.” ¹⁵ Legitimate debate could easily fall within Jurová’s characterization of hate speech.

As more expression is deemed to violate TOS agreements, more expression will be deleted. When content is reported as hate speech, the likely response will be removal.¹⁶ Removal of reported content would forestall criticism and would be cheaper than the cost of complying with new laws. The pledge to review hate-speech reports within 24 hours will reinforce this tendency. Speed inevitably sacrifices thoughtful deliberation. Similarly, there surely will be pressure to remove content that other companies have designated as violent extremist expression. If that were the case, the industry database would become a “delete-it-all” program.¹⁷

These developments will have a far-reaching impact because TOS agreements typically apply globally.¹⁸ Unlike a court order that applies only within the issuing country’s borders, a company’s decision about a TOS violation applies everywhere its services are accessed.¹⁹ This is true for hate speech and violent extremist material included in the database. Removal for a TOS violation means worldwide removal. This sort of censorship is hard to circumvent.

The stakes for free expression are high. Content may be removed even though it is essential for public debate and the reporting of news.²⁰ A key insight of free speech theory is that individuals need to speak and listen to make decisions about the kind of society they want.²¹ As the editorial board of the Washington Post wrote in response to social media companies’ removal of terrorist propaganda, “Citizens of every country deserve to know what is going on in the world and what people at both ends of the spectrum think about it—however hard that is to stomach.”²²

Extremist and hateful speech adds valuable information to public discourse: the fact that such views exist can highlight the need to counter them.²³ As human rights activist Aryeh Neier has argued, “Freedom of speech itself serves as the best antidote to the poisonous doctrines of those trying to promote hate.”²⁴ The expression of hate or extremist views enables society to assert strong social norms rejecting them.²⁵

Removal of extremist expression would undermine efforts designed to change people’s minds.²⁶ For example, Jigsaw, a Google-owned think tank, has developed a program that uses a combination of Google’s advertising algorithms and YouTube’s video platform to identify aspiring ISIS recruits and to offer alternatives to hateful ideologies. The program places advertising alongside results for keywords and phrases commonly searched for by people attracted to ISIS. The ads link to YouTube channels containing videos that have potential to undo ISIS’s brainwashing, such as testimonials from former extremists and imams denouncing ISIS’s corruption of Islam.²⁷

Even if the majority of people embracing hateful ideas may not be open to counter speech, some may be.²⁸ In 2009, Megan Phelps-Roper, a member of the Westboro Baptist Church, developed a considerable following tweeting hateful views about lesbian, gay, bisexual, and transgender individuals. She connected online with people who explained the cruelty of her positions. Phelps-Roper’s interactions on Twitter ultimately led her to reject bigotry.²⁹ In a Brookings Institution study titled “The ISIS Twitter Census,” J. M. Berger and Jonathon Morgan found that “when we segregate members of ISIS social networks, we are, to some extent, also closing off potential exit ramps.”³⁰

Moreover, the removal of expression denies disaffected individuals opportunities to let off steam that might stop them from turning to violence.³¹ As noted by the United Nations General Assembly in its Plan of Action to Prevent Violent Extremism, blocking online activity fuels narratives of victimization and risks further isolating disaffected individuals. Aggrieved speakers may feel even more aggrieved and more inclined to act on pent-up anger. Removing an ISIS Twitter account could “increase the speed and intensity of radicalization for those who do manage to enter the network.”³²

Protections against Censorship Creep

European regulators have effectively exerted power over the expression of people who do not live in their jurisdictions and cannot hold them accountable. The result is worldwide conformity with European speech values without meaningful accountability or oversight.³³ Given the success of these efforts, European regulators will continue to demand more “voluntary” changes to coerce conformity with desired speech norms. Such “public-private partnerships” are fruitful courses of action for state censors. They secure the adoption of governmental preferences without the burdens of formal process. EU regulators will hardly rein in their pressure on their own.

Silicon Valley may be our best protection against censorship creep. Tech companies can pursue several strategies to push back against government overreach: definitional clarity, robust accountability, detailed transparency, and ombudsmen oversight.

Definitional Clarity

Government requests to remove hate speech or to hash extremist material should be reviewed under a well-developed set of definitions. Clarity in the definition, meaning, and application of both terms would help constrain censorship creep. To that end, policies should provide specific examples of content deserving designation as hate speech or violent extremist material. This would help prevent the gradual broadening of the standards governing the removal of expression.

