[Economic Report of the President (2001)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 5
Living in the New Economy



This Administration came to office on a platform of ``putting people
first.'' The Administration has kept that pledge. Although the phrase
``New Economy'' typically brings to mind technological innovation and
globalization, arguably one of the most important changes from the old
economy to the new has been an improvement in the well-being of the
American people. By virtually any measure, Americans are better off
today than they were 8 years ago.

The private sector has demonstrated great entrepreneurial dynamism
and technological sophistication in bringing us the New Economy. But
we need to recognize that even in a New Economy, private markets alone,
for all their virtues, will not guarantee that all our national goals
will be met. Private markets can create wealth, but they cannot ensure
that all citizens, even those able to find jobs, will have adequate
incomes. Nor will private markets ensure that all citizens have access
to quality education and health care. Similarly, although private markets
can generate growth, they cannot ensure that growth will reach all
communities. Nor will purely private markets necessarily deal with
the side effects of growth on both the environment and urban congestion.

Many of our most difficult national challenges will require government
intervention through policies that assist individuals and communities
in danger of being left behind. This chapter, therefore, considers
policy areas that have a major impact on the opportunities given to
all Americans to create a better life for themselves and their children.
In particular, the chapter outlines recent reforms in the Nation's
welfare system and policies designed to improve the educational system,
expand health insurance coverage, and ensure smart growth. It also
describes the considerable progress that has been made and identifies
the tasks that remain to be accomplished.

Although the New Economy may not meet these challenges on its own,
the faster growth it has generated does make meeting them considerably
easier. In addition, the innovations that have occurred in information
technologies, organizational redesign, and policy provide better tools
with which to meet them. In each section of the chapter, particular
attention is paid to the contributions such innovations have made and
can make in improving the quality of life for all Americans. For example,
in the welfare system, new policies that make work pay have dramatically
reduced the number of families receiving cash assistance, while
increasing employment. In education, educators have worked to implement
higher standards for students and teachers and have brought aspects of
the New Economy into the classroom through the increased use of
computers. In health care, innovations in medical technology and
managerial practices have increased the quality of care and helped
rein in costs. Finally, across our communities, some localities are
taking advantage of new techniques to combat problems of congestion and
pollution and ensure smart growth practices. This chapter elaborates
on these and similar policies that have helped grow the work force,
sustain strong economic growth, and improve the quality of life for
all Americans.

Good News from the American Economy

Record-setting gains in the stock market and growth in the net worth
of wealthy individuals have received wide media coverage. But the most
noteworthy aspects of the current economic expansion are its duration
and its reach. The last few years in particular have brought tremendous
gains to all segments of our society.

Employment gains have been dramatic. Between January 1993 and
November 2000, 22.4 million new jobs were created. In 1999 the
unemployment rate reached 4.2 percent--the lowest annual rate since
1969. Just as important, unemployment has stayed low, remaining below
5 percent for 41 consecutive months through November 2000. At the same
time, wages have been increasing. After declining consistently from
1986 to 1993, real hourly wages for private sector workers rose by 7.4
percent between 1993 and 1999. These gains in employment and wages are
echoed in growth in income and reductions in poverty. The real median
household income reached a new high of $40,816 in 1999, an increase
of 2.7 percent since 1998 and a total increase of 13.3 percent from
1993. In 1999 the poverty rate fell to 11.8 percent, its lowest level
since 1979 and 3.3 percentage points below the 1993 rate of 15.1 percent.

These gains were shared by Americans at all income levels. Between
1998 and 1999, real income grew by 4.4 percent for those at the 20th
percentile and by 3.5 percent for those at the 80th percentile. (The
household at the 20th percentile has an income higher than 20 percent
of all households and lower than the other 80 percent.) From 1993 to
1999 the comparable figures for real income growth were 15.0 percent
and 14.2 percent, respectively. In addition, the most disadvantaged
groups tended to experience the greatest improvements in financial
well-being. Household incomes for African  Americans and Hispanics saw
record one-year increases, rising to all-time highs. The real median
income for African-American households increased 7.7 percent between
1998 and 1999 (it is up 23.9 percent since 1993), climbing to $27,910.
The real median household income for Hispanics  rose to $30,735, an
increase of 6.1 percent between 1998 and 1999 (and 16.5 percent since 1993).

In 1999, unemployment for African Americans and Hispanics fell to the
lowest rates on record. African Americans saw unemployment fall from
13.0 percent in 1993 to an average of 7.6 percent for the first 11
months of 2000, while Hispanics saw their unemployment rate drop to an
11-month average of 5.7 percent (Chart 5-1). Male earnings have also
increased,  particularly for African Americans. Between 1998 and 1999
the real median earnings for full-time African-American male workers
increased by $2,379 in 1999 dollars, or 8.6 percent--a dramatic rise
for a single year. With this sharp increase, the ratio of
African-American male to white male earnings rose to  0.81, the
highest level ever recorded.

Along with record increases in income have come record lows in poverty
rates (Chart 5-2). The decrease in the poverty rate for African Americans
between 1998 and 1999 was the largest 1-year decline in percentage terms
since  1967-68, and the poverty rate for this group in 1999 reached an
all-time low  of 23.6 percent. Hispanics also experienced a record drop
in poverty. At  22.8 percent, the poverty rate for this group is now at
its lowest since 1979.

In the past, economic gains have often had a limited impact on
households headed by women. Since 1993, however, the strong economy
and a social welfare policy that emphasizes work have brought
substantial benefits to this group. In March 1993 just 56.8 percent of
women maintaining a family on their own were employed; this figure
rose to 63.4 percent in March 1998 and 65.2 percent in March 1999.
This increase in employment corresponded to an increase in income.
Between 1993 and 1999 the median income for these



families increased by 18.0 percent. Between 1998 and 1999 alone, the
increase was 4.8 percent. The poverty rate for people in families
headed by females also fell, from 38.7 percent in 1993 to 33.1
percent in 1998 and 30.4 percent in 1999.

Within this group are those most likely to have been affected by
welfare reform: low-income single mothers and their children. (Low
income is defined here as an income below 200 percent of the poverty
line.) An analysis of a recently completed survey indicates that
between 1997 and 1999 the proportion of low-income single mothers
between 25 and 54 who were employed increased from 59.7 percent to
65.2 percent. Children as well as their mothers benefited from this
change. Between 1998 and 1999 the poverty rate for children fell by 2
percentage points, to 16.9 percent, the lowest level since 1979  and
the largest percentage-point decline since 1966. Poverty among African-
American children declined by even more in absolute terms, falling by
3.6 percentage points to 33.1 percent. Since 1993 the poverty rate for
all  children has fallen by 5.8 percentage points.

Older Americans have also benefited from economic growth. In 1999
the poverty rate among the elderly fell below 10 percent for the first
time on record. With the elimination last year of the Social Security
earnings test for those aged 65 and over, older Americans will likely
participate in the labor force in greater numbers, further improving
their financial status.

In the past, residents of our central cities have seen little change
in their poverty levels, yet here, too, the situation is improving.
Over the last several years, central-city residents in large
metropolitan areas experienced an above-average increase in median
income and the largest declines in poverty of any geographic category.

The gains experienced by Americans over the past 8 years have not
been limited to financial gains but include a long list of improvements
in the  quality of life. Low interest rates and a strong economy have
contributed to the highest home ownership rate ever in America. In
the third quarter of 2000,  67.7 percent of American families owned a
home, up from 63.7 percent in the first quarter of 1993 and surpassing
the Administration's goal, set in 1995, of 67.5 percent. Improvements
in job opportunities, in combination with Administration initiatives
to hire additional police officers, strengthen gun laws, and increase
local resources to improve public safety, have contributed to a dramatic
reduction in crime. In 1999 the overall crime rate fell to its lowest
level in  26 years.

Again, some of the least well off Americans have benefited most. The
violent crime victimization rate among those with annual household
incomes of less than $7,500 fell at an average annual rate of 4.7
percent between 1993 and 1999, while victimization rates for those
with incomes of $75,000 or more fell at an average annual rate of 2.8
percent. During the same period the number of violent crimes perpetrated
against African Americans declined by an average of 4.6 percent per year,
while whites experienced a 3.0 percent annual decline.  Patterns by
race for property crimes are similar.

The Nation's schools today are also showing improvements on several
fronts. Between 1993 and 1998 the proportion of high-school graduates
going  directly to college grew by nearly 7 percent, and college
enrollment  is at an all-time high. Math SAT test scores have reached
their highest level  in 30 years, and average verbal SAT scores have
held steady even though  the number of nonnative English speakers
taking the exam has increased. Minorities have also made notable
academic achievements. Among  high-school graduates aged 18-24, the
proportions of African-American  and Hispanic students continuing their
education at a 4-year college are at  record highs.

Improvements have also been made in the public health arena. The
birth rate among teenagers declined 17 percent between 1993 and 1999.
Infant mortality was down from 8.4 deaths per thousand in 1993 to 7.2
per thousand in 1998. Between 1997 and 2000 smoking among teenagers
declined after rising for most of the decade. Over the past several
years, death rates attributable to heart disease, cancer, stroke, and
AIDS are down, and life expectancy has improved.  A child born in
1998 can expect to live 76.7 years, up from 75.5 years in 1993.

Although these statistics present a glowing picture of the New
Economy and the well-being of the Nation as a whole, more work remains
to be done. Despite the recent gains, the incomes of minority groups
remain signifi- cantly below those of whites, and their poverty rates
significantly above. Infant mortality rates and life expectancy also
differ substantially by race and ethnicity, as does access to a quality
education. Certain areas of the country continue to experience
unemployment rates of more than 10 percent, as well as distressingly
high levels of poverty. Many Americans still lack health insurance
coverage and access to adequate medical care.

Innovative policies have helped us share many of the gains of the
New Economy, reduce the number of people on welfare, and improve
employment opportunities. But new policies may be needed to contend
with future changes in the economy. A slowing of economic growth will
likely be felt most severely by those who have only recently begun to
share in its benefits. Those most recently employed may lose their
jobs and accompanying benefits such as health insurance. Federal,
State, and local governments may feel pressure to cut back on
investments in education if their revenues decline. Thus, continued
improvements in the well-being of the American people likely depend
on both sustained economic growth and active public policy.

Helping Families Help Themselves

The New Economy is popularly characterized by new technologies, new
methods of communication, and new avenues of trade. But it also brings
innovative ways of providing for the least well off Americans.
Substantial changes have taken place in the organization of our welfare
system and in the incentives it provides. These innovations, and in
particular policies designed to increase the benefits of work, such
as child care subsidies and rules that increase the fraction of
earnings that welfare recipients can keep, have changed the tenor of
American social welfare policy. Public policy now emphasizes employment
and investment in the skills of those who are less well off. In doing
so the Administration has helped low-income families leave welfare and
enter the labor market, thereby promoting a more equitable distribution
of the gains from the New Economy.

Welfare Reform

Two of the most impressive achievements of the past 8 years have been
the reduction in the number of Americans receiving welfare, and the
increase in the numbers of current and former welfare recipients who
are working. The Administration has worked hard to reform welfare. It
began by allowing a record number of States to implement changes in
their welfare programs on an experimental basis, through waivers from
Federal welfare regulations. As of August 1996, 43 States had received
waivers and set up alternative programs that emphasized work and
parental responsibility.

These changes at the State level were followed by changes at the
national level, in particular the bipartisan Personal Responsibility
and Work Opportunity Reconciliation Act signed by the President in
1996. This act replaced the Aid to Families with Dependent Children
(AFDC) program with one that provides needy families with temporary
assistance, established time limits for receiving welfare benefits,
and shifted the emphasis from simply providing assistance to helping
families leave welfare and enter the labor market. Policies that offer
tax credits to subsidize the earnings of low-income workers, provide
assistance with child care, and expand eligibility for health insurance
support the welfare-to-work transition.

The new program, Temporary Assistance for Needy Families (TANF),
differs from the AFDC program in three fundamental ways. First, it
gives States much more discretion in using Federal funds. Under the
AFDC program, States set eligibility and benefit levels (within Federal
guidelines) and received matching funds from the Federal Government
to help with the program costs. The new program provides States with
block grants that are used to finance cash benefits, job preparation,
and other worker support programs. States now have much more flexibility
in spending, and they have used this flexibility to meet the  particular
demands of their constituencies--for example, allocating additional funds
for child care subsidies or allowing welfare recipients to keep a greater
fraction of their earnings. States are also eligible for bonuses for
helping people get and keep jobs and decreasing out-of-wedlock births.
In the future, bonuses will be offered for increasing participation in
the food stamp, Medicaid, and children's health insurance programs; for
providing child care to a larger fraction of eligible children; and for
increasing the proportion of children living in married-couple families.

Second, the new system imposes time limits and work requirements on
welfare recipients. In general, States can no longer use Federal funds
to pay  benefits to recipients beyond a lifetime limit of 60 months.
States can exempt some recipients from this requirement, set even
shorter time limits, or use their own funds to continue support beyond
the 5-year limit. In 1999, 38 States used the 60-month time limit, and
the remainder implemented other policies  (8 States had shorter time
limits, 3 had no time limit, and others intended to use longer periods).
Recipients must also work in some capacity after receiving benefits
for 2 years, but States have flexibility in deciding how to implement
this requirement, particularly in terms of strengthening it. In 1999,
28 States had welfare policies that imposed immediate work requirements
rather than the 2-year requirement.

