2018

HOOVER INSTITUTION
Summer Policy Boot Camp
Director’s Award Winners
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HOOVER INSTITUTION SUMMER POLICY BOOT CAMP
DIRECTOR’S AWARD
Capping off an intensive week-long study and discussion of the core principles and
tools of public policy, students were invited to apply their knowledge by researching
and developing a policy proposal. Following the principles of Hoover scholarship, the
proposals emphasize a specific recommendation using facts, data, and well-constructed
arguments. The papers summarize the significance of the new policy and the expected
result, expressed in essays of 2,000 words.

After review of each submission, we recognized three participants with the Hoover
Institution Summer Policy Boot Camp Director’s Award based on their outstanding work. The
winning proposals demonstrate particular creativity in addressing complex policy issues.

We are proud to include these proposals written by the following winners of the 2018
Hoover Institution Summer Policy Boot Camp Director’s Award.

• Justin Hatherly
• Chelsea C. Michta
• Shane Reed

Sincerely,

Scott Atlas Joshua Rauh

David and Joan Traitel Senior Fellow Senior Fellow and Director of Research
Hoover Institution Hoover Institution
Ormond Family Professor of Finance
Stanford Graduate School of Business

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 CONTENTS

Reforming Land Use Regulations through 7

Conditional Federalism
By Justin Hatherly

Developing a Strategic Partnership with Poland 13

to Enhance Deterrence against Russia
By Chelsea C. Michta

Clean Affordable Transportation for Our 18

Future
By Shane Reed

6
Reforming Land Use Regulations through Conditional
Federalism
By Justin Hatherly, McGill University

Introduction
Many major American cities such as San Francisco and New York have faced a
growing housing affordability crisis as housing costs surge to levels that place a
severe strain on middle- and lower-income residents.1

The primary cause of inflated housing costs in certain jurisdictions is the plethora of
land-use regulations (LURs) imposed by some American local governments.2 LURs
restrict how or whether land can be utilized for construction and development.
An excess of these regulations can induce local housing scarcities. By leading to
higher housing costs, LURs discourage interregional migration by making econom-
ically growing cities prohibitively expensive to live in for low- and middle-income
workers. Less migration to economically vibrant cities contributes to lower economic
growth and national economic welfare.3 Moreover, housing costs spurred by exces-
sive LUR increase political pressure on state and local governments to adopt other
economically damaging public policies, such as rent control.

This paper proposes incentivizing state and local governments to adopt deregula-
tory reforms to LURs to liberalize housing markets and reduce pressure on housing
costs by conditioning selective federal aid programs to local governments on recip-
ient jurisdictions liberalizing LURs such as zoning laws. As local governments would
stand to lose federal funds if they failed to comply, they would face powerful
incentives to comply and encourage greater volumes of new housing construction.

A Guide to LURs

LURs are the rules (generally imposed by local governments) that regulate land
development. LURs can range from limiting the amount of land available to devel-
opment (so-called smart-growth rules) to controls such as zoning, which designate
what categories of property (i.e., residential or commercial) can be built in a giv-
en area of a municipality.4 The most common types of LURs include zoning rules,
smart-growth rules, and maximum allowable density rules.5

In many (though by no means all) American municipalities, the volume of these reg-
ulations has increased precipitously.6 LURs in certain areas were often implemented
as part of well-intentioned efforts to promote environmental objectives or other
goals. However, whatever the intent of these regulations, a significant consequence
of expanding LURs has been to deter construction and reduce the supply of hous-
ing.7 With artificially reduced supply, many of the most regulated American cities
suffer from housing affordability challenges.

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 How LURs Increase the Cost of Housing

Simple economic reasoning supports the contention that the extensive application
of LURs negatively impacts housing affordability. If, as some suggest, supply-side
restrictions had no real effect on impeding housing development and that demand
alone drove prices, areas of the country with the highest housing costs would likely
also have high levels of new housing construction. However, the reverse is true.8
Between 2000 and 2015, cities with some of the most restrictive LURs, as measured
by the Wharton Residential Land Use Regulation Index (WRLURI), and the highest
(and most rapidly rising) housing costs such as Honolulu had some of the lowest
levels of new housing starts. By contrast, during the same period, Las Vegas, with
relatively lax zoning and density restrictions (and thus a lower numerical score on
the WRLURI), boasted the greatest amount of new housing development and far
more moderate absolute and relative housing costs.9 In sum, LURs, in their various
forms, increase the inelasticity of housing supply. When inelastic supply is coupled
with growing demand, housing costs inevitably rise.