Some have suggested that companies look to international human rights law for guidance in defining both terms.³⁴ But human rights law is unlikely to provide clarity because it contains exceptionally flexible standards.³⁵ The Council of Europe’s secretary general is drafting “common European standards for hate speech and terrorist material to better protect freedom of expression online.”³⁶ That project will be helpful if it provides clear definitions and illustrations that curtail the malleability of both terms.³⁷ As tech companies work on their definitions of hate speech and extremist material, they should consider including human rights groups and academics in their efforts.³⁸ Civil liberties groups have argued for a role in helping companies understand “various meanings given to ‘violent extremism’ and related concepts, and the potential impact of ambiguity in this area on the promotion and protection of human rights.”³⁹

Those definitions, while designed for content moderators, should be shared publicly so that government actors can understand the limits of efforts to remove speech under TOS agreements and community guidelines. With those limits in mind, governmental authorities may be less inclined to try to silence unpopular but protected expression.

Robust Accountability

Rigorous accountability is essential to check government efforts to censor disfavored viewpoints and dissent. Removal requests by state authorities (or nongovernmental organizations [NGOs] acting on the state’s behalf) should be subject to rigorous review. For instance, the European Commission worked with 12 NGOs to report hate speech and assess companies’ compliance with the hate speech agreement. To start, government officials or NGOs acting on their behalf should be required to identify themselves when reporting content for TOS violations. Online platforms must know that they are dealing with governmental authorities or their surrogates. Companies should have a separate reporting channel for government authorities and any organizations working on the state’s behalf. Twitter, for instance, has “intake channels dedicated for law enforcement and other authorized reporters” to file “legal requests.”⁴⁰ All removal requests made by state actors or their surrogates, including TOS reports, should proceed through that channel.

Government requests should be viewed through a special lens. Governments raise particularly troubling concerns about silencing political dissent. To be sure, ordinary people can be hecklers, but the concern for governments is systematic efforts to silence dissent or unfavorable news. When state actors seek to suppress speech under TOS agreements, reviewers should view their requests with a presumption against removal, or at least a healthy dose of skepticism.⁴¹ Content moderators should receive training about censorship creep, including past and present governmental efforts to silence critics. Training should focus on how to distinguish banned material from newsworthy content. This is not an easy task, but it is crucial nonetheless.

Decisions related to government requests should be accompanied by an explanation—decisionmakers who have to articulate their reasons are likely to think more carefully about their decisions.⁴² When a moderator decides to grant a government request for removal on the basis of a TOS violation, that decision should automatically pass through a second layer of review. Individuals whose speech is removed should be notified about the removal and given a chance to appeal.

Even-stronger protections are essential to prevent governments from co-opting the industry database, which runs the risk of becoming a total blacklist as more companies participate. The Tech Companies could adopt a blanket rule that governments cannot contribute hashes to the database.⁴³ An alternative is to subject government requests to several layers of review and to condition the submission on the approval of senior staff.⁴⁴

Detailed Transparency

Another check on censorship creep is for companies to provide detailed reports on governmental efforts to censor hate speech and extremist material through informal measures. Transparency reports enable public conversation about censorship. European users can contact lawmakers with concerns about authorities’ attempts to use tech companies as censorship proxies. The more users understand about companies’ efforts to protect their fundamental freedoms, the more users will trust the platforms they use. Human rights advocates can call attention to concerns about censorship creep. Ultimately, transparency reports can generate “productive discussion about the appropriate use and limits of [state] authority.”⁴⁵

Some social media companies have provided transparency about government requests to suppress speech. Twitter has been hailed for its transparency efforts, and rightfully so. The company’s 2016 Transparency Report details the number of legal requests for content removal broken down by country.⁴⁶ Crucially, and uniquely, it discloses the number of government requests seeking removal of terrorism content for TOS violations.⁴⁷ Twitter is working to expand its reporting of all “known, non-legal government TOS requests we receive through our standard customer service intake channels, such as requests to remove impersonating accounts and other content that violates our Rules against abuse.”⁴⁸

Much as Twitter has done for terrorist content and expects to do far more of in the future, corporate transparency reports should detail the number, subject matter, and results of all government requests to remove content for TOS violations.⁴⁹ If governments are allowed to request the addition of hashes to the industry database, transparency reports should include details about those requests. Although transparency cannot solve the problem of censorship creep, it can help contain it, especially if strong standards and robust accountability procedures are adopted.