Finally, States can now design the parameters of their program to suit
the needs of their residents. Although even before 1996 States had the
freedom to set benefit levels, the new program allows them to set income
and asset limits for eligibility as well and to establish their own
methods of calculating the income of potentially eligible families.
The majority of States have used this freedom to decrease the implicit
tax on earnings. The AFDC program reduced benefits dollar for dollar
for any earnings of more than $90 per month after 12 months of work.
This 100 percent ``tax'' on earnings created a strong disincentive to
work, as it was possible for a recipient to see little if any increase
in income from additional hours of work. Many States now use a more
gradual benefit reduction rate to encourage greater work force
participation. They are also investing in a wide range of supports
to help welfare recipients and other low-income working families enter
the work force and succeed on the job.

The Effects of Welfare-to-Work Programs

Since August 1996, welfare caseloads have fallen dramatically. Between
August 1996 and June 2000, the number of people receiving welfare
declined by half, to 5.8 million. Including reductions that have taken
place since 1993, caseloads have fallen by 8.3 million, or 59 percent.
Declines in some States have been even more dramatic. In Wisconsin,
for example, the number of welfare recipients fell by 75 percent
between August 1996 and June 2000, and it has fallen by 84 percent
since 1993.

The 1996 reforms have undeniably been successful in reducing the
number of people receiving welfare. But reductions in caseloads are
not the only measure by which to judge the reforms: the well-being of
the millions of former welfare recipients is at least as important.
Much of what we know about outcomes for welfare leavers comes from
studies undertaken in individual States. To date, studies monitoring
the outcomes of those who have left welfare have been conducted in
over 30 states. In addition, some of the data from State waiver
experiments undertaken before the nationwide welfare reform have
implications for current programs.

Available data on the results of welfare reform often differ from
State to State and do not represent nationwide averages. This Report
therefore supplements this information with new results based on the
Census Bureau's Survey of Income and Program Participation (SIPP),
providing some of the first evidence on the effects of welfare reform
for a nationally representative sample. The results from the SIPP are
based on a sample of people who were observed for at least 12 months
after leaving the welfare rolls. These individuals were first observed
between December 1995 and March 1996 and were reinterviewed every 4
months until the period between November 1998 and February 1999, the
exact month depending on the month of the initial interview. The new
data cover the experiences of some of those first affected by welfare
reform and may not reveal the effects of the time limits on receiving
benefits or the long-term impact on families.

One of the most important issues in evaluating welfare reform is the
incidence of recidivism, that is, the return of individuals to the
welfare rolls. Both SIPP data and a synthesis of State studies show
that approximately  25 percent of those who leave welfare return within
12 months. (Most  studies of recidivism, including those cited here, do
not treat transitions of less than 2 months as true changes.) The
majority of those who do return to welfare do so quickly: the SIPP
data show that 18 percent of those who exit return  within the first
6 months of leaving, and only 7 percent during the second  6-month
window. Further, the probability of returning to welfare declines with
time. In Maryland 25 percent of former recipients returned to welfare
within  12 months, but only 10 percent returned in the next 12 months,
and  approximately 1 percent did so in the third 12-month period.

Helping Welfare Leavers Find and Keep Jobs

A key factor in success after welfare is the ability to obtain a job
and remain employed. The Administration provided a total of $3 billion
in fiscal 1998 and fiscal 1999 in the form of Welfare-to-Work grants to
help States and local communities move long-term welfare recipients and
noncustodial parents into jobs. The Administration also implemented the
Workforce Investment Act, which allows States to provide job placement
assistance to residents, with priority given to low-income individuals
(Box 5-1).

__________________________________________________________________________

Box 5-1. The Workforce Investment Act

The Workforce Investment Act of 1998 was the result of a bipartisan
effort by the Congress and the Administration. The law requires that
basic job and career information and assistance be available to all
Americans and creates a system developed around one-stop career
centers in order to knit together multiple programs at the local level.
The law also provides for intensive assessment, counseling, job search
assistance, and training, with priority given to people on public
assistance and to low-income individuals.
The law initiates three reforms that are designed to maximize
training choices: individual training accounts, systems for identifying
eligible training providers and their programs, and extensive
information on program performance such as success in job placement,
post- placement earnings, and rates of skill attainment. These reforms
were designed so that trainees will have the opportunity and the
purchasing power to enter the training program of their choice rather
than be channeled into one of a handful of locally contracted programs.
The reforms provide an abundance of reliable information that will
empower trainees, allowing them to make informed choices.
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Employment programs for welfare recipients generally use one of two
approaches to helping welfare leavers find jobs. The ``work first''
approach aims to get people employed as quickly as possible. It is based
on the belief that work itself will give inexperienced workers the
skills (human capital) they need to remain in the labor force and move
to increasingly better jobs. This approach focuses on maintaining an
attachment to the labor force rather than on initial wages. The
alternative approach relies on comparatively extensive education and
training before welfare leavers enter the labor market. It delays
their entrance into the work force in the expectation  that, once
employed, they will have better jobs than they could otherwise have obtained.

The work-first approach is the more common, and past studies of initial
outcomes have indicated that it is the more successful: gains in
employment levels and earnings for program participants were higher
in areas with work-first programs than in areas using a training-based
approach. However, a new study comparing outcomes across counties in
California over a 9-year period finds that results for the two approaches
are similar in the long term.  A separate study comparing the outcomes
of 11 different welfare-to-work programs over a 2-year period finds
that the most successful approach combined an emphasis on work with
assistance in completing the General Educational Development (GED) diploma.

Employment rates among former welfare recipients are high.
Administrative data from studies conducted in several different States
show that between 62 and 75 percent of those leaving welfare were employed
at some point in the following year, and approximately 40 percent were
employed in all  four quarters. Results are similar at the national level.
SIPP data show that  66 percent of welfare leavers were employed at some
point in the following  12 months, and 43 percent had earnings in all four
quarters. However, few leavers were continuously employed. Only 32 percent
of welfare leavers worked 50 weeks or more during the year, and just 40
percent of this group (12.8 percent of all leavers) worked 35 or more
hours in each week. Thus, although labor force participation has
increased significantly among former welfare recipients, there is
considerable room for further gains.

Importantly, employment rates increased even among those who remained
on welfare. In fiscal 1999, 33 percent of welfare recipients were working,
compared with fewer than 7 percent in 1992. Developing an attachment to
the labor market even while on welfare is important, because it increases
the probability of success after leaving welfare.

The importance of the booming economy to these successes should not
be understated. Theories of human capital accumulation and the tenets
behind work-first programs suggest that time spent working increases
productivity, job skills, and wages. The long economic expansion and
historically low unemployment rates have given current and former
welfare recipients the chance to accumulate work experience that would
be expected to serve them well in a future downturn. The longer the
expansion continues, the better prepared they will be to weather the
consequences.

Earnings

Although employment is important in and of itself, so, too, are
earnings. Welfare leavers are unlikely to thrive in the workplace if they
are no better off financially than they were before leaving the welfare
rolls. Evidence from State studies indicates that, at least initially,
few leavers are significantly  better off. Median quarterly earnings for
those who found employment  varied from $2,000 to $3,000, or approximately
$700 to $1,000 per month. For the majority of leavers in Wisconsin,
earnings after leaving welfare were lower than the sum of earnings and
welfare benefits prior to exit.   For the sample of SIPP leavers, the
median monthly household income plus food stamps for the year following
exit was $1,605, compared with $1,509 in the 2 months preceding exit.
For 44 percent of leavers, household income plus food stamps in the
year following exit was more than $50 per month higher than in the
months before; for 49 percent it was at least $50 lower.

The idea behind work-first programs is that an initial job will lead
to  earnings growth over time. Because many former welfare recipients
find employment in low-wage industries such as food services, their
prospects for earnings growth may not seem extremely bright. Yet 39
percent of SIPP leavers had monthly earnings in the second 6 months
after leaving welfare that were $50 or more higher than in the first
6 months. Twenty-eight  percent saw a reduction in earnings of $50 or
more over the two 6-month periods immediately following exit. Thus at
least some former welfare  recipients did have earnings growth in the
year of exit through increases in hours, wages, or both.

Income gains from the Earned Income Tax Credit (the EITC is discussed
in detail below) are not included in these calculations. Although its
benefits are not recorded in the SIPP data, the credit provides a
substantial subsidy to low-income workers, and including its effects
would improve incomes and poverty rates considerably. Although its
figures do not focus specifically on welfare leavers, the Census Bureau
estimates that in 1999 the fraction of households with after-tax incomes
of less than $10,000 a year falls from  9.9 percent to 9.3 percent when
the EITC is factored in. At a maximum credit of $3,880 in 2000 for a
low-income worker with two children, the EITC could add up to $323 per
month to a family's income.

Making Work Pay

As the earnings of welfare recipients increase, they can lose not only
their cash assistance but also other benefits such as food stamps and
Medicaid.  At the same time, they incur explicit payroll taxes and
additional expenses associated with work such as child care and
transportation costs. In the past these costs have been large. One
study found that the implicit marginal tax rate for AFDC recipients --the
net amount paid in taxes, forgone benefits, and work-related expenses
from a $1 increase in income--could easily exceed 50 percent. In other
words, earning $1 more in the labor market increased their disposable
income by less than 50 cents.

The Administration's welfare reform proposals have attempted to reduce
these implicit taxes and increase the rewards from work, through a
higher minimum wage and an increased EITC, through increased subsidies
for child care, and through expanded health insurance coverage that
includes working families not previously eligible for public programs.
The Administration has also worked to help single parents collect the
child support payments due them. These programs do more than help ease
the transition from welfare to work; they also benefit working families
who may have never received welfare. By reaching out to both groups,
the Administration has worked to ensure that no working family is left
behind.

The Earned Income Tax Credit

Operating through the income tax system, the EITC provides a wage
subsidy for many low-income workers. The amount of the subsidy depends on
how much the family earns and on whether the family has zero, one, or two
or more children. By effectively increasing the wage rate, the EITC offers
those eligible an added incentive to participate in the labor force. In
2000, families with two or more children received a subsidy of 40 cents
for every dollar of earned income up to $9,700, for a maximum credit of
$3,880. This tax credit is refundable, so that even families who pay
little or no income tax can benefit fully from the tax provision. Rather
than falling to zero when earnings surpass $9,700, the credit remains
at $3,880 until earnings reach $12,700 and then gradually declines. For
two-child families it phases out completely when earned income reaches
$31,152 (Chart 5-3). The gradual phaseout reduces the disincentive to
earn income beyond the level at which the credit peaks.

The EITC has been expanded greatly since 1990, with increases in both
benefits and scope of coverage. The 1993 expansions increased benefits for
approximately 15 million tax-filing units (assumed to be roughly equivalent



in number to households), in large part by raising the subsidy for
families with two or more children. The 1993 expansion also, for the
first time, allowed workers without children to claim a tax credit. As
a result of both the 1990 and the 1993 expansions, credits paid increased
from $15.5 billion  in 1993 to nearly $31 billion in tax year 1999. At the
same time, the number of tax returns claiming the EITC increased by
roughly 30 percent, from 15 million to nearly 19 million. The program now
pays out nearly as much as the Federal outlays on the TANF and food stamp
programs combined.

This wage subsidy has been effective in attracting more workers into
the labor market (Chart 5-4). According to one estimate, the EITC alone
was responsible for 34 percent of the increase in annual employment
among unmarried mothers between 1992 and 1996.

In addition to increasing the probability of employment for low-income
people, the EITC has done much to improve the well-being of those who
receive it. Many workers do not have jobs that pay enough to raise their
incomes above the poverty level. But when the credit is taken into account,
the earnings of these workers can rise substantially. Calculations of
after-tax income excluding and including the EITC indicate that in 1999
the credit lifted 4.1 million individuals out of poverty. Of these, 2.3
million were children. The provision has also been effective in targeting
benefits to the most needy. Estimates based on 1997 data indicate that
between 50 and 60 percent of its benefits accrue to families with incomes
below the poverty line.



The Minimum Wage

The minimum wage operates in tandem with the EITC: the credit  provides
an effective wage subsidy, and the minimum wage laws ensure that the
subsidy is based on an acceptable wage. The real value of the minimum
wage declined substantially from 1992 to 1995, falling to just 71 percent
of its peak value, recorded in 1968. Subsequent Administration-backed
efforts led to increases in the minimum wage in 1996 and 1997. Even with
these most recent increases, however, the minimum wage in 1999 was less
than  80 percent of its 1968 level (after controlling for inflation).

However, when the minimum wage is combined with a possible  40 percent
subsidy from the EITC, the true minimum wage for workers with two or more
children and earnings of less than $9,700 is $7.21 an hour  (Chart 5-5).
This hourly rate is higher in real terms than the peak minimum wage rates
of the 1960s. Even so, an individual working full-time at the minimum
wage would have a yearly income of just $14,188 (including the credit),
well below the poverty line for a family of two adults and two children.

Child Care

For many parents, one of the most difficult barriers to employment is
finding affordable, good-quality child care. For low-income families and
new entrants to the labor market, the costs of child care may make
working impossible. Recognizing these costs as a barrier to work, the
Administration



has worked to make child care more affordable for low-income
families and to provide assistance with child care expenses to a greater
number of families. Federal funding for child care has increased
substantially, and the various existing child care programs have been
combined to create the Child Care and Development Fund. This fund provides
States with block grants for the purpose of subsidizing approved child
care arrangements. States can transfer additional funds from their TANF
block grants to help finance child care subsidies. In fiscal 1999, States
spent a total of $5.2 billion in Federal dollars on child care, including
both child care allocations and TANF block grant transfers. They also added
$1.6 billion of their own funding. These resources benefited an average
of 1.8 million children per month. Despite this investment, however, many
States have waiting lists for benefits, and many families who qualify for
the subsidies do not receive benefits. It is estimated that only 12 percent
of eligible children were served by this program in fiscal 1999.