Empirical evidence supports the reasoning outlined above. To analyze the afford-
ability of housing in the United States, the economist Edward Glaeser compared
the minimum profitable construction cost (MPPC) of housing in multiple cities across
the country to home prices and rental costs.10 A competitive housing market would
be expected to have home prices that are tied closely to the cost of construction.
By this standard, most American cities have competitive housing markets. A 2017
study estimates that approximately 73 percent of America’s housing stock is priced
at 125 percent or less of MPPC.11

However, while the country does not face a general housing affordability crisis,
it faces several local ones. Presently, housing costs impose significant burdens on
residents in major American cities like New York and San Francisco. For example,
a study by the real estate listing firm StreetEasy found that the prevailing citywide
median rent in New York City in 2016 constituted 65.2 percent of the median,
pretax, household income.12 Similarly, as of 2017, estimates for San Francisco sug-
gest that the average home sells anywhere from 200 to 400 percent of the local
MPPC.13 Further data suggest that housing expenditures toward monthly rent or
mortgage payments on average make up 40.3 percent of household consumption
expenditures in San Francisco.14 Abundant data from multiple other key American
municipalities such as Boston and Washington, DC, paint a picture of high and
rising housing costs relative to income. These data suggest that too many Ameri-
can cities are becoming too expensive for much of their populace to comfortably
reside in.15

In spite of these high prices (which should incentivize home builders to increase
housing supply to meet growing demand), cities with some of the highest housing
costs (both in absolute terms and relative to income) tend to have some of the

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lowest levels of new house construction. This indicates that there are pervasive
supply-side barriers to increased home construction.

In America’s highest priced housing markets, those barriers are pervasive LURs.
The WRLURI attempts to measure the range and severity of controls that munici-
palities in the United States impose on land use and housing development (a high
numerical score on the index indicates a restrictive land-use regulatory regime).16
A 2017 study found that after controlling for other potential causal variables (such
as population growth) among the one hundred largest American cities, the higher
the score a city has on the index, the lower its level of new housing construction and
the higher its housing costs.17 Put simply, there is a clear and statistically significant
negative relationship between the intensity of local LURs and the amount of new
construction and housing prices.18 Glaeser’s estimates indicate that in the nation’s
most expensive cities (which have correspondingly high WRLURI scores), stricter
LURs serve as an implicit tax on housing development and account for up to 50
percent of home values in and explain up to 30 percent of the variation in housing
costs between the least and most regulated American cities.19

Some might counter that high housing costs in particular cities result from demo-
graphic factors or robust regional economies. However, many American cities with
healthy urban economies and higher population growth than more expensive ju-
risdictions have avoided a sharp rise in housing costs. For instance, between 1995
and 2015, Atlanta, Georgia, which has a relatively liberal land-use framework,
experienced population growth of 18 percent, yet in 2015, housing costs constitut-
ed only 33.2 percent of average household consumption expenditures.20 By con-
trast, in the same year, housing expenditures in San Francisco consumed 40.3 per-
cent of average household consumption.21 During the period cited, San Francisco
had comparable population growth (18 percent) to Atlanta. Furthermore, the same
period saw the average price of a home increase by 231 percent in San Francisco.
Moreover, to consider an international example, between 1995 and 2015, Tokyo,
Japan, which is known for its liberal LURs, experienced population growth of 15
percent and saw home prices increase by only 10 percent in real terms.22

The Economic and Social Consequences of Excessive LURs

Most of the US cities with the strongest economic growth also unfortunately have
some of the strictest LURs and, thereby, some of the highest housing costs nation-
ally.23.Despite ample economic opportunities provided by municipalities like New
York, data suggest that the regulation-induced housing affordability crisis in ex-
pensive cities is a major disincentive for many to migrate to them and is tied to
declining rates of interregional migration among Americans.24 Many medium- and
lower-income workers cannot afford the high housing costs in such highly regulated
cities and thus remain in cheaper, but lower-productivity, jurisdictions. If, ceteris pa-
ribus, more Americans were to relocate to these economically dynamic but expen-
sive urban centers, national economic welfare would likely increase. This is because