Ombudsmen Oversight

An acute concern of censorship creep is its potential to suppress newsworthy content. Governments may seek to remove terrorist or hateful content whose publication is in the legitimate public interest. To address this concern, companies should consider hiring or consulting ombudsmen whose life’s work is the newsgathering process.⁵⁰ Ombudsmen, who are also known as public editors, work to protect press freedom and to promote high-quality journalism. Their role is to “act in the best interest of the news consumer.”⁵¹

Ombudsmen should have a special role in assessing government removal requests made through informal channels such as TOS or industry databases. They can help identify requests that would remove material that is important for public debate and knowledge. Then, too, because the industry database raises special concerns about the suppression of expression, ombudsmen could review all contributions to the database with the public interest in mind.

Conclusion

By pressuring Silicon Valley to alter private speech policies and practices, EU regulators have effectively set the rules for free expression across the globe. The question is whether tech companies will fight on behalf of their users to contain government overreach. My proposals for definitional clarity, robust accountability, detailed transparency, and ombudsmen oversight will help combat censorship creep.

Notes

This paper is based on Danielle Keats Citron, “Extremist Speech, Compelled Conformity, and Censorship Creep,” forthcoming, 2018, in the Notre Dame Law Review. Special thanks to Susan McCarty for her expert assistance and to the editors of Notre Dame Law Review for supporting this effort.