The Food Stamp Program

The food stamp program helps to ensure that low-income individuals receive
adequate nutrition. Benefits are available to households with incomes up to
130 percent of the poverty line. In fiscal 1998 the vast majority of
benefits (nearly 90 percent in dollar terms) went to households with
children or elderly individuals. In 1999, 27 percent of participating
households had earned income. Enrollment in the food stamp program has
fallen  dramatically since 1994, from a high of 27.5 million participants
to  18.2 million in 1999, in part because of the strong economy. Of
concern, however, is the fact that the participation rate for eligible
families declined from 71 percent in September 1994 to 62 percent in
September 1997. This decline is particularly marked for families with
children. In 1999 only  51 percent of children in families with incomes
below the poverty line received food stamps. Even among the very poorest
children--those in  families with incomes less than 50 percent of the
poverty line--data indicate that only 58 percent received food stamps in
1999, down from 76 percent in 1993. (Not all poor families are eligible
for food stamps. Limitations on the value of assets that an eligible
family may hold may exclude some families.)

Several factors could be responsible for the decline in participation.
Changes in the laws governing the program have excluded some immigrants
and  restricted the eligibility of able-bodied adults without dependents,
decreasing the pool of potential participants. The strong economy and
the growing number of people with jobs may have further reduced the
number of eligible individuals. But these factors alone cannot explain
all of the steep decline in participation rates, and it is likely that
some eligible families are not receiving the benefits they need (and
are entitled to receive). This is especially true of families just
leaving the welfare rolls. Rules governing participation in the program
are often a factor here. States require that wage-earning food stamp
recipients have their incomes recertified at regular intervals, often
every 3 months and even more frequently in some States. For low-wage
earners without much time off, this requirement could well be a
substantial deterrent to participation. A recent study underscored
this concern, attributing a large portion of nonparticipation to the
costs to recipients of regular recertification.

In response to these recent trends, the Administration has implemented
a series of changes in the regulations governing the food stamp program.
These changes substantially reduce the need for recertification for those
leaving welfare and the newly employed and give States greater
flexibility in processing applications. States will soon be able to
receive bonus awards under the TANF program for increasing participation
rates for low-income working households. In the future, $20 million will
be allocated for these awards. Finally, the Administration has provided
funding for educational and outreach campaigns aimed at improving
nutrition for low-income families and the elderly.

Child Support

Child support payments from noncustodial parents are an important
source of income for poor children. In 1997 child support lifted an
estimated half a million children out of poverty. Child support is
particularly important for families leaving welfare. Divorced or
separated women who leave  welfare and do not receive child support
have a significantly greater chance  of returning within 6 months than
those receiving even small amounts of child support.

An important component of the Administration's policies to help
working families is ensuring that single and divorced parents receive
the child support payments they are entitled to under the law. Between
fiscal 1992 and fiscal 1999 the dollar value of child support collections
doubled, from $8 billion to $16 billion--an increase of more than two-
thirds after adjusting for inflation. During the same period the number
of child support cases involving  collections increased from 2.6 million
to 6.1 million.

However, much of the money collected never reaches the custodial
parent. Many States reduce TANF benefits dollar for dollar when a
noncustodial parent provides support, lowering the incentive for
noncustodial parents to provide for their children. The President
proposed legislative changes that would make it easier for States to
pass along a portion of child support  payments to custodial parents
receiving assistance. This change would give parents an incentive to
cooperate with the system. Some States, such as  Wisconsin, are already
experimenting with this type of policy, with some  success.  Results
show that noncustodial parents are more willing to pay child support
when they know that at least some of the money will go to benefit
their child. Ultimately, widespread use of this policy should increase
collections of child support payments.

Access to Health Insurance

Historically, individuals and families leaving the welfare rolls
have lost their Medicaid coverage as they did so. During the 1980s a
series of Medicaid expansions and the introduction of Transitional
Medical Assistance began providing health insurance benefits to former
welfare recipients and low-income families, easing the transition to
work. Before the 1996 welfare reform a Federal mandate required that
States offer Medicaid coverage to children and pregnant women in
low-income families, regardless of whether they were already
receiving welfare. This group included children under the age of 6
and pregnant women in families with incomes below 133 percent of the
poverty line, and children between the ages of 6 and 19 in families
with incomes below 100 percent of the poverty line. Many States opted
for even broader coverage, setting higher income thresholds and
covering children of all ages. Adults could obtain Medicaid for up to
12 months after leaving welfare under the Transitional Medical
Assistance program or through State programs for the medically needy.
The 1996 legislation expanded Medicaid coverage to low-income
single-parent and some two-parent families, and to families leaving
welfare. In 1997 the State Children's Health Insurance Program (SCHIP)
was created to target children in low-income families. SCHIP is further
discussed later in the chapter.

Looking to the Future

The success thus far in helping families leave welfare is tempered by
the realization that many families still depend on public assistance.
As the time limits for TANF begin to bind, the focus must be on how to
help those who have been unable to secure employment. Furthermore, as
already noted, some who have left the welfare rolls are no better off
financially than they were while receiving benefits. Investments in
job skills, a continued strong economy, and policies that ensure a
living wage can all help these people succeed in the labor force.
However, when the economy does begin to slow, policies must be in place
to help those who lose their jobs. If former welfare recipients are
among the last hired, they may be among the first laid off, and they
run the risk of returning to public assistance. These challenges are
not insurmountable, but they require the continued commitment of
government and the private sector to reach workable solutions.

Reaching out to Underserved Communities

Providing opportunity and independence for American families
sometimes requires more than a strong national economy and responsible
welfare policy. Areas where poverty has become entrenched and the local
economy is weak may need additional assistance. Some of the most
intractable poverty is found in America's central cities and rural
areas. Because these areas are home to large numbers of Americans--in
1999, 30 percent of the population lived in the central cities and 20
percent outside metropolitan areas--this situation is cause for great
concern.

In 1967, when statistics for these areas were first recorded
separately, the poverty rate for central cities was 15.0 percent,
compared with a nationwide rate of 14.2 percent. In contrast, poverty
in nonmetropolitan areas was over 20 percent. By this measure the
central cities were nearly as well off as the rest of the country,
but nonmetropolitan areas suffered from disproportionately high
poverty. Between 1967 and the early 1990s, however, the incidence of
poverty shifted: conditions in the central cities worsened, and
nonmetropolitan areas saw a slight improvement. By 1993 the proportion
of central-city  residents living in poverty had reached an all-time
high of 21.5 percent,  and the poverty rate in nonmetropolitan areas
had declined slightly, to  17.2 percent--well above the national
poverty rate of 15.1 percent in both cases. Since 1993, however, the
situation has improved dramatically,  especially for central cities.
In 1999 the poverty rate for central cities was  16.4 percent and that
in nonmetropolitan areas stood at 14.3 percent. Yet these rates remain
well above the national average of 11.8 percent.

The strong national economy and current policies to make work pay,
discourage out-of-wedlock births, and improve schools in poor
neighborhoods can be expected to provide some relief. But given
the persistently high poverty rates in these locales, additional
strategies may be required. To reach out to residents of these locales,
the Administration has enacted a series of  programs that directly
target communities.

Central Cities

Central cities offer some advantages for low-income workers.
Central-city residents likely have ready access to public
transportation, and city governments often provide more generous
support services than governments in other locales. But cities often
have one key drawback: fewer job opportunities. Recent research shows
that most job creation today is taking place in the suburbs. One study
by the Department of Housing and Urban Development (HUD) found that,
from 1992 to 1997, job growth was slower in the cities than in the
suburbs and that the job mix in cities is increasingly shifting toward
high-technology industries, which provide fewer opportunities for
low-skilled workers.

Central-city residents also face other barriers to employment.
Low-income workers are unlikely to own a car and must rely on public
transportation. Yet a recent study found that nearly half of all
low-skilled jobs in the suburbs are not accessible by public
transportation. Compounding this situation is the fact that minorities
still face discrimination in housing and employment markets. Studies
have shown that minorities have difficulty renting and purchasing housing
in the suburbs and are less likely to be hired by white-owned or
suburban firms. The cost of housing in the suburbs may also make it
difficult to move to homes near suburban jobs.

From a policy perspective, several approaches are available to
address the mismatch between where low-skilled workers live and where
they can find work. The first is to rebuild the economies of our
central cities. The second involves seeking ways to overcome the
transportation hurdles that commuters from the central city face. The
third approach is to help low-income families obtain housing in areas
where jobs are available. Providing training is yet another way to
address this issue, improving workers' skills and thus their
employability at a range of jobs. The Administration has pursued
policies that incorporate all four approaches.

When this Administration took office, a number of programs already
addressed underserved communities. The long-standing problems in these
areas, however, clearly called for additional policy measures. The
Administration developed a number of strategies for rebuilding the
economies  of America's central cities, including Empowerment Zones
and Enterprise  Communities. The Empowerment Zone/Enterprise Community
initiative aims to assist communities by encouraging investment from
private businesses through tax credits, wage credits, and improved access
to credit markets. Since 1995 over $1 billion has gone to 78 designated
urban areas under these initiatives, supplemented by over $10 billion
leveraged through other public investment.

To help solve commuting problems, the Administration's Transportation
Equity Act for the 21st Century established a new Job Access and Reverse
Commute Program designed specifically to connect low-income persons to
employment and support services. Similarly, the Bridges to Work program
provides job placement, transportation, and job retention services in a
select group of cities. In addition, the Administration has made owning
a car  easier for low-income families receiving food stamps, by giving
States the flexibility to raise the limit on the value of a car counted
as an asset for  eligibility purposes. HUD programs also address
transportation problems by subsidizing low-income families in both
public and private sector housing. HUD's housing voucher and certificate
programs help over 1.4 million  families pay the rent for apartments in
the private market. This portable form of assistance helps families
locate near jobs.

Two Administration housing initiatives focus on improving employment
outcomes for low-income families. The Moving to Opportunity demonstration
program combines counseling with voucher assistance to help families
move from high-poverty public housing projects to private housing in low-
poverty areas. The Welfare-to-Work voucher program provides housing
subsidies and services to families eligible for or recently leaving
TANF to help adults in the family obtain and keep jobs. Preliminary
evidence from a Moving to Opportunity program in Baltimore suggests
that the program also helps children by improving their educational
outcomes.

Rural Communities

Like the central cities, many of America's rural communities face high
rates of poverty and unemployment. But these communities also face a
number of unique problems. First, they tend to have smaller, less
diversified economies than do the central cities and thus can be
severely affected by the closing  of only one or two industrial
plants. Second, many rural communities are geographically isolated from
major markets, making it hard for residents to find jobs and for
businesses to reach their customers. Third, rural com- munities often
offer little in the way of public transportation, so that  commuting
problems are likely to be more acute than in urban areas. Although
recent advances in telecommunications promise to reduce some of this
disadvantage, rural communities also lag behind urban communities in
access to this technology. Finally, rural governments often lack the
economies of scale needed to make investments in public services
economical.

A variety of agencies and programs exist to help these communities.
Technical assistance, grants, and loans offered through the Rural
Utilities Service  provide assistance with basic infrastructure needs
such as electricity, telecommunications, and water and waste facilities.
The Rural Housing Service helps rural communities build and renovate
community facilities and housing. Its programs provide housing
assistance to families with moderate and low incomes; it also helps
communities develop and improve facilities such as fire stations,
libraries, and hospitals.

The Rural Business-Cooperative Service cultivates partnerships
between the private sector and community-based organizations.  It also
provides technical assistance and funding for projects that generate
employment. Rural businesses also get a boost from the Empowerment
Zone/Enterprise Community initiative, as many of the areas these programs
target are in rural communities. Finally, the Telecommunications Act of
1996 is addressing the digital divide by providing funds to help schools
and libraries and rural medical facilities in low-income communities
develop modern communications infrastructure.

At the regional level the Administration has supported several
initiatives addressing the problems of rural development, including a
Task Force on the Economic Development of the Southwest Border, the
Mississippi Delta regional initiative, and the Denali Commission in
Alaska. These initiatives coordinate Federal, State, and local
development assistance to areas with  historically high poverty rates
and limited employment opportunities.

Results

These programs, coupled with the strong national economy and policies
aimed at making work pay, have led to substantial improvements in the
quality of life for those living in central cities and rural areas. The
unemployment rate in the Nation's central cities fell from 8.2 percent
in 1993 to 5.3 percent in 1999, while unemployment in rural areas
declined from 5.9 percent to 3.7 percent. Increased employment has
meant reductions in poverty and increases in median incomes (Chart 5-6).
As noted, the poverty rates in both central cities and nonmetropolitan
areas fell significantly between 1993 and 1999, with the largest drop
in central-city rates (2.1 percentage points) occurring in the last year.
This change was so large and affected so many people that it accounted
for  80 percent of the total reduction in poverty from 1998 to 1999.
The median household income in the central city has also increased,
rising 5 percent in real terms from 1998 to 1999--more than double
the 2.1 percent increase in the median income in metropolitan areas as
a whole. The gains in income for African Americans were particularly
striking. After adjusting for inflation, the median income for African-
American households in central cities increased  by 13.9 percent between
1998 and 1999. These economic gains have been  accompanied by a decline
in the number of people on welfare. Caseloads in the largest central-city
areas declined by 40.6 percent between 1994 and 1999. Increases in the
median household income in rural areas were less dramatic than those in
the cities, rising just 0.9 percent in real terms between 1998 and 1999.