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 if more workers of all skill levels deployed their labor in more economically robust
locales, national productivity growth would increase due to greater economies of
agglomeration, increased scope for a more efficient division of labor, a more en-
trepreneurial environment, and greater opportunities to learn new skills in rapidly
growing urban centers.25 In essence, if workers cannot afford to live in the places
where their labor can provide the most marginal value added, American economic
welfare will suffer.26

A recent study indicates that these effects are significant. The study contends that
excessive LUR-induced housing costs contribute to a mismatch between available
job opportunities (in growing but heavily regulated cities) and labor supply. The
authors of the study argue that weaker LURs could dampen housing costs and push
workers to relocate to more productive urban economies. Such migration could,
according to the authors, lift economic output by up to 9 percent in the long term.27

Additionally, the housing affordability crisis in some cities arguably has led to
increased pressure for policy makers to adopt unsound public policies.28 In many
high-cost cities, activist groups, often citing the cost of housing, have pressured local
governments to enact counterproductive policies such as higher minimum wages or
rent controls.29 Thus, if liberalization of LURs in expensive cities facilitated lower
housing costs, there might be less public pressure to adopt deleterious economic
policies aimed (in part) at allegedly addressing high housing costs.

Policy Recommendation: Condition Federal Urban Aid on Regulatory Reform

Federal policy makers looking to improve American economic welfare should thus
take steps to incentivize local governments to deregulate their housing markets by
relaxing LURs. One way to do this would be to condition the federal urban aid
programs such as the Community Development Block Grant (a discretionary grant
to local governments for initiatives in areas such as subsidized housing construc-
tion) on local governments producing and implementing a clear set of policies that
reform LURs to encourage housing construction. If a jurisdiction refused to comply,
federal lawmakers could reduce funds provided under grant programs by, say, 5
percent annually until the jurisdiction in question agreed to implement a credible
LUR reform plan. (Other possibilities for conditional funding include aid to cities for
mass-transit projects.)

While some might worry that such conditional funding would invite constitutional
and legal challenges, this fear is overblown. Making federal funds contingent upon
certain actions by recipient governments is hardly unprecedented. In the 1980s,
Congress successfully used the threat of withholding federal highway funds from
states to entice them to adopt a higher, uniform national drinking age.30 Addition-
ally, in 1987, in South Dakota v. Dole, the US Supreme Court stipulated that the
federal government had wide latitude to condition federal assistance to state and
local governments so long as (1) the lower levels of government had the capacity

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to reject the funding, (2) such funding was not inconsistent with other provisions of
the Constitution, and (3) the conditions attached to the funding furthered a legiti-
mate federal interest.31 The above proposal fulfills all three of these criteria.

Restrictive land-use policies have placed a significant burden on many Americans

and have led to unaffordable housing markets in many of the nation’s most eco-
nomically vibrant and important cities. Liberalizing these markets could provide
greater economic benefits to all Americans. By tying certain federal assistance
programs to cities to LUR reform, the federal government could provide the push
local governments need to adopt housing policies that would unleash the full po-
tential of the nation’s most dynamic urban areas.

Justin Hatherly was born and raised in Hong Kong to parents from Canada and the
United States. He speaks, reads, and writes Mandarin Chinese and Cantonese. He
attended McGill University in Montreal and earned a BA (Honors) in political science
in 2017. At McGill, he also pursued studies in economics. He has worked as an in-
tern for various Canadian public policy think tanks, such as the Canadian Taxpayers
Federation and the Atlantic Institute for Market Studies (AIMS). In 2017, AIMS pub-
lished an academic study he authored advocating an overhaul of Canada’s system
of unemployment insurance. Since graduating, he has returned to Hong Kong and
currently works in anti-money laundering in the Legal and Compliance division for
China Construction Bank (Asia). His personal interests range from Canadian and US
public policy to soccer and classic rock.