1. Cara McGoogan, “EU Accuses Facebook and Twitter of Failing to Remove Hate Speech,” Telegraph (London), December 5, 2016, http://www.telegraph.co.uk/technology/2016/12/05/eu-accuses-facebook-twitter-failing-remove-hate-speech/.
2. Timothy B. Lee, “YouTube Rebuffs Senator’s Demand to Remove Islamist Videos,” Ars Technica, May 20, 2008, https://arstechnica.com/tech-policy/2008/05/youtube-rebuffs-senatorss-demands-for-removal-of-islamist-videos/.
3. Danielle Keats Citron, Hate Crimes in Cyberspace (Cambridge, MA: Harvard University Press, 2014), p. 232; Kate Klonick, “The New Governors: The People, Rules, and Processes Governing Online Speech,” Harvard Law Review (forthcoming, 2018).
4. Lizzie Plaugic, “France Wants to Make Google and Facebook Accountable for Hate Speech,” Verge, January 27, 2015, https://www.theverge.com/2015/1/27/7921463/google-facebook-accountable-for-hate-speech-france.
5. European Commission, “European Commission and IT Companies Announce Code of Conduct on Illegal Online Hate Speech,” news release, May 31, 2016, http://europa.eu/rapid/press-release_IP-16-1937_en.htm.
6. Liat Clark, “Facebook, Twitter, Microsoft, YouTube Launch Shared Terrorist Media Database,” Wired UK, December 6, 2016, http://www.wired.co.uk/article/facebook-twitter-microsoft-youtube-launch-shared-terrorism-database.
7. European Commission, “EU Internet Forum: A Major Step Forward in Curbing Terrorist Content on the Internet,” news release, December 8, 2016, http://europa.eu/rapid/press-release_IP-16-4328_en.htm.
8. Clark, “Facebook, Twitter, Microsoft, YouTube.”
9. Facebook, “Partnering to Help Curb Spread of Online Terrorist Content,” news release, December 5, 2016, http://newsroom.fb.com/news/2016/12/partnering-to-help-curb-spread-of-online-terrorist-content/.
10. Amanda Paulson and Eva Botkin-Kowaki, “In Terror Fight, Tech Companies Caught between US and European Ideals,” Christian Science Monitor, June 23, 2017, https://www.csmonitor.com/Technology/2017/0623/In-terror-fight-tech-companies-caught-between-US-and-European-ideals.
11. Kent Walker, “Four Steps We’re Taking Today to Fight Terrorism Online,” Google in Europe (blog), June 18, 2017, https://blog.google/topics/google-europe/four-steps-were-taking-today-fight-online-terror/.
12. Monika Bickert and Brian Fishman, “Hard Questions: How We Counter Terrorism,” Hard Questions (blog), Facebook, June 15, 2017, https://newsroom.fb.com/news/2017/06/how-we-counter-terrorism/.
13. Article 19 of the International Covenant on Civil and Political Rights allows states to limit freedom of expression under circumstances that satisfy proportionality review. http://www.ohchr.org/EN/ProfessionalInterest/Pages/CCPR.aspx.
14. Sam Levin, “Facebook Temporarily Blocks Black Lives Matter Activist after He Posts Racist Email,” Guardian, September 12, 2016, https://www.theguardian.com/technology/2016/sep/12/facebook-blocks-shaun-king-black-lives-matter; Tracy Jan and Elizabeth Dwoskin, “A White Man Called Her Kids the N-Word. Facebook Stopped Her from Sharing It,” Washington Post, July 31, 2017, https://www.washingtonpost.com/business/economy/for-facebook-erasing-hate-speech-proves-a-daunting-challenge/2017/07/31/922d9bc6-6e3b-11e7-9c15-177740635e83_story.html?utm_term=.97d6e7103703.
15. Cara McGoogan, “EU Accuses Facebook and Twitter.”
16. Jillian C. York, “European Commission’s Hate Speech Deal with Companies Will Chill Speech” (blog of the Electronic Frontier Foundation), June 3, 2016, https://www.eff.org/deeplinks/2016/06/european-commissions-hate-speech-deal-companies-will-chill-speech.
17. Andy Greenberg, “Inside Google’s Internet Justice League and Its AI-Powered War on Trolls,” Wired, September 19, 2016, https://www.wired.com/2016/09/inside-googles-internet-justice-league-ai-powered-war-trolls/.
18. YouTube’s description of its TOS is the same for inside the United States as outside it. “Terms of Service,” YouTube, https://www.youtube.com/t/terms. The same is true for Twitter. “The Twitter Rules,” Twitter, https://support.twitter.com/articles/18311.
19. Emma Llansó (director of free expression, Center on Democracy and Technology), in discussion with the author, January 15, 2017.
20. Courtney C. Radsch, “Privatizing Censorship in Fight against Extremism Is Risk to Press Freedom” (blog of the Committee to Protect Journalists), October 16, 2015, https://cpj.org/blog/2015/10/privatizing-censorship-in-fight-against-extremism-.php.
21. Citron, Hate Crimes in Cyberspace.
22. Editorial Board, “The Government Wants Social Media Sites to Take Down Terrorist Propaganda. Maybe They Shouldn’t,” Washington Post, September 16, 2016, https://www.washingtonpost.com/opinions/the-government-wants-social-media-sites-to-take-down-terrorist-propaganda-maybe-they-shouldnt/2016/09/16/148d75cc-7b77-11e6-ac8e-cf8e0dd91dc7_story.html?utm_term=.4a6a4fb8e07c.
23. Steven H. Shiffrin, “Racist Speech Outsider Jurisprudence and the Meaning of America,” Cornell Law Review 80 (November 1994): 43.
24. Flemming Rose, The Tyranny of Silence (Washington, Cato Institute, 2014), p. 85.