Despite these clear improvements in the well-being of our poorest
communities, much remains to be done. Poverty rates and unemployment are
still too high. It is too soon to judge the effectiveness of the
Administration's community-based policies, but reaching out to these
communities demonstrates a willingness to seek creative solutions to some
of the Nation's most pressing problems.

Education in the New Economy

What students learn in school is crucial in determining their future
options and, more broadly, in enhancing the productivity of the Nation.
Thus it is imperative that all children be given adequate opportunities
to learn. To this end the United States has invested in a quality public
education system. Unfortunately, not all communities can afford to invest
equally in the education of their children, and the Federal Government has
worked to reduce this inequality. And by promoting educational innovations
such as more challenging curricula and the increased use of technology in
the classroom, the Federal Government is working to improve the quality of
schooling for all children.

Investments in human capital play an important role in the New Economy.
Last year's Report focused on the demand for educated workers and on
postsecondary education and training. This year's Report examines America's
public elementary and secondary schools--institutions that are also
important to the development of our future work force. Although many
factors go into producing a quality education, and parents, families,
and communities surely rank among the most important, the discussion
here focuses on the components of the education system more directly under
the control of Federal, State, and local governments.  This discussion
highlights the effects of class size, teacher quality, and school
infrastructure and  equipment. Strengthening these inputs to the education
process is key to improving educational outcomes.

A Role for Federal Education Policy

To prepare America's young people to join the New Economy, innovations
must be sought in the provision of education that will increase its
quality for all. These innovations include a committed effort to reduce
class size,  investments in teachers, higher standards for schools, the
widespread  adoption of computer technologies in the classroom, and new
charter schools that provide parents with a choice in their children's
education but retain public accountability.

The Federal Government has long sought to improve access to education
for the Nation's poorest children and to help States ensure that their
public schools are of high quality. Federal funds are used primarily
to help  implement needed reforms, expand new programs, provide access
to new technology, and pay part of the cost of education for students
with dis- abilities. Many Federal education programs are targeted to
schools and school districts serving students from lower income families.
By directing funds to these important areas, the Federal investment
in schooling can have an impact greater than the expenditure itself
would suggest.

In the United States, primary responsibility for elementary and
secondary education rests with the States and with local school
districts. Excluding school-based health and nutrition programs, the
Federal Government  provides just a little more than 6 percent of all
funding for kindergarten,  elementary, and secondary education. However,
this figure belies the  disproportionately large impact that Federal
dollars can have on schools.  Federal spending in the poorest schools
reduces inequalities across school  districts but does not fully
compensate for the overall pattern of funding  disparities created
by differences in local property tax bases and State funding levels
(Chart 5-7). A study of 1994-95 data found that the Federal  Government
spent more than four times as much per student in the poorest quartile
of school districts as in the wealthiest quartile, but that the wealthiest
school districts still had the highest level of expenditure per student.



The largest Federal education program for kindergarten through  12th
grade (K-12) is Title I of the Elementary and Secondary Education Act,
which provides funds to schools based on the number of poor children and
the child poverty rate in the local area. Since passage of this legislation
in  1965, these funds have been targeted to schools serving the poorest
children. The ability to target funding to the most needy schools
improved significantly after 1994, when the distribution of funding began
to be based on newly available biennial data from the U.S. Bureau of the
Census on child poverty in smaller geographic areas (such as counties).
In the 1997-98  academic year, 96 percent of those schools with the
highest poverty levels received Title I funds, up from 79 percent in
1993-94. In 1997-98 the highest-poverty quartile of school districts
received 43 percent of all Federal funds for K-12 education and 50 percent
of Title I funds--amounts that reflect the share of the Nation's poor
children in these districts (49 percent). At the same time, these school
districts received less than a quarter of all State and local funds.
Clearly, Federal funds in general and Title I funds in  particular are
a critical resource for improving equality in education.

Reducing Class Size

For decades the merits of various educational spending programs,
including those aimed at reducing class size, have been the subject of
much debate. Are they in fact effective in improving student achievement?
Mounting evidence is showing that smaller classes are beneficial,
especially for disadvantaged students and those in the early grades.

The most compelling evidence comes from the Project STAR (Student-Teacher
Achievement Ratio) experiment in Tennessee in the late 1980s. To determine
to what extent smaller classes improve academic outcomes,  Tennessee
authorized and financed an experiment that randomly assigned students and
teachers in kindergarten through third grade to classes with a standard
number of students (22-25) or to smaller classes (13-17 students). The
results showed better performance for children in the smaller classes:
these children did better on standardized tests of reading and math
than  students in larger classes.

A follow-up study showed that the students enrolled in smaller classes
in the early grades continued to do better on standardized tests in
middle school than other students. These students were also more likely
to take  college-entrance exams in high school. The results were
especially strong for minority students. For example, white students
in general are more likely to take a college-entrance exam than African-
American students. But when the probabilities were calculated for white
and African-American students who had been placed in small classes in
elementary school, this difference  narrowed substantially. Some 46 percent
of white students and 40 percent of African-American students who had been
in small classes took a college-entrance exam; the corresponding figures
for students in standard-size  classes were 45 percent and 32 percent,
respectively.

The quality of the Tennessee experiment's design and the outcomes it
generated persuaded many scholars that reductions in class size can
improve educational outcomes for children. Teachers in smaller classes
can spend more time on individual instruction and review, and less on
student  discipline and routine administrative tasks, than teachers in
larger classes. Teachers of small classes are also more likely to get to
know their students, interact with them frequently on a one-to-one basis,
and provide frequent, in-depth feedback. Results are now emerging from
programs in other States that reinforce the conclusions of the Tennessee
study.

In 1998 the Administration proposed a 7-year initiative to reduce
class sizes in grades 1-3. Its goal is an average of 18 students per
class nationwide. In its first 2 years the program enabled school
districts to hire an estimated 29,000 new teachers, reducing class
size for 1.7 million children. Smaller classes are expensive, however.
One study estimates that reducing class size in grades 1-3 nationwide
to an average of 18 students would cost $5 billion per year. Despite
the expense, the expected gains in students' future earnings appear to
be large enough to make the investment worthwhile.

The Importance of Teachers

The quality of teachers may play an even more important role than class
size in improving student outcomes. Parents, students, and professional
educators agree that teacher effectiveness is an important factor in
student achievement, and several recent studies find that differences
among teachers have significant effects.  Further, these analyses show
that some measurable characteristics, such as holding a master's degree,
are not necessarily  indicative of a teacher's ability to enhance student
performance. And although a teacher's effectiveness seems to increase
with experience in the first years of teaching, these gains to seniority
are not significant beyond 3 to  5 years. These results suggest that much
of the difference in teachers'  effectiveness stems from variations in
attributes that are hard to measure, such as talent and motivation.

Many schools are finding it difficult to attract and retain highly
effective teachers. Some of this difficulty likely stems from the existing
pay scales in public schools. In the last several decades, teachers'
salaries have fallen relative to those in other occupations. A large
majority of public school teachers are women, and for women in particular
the rewards of teaching have shrunk by comparison with other opportunities.
In 1940 fewer than 32 percent of women with a college degree earned more
than the average female teacher. By 1990 this fraction had risen to 55
percent. This trend continued throughout the 1990s, with starting salaries
in most occupations increasing at a much faster rate than starting salaries
in the teaching profession. One study found that from 1994 to 1998 the
average salary for persons with a master's degree in nonteaching fields
increased by 32 percent in real terms, while the real increase in the
average salary for teachers was less than 1 percent. Other factors that
affect job quality for teachers, such as crowded classrooms, unsafe
schools, and limited opportunities for professional development and
advancement, also affect schools' ability to attract and retain teachers.

The challenge of attracting and retaining effective teachers in
sufficient numbers will become particularly acute in coming years.
Between July 2000 and July 2008, the number of children aged 5-17 will
rise by nearly  1 million, significantly increasing the need for teachers
nationwide. Yet in this same period about 750,000 teachers are expected
to retire,  and many others are likely to leave the field to pursue other
occupations. Given these statistics, the United States will need an
estimated 2 million new teachers in the next 8 years. The demand for
teachers will be further heightened by mandates to reduce class size.
Meeting the target of 18 students per class in grades 1-3 will require
staffing an estimated 100,000 additional classrooms.

These increases in the demand for teachers will make it increasingly
difficult to maintain consistently high teacher quality in all classrooms.
The magnitude of the challenge is already becoming clear. In 1996
California began a massive program designed to reduce class size in the
early grades  (K-3). Expenditures for the program, which seeks a
statewide class size reduction from an average of 28 students to a maximum
of 20, are running $1.5 billion per year. The State has been largely
successful in achieving its goal: by the 1998-99 school year, more than
92 percent of California's  students in the targeted grades were in
classes of 20 or fewer students. But the share of fully credentialed
teachers instructing these classes fell from  98 percent in the 1995-96
school year to 87 percent in 1998-99. This decline indicates that the
demand for well-trained teachers is outstripping the supply and that
continued increases in this demand will likely make it more difficult
for schools to find qualified instructors. Ultimately, the benefits of
nationwide reductions in class size will depend on the ability to attract
and retain greater numbers of talented teachers (Box 5-2).

This Administration has supported investments in teachers. Its Class
Size Reduction Initiative requires that teachers hired with Federal
funds available under the program be fully certified. The initiative
allows school districts to spend up to 25 percent of their allocated
funds on professional development and testing for new teachers. Districts
that have met the appropriate goals for

____________________________________________________________________________
Box 5-2. Rewarding Effective Teachers

Traditionally, teacher salaries have been based on education levels,
experience, and responsibilities, leaving school systems little room to
reward the most effective teachers. Recently some schools and school
districts have experimented with alternative, performance-based pay
systems. These new methods may help improve the quality of instruction
in several ways. First, by establishing specific criteria for
evaluation, performance-based awards can help clarify and prioritize
goals, thus providing better guidance for teachers. The awards may
also provide teachers with additional motivation to work to achieve
these goals. Tying teacher compensation to performance may also help
attract talented people to the teaching profession and retain them, if
they know that their hard work and skills will be rewarded. But
although performance-based pay systems may offer new ways to reward
exemplary teachers, they should not substitute for appropriate
baseline salaries.
To be effective, performance-based pay systems must be carefully
designed. Because student achievement depends on many factors that
teachers cannot control, such as family circumstances and previous
education, fair, performance-based systems should reward teachers
for gains in student achievement rather than for absolute levels of
performance. Furthermore, because student learning involves
cooperative effort, incentives must be designed to create a cooperative,
not a competitive, environment for teachers. For example, team-
spiritedness might be enhanced by basing a portion of the awards on
schoolwide  rather than class-by-class achievement. Finally, the
standards used to assess performance must be carefully constructed. If
student outcomes are to be the basis of a performance-based pay system,
measures such as gains in student test scores, increases in attendance,
and increases in graduation rates should be considered--and they have
been in a  few schools.
The design of these school-based performance awards systems varies
widely. In some cases the awards are given directly to individual teachers;
in others the rewards benefit all teachers in a school equally. In
the Charlotte-Mecklenburg school district in North Carolina, for
example, awards were based on a broad array of student outcomes
including subject mastery, dropout rates, and absenteeism. Schools
received points for meeting annual improvement goals, and teachers in
these schools benefited directly: in the highest-performing schools
(classified as ``exemplary''), each teacher received $1,000. Teachers
in ``outstanding'' schools (those with slightly lower gains) received
$750. In contrast to this equal division of awards, the program
implemented at the Vaughn charter school in Los Angeles offers awards
that vary    substantially from teacher to teacher. Teachers at Vaughn
are provided the opportunity to receive cash bonuses in each semester
for effective performance in a number of areas, including the teaching
of specific academic subjects and more general skills such as
classroom management and lesson planning. Performance is assessed
through self-evaluations, peer review, and reviews by administrators.
For a veteran teacher, performance-related awards can total up to $13,100
per year.
A nationwide program that can also provide incentives to teachers
beyond the traditional pay scales has been developed by the National
Board for Professional Teaching Standards. The board has established
distinct programs of national board certification, which have drawn
the support of policymakers and educators alike. Many States and local
school districts are providing incentives to teachers to complete
this certification process. To become certified, teachers must compile
an extensive portfolio of their work, including classroom videotaping,
and take a full-day exam. Once certified, teachers are encouraged to
act as mentors to new teachers and to support colleagues seeking
such certification.
Studies of their effects on teachers have found that many award systems
that are based on schools' performance help improve cooperation among
teachers, but that these programs vary in their effectiveness in
increasing teacher motivation. Teachers in many programs also reported
that they feel increased pressure at work and work longer hours. Systems
that reward individual teachers also have positive aspects. The system
at Vaughn has helped attract new recruits, and many current teachers
were pleased with the program. However, some problems were also
encountered. One teacher complained that the peer review process, which
result in differing amounts being paid to teachers, ``pits teacher
against teacher.'' These difficulties indicate that additional research
and experimentation might be useful in  arriving at the best
compensation strategies.
---------------------------------------------------------------------------

reducing class size in the early
grades have the option of using their entire allocation for activities
to improve teacher quality. The Teacher Quality Enhancement Grant
program helps States improve the quality of teaching. To date it has
helped prepare about 20,000 new teachers for high-need school districts,
and it will help prepare many thousands more in coming years. Funding for
another Federal professional development program--the largest in the
budget (and currently called the Eisenhower Professional Development
Program)--increased from $275 million in 1993 to $335 million in fiscal
2000.