1
Sanford Ikeda and Emily Washington, “How Land-Use Regulation Undermines Affordable
Housing,” Mercatus Center (November 4, 2015).
2
Ibid.
3
Matthew Yglesias, “Housing Affordability Is Blue America’s Greatest Failing,” Vox, Decem-
ber 15, 2014, accessed December 7, 2018, https://www.vox.com/2014/8/28/6063679/
the-biggest-thing-the-blue-states-are-screwing-up.
4
Vanessa Calder, “Zoning, Land-Use Planning, and Housing Affordability,” Cato Institute
(October 18, 2017).
5
Ibid.
6
Ibid.
7
Ibid.
8
Edward Glaeser, “Reforming Land Use Regulations,” Brookings Institution (April 24, 2017).
9
Ibid.
10
Ibid.
11
Ibid.
12
Alan Lightfeldt, “The State of New York City Rent Affordability in 2016,” StreetEasy, April
21, 2016, accessed December 7, 2018,
https://streeteasy.com/blog/new-york-city-rent-affordability-2016.
13
Edward Glaeser and Joseph Gyourko, “The Economic Implications of Housing Supply,”
Zell/Lurie Working Paper #802, January 4, 2017 (draft), accessed December 7, 2018,
http://realestate.wharton.upenn.edu/wp-content/uploads/2017/03/802.pdf.

11
 14
“Consumer Expenditures for the San Francisco Area: 2015–16”, Bureau of Labor Statis-
tics, December 5, 2017, accessed December 7, 2018
https://stats.bls.gov/regions/west/news-release/consumerexpenditures_sanfrancisco.htm.
15
Glaeser and Gyourko, “The Economic Implications of Housing Supply.”
16
Ibid.
17
Ibid.
18
Ibid.
19
Ibid.
20
“Consumer Expenditures for the Atlanta Metropolitan Area: 2014–15”, Bureau of Labor
Statistics, November 03, 2016, accessed December 7, 2018
https://www.bls.gov/regions/southeast/news-release/2016/pdf/consumerexpenditures_
atlanta_20161103.pdf.
21
Kristin Capps, “Blame Zoning, Not Tech, for San Francisco’s Housing Crisis”, March 11,
2016, accessed December 7, 2018
https://www.citylab.com/equity/2016/03/are-wealthy-neighborhoods-to-blame-for-
gentrification-of-poorer-ones/473349.
22
Robin Harding, “Why Tokyo Is the Land of Rising Home Construction but Not Prices,” Fi-
nancial Times, August 3, 2016, accessed December 7, 2018,
https://www.ft.com/content/023562e2-54a6-11e6-befd-2fc0c26b3c60.
23
Calder, “Zoning, Land-Use Planning, and Housing Affordability.”
24
Ibid.
25
Ibid.
26
Tai Hsieh Chang and Enrico Moretti, “Housing Constraints and Spatial Misallocation,”
University of Chicago (May 11, 2017).
27
Ibid.
28
Calder, “Zoning, Land-Use Planning, and Housing Affordability.”
29
Ibid.
30
Brian T. Yeh, “The Federal Government’s Authority to Impose Conditions on Grant Funds,”
Congressional Research Service (March 23, 2017), accessed December 7, 2018,
https://fas.org/sgp/crs/misc/R44797.pdf.
31
Ibid.

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Developing a Strategic Partnership with Poland to Enhance
Deterrence against Russia
By Chelsea C. Michta, University of Cambridge

This essay presents a proposal for the United States to develop a strong bilateral
security relationship with Poland—a key US ally along NATO’s eastern flank, and
a country that has demonstrated its commitment to allocating resources to defense
and to working closely with the US military. The objective is to ensure that the de-
fense of the Baltic States and NATO’s eastern flank is not by default reduced to a
“liberation strategy” requiring a massive deployment of US troops across Europe
as Washington’s only available option.1 The policy’s goal is to make Poland the
lynchpin of a supplemental security and defense architecture in Central and East-
ern Europe and to provide, among other benefits, alternative entry points for US
forces into Europe by developing the Gdańsk, Gdynia, and Szczecin harbors on the
Baltic Sea to supplement existing facilities in Germany.