25. C. Edwin Baker, “Autonomy and Hate Speech” in Extreme Speech and Democracy, ed. Ivan Hare and James Weinstein (New York: Oxford University Press, 2011), p. 151.
26. Whitney v. California, 274 U.S. 357, 377 (1927) (concurring, J. Brandeis) (remedy for bad speech is “more speech, not enforced silence”).
27. Andy Greenberg, “Google’s Clever Plan to Stop Aspiring ISIS Recruits,” Wired, September 7, 2016, https://www.wired.com/2016/09/googles-clever-plan-stop-aspiring-isis-recruits/.
28. Adrian Chen, “Unfollow,” New Yorker, November 23, 2015, http://www.newyorker.com/magazine/2015/11/23/conversion-via-twitter-westboro-baptist-church-megan-phelps-roper.
29. Megan Phelps-Roper, “I Grew Up in the Westboro Baptist Church; Here’s Why I Left,” Ted Talk, February 2017, https://www.ted.com/talks/megan_phelps_roper_i_grew_up_in_the_westboro_baptist_church_here_s_why_i_left?utm_campaign=social&utm_medium=referral&utm_source=facebook.com&utm_content=talk&utm_term=global-social%20issues#t-627390.
30. J. M. Berger and Jonathon Morgan, “The ISIS Twitter Census,” Brookings Analysis Paper no. 20, March 2015, p. 58, https://www.brookings.edu/wp-content/uploads/2016/06/isis_twitter_census_berger_morgan.pdf.
31. Whitney, 274 U.S. at 375 (concurring, J. Brandeis); Vincent Blasi, “The Checking Value in First Amendment Theory,” American Bar Foundation Research Journal 2, no. 3 (1977): 521.
32. Berger and Morgan, “The ISIS Twitter Census,” p. 3.
33. Article 19 of the International Covenant on Civil and Political Rights allows states to limit freedom of expression under circumstances that satisfy proportionality review.
34. Scott Craig and Emma Llansó, “Pressuring Platforms to Censor Content Is Wrong Approach to Combatting Terrorism” (blog of the Center for Democracy & Technology), November 5, 2015, https://cdt.org/blog/pressuring-platforms-to-censor-content-is-wrong-approach-to-combatting-terrorism/ (arguing that when government seeks to police speech, notably extremism, through TOS, those requests should be grounded in legal frameworks rooted in international human rights rather than TOS).
35. Rose, The Tyranny of Silence, pp. 150–51. As Floyd Abrams explains in The Soul of the First Amendment (New Haven, CT: Yale University Press 2017), pp. 44–45, the European Court of Human Rights has upheld hate-speech convictions involving criticism of politicians and bigoted views expressed by politicians.
36. Council of Europe, “Council of Europe Secretary General Concerned about Internet Censorship: Rules for Blocking and Removal of Illegal Content Must Be Transparent and Proportionate,” news release, June 1, 2016, http://www.coe.int/en/web/tbilisi/-/council-of-europe-secretary-general-concerned-about-internet-censorship-rules-for-blocking-and-removal-of-illegal-content-must-be-transparent-and-prop?desktop=false.
37. Ibid.
38. European Digital Rights, “Input on Human Rights and Preventing and Countering Violent Terrorism,” March 18, 2016, https://edri.org/files/2016-UN-consultation.pdf.
39. Ibid.
40. “Removal Requests,” Twitter, https://transparency.twitter.com/en/removal-requests.html.
41. Article 19, Freedom of Expression and the Private Sector in the Digital Age: Article 19’s Written Comments, Office of the United Nations High Commissioner for Human Rights, http://www.ohchr.org/Documents/Issues/Expression/PrivateSector/Article19.pdf.
42. Danielle Keats Citron, “Technological Due Process,” Washington University Law Review 85, no. 6 (2007): 1249.
43. Emma Llansó, (director of free expression, Center on Democracy and Technology), in interview with the author, January 15, 2017.
44. Emma Llansó, “Takedown Collaboration by Private Companies Creates Troubling Precedent” (blog of the Center for Democracy & Technology), December 6, 2016, https://cdt.org/blog/takedown-collaboration-by-private-companies-creates-troubling-precedent/.
45. Liane Lovitt, “Why Transparency Reports Matter Now More Than Ever,” Medium, May 13, 2016, https://medium.com/inflection-points/why-transparency-reports-matter-now-more-than-ever-9fb6ebe733fa.
46. “Removal Requests,” Twitter.
47. “Government TOS Reports,” Twitter, https://transparency.twitter.com/en/gov-tos-reports.html (in the six-month period from July 2016 to December 2016, Twitter received 716 reports from governments worldwide related to 5,929 accounts; 85 percent were removed by Twitter for terms-of-service violations related to violent extremism, https://transparency.twitter.com/en/removal-requests.html shows breakdown by country).
48. “Government TOS Reports,” Twitter; “Content Removal Requests Report,” Microsoft, https://www.microsoft.com/en-us/about/corporate-responsibility/crrr.
49. Freedom Online Coalition Working Group 3, Submission to UN Special Rapporteur David Kaye: Study on Freedom of Expression and the Private Sector in the Digital Age, Office of the United Nations High Commissioner for Human Rights, http://www.ohchr.org/Documents/Issues/Expression/PrivateSector/FreedomOnlineCoalition.pdf.
50. “About ONO,” Organization of News Ombudsmen, http://newsombudsmen.org/about-ono.
51. Ibid.