The Need for Modern Schools

The physical condition of classrooms may also affect the quality of
the educational experience and, in the most severe cases, the safety
of students. Communities across the country are struggling to address
the problems of aging schools. In 1999 the average public school was 40
years old, and schools in largely poor or minority districts were even
older. Many of these aging buildings have outdated electrical systems
that must be upgraded for computers, and asbestos in the walls of some
schools increases the cost of such upgrades. Some buildings need to be
renovated extensively to accommodate disabled students. Many schools
will need more classrooms as enrollments increase and average class size
is reduced, putting additional pressure on aging facilities.

The National Center for Education Statistics estimates that getting
America's schools into good physical condition will require an investment
of $127 billion.  Some 39 percent of our public schools already have
temporary additions, about one-fifth of which are in less than adequate
condition. Schools with a relatively high proportion of poor and minority
students are more likely than other public schools to have temporary
buildings, and thus will have the most difficulty housing additional
classes.

New Educational Technology and Internet Access

Today's workers are increasingly required to be computer literate.
Schools must be able to teach students the skills they will need to
work with computers and other new technologies. In addition, Internet
access  is becoming an important classroom resource, helping students
learn by  connecting them to libraries, museums, and educational
materials around the world. Internet access has become increasingly
widespread in American classrooms over the past 8 years, and Federal
programs, especially the E-rate program discussed below, have played a
large role. The E-rate program  provides up to $2.25 billion per year
to schools and libraries to offset the cost of telecommunications
services, Internet access, and internal connections.

Tremendous strides have been made in connecting public schools to
the Internet (Chart 5-8). With the help of the E-rate program, the
number of public schools with Internet access nearly tripled between
1994 and 1999, and by 1999 some 95 percent of all public schools were
on line. Increases in Internet connectivity within classrooms were even
more dramatic. In 1994 only 3 percent of public school classrooms had
Internet hookups; by 1999 that figure had risen to 63 percent.

The Federal Government has helped local school districts make the
transition to the digital age, committing $5.7 billion over the last
3 years through its E-rate program to connect school and library
computers to each other and



to the Internet (Box 5-3). These funds
have targeted schools with a high  proportion of low-income students.
Schools where 75 percent or more of  students are eligible for free
school lunches receive approximately 10 times as much funding per student
from the program as schools with the smallest percentage of such students.

Other Federal programs have also helped schools purchase new
educational technology. In addition to the E-rate program, in fiscal
2000 the Federal Government spent $766 million on education technology
programs through Title III of the Elementary and Secondary Education Act.
Some $425 million of this was provided through the Technology Literacy
Challenge Fund. Schools also used portions of their Title I funding to
invest in technology. A large share of these funds was used to purchase
computers and train staffing using new technology. During the 1997-98
school year, Federal funds paid for one-fourth of all new computers in
schools (Chart 5-9). Federal funds were especially important in helping
elementary schools with large numbers of low-income students acquire
technology, accounting for nearly 60 percent of new computers in these
schools.

For computers to improve the quality of instruction, teachers must know
how to use them and how to integrate them into the classroom. A recent
study found that only 53 percent of all public school teachers with
computers or Internet access used these resources for classroom
instruction. Teachers

____________________________________________________________________________
Box 5-3. Reducing the Digital Divide

Since 1993, computer use in America has grown at an enormous rate,
revolutionizing the way Americans communicate, work, and do business.
Access to a computer--and knowing how to use it--are increasingly
important for success in today's society. Currently more than half of
all U.S. households have computers, and more than  two-fifths have
Internet access at home. But computer use varies  greatly with income
and education. People in households earning more than $75,000 per year
are almost four times as likely to use the Internet as those in
households earning less than $15,000 per year. Adults with college
degrees are more than eight times as likely to use the Internet as
adults who have not completed high school. Race is also a factor.
African Americans and Hispanics are substantially less likely than
white and Asian Americans to use the Internet. A recent study finds
that income and education explain only around half of this
difference. Individuals from disadvantaged groups that already face
obstacles in the workplace are at risk of falling even further behind
if they lack computer know-how.
There is encouraging news, however. Notable changes are occurring
among school-age children, suggesting that the widespread availability
of computers in the classroom is playing a role. Across all income
and demographic groups, Internet usage among children aged 9-17 is
higher than the national average. And over the last few years Internet
usage has grown faster among African-American and Hispanic children
than among white children, and faster among children in households
earning less than $35,000 per year than among children from
wealthier households.
---------------------------------------------------------------------------

who have received more professional development in
using computers and the Internet, and teachers in schools with relatively
few low-income students, were the most likely to report using computers
and the Internet.  Newer teachers were also more likely to use computers
``a lot'' to create instructional materials.

Despite the growth in the number of classrooms with computers, only
one-third of teachers with access to computers and the Internet said that
they felt well or very well prepared to use them. These results clearly
show that more investment in teacher preparation is needed. The Federal
Government has addressed this issue through its Preparing Tomorrow's
Teachers to Use Technology grant program. This program supports 352
partnerships among colleges, educational agencies, and nonprofit
organizations, providing  training for teachers in integrating technology
into the classroom.



Standards and Accountability

Over the last decade, changes have taken place in America's public
schools that go far beyond increasing the investments just described.
Among  the most important changes are new ways of improving accountability
for educational outcomes.

Initiatives that establish clear performance outcomes and systematically
test student progress aim to help teachers and students focus their efforts
on those areas needing the most work. Spurred in part by legislation passed
in 1994 (the Improving America's Schools Act and the Goals 2000: Educate
America Act), State after State has implemented standards for what
students need to learn. As of October 2000, 48 States and the District
of Columbia had adopted such standards; the majority of States adopting
standards have done so since 1994.

The establishment of these standards has been followed by an increase
in standards-based assessment. Forty-eight States and the District of
Columbia now administer tests to assess student performance relative to
these standards in reading and math, and many States do so for science
and social studies as well. Thirty-six States currently publish some form
of report card for each school, measuring school performance against a
number of indicators, including student assessment test scores.

Both the standards themselves and the assessments based on them have
been controversial. Many argue that classroom instruction is now geared
toward preparing students for the exams--that teachers are, in effect,
``teaching to the test.'' However, when implemented correctly, such
assessments can help improve the quality of the educational experience--
and educational outcomes--in several ways. First, tests that are
challenging and well constructed can help raise the expectations of
students, teachers, and parents. These expectations can motivate all
parties to improve their performance. Second, by clearly outlining the
material to be covered and the degree of mastery required, these measures
of accountability may help teachers focus on what are generally agreed
to be the most important topics. Finally, these tests provide parents,
teachers, and students with information that highlights those areas in
which students are less than fully prepared.

The Federal Government has played an important role in the standards
movement. Since 1994 it has devoted more than $2.6 billion to helping
agencies in every State implement school reforms through the Goals 2000
Act. Even before that legislation was passed, the government supported
the development of voluntary national standards that States could use as
a basis for their own standards. In addition, the Improving America's
Schools Act tightened Title I accountability at the school and the
district levels by requiring States to hold students in Title I schools
to the same challenging standards as other students and to assess all
students in Title I schools against these standards.

The Federal Government has also increased its efforts to track student
progress, undertaking evaluations that help in assessing State-level
reforms.   In recent years the National Assessment of Educational
Progress has been expanded to track student performance in each State.
Thanks to these assessments a valuable set of baseline indicators now
exists for measuring student progress that can help researchers and
education professionals evaluate the effectiveness of new policies
(Box 5-4). The Individuals with Disabilities Education Act Amendments
of 1997 further require that children with  disabilities be included
in State- and district-level assessment programs, so that the performance
of these children will be measured as well.

Increasing Public School Choice

A persistent thread during the last decade of educational change has
been the call for parental choice in their children's education.
Allowing parents to choose among different public school models would
likely benefit students by allowing them to choose the method of
instruction that offers the best fit for their child's learning skills
and interests. In responding to parental demand, educators would offer
the most effective educational models  and innovations.

Many States have responded to the demand for choice by allowing parents,
teachers, and other interested parties to establish independent public
schools

__________________________________________________________________________
Box 5-4. Ensuring That Gains Are Maintained

Effective teachers, adequate facilities, and well-constructed
standards can help students learn more. However, these investments
are of little value unless students retain what they have learned.
Numerous studies have demonstrated that knowledge and skills
deteriorate while children are away from school, especially during
summer vacations. Drawing their conclusions from an analysis of many
previous studies, one group of researchers found that children lost an
average of a month's worth of learning over summer break.
Much of the Federal Government's role in education policy  has been
aimed at helping children in low-income families receive a quality
education, thus mitigating the effect of family income on schooling
outcomes. When children are not in school, it appears that family
characteristics play an important role in determining learning. Many
studies have noted that the deterioration of skills associated with
summer vacation was greatest for children in low-income families.
These differences appear to be particularly large for reading: students
from middle-class families experienced a small gain in test scores over
the summer, whereas students from low-income families fell behind. The
result was a gap between the two groups in reading skills equal
to approximately 3 months of schooling.
These differences suggest that public schools can do even more to
help children from low-income families succeed. One possibility is to
lengthen the school year. If students attended school year-round, there
would be less opportunity for skills to deteriorate. Alternatively,
summer enrichment programs targeting low-income communities can help
poor children overcome some of the disadvantages they face at  home and
in their neighborhoods. In addition to changes in the school calendar,
communities can offer after-school enrichment programs.
Both after-school and summer learning programs can also be a boon
for working parents, particularly for lower income parents who may
have difficulty arranging alternative care for their children. Not only
can such programs assure parents that their children are in a safe,
enriching environment, but they can also allow working parents  to invest
in their jobs and gain important labor market skills that can further
benefit their children through increases in family income and exits
from welfare.
The Administration has worked to assist local communities develop
after-school activities through its 21st Century Community Learning
Centers Program. This program has funded more than 3,600 after-school
and summer programs. Preliminary evaluations indicate that these programs
have had beneficial impacts on the academic and social behaviors
of participating children.
-----------------------------------------------------------------------------

chartered by State or local education agencies. These charter
schools are given autonomy over their operations and are exempted from
certain State and local regulations (although not from standards-based
assessment) in exchange for strict public accountability and results.
Charter schools have great potential as laboratories of educational
innovation, allowing individual schools to explore a variety of
educational methods while remaining  publicly accountable.

The Administration has strongly supported the development of charter
schools, having overseen the creation of the Public Charter Schools
Program in 1994 and passage of the Charter School Expansion Act in 1998.
In 1991 Minnesota became the first State to allow charter schools, and
by the end of 1999, 36 States and the District of Columbia had made
provisions allowing for such schools. At the beginning of the 2000-01
school year, 2,069 charter schools were operating nationwide, up from
just 34 at the start of the 1993-94 school year.

Helping Students Make the Transition
from Secondary School to College

Federal programs are also helping students make the transition from
secondary school to college or work. The Gaining Early Awareness and
Readiness for Undergraduate Programs (GEAR UP) bring middle schools
with a high proportion of poor students together with local colleges
and  universities. These partnerships helped prepare more than 250,000
students for college in fiscal 2000. The programs provide entire classes
of students and their families with academic enrichment programs as well
as information about choosing a college, applying for financial aid,
and preparing for college entry; in some cases they will also provide
college scholarships. The TRIO programs such as Upward Bound currently
serve 730,000 low-income, first-generation college and disabled students,
helping them prepare for and  succeed in college. And after 6 years of
receiving seed money from the  Federal Government, all States have
instituted local school-to-work  programs to benefit secondary school
students as they prepare for  their working lives.

Over the past 8 years, Federal assistance to Americans investing in
their college education has also increased. Direct Pell grants have risen
from a maximum of $2,300 per student per year to $3,300. The HOPE
Scholarship and Lifetime Learning tax credits have also reduced the cost
of education  for American families. Fees and interest rates on student
loans have been reduced, and restructuring the Federal student loan
program has saved  billions in taxpayer dollars.

Innovation and Access in Health Care

The American health care system today reflects the successes and the
promise of the New Economy. Americans are healthier now than they were
just 10 years ago. Between 1990 and 1998 life expectancy at birth rose
approximately 1.3 years, and life expectancy at age 65 rose more than
half  a year. The rate of chronic disability among the elderly declined
by  14.5 percent between 1982 and 1994. Medical innovations are in part
responsible for these improvements, as are factors such as improved
nutrition and exercise. Yet health care continues to present challenges
that demand an ongoing role for the government.

A stream of technological innovations has raised the quality of care
and improved health outcomes. Innovative diagnostic tools and new
treatments have improved the medical system's ability to treat many
diseases and conditions. These innovations enable medical professionals
to identify health problems more accurately and to offer treatments that
are less invasive and promise better outcomes. One good example is the
use of drug therapy to treat some conditions that formerly required
surgery.

These improvements in treatment are expensive, however, and overall
health care costs have risen as people demand more and better care. The
upward pressures on expenditures are exacerbated by traditional fee-
for-service insurance, which offers weak incentives for patients or
providers to limit their health care consumption. Managed care has evolved
as an organizational innovation to control rising health care
expenditures. It attempts to create incentives for both patients and
providers to make efficient health care  consumption choices--to
utilize treatments, especially costly technological innovations, only
when they are medically appropriate.