The overarching strategic objective of this policy is to lower the risk of conflict and
to enhance deterrence along NATO’s eastern flank. The policy should include es-
tablishing a permanent US Army base in Poland to replace our current persistent
rotational deployments, in the process increasing America’s ability to shape its
relations with Europe by leveraging Poland’s dominant role in the Visegrád Four
(Poland, Hungary, Czech Republic, and Slovakia). Forming such a close bilateral
relationship with a willing partner in Europe under the NATO umbrella will lower
the cost of the United States’ security guarantee to Europe, decrease the risk of
war, and provide an impetus for NATO to address its security deficits, especially
when it comes to defense spending.

The Problem

Since the Russian seizure of Crimea in 2014 and the follow-on Moscow-sponsored
separatist war in Donetsk and Luhansk in eastern Ukraine, the United States and
its European allies have been confronted with the challenge of securing NATO’s
eastern flank against Russian revisionism. Russia’s pressure in Europe has been ac-
companied by a surge of Chinese power and influence both in Asia and globally.
As noted in the 2018 National Defense Strategy,2 great power competition is back
at the center of US national security priorities, with Russia and China identified in
the NDS as the two greatest challengers to America’s global position and interests.
The rise of China as a near-peer competitor in the Pacific has lent urgency to the
United States’ goal of strengthening the transatlantic alliance to ensure that, in the
event of a crisis in Asia, America is not confronted with conflict in two major the-
aters simultaneously. Hence, developing credible deterrence along NATO’s eastern
frontier through close cooperation with allies and partners is a key priority, espe-
cially given that, since the end of the Cold War, the US has drastically reduced

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 its military presence in Europe to approximately 60,000 personnel (of which the
Army numbers about 30,000), down from its Cold War peak strength of more
than 400,000 troops.3 More important, our European allies have all but disarmed,
with only five of NATO’s twenty-eight members—excluding the US—meeting the
agreed upon 2 percent of GDP on defense spending, and with the Cold War lo-
gistical infrastructure all but dismantled.

A key problem facing the United States as it seeks to shore up NATO is the progres-
sive fragmentation of allied consensus when it comes to the nature of the security
threats facing Europe, and hence the steps that need to be taken to address cur-
rent security deficits. Specifically, the largest states in Europe, especially Germany,
continue to lag behind when it comes to investing euros in defense, making most of
Europe’s armed forces only marginally effective and largely nondeployable. For
instance, today the Bundeswehr would find it difficult in a crisis to deploy even a
brigade, while all six of the German navy’s submarines are inoperable4 and only
four of the country’s 128 Eurofighters are able to fly.5

The principal challenge for NATO is how to deter Russia so that the United States
and its allies are not confronted with an all-out border war. In light of the unwilling-
ness of the majority of European NATO members to spend on defense, it has be-
come increasingly clear that our established assumptions about the extent to which
we can rely on our traditional allies need rethinking. Given the increased Russian
militarization of the Kaliningrad District, the United States should boost its bilateral
relations with allies along NATO’s eastern flank, especially those willing and able
to support America’s foreign and security policy objectives. The most important
ally along NATO’s eastern flank that remains committed to close cooperation with
the United States is Poland. I propose that Washington buttress its relations with
Warsaw by making Poland a strategic partner of the United States through the es-
tablishment of enhanced defense cooperation, including a permanent US military
base on the country’s territory.

Analysis

With a population of approximately forty million, Poland is the largest state on

NATO’s eastern frontier. Among the fastest growing economies in Europe,6 it has
consistently been spending 2 percent of its GDP on defense, in addition to an-
nouncing plans in 2017 to boost defense spending to 2.5 percent of its GDP within
a decade and to allocate an additional $55 billion by 2032.7 As part of NATO’s
Enhanced Forward Presence, since 2015 Poland has hosted a rotational US Army
brigade combat team. In addition to the US Army presence in Poland, NATO has
deployed four multinational battalions in the Baltic States and has enhanced its
deployments in Romania.