However, health insurance coverage remains a problem. Around  42.6
million Americans have no health insurance coverage, often because they
cannot afford it. Thus the government has a continuing role to play
in providing health insurance to those in need of assistance. The
Administration recognizes the importance of health insurance and has
worked to extend  coverage to those most in need of it. The State
Children's Health Insurance Program, for instance, has extended
health insurance to an estimated  2.5 million children nationwide.

Technological Innovations

Dramatic innovations in medical care, often driven by computer
technology or research in fields such as biotechnology, have led to
more accurate diagnostic techniques, better surgical procedures, and
treatments for previously untreatable conditions. Evidence indicates
that technological innovations have been beneficial as a whole. One
study found that the lifetime value of improved health (including longer
life) attributable to improved medical care outweighed the significant
costs. Nevertheless, examples of innovations are particularly revealing,
because aggregate studies are unable to fully measure the impact of
these innovations.

For example, by providing very high resolution anatomical and patho-
logical images, magnetic resonance imaging (MRI) enables much more
precise diagnosis of a number of diseases and conditions than traditional
computed tomography (CT) scanning. In the 1990s MRI technology and
computers were further combined to create ``open MRI'' systems, which
can be used to provide continuous pictures to guide surgeons during
brain operations. Modern techniques for abdominal aneurysms illustrate
how surgical procedures have improved. The development in the 1990s of
endovascular surgery, a minimally invasive procedure that uses
intraluminal stents  (scaffolding-like wire-mesh devices used to prop
open artery walls), has led to remarkable improvements over open surgery
to repair abdominal aneurysms. Experts reporting on the results of
clinical trials have testified that endovascular surgery reduces
operating procedure time by 20 percent, reduces blood loss by two-thirds,
halves the number of patients requiring a transfusion, and reduces
intensive care unit time from 3.5 days to less than  1 day and the
hospital length of stay from 9.3 days to 3.4 days. Mortality is
comparable to that from open surgery, but endovascular surgery produces
only half the number of severe treatment-related adverse effects.

In addition, innovative techniques and treatments now allow physicians
to treat some previously untreatable conditions, such as Alzheimer's
disease, which affects some 4 million Americans. A new drug therapy
that enhances cognitive function and delays the progress of the disease
was introduced  in 1993, the result of advances in neurobiological
research. New drug  treatments for other conditions have also come on
the market. Facilitated by the streamlining of the drug approval process
in 1997, the number of new drugs approved by the Food and Drug
Administration that are significant improvements over existing drugs
grew from an average of 12.5 per year in 1990-93 and 13.3 in 1994-96 to
14.7 in 1997-99.

Innovations that produce better care can save money by reducing the
number of medical inputs required to produce the same or a better
health outcome. The development of minimally invasive laparoscopic
surgery, made possible by advanced digital technology, has reduced the
costs of abdominal surgery. Laparoscopy has reduced the postoperative
hospital stay for gall bladder surgery by up to 6 days, and the time
patients need to  take off work by a month, reducing overall costs.
Drug therapies can prevent peptic ulcers or substitute for expensive
abdominal surgery for severe  ulcers, and new psychotropic drugs may keep
many people who suffer  from depression out of the hospital and reduce or
eliminate the need for  extensive psychotherapy.

However, many innovations actually raise the cost of health care
because they require more medical staff time and more expensive
equipment than traditional treatments in order to produce better outcomes.
MRI scans, for example, are extremely expensive, as are certain types
of highly innovative brain surgery. Intensive cardiac interventions are
being offered with increasing frequency. Among Medicare patients, the
use of coronary bypass surgery tripled between 1984 and 1991.
Catheterization procedures quadrupled, and angioplasty use rose 15-fold.
As a result, the cost of treating a heart attack rose 36 percent faster
than inflation between 1984 and 1991. But life expectancy after a heart
attack rose by 8 months during the same period. Overall, innovations in
acute interventions accounted for about 55 percent of the decline in
mortality from heart attacks between 1975 and 1995.

Both interventions that lower costs and interventions that increase
them can contribute to higher total expenditure. Cost-saving innovations
may lower the cost per patient of treating a condition, but if more
people then use them, or use them more often, total costs are likely
to increase. Innovations that raise per-patient costs unambiguously raise
the total cost of health care, even if the number of treatments does
not rise. More frequent use of these expensive new procedures raises
costs even further. Treatments for previously untreatable conditions
also raise overall health care expenditure.

Organizational Innovations
to Control Health Care Costs

Medical innovations have been the primary reason for the rapid growth
in health care expenditure in the last two decades, accounting for more
than half of the long-term increase. These technological innovations
have exacerbated the dilemma of providing high-quality care while
holding costs at a reasonable level. To balance these conflicting
goals, health care decision- makers must meet two challenges: they
must determine when improved  outcomes justify the additional expense,
and they must structure the health care system so that it uses medical
technology in the most cost-effective way.

Because health insurers pay for most health care, the incentives
embedded in the health insurance system strongly influence the
efficiency of the entire health care system. Before the 1990s the
predominant health insurance arrangement was that known as fee-for-
service. Under this system patients face low copayments, and providers
are reimbursed on a cost-based method after each medical encounter. The
system provides those who determine a course of medical treatment with
great flexibility and satisfies health care consumers' desire to obtain
the highest-quality care available (including expensive technologies).
From a physician's point of view, fee-for-service plans are desirable
because they take into account the complex nature of medical needs and
the variety of appropriate responses available. However, because
reimbursements are based strictly on utilization, patients and
medical personnel using these plans have few direct incentives to use
the most cost-effective technologies and practices. Physicians have
incentives to overprescribe services and procedures, and patients
have incentives to let them.

To address these problems, managed care has introduced an incentive
structure that encourages providers to choose services more efficiently.
Managed care employs two mechanisms, one financial and one non-
financial, to alter providers' incentives and treatment choices. The
first is  capitation, a method of payment that gives providers a fixed
payment for each patient in a risk pool. Under this arrangement,
providers have a strong incentive to reduce treatment costs, because
they retain whatever is left  over from the payment after all medical
treatment is provided. The second mechanism is utilization management,
which includes establishing treatment guidelines, controlling access to
specialists, and monitoring physicians'  performance to reduce
low-valued services.

Managed care organizations can influence the expected profitability of
new technology by reducing reimbursement and restricting utilization.
When they do, hospitals and physicians are likely to acquire and use
fewer new and expensive technologies. By balancing patients' desire for
better health care with incentives for providers to reduce costs, managed
care can encourage more cost-effective use of technology while promoting
innovations that improve health and keep costs in line.

At the same time that it seeks this balance, however, managed care
creates a different set of problems. These include incentives for health
insurance plans to select only healthy patients and to underprovide
services. Managed care organizations have a strong incentive to sign
up healthy patients whose health care costs will be low. This incentive
can override the goal of improving efficiency. Furthermore, providers
have an incentive to restrict even cost-effective services because
they receive no additional revenue from providing them. Because
patients frequently lack information about the effectiveness of
alternative treatments and are thus unable to act as knowledgeable
consumers, this problem can be severe (Box 5-5). As a result, patients
may not get expensive but medically necessary services. Thus patients
need meaningful protections against incentives that lead to too little
care being provided.

The optimal reimbursement design, in terms of offering incentives
that balance cost and access, likely lies somewhere between fee-for-
service and capitation plans. Such a plan would involve partial cost
sharing by providers and patients through copayments and coinsurance,
but the ideal incentive structure has not yet been identified.
As managed care plans have evolved to allow patients more choices, the
plans' ability to influence utilization has diminished. Consolidation
among physicians and hospitals in the 1990s created intermediary
organizations between providers and managed care

___________________________________________________________________________
Box 5-5. The Rise of E-Health: On-Line Medical Information

The Internet is becoming an important source of medical information
for consumers, for at least two reasons. First, it empowers patients
by providing them with medical information that increases the value of
a medical appointment. Interactions with physicians are more efficient
if patients know what questions and concerns to raise beforehand.
Second, for general information the Internet offers an attractive
alternative to a costly consultation.
Tens of thousands of Internet websites provide medical and health-
related information. About 60 million Americans searched for
health information on line in 1998, and that number was expected to
increase in 2000. An analysis of patient electronic inquiries to a
university  dermatology department found that 40 percent of the
inquiries could be answered by a librarian, 28 percent could be answered
by a physician via e-mail, and only 27 percent required a visit with
a physician.  Without the Internet many of these questions might not
have been asked or answered at all, and unnecessary visits might
have occurred. The Internet thus has the potential to effectively
supplement the  physician's role in providing medical information and
thereby to improve efficiency.
However, the websites currently available may present problems. Not all
on-line medical information is easily comprehensible to the lay reader,
and some sites raise conflict-of-interest issues. Although the Internet
can reduce the cost of obtaining medical information, it cannot
make information on complex medical issues understandable to all.  To
the extent that it leads patients to self-diagnose and self-treat
inappropriately, then, on-line information can be harmful. Furthermore,
the quality of information varies greatly, in part because commercial
interests can influence content. These problems can actually increase
the demands on physicians, who must spend time clarifying  misleading
or misinterpreted information.
For these reasons the government has a role in overseeing and
regulating medical information websites. Several government agencies,
including the National Institutes of Health, the Food and Drug
Administration, and the Agency for Healthcare Research and Quality,
have taken the initiative either to provide information directly or to
provide links to reliable medical websites.
-----------------------------------------------------------------------------

plans, so that
fewer providers actually operate on a strict capitation basis.  For
these reasons managed care plans at the beginning of the 21st century
differ markedly from the original managed care organizations, and the
mechanisms that managed care uses to influence cost-effectiveness have
been significantly altered.

Empirical evidence suggests that managed care was one of the factors
that slowed the growth in total health care expenditure in the 1990s
(Chart 5-10). Managed care slowed health care inflation not only by
reducing the use of expensive procedures, but also by lowering physician
and hospital fees relative to fees under traditional insurance. However,
further reductions in utilization may not be feasible, simply because
continued reductions could prevent patients from receiving medically
necessary treatment. In addition, managed care's ability to restrict
fees in the future  is uncertain, because fees cannot fall below costs.
Whether reductions in health care expenditure will continue is thus an
open question, and recent  indications suggest that expenditures are
again beginning to grow.

If technological progress remains the key factor behind rising health
care costs, managed care can continue to generate significant cost
reductions only by influencing the types of innovations that are used.
If managed care can increase the use of cost-saving innovations, the
rate of growth may be slowed. But if patients continue to demand access
to the latest technology and are willing to pay for any innovation
regardless of its medical efficacy or cost-effectiveness, managed
care may be unwilling or unable to impose further cost-saving
innovations. Evidence of managed care's impact on the types of
technology that are adopted and the rate at which innovations are
introduced is mixed. Some researchers have found that increasing
enrollment in managed care organizations restricts the adoption and
use of cost-increasing  technologies. One study, for example, found
evidence that neonatal intensive



care units are introduced and used
more cost-effectively in areas with a high concentration of managed
care organizations. However, another study found evidence that health
maintenance organizations (HMOs) slowed general technological growth
in the early and mid-1980s but had little effect on technological
growth by the early 1990s. Thus managed care's ability to influence
how innovations will affect costs remains to be seen.

Improving Health Insurance Coverage

Considering the progress that has been made in medical innovation,
access to high-quality health services is becoming increasingly valuable.
Because these services, particularly treatments for nonroutine health
care, can be very expensive, health insurance is the best means of
ensuring that people receive the care they need. The number and proportion
of Americans without health insurance decreased in 1999 for the first
time since 1987, when comparable statistics first became available. As
has been noted, however, around  42.6 million Americans remained
without insurance coverage. This section discusses the current state of
the health insurance system and some approaches that have been
considered for extending health insurance to more people.

The Health Insurance System

The American health insurance system relies primarily on employer-
sponsored health plans. Employer-sponsored programs cover about  63
percent of all Americans, and 74 percent of all who are insured. One
reason for the prevalence of this type of group insurance is that the
Federal tax code favors it. The insurance premiums that firms pay on
behalf of their employees are not included in the employees' taxable
income. In addition, certain arrangements, such as flexible spending
accounts, allow employees to make contributions toward their health
care expenses with before-tax dollars.

The employer-sponsored insurance system offers several important
benefits. First, it encourages groups, especially large groups, to pool
risks effectively. In addition, firms can hire benefits administrators
to evaluate policies and ensure that quality plans are offered. Finally,
insurance companies can offer large employers lower premiums, in part
because economies  of scale reduce their administrative costs.

Because low-income individuals have a lower marginal tax rate and are
less likely to have insurance, the tax-preferred treatment of employer-
sponsored health insurance often does not provide them with
significant benefits  (Chart 5-11). People who do not obtain health
insurance through their employer must buy insurance with after-tax
dollars. This group includes not only the unemployed but also people who
work for employers that do not offer health insurance. These groups are
more likely to need a subsidy to be able to purchase health insurance.



People without employer-sponsored health insurance who do not qualify
for publicly funded programs must enter the individual insurance market
in order to obtain coverage. This market can present problems that
limit affordable access. Some insurers may choose not to cover people
with preexisting health problems or may cover them but exclude the
preexisting condition. Insurers may also charge premiums based on
an individual's perceived risk. For example, people with diabetes may
have to pay significantly higher  premiums because they are more likely
to experience health problems. In some cases the premiums can become
unaffordable. The fact that the cost of administering policies is
higher for individual than for group policies raises the premiums
for individuals still further.

Publicly provided health insurance programs--Medicare, Medicaid, and
SCHIP--are an important source of coverage for many people. Created in
1965, Medicare and Medicaid provide health insurance for the elderly,
people with disabilities, and low-income Americans. Over 39 million
individuals received medical insurance through Medicare in 1999.
Medicaid, which offers Federal assistance to States in providing medical
care to low-income Americans, served more than 40 million people in
1998. Historically, eligibility for Medicaid was linked to eligibility
for welfare assistance--that is, eligibility was primarily restricted
to single-parent families with very low incomes. In the late 1980s and
the early and mid-1990s, Medicaid coverage was gradually extended
through a series of expansions. The 1996 Personal Responsibility and
Work Opportunity Reconciliation Act formally delinked Medicaid from
cash assistance eligibility and further extended it to cover more low-
income households, including two-parent families. In 1997 the
Federal Government created SCHIP to target the growing number of
uninsured children in families with incomes that are too high for
Medicaid but not sufficient to cover the cost of private insurance.
Through SCHIP, States can provide eligible children with Medicaid
coverage, coverage through a separate non-Medicaid program, or a
combination of both.

The likelihood that an individual will have health insurance and the
source  of that insurance vary with income and other demographic
characteristics (Chart 5-12). Because Medicare covers virtually all
elderly Americans, only  1.3 percent of this group were uninsured in
1999, compared with 17 percent of the nonelderly. Among the nonelderly,
those in low-income households are more likely to be without insurance.
Among nonelderly people in households below the poverty line, 36 percent
were uninsured in 1999. Medicaid was the source of insurance for almost
two-thirds of the non-elderly in this group who had coverage, whereas 28
percent were covered by an employer's plan. In contrast, 91 percent of
nonelderly people in households with incomes above 300 percent of the
poverty line were covered, and of these, 92 percent were covered by
an employer plan.

Part-time employees are less likely than full-time employees to be
insured, because employers often exclude part-time and temporary workers
from



their health insurance plans. Twenty-five percent of those in
households with only part-time workers were uninsured in 1999. Seventy-
four percent of adult workers employed in small businesses were insured,
compared with  88 percent of those working in large firms, although some
in both groups were covered under another person's policy. These
figures reflect the fact that small businesses are less likely to offer
health benefits than large firms, possibly because small businesses
have a large share of part-time workers. Health insurance coverage
also differs significantly across racial and ethnic groups. Non-
Hispanic whites are least likely to be uninsured (11 percent), compared
with African Americans (21 percent), Asian Americans and Pacific Islanders
(21 percent), and Hispanics (33 percent).

Lack of health insurance can be costly not just for individuals but
for  society. The uninsured often obtain care in an emergency room rather
than in a physician's office, and emergency room care is more expensive
than office visits. Because they often receive inadequate care, the
uninsured tend to have more severe health problems and are therefore
more likely to require more expensive care when they do seek treatment.
Evidence indicates that initiatives to expand Medicaid coverage have
been associated with significant increases in the use of primary
care facilities and reductions in expensive and avoidable
hospitalizations. One recent study found that expanding Medicaid
eligibility was associated with a 22 percent decline in avoidable
hospitalizations. The costs of hospital care for people who cannot pay
are often absorbed by providers, passed on to the insured through
increases in the cost of both health care and health insurance, or borne
by taxpayers through tax increases imposed to finance public hospitals
and insurance programs.

Reforming Health Insurance

Proposals to expand health insurance coverage must be considered
carefully, because of the risk that unintended consequences can so
severely erode the existing system that the overall effect is to
worsen coverage. Some proposals, such as expanding tax deductions to
all purchases of individual insurance, might have such unintended
consequences. To evaluate such proposals, this Report uses three
measures: how much the proposal would reduce the ranks of the uninsured,
how much it would cost to insure each additional individual, and how
the prices and coverage of existing insurance plans would be affected.

How many formerly uninsured people an initiative is able to cover
depends on how generous the subsidy is, how the subsidy is provided,
and who is eligible. For instance, a partial subsidy may fail to
increase coverage, because even modest out-of-pocket expenses can
discourage participation, especially by relatively healthy low-
income families. Such families may choose to forgo health insurance,
unless it is made very inexpensive, to pay for immediate necessities
such as food and housing. Similarly, subsidies that become available
only after premiums are paid may not help people who lack the funds
to pay even these up-front costs. Further, a complex application
process may have the unintended side effect of keeping qualified
individuals from participating. Eligibility criteria must also be
carefully designed, not only to determine how many uninsured people
can use the new subsidy, but also to limit the number of people who
already have insurance but are  eligible for the new subsidy.

The second measure--the subsidy's total cost relative to the amount
of increased coverage--reflects how efficiently the proposal expands
health insurance coverage. This relative cost can be driven much higher
if a new subsidy crowds out existing insurance arrangements. This
situation can occur when people drop their current coverage in favor
of a newly subsidized alternative, or when an employer, expecting
its employees to use a newly offered subsidy, stops offering
insurance coverage. When crowding out occurs,  government expenditures
go not just to the newly insured but also to people who had coverage
and are simply switching to the new plan to take advantage of the
subsidy. If for these people the new subsidy is more generous than
their old subsidy, the cost to the government increases. If firms drop
coverage and employees do not get replacement coverage, the net increase
in coverage drops and the cost relative to increased coverage again
rises.

Third, newly enacted subsidies may affect the prices and coverage
of  existing insurance plans, for instance through adverse selection.
Adverse selection occurs when relatively healthy, low-risk individuals
decide that the cost of their current health insurance is greater than
the benefits and therefore seek cheaper insurance or go without. As
these people (whose health care costs tend to be low) leave the original
pool, the average cost of insuring each person remaining in the pool
increases. When the medical costs of treating the remaining participants
rise and premiums increase as a result, still more people leave the
pool. The result is a spiral of rising premiums and declining
enrollment, so that those who still wish to purchase health insurance
sometimes find that the premiums are prohibitively high, and they may
remain (or become) uninsured.

Employer-sponsored group health insurance is a good basis for risk
pooling. Workers are attracted to a firm for many reasons, of which
health insurance is but one, and so a wide range of health risks is
likely to exist within each firm. The existing tax subsidy encourages
workers to remain in the group pool. But any subsidy that makes
individual insurance more attractive can lead to adverse selection
in the group pool. Adverse selection can also affect the market for
individual insurance. Proposals to reduce premium variability due to
health risk rating in the individual insurance market must also be
careful to employ pooling mechanisms in order not to drive out healthy
individuals. Increased reliance on the individual insurance market also
raises concerns about the quality of the insurance plans  purchased,
because of limited regulation and consumer bargaining power.

Empirical evidence indicates that crowding out and adverse selection
do occur and thus are real concerns in proposals to expand health
insurance coverage. Studies of the expansion of Medicaid coverage to
children in the late 1980s and the first half of the 1990s found that
the crowding out of  private insurance coverage was responsible for
around 10-20 percent of the increase in Medicaid coverage. Because
Medicaid covers mostly low-income people who are less likely to have
private insurance, the crowding out was particularly modest.

Studies of the choices employees make when offered a choice of
several health insurance plans found evidence of adverse selection.
One study found that premiums for plans with relatively generous
benefits increased much faster than premiums for other plans,
presumably because of the poorer health status of the people selecting
the more generous plans. Another study found that, in one firm,
healthy employees were the least likely to choose the most generous
benefit plan. The premiums for that plan ultimately became so expensive
that the employer dropped it.

Types of Subsidies

In general, efforts to extend health care coverage by offering
public  subsidies use one of three approaches. The first approach,
tax deductions, allows individuals who purchase health insurance in
the individual insurance market to reduce their taxes by deducting
their health insurance premiums from their taxable income. A second
approach, tax credits, reduces an individual's taxes by the full amount
of the credit. A third approach extends government-provided insurance to
more people. SCHIP, for instance, finances health insurance for children
in lower income households.

These three options differ in how well they extend coverage, in their
cost  relative to increased coverage, and in their effects on existing
insurance plans. Tax deductions provide only partial subsidies, and
the subsidy is smaller for those with low incomes, who are the most
likely to be uninsured. These weaknesses mean that tax deductions are
unlikely to effectively expand health insurance coverage. By making
individual coverage more attractive, tax deductions could also crowd
out employer-sponsored plans, reducing the number of newly insured
people on a net basis. Because a tax deduction for individual insurance
would provide many who already purchase individual coverage with a
more generous benefit than they currently receive, but is not likely
to significantly increase coverage, the cost relative to increased
coverage is also high. By subsidizing individual coverage, a tax
deduction can also cause adverse selection that undermines existing
coverage, and it can lead to increased reliance on the  individual
insurance market, with its associated concerns. Thus tax deductions
fare poorly on all three criteria.

Tax credits, if well designed, can help many people, including lower
income families and individuals, purchase insurance. To be effective,
the credits must be generous enough to make insurance affordable.
Further, to enable lower income people to afford premiums, the credits
ideally would be refundable, so that those with little or no tax
liability can receive the  credit. Ideally, they would also be
payable incrementally through the year, so that those who have
difficulties paying up-front costs are helped. However, these features
also make administering the credits more difficult. Because such credits
would apply to individual insurance, they have the drawbacks discussed
earlier. They can raise the cost relative to the amount of increased
coverage and reduce current risk pooling. These problems can be
ameliorated through income cutoffs that restrict eligibility to
those populations least likely to be able to afford coverage.

Government-provided insurance can fully subsidize insurance and thus
cover many of the uninsured. But if such a program provides full
insurance, some individuals who are already insured and become eligible
for the program can be expected to switch, increasing the cost relative
to the amount of increased coverage. Again, income cutoffs to restrict
eligibility to uninsured populations can limit the crowding out.
Because government-provided insurance does not increase the subsidy
for individual insurance, adverse selection is much less likely to occur.

Meeting the Challenge of Covering More People

The Administration has taken a number of steps to extend coverage to
more people. As noted above, the number of uninsured nationwide declined
in 1999 for the first time in 12 years. Particularly noteworthy
successes include the creation of SCHIP, which is intended to cover up
to 5 million children when fully implemented. Other successes include
extending Medicare and Medicaid coverage to persons with disabilities
who are returning to work, providing Medicaid coverage to young adults
leaving foster care, and covering low-income uninsured women diagnosed
with breast and  cervical cancer. In addition, the Health Insurance
Portability and Accountability Act of 1996 limits exclusions for
preexisting conditions in employer health insurance plans and plans
sold to people converting from an employer's plan to individual
insurance. In its last budget, submitted in  February 2000, the
Administration proposed a health insurance initiative to extend
publicly provided health insurance to around 5 million more people.
This proposal included a FamilyCare program to extend SCHIP to the
parents of children covered by Medicaid and SCHIP; accelerated
enrollment of eligible but uninsured children in Medicaid and SCHIP;
and expanded health insurance options for vulnerable populations such
as legal immigrants, early retirees, and displaced workers.

Although much has been done to ensure access to health care for
millions of Americans, a number of challenges lie ahead. The benefits
of innovative prescription drugs make access to these drugs more
valuable, especially for the elderly and persons with disabilities.
As a result, in its last budget the Administration proposed a
prescription drug benefit within the Medicare program. We must also
prepare for a growing elderly population and expected increases in
long-term care needs. Meeting this challenge requires increased
investments to ensure the solvency of the Medicare program and
provide financial assistance to the increasing number of families
with members needing long-term care. To address these needs, in its
last budget the Administration proposed providing tax credits for
long-term care, and in the midsession review of that budget it proposed
placing the Medicare trust funds in a lockbox. Finally, we must continue
to work toward providing access to the health care system for the
millions of Americans who remain uninsured.

Building Livable Communities

Just as the New Economy has transformed the structure of economic
activity to provide better options and opportunities for Americans,
so has it transformed the way we organize our communities and build
new ones. The economic forces stimulating today's rapid growth do not
automatically create incentives to preserve community amenities and
environmental quality. With the support of Federal and State
initiatives, regional governments are beginning to experiment with
new economic and planning tools that can channel the economic drivers
of growth in ways that preserve the quality of life Americans desire.
Changing the way people think about growth in their communities will
also change the kinds of public investments and policies that shape
the landscapes of the new century.

The 20th century witnessed the evolution of the American suburb,
especially in the 1990s, when suburban growth accelerated. From 1990
to 1999 the suburban population grew by nearly 19 percent, compared
with  6 percent in the central cities. The New Economy has brought
about a change in the patterns of job location as well. Job creation
is shifting away from the central city. New jobs and new industries
are springing up on the fringes of cities, often in so-called technology
parks and research corridors. Between 1979 and 1999 the central cities'
share of overall metropolitan office space fell significantly. In 1979
central cities accounted for 74 percent of office space and suburbs
for only 26 percent. By 1999 the share of the central cities had
dropped to 58 percent, and the suburban share had mushroomed to
42 percent.

Rural areas just beyond the edge of urban settlements have experienced
particularly rapid growth. In metropolitan counties that were primarily
rural in 1990, the population rose by 20 percent between 1990 and 1999--
a much higher rate than in any other type of county. As farmland is
converted to other uses, these counties are becoming low-density
urban areas.