Much of the analysis of the current security situation along NATO’s eastern flank
has focused on the Baltic States, with the general consensus being that Estonia,

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Latvia, and Lithuania are not defensible in an all-out Russian cross-border assault
and would have to be liberated after the US brought additional forces to Europe;
nonetheless, it is Poland that arguably holds the key to Europe’s defense as the
so-called Suwałki Gap, a sliver of Polish territory in the northeast, remains Russia’s
main entry point into Europe should Moscow decide to invade. Hence, reinforcing
Poland is critical to the in-depth defense of NATO’s territory, not unlike the Fulda
Gap in Germany, which during the Cold War was considered to have been the
gateway to Europe for Soviet forces had Moscow invaded.

Arguments against establishing a permanent basis in Poland on the grounds that

this would “strain cohesion within the alliance”8 miss the larger point that much of
the current political tension in NATO stems from the willingness of a number of Eu-
ropean allies to seek an accommodation with Russia. More important, my proposal
argues for an overall rebalancing of US policy in Europe to build a comprehen-
sive and deep security partnership with allies along the eastern flank, especially
Poland. It argues that America’s deepened strategic partnership with Poland (of
which the base would be but the most direct manifestation) would send a strong
deterrent message to Russia. This in turn would make the threat of a possible con-
flict on the eastern flank that might force the United States to intervene that much
less likely. Moreover, by upgrading the level of security cooperation with Poland,
the United States would be able to influence how the logistical infrastructure in the
country, and in Central and Eastern Europe more broadly, would be designed and
built, including direct access to Poland’s ports in Gdańsk, Gdynia, and Szczecin so
as to dramatically reduce the time needed for US reinforcements to arrive should
an all-out crisis develop.

Policy Recommendations

Increasing US deployments in Poland, and most importantly going beyond the cur-
rent “persistent rotational” posture to permanent basing, has several clear advan-
tages and should be US policy going forward. First, the deterrent value of US for-
ward presence was proved during the Cold War and remains the most direct way
of forestalling aggression thanks to its “trip wire” effect. Second, considering the
current degraded state of European defense infrastructure when it comes to roads,
bridges, and access to rail, the US ability to conduct military exercises in Europe is
seriously hampered by the need to move troops across Germany into Poland and
then into the Baltic States. As recent US exercises have shown, just obtaining nation-
al permits for US troops and equipment to move across Europe requires weeks.9
Hence, the permanent stationing of US troops in Poland would significantly reduce
the time needed to position troops in place for exercises, thereby attenuating the
continued significant shortfall in allied exercises when compared to snap exercises
conducted by Russia.

Next, establishing a permanent US base in Poland would offer considerable sav-

ings relative to the cost of building additional US installations in Germany or Italy,

15
 as the Polish government has already offered $2 billion to build a base, as well
as significant concessions on bilateral Status of Forces Agreement (SOFA) rules and
access to military proving grounds.10 This is a significant allied contribution, more in
line with what Japan contributes to the cost of US deployments ($2 billion annually,
or 50 percent of the total cost of US bases in Japan), while, in contrast, Germany
pays only $907 million, or 18 percent of the total US cost of stationing troops in
the country.11 Also, since Poland has just concluded a deal to acquire the Patriot
air and missile defense system from the United States as part of its Wisła air and
missile defense program, the US Army would be well positioned to integrate its
own systems with those of the Poles. A permanent US base in Poland would also
increase interoperability between US and Polish forces both through exercises and
daily collaboration, not unlike the close cooperative relationship that developed
between US and German forces along NATO’s then-eastern flank during the Cold
War. Finally, a permanent base in Poland would send a strong political message
that the United States stands by its commitment to defend its allies, thereby gen-
erating an ancillary stabilizing effect in Scandinavia and the Baltics as well as in
south-central Europe.

The overall effectiveness of this proposed policy would be gauged by (1) a signifi-
cant reduction in US deployment times to the eastern flank during NATO exercises;
(2) the savings realized from the host country (Poland) funding a permanent US
base versus the cost of rotating and moving troops from the United States across
Europe; and (3) most important, its overall deterrent effect against Russia, as mea-
sured, for instance, by a reduction of Russian snap exercises along NATO’s eastern
frontier and a concomitant decline in provocative incidents around the Kaliningrad
District and the Baltic Sea area overall. The savings realized through Poland’s $2
billion contribution to the proposed permanent US military basing facilities could
be redirected toward other US priority military modernization programs.

Chelsea Michta is a doctoral candidate in modern European history at the University

of Cambridge. Her dissertation examines representations of the Warsaw Uprising
of 1944 in Poland, focusing primarily on developments in the country following the
collapse of the Polish People’s Republic. This research is supported by the Cambridge
Commonwealth, European and International Trust through the provision of a Cam-
bridge International Scholarship. She has interned at the Center for Strategic and
International Studies, the Polish Ministry of Foreign Affairs, and Freedom House. She
received her master’s degree from Cambridge in 2015 and her BA from Amherst
College in Massachusetts in 2013.

1
This view of US and NATO options, i.e., the “liberation strategy” for the Baltics, has been
articulated by David A. Shlapak and Michael Johnson, Reinforcing Deterrence on NATO’s
Eastern Flank (Santa Monica, CA: Rand Corporation, 2016), accessed September 6, 2018,
https://www.rand.org/pubs/research_reports/RR1253.html.

16
2
Summary of the 2018 National Defense Strategy of the United States (Washington, DC,
2018), accessed September 6, 2018, https://dod.defense.gov/Portals/1/Documents/
pubs/2018-National-Defense-Strategy-Summary.pdf.
3
Kristen Bialik, “US Active-Duty Military Presence Overseas Is at Its Smallest in Decades,”
Pew Research Center, August 22, 2017, accessed September 6, 2018, http://www.pewre-
search.org/fact-tank/2017/08/22/u-s-active-duty-military-presence-overseas-is-at-its-
smallest-in-decades.
4
Sebastien Roblin, “Germany Does Not Have One Working Submarine,” The National Inter-
est, December 16, 2017, accessed September 7, 2018, https://nationalinterest.org/blog/
the-buzz/germany-does-not-have-one-working-submarine-23688.
5
“Only 4 of Germany’s 128 Eurofighter Jets Combat Ready—Report,” Deutsche Welle,
May 2, 2018, accessed September 7, 2018, https://www.dw.com/en/only-4-of-germanys-
128-eurofighter-jets-combat-ready-report/a-43611873.
6
Lili Bayer, “Europe’s Eastern Tigers Roar Ahead,” Politico, April 20, 2018, accessed Sep-
tember 8, 2018, https://www.politico.eu/article/central-and-eastern-eu-gdp-growth-
economies.
7
“Poland to Allocate Additional $55 Billion on Defense by 2032: Deputy Minister,” Re-
uters, August 23, 2017, accessed September 7, 2018, https://www.reuters.com/ar-
ticle/us-poland-military-spending/poland-to-allocate-additional-55-bllion-on-de-
fense-by-2032-deputy-minister-idUSKCN1B31AB.
8
See, for instance, Ben Hodges, “Don’t put US bases in Poland,” Politico, June 4, 2018,
accessed September 10, 2018, https://www.politico.eu/article/dont-put-us-bases-in-po-
land/.
9
“NATO in Europe Needs ‘Military Schengen’ to Rival Russian Mobility,” Deutsche Welle,
September 12, 2017, accessed September 8, 2018, https://www.dw.com/en/nato-in-eu-
rope-needs-military-schengen-to-rival-russian-mobility/a-40470302.
10
Kyle Rempher, “Why Poland Wants a Permanent US Military Base, and Is Willing to Pay
$2 Billion for It,” Army Times, May 29, 2018, accessed September 7, 2018, https://www.
armytimes.com/news/2018/05/29/why-poland-wants-a-permanent-us-military-base-
and-is-willing-to-pay-2-billion-for-it.
11
John Vandiver, “Germany Irked by Demands for Financial Support for US Bases,” Stars
and Stripes, February 2, 2017, accessed September 8, 2018, https://www.stripes.com/
news/germans-irked-by-demands-for-financial-support-for-us-bases-1.452175.

17
 Clean Affordable Transportation for Our Future
By Shane Reed, University of Michigan

Americans have been burning corn ethanol in engines for as long as the combustion
engine has existed.1 Americans produce over 30 percent of the world’s corn sup-
ply,2 corn makes up a substantial amount of global calorie consumption,3 and corn
by-products are key inputs in countless commercial goods.4 And while corn is one
of the most important crops in the global economy, unfortunate American policy
has had an adverse impact on consumers, producers, and the planet at large. If
Congress were to simply eliminate burdensome mandates as well as slash mar-
ket-distorting subsidies, consumers, drivers, governments at every level, and the
planet would all benefit.