Although many Americans still seek the high quality of life available
in America's cities, the suburbs have a special attraction. They
promise  American families the best of both worlds: the amenities and
quality of life that many prefer and the availability of jobs formerly
associated primarily with cities. But this trend has its drawbacks.
Rapid growth can create  problems that affect an entire region. Local
communities, especially those experiencing rapid development, must
invest in plans to channel growth in ways that are consistent with
social well-being and environmental quality.

Business and Suburbanization

Economists have noted a positive relationship between the concentration
of economic activity and productivity. In the past, access to natural
resources and effective means of transportation were often the driving
force behind a region's economic gains. In contrast, economic growth
today is often based on so-called agglomeration economies. These develop
when firms in the same industry cluster together in a region in order to
share ideas, customers, and pools of workers with specialized skills.
Agglomeration economies exist in Manhattan's financial industry,
among Boston's mutual fund companies, and in California's Silicon
Valley, where many high-technology firms have gathered. Because they
are often free of the traditional resource-related needs that tied
earlier industries to specific locations, New Economy firms are able
to choose from a wide array of potential business sites. They can
choose to locate in a community because of the proximity of other
firms or simply because of its cultural and recreational amenities
and general livability.

Several economic explanations have been offered for the resulting
pattern of development. First, for many firms, central cities may
exhibit dis-economies that offset the benefits associated with locating
there. The building stock may be costly to upgrade, making rents
in revitalized or re-developed urban areas expensive. Similarly,
the unintended consequences of environmental clean-up laws can
discourage firms from reusing contaminated or abandoned urban
properties. Despite more than $2.3 billion in leveraged economic
development devoted to these ``brownfields'' through the national
Brownfields Initiative, hundreds of thousands of properties remain
unused because of real or perceived environmental contamination. For
these reasons it may be more cost-effective for firms to start from
scratch in  outlying areas.

Sprawl and Its Challenges

With growth occurring more on the outskirts of cities than in the
central cities themselves, land in many metropolitan areas is now
being consumed at a rate that exceeds population growth. An average
of 2.3 million acres of land undergoes development each year, and
a significant share is used for low-density residential development
in fringe suburbs and smaller cities. This growing, often unplanned
development is commonly known as sprawl. Sprawl is characterized by
low-density residential and commercial settlements and often forces
residents to rely exclusively on automobiles for transportation.

Sprawl often imposes significant costs on entire regions. Many
suburban communities are becoming increasingly congested and are
thus in danger of losing the very attributes that make them attractive
places to live and work. Growing populations strain public resources
such as schools and parks. Affordable housing moves farther away from
jobs, increasing average commuting distances throughout metropolitan
areas. Commuting is only one factor in increasing traffic congestion.
Four out of five household automobile trips are now taken for
noncommuting purposes, and distances from homes to destinations
such as stores, schools, and recreational facilities are  increasing.
Limited public transportation makes congestion even worse, increasing
demand for new roads--and creating more congestion.

Unplanned growth affects the quality of the environment, including
water, air, and land resources. Increases in paved surfaces,
including roads, buildings, and parking lots, can contribute to
deteriorating water quality and to an overall loss of greenspace. This
leads to less effective natural drainage, diminishes water quality,
and in some areas dramatically increases the potential for flooding.
For example, residents along California's Russian River experienced
four major floods in 3 consecutive years. Hydrologists attribute
such events in part to urbanization's effects on stream flow:
downstream runoff into streams and rivers increases as the area
devoted to roads, parking lots, and other impervious surfaces that
keep water from filtering into the  soil increases.

Increased traffic affects not only the daily commute but also
ambient air quality. Automobile emissions lead to hazardous air
pollution by elevating concentrations of ozone and particulate matter.
Although national air quality trends have improved over the last 20
years, in 1999 approximately  62 million people nationwide still
lived in counties with pollution levels that exceeded national
standards. Pollution affects the health of residents, and some are
more vulnerable than others. Pediatric asthma, for instance, is
aggravated by particulate matter, sulfur dioxide, and ozone. Between
1982 and 1996 the incidence of this disease increased by 76 percent.

Regional Coordination and Sprawl

Jurisdiction over transportation routes and systems, as well as over
housing and economic development decisions, is often fragmented
among different local and State governments, resulting in little
coordination of land-use planning. Regional commissions can help to deal
with the spillover effects that community decisions have on neighboring
municipalities. Sprawling  communities are often divided by great
fiscal disparities and distinctly zoned land uses. Planners with an
interest in regional growth may be able to help communities accommodate
new growth collaboratively.

Regional coordination has been particularly important in transportation.
Communities are making significant investments in transportation and
are coordinating their land-use plans with these investments. Ridership
on  public transportation is up nationwide. In 1999 transit riders made
more than 9 billion trips, the most in nearly 40 years. The
Transportation Equity Act for the 21st Century provided $36 billion in
Federal funding for transit for fiscal 1998-2003, around 50 percent more
than during the previous  6-year period. Finally, State and local
officials are increasingly choosing to tap into financial assistance
available for surface mass transit, transferring over $1.5 billion to
transit projects in fiscal 2000 alone.

Individual Decisions and Sprawl

One of the difficulties in dealing with development issues is that the
costs and the benefits of development are typically borne by
different entities. Decisions benefiting private individuals may have
adverse public effects, but private decisionmakers are unlikely to weigh
these social costs. For example, many individuals prefer homes on large
private lots far from both city centers and major highways. But these
homes require new roads and the installation of public utilities. If
many people choose to live in such homes, the negative spillovers
their decisions generate--increases in traffic congestion, air
pollution, impervious surfaces, and property taxes--may outweigh the
benefits they and their neighbors receive. The results of such decisions
are evident in many areas of the country and are particularly vivid in
Atlanta (Box 5-6).

The true economic costs of building a new home include the costs of
associated spillovers, and these costs should be recognized, but
quantifying these social and environmental burdens is more difficult
than identifying the private costs of development. Some positive steps
can be taken in this direction, however. For instance, studies have found
that the additional tax revenue received from new development does not
cover the costs of building new roads and providing public services
(including  utilities) to new residents. If developers and homeowners
were required to bear the full cost of these services, including
infrastructure, the resulting pattern of development would look much
less like sprawl. Many

_____________________________________________________________________________
Box 5-6. Challenges to Smart Growth in Atlanta

Ranked by some as the U.S. city most threatened by sprawl, Atlanta
continues to expand at a phenomenal pace.  From 1980 to 1998 the
Atlanta area's population grew almost 68 percent, with virtually all
of this growth occurring beyond the city limits. According to one study,
the Atlanta metropolitan area loses 500 acres of greenspace, forest,
and farmland each week. Water quality in the Chattahoochee River and
Lake Allatoona is deteriorating, and the city's air is in violation of
clean air standards. The costs of traffic congestion from lost time and
wasted fuel are estimated at an overwhelming $2.3 billion a year. The
average time spent per person per day in a vehicle on Atlanta's roads
and highways has been estimated at 1 hour and 11 minutes. Motorists in
Atlanta lead the Nation in miles driven per person per day, logging a
total of over 100 million miles daily. The region's growth has further
isolated minority and low-income communities and created tremendous
geographical imbalances in the availability of jobs and housing.
Atlanta's residents may be enjoying the benefits of the New Economy,
but they are clearly suffering the resulting costs of sprawl.
The Atlanta Regional Commission (ARC) is attempting to limit this
expansive growth and coordinate development. To help this coalition
of regional governments, in 1999 the State created the Georgia
Regional Transportation Authority (GRTA), assigning to it broad
powers to manage projects involving transportation, air quality, and
land use in heavily polluted areas, particularly the city of Atlanta
itself. Metropolitan governments are opposing a perimeter highway
proposal because it threatens investment in the center city and
encourages further sprawl. The ARC, supported by the State government,
is trying hard to provide and encourage alternatives to single-motorist
auto-mobile transportation. The ARC and the GRTA are also seeking to
encourage development that incorporates  elements of smart growth
by revitalizing older communities and emerging population centers
through efforts to promote livability and increase the mix of land
uses and housing types. But the sprawl continues, and Atlanta faces a
serious challenge: it must channel future growth in order to build
sustainable, attractive communities.
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governments have begun to assess impact fees on
new construction so that the financial burdens of infrastructure and
public service provision are taken into account in development decisions.

Communities are beginning to use other kinds of economic incentives
to achieve outcomes more consistent with smart growth. For example,
communities such as South Bend, Washington, have imposed fees on
development that increases impervious surface area, in order to
encourage development that has fewer detrimental effects on water
quality and  minimizes the potential for flooding. Other communities
are using road pricing to improve traffic patterns. In San Diego, solo
drivers in the express lanes of one major freeway pay higher prices
during congested times than during off-peak hours. Electronic
transponder technology helps identify individual motorists and assess
tolls, making this system possible without the significant slowdowns
caused by toll plazas. Other communities are using transferable
development rights to provide incentives for keeping land in agriculture
and other uses that maintain open space and provide ecological benefits.

The Administration's Response

The Administration's 30-point Livable Communities Initiative
encourages smart growth. It sets forth several principles aimed at
aligning  Federal policy efforts with smart growth priorities and
encouraging  planning and coordination over larger regions to resolve
negative spillovers. The Livable Communities Initiative seeks to
sustain prosperity, expand economic opportunity, enhance the quality
of life, and build a stronger sense of community. It provides funds
for regional smart growth efforts, including Better America Bonds for
State, local, and tribal governments. The initiative aims to reuse
brownfields and preserve greenspaces, ease traffic congestion, restore
a sense of community, promote collaboration among neighboring
municipalities through regional governance, and enhance
economic competitiveness. In addition, its smart growth initiatives
attempt to counter various socially undesirable effects of sprawl such
as racial segregation, concentrated poverty, decreased  personal
interaction, and a less active civil society. Initiatives at the State
and the local level are beginning to have real impacts on communities--
for instance, in the State of Maryland and the city of Chattanooga,
Tennessee (Box 5-7).

An educated work force that views quality of life and favorable
economic conditions as priorities often characterizes areas of new
and rapid growth. These communities have both the constituency needed
to demand change and the resources necessary to implement it. Business
and community leaders are already recognizing the costs and impacts of
sprawl and acting to mitigate the negative effects. In metropolitan areas
such as Chicago, Denver, Omaha, and Philadelphia, leaders are acting
to improve land use and transportation decisions and enhance
environmental quality. The success of these endeavors will depend on
the ability of these  communities to make hard choices and find
creative solutions to the challenges of sprawl.

_____________________________________________________________________________
Box 5-7. Examples of Smart Growth

Maryland has established several specific goals for its smart
growth program. These include preserving the State's most valuable
remaining natural resources, supporting existing communities and
neighborhoods by targeting State resources to development in areas
where the necessary infrastructure is already in place, and saving
taxpayer dollars by avoiding the unnecessary cost of building the
infrastructure required to support sprawl. The program also stipulates
that the State will regularly evaluate the program's effectiveness.
By winning Federal grant money, reprioritizing within the State budget,
and designing financial incentives for businesses, local governments,
and home-owners, Maryland has been able to leverage the funds necessary
to emerge as a leader in the smart growth community while preserving
local decisionmaking authority.
Similarly, the success of Chattanooga, Tennessee's, smart growth
initiative affirms the conviction that Americans can enjoy both
economic prosperity and a high quality of life. Chattanooga's economy
was historically based on iron foundries, textile mills, and chemical
plants, but in recent decades these were not providing the growth
and employment the city required. However, through thoughtful
economic development efforts, Chattanooga has become a model for other
cities seeking environmentally sound urban renewal. Using extensive
grants from private foundations together with Federal and local public
funds, Chattanooga has built successful public-private partnerships
throughout its visionary redevelopment process. The city now prides
itself on being a laboratory for sustainable development projects
involving rezoning, reclamation, revitalization, and redevelopment.
Illustrating how older cities can thrive in the New Economy,
Chattanooga boasts a 22-mile Riverwalk with picnic areas, the world's
largest freshwater aquarium, a sculpture garden, waterfront housing
developments, an electric-bus public transit system, footbridges, and
an arts district.
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Conclusion

The ongoing, unprecedented economic expansion has done much to improve
the well-being of the American people. However, an important part of
the Administration's role during the expansion has been to ensure that
no one is left behind. And indeed, government policies have helped--and
will continue to help--many of the most disadvantaged Americans.
Policies easing the transition from welfare to work, improving
educational opportunities, increasing access to health care, and
improving the health of our communities have helped distribute recent
economic gains more fully. Improving outcomes for those in danger of
being left behind benefits the Nation as well as disadvantaged populations.

This Administration has maintained policies that support strong
economic growth and low inflation. Many previously unemployed Americans
have been moved from welfare to work, increasing the supply of workers at
a time when the demand for workers is high. Investments in the education
of young people help ensure that future generations will have the
necessary skills to succeed in the New Economy and increase
productivity. Health care initiatives have helped Americans maintain
access to recently developed, innovative technologies. The Administration
has also worked to guarantee that our communities enjoy the amenities
that families desire: safe streets, clean air and water,
reliable transportation, and access to greenspace.

Despite this substantial progress, many challenges remain. Confronting
these challenges will require ongoing public policies that combine
initiatives to support economic growth with efforts to reach out to
those still in need of assistance. The Nation has made enormous strides
in helping the least well off among us, but substantial disparities
persist in income levels, educational quality, access to health care,
and quality of life. These differences must be addressed. At the same
time, we must consider how to help those who need additional assistance
even in this period of strong  economic growth: our elderly, our
disabled, and our children. We are  certainly better off than we were
8 years ago, but we can do more to ensure an even brighter future for
all Americans.