Background on Ethanol

Out of all the corn produced in the United States, anywhere from 30 to 40 per-
cent goes directly into the production of ethanol.5 In the 70s and 80s, regulations
banning the use of certain fuel additives led to companies contemplating the use
of ethanol as a fuel additive,6 and when the Energy Tax Act of 1978 was passed,
it created a forty-cent-per-gallon subsidy for every gallon of ethanol blended into
fuel.78 Legislation since then has continued to favor ethanol production, with some
claiming that the unique nature of the Iowa caucus has led to disproportionate
political gains for the corn lobby.9

Nearly all domestic transportation fuel is 10 percent ethanol (E10), while pure
gasoline (E0) represents less than 5 percent of all fuel consumed.10 This change has
largely been driven by a crucial mandate: the Renewable Fuel Standards (RFS)
created in the 2005 Energy Policy Act and expanded by the Energy Independence
and Security Act of 2007, which mandated that a percentage of all transportation
fuels contain renewable fuels. The policy had unintended consequences: using eth-
anol in transportation fuels led to efficiency losses. According to the Energy Infor-
mation Administration (EIA), “Vehicle fuel economy decreases by about 3 percent
when using E10 relative to ethanol-free gasoline.”11 Even more dramatic efficiency
losses are caused by using E85, which has an efficiency of only 28 percent that
of E10.12

In the years between 2005 and 2013, the Congressional Budget Office estimated
that motorists have incurred over $83 billion in costs as a result of these mandates.13
That translates to an additional $272 per driver a year in fuel costs alone.14 Con-
sumers pay other costs as well, as all new domestic automobiles were mandated
to be E10-compatible, which necessitates several parts being replaced with more
costly corrosion-resistant parts and is associated with higher maintenance costs.15

18
But the costs are not just felt at the pump and on the road. Economists estimate that
American ethanol demand adds at least an additional 20 percent to the cost of
corn.16 In turn, the rising cost of corn impacts grocery costs in four ways:17

1. Raising the cost of corn itself

2. Increasing the price of meat via feed costs
3. Indirectly lifting the prices of other crops via land-use changes
4. Increasing energy prices

Via these mechanisms, the CBO estimates that American households spend rough-
ly $400 million extra annually.18 Just as stunningly, however, they found that the
overall impact of ethanol policy led to a nearly 2 percent increase in the CPI-U
for food.19 They also concluded that the rising costs of groceries disproportionately
hurts poorer communities.20

Since ethanol is so energy inefficient, and because growing corn is carbon intensive,
using corn ethanol as fuel produces substantially more carbon dioxide than an en-
ergy equivalent amount of gasoline. Estimates vary regarding the amount of that
increase, but researchers found that feedstock changes alone resulted in emissions
that are 63 percent more carbon intensive than gasoline emissions.21 According to
the CBO, “Evidence suggests that replacing gasoline with corn ethanol has only
limited potential for reducing emissions, and some studies indicate that it could
increase emissions.”22 Even the Intergovernmental Panel on Climate Change (IPCC)
has adopted a cautionary position: “Indirect emissions [for biofuels] can lead to
greater total emissions than when using petroleum products.”23 And the Sierra Club
has described the biofuel mandate as “[an] unconscionable [action] that the EPA
continues to turn a blind eye to.”24

But the environmental harm doesn’t end with carbon emissions. When the National
Oceanic and Atmospheric Administration announced that the dead zone in the
Gulf of Mexico tripled in size, the Harte Research Institute at Texas A&M found
that a fertilizer used in ethanol production was the culprit.25 Similar research at
Iowa State found that fertilizer usage associated with ethanol production led to
dangerous nitrogen and phosphorus runoff into lakes and streams.26 Similarly, Dr.
Jacobson at Stanford found that using E85 in place of E0 increased human mor-
tality, hospitalization, and asthma incidents by 4 percent in the nation as a whole,
and 9 percent in urban areas.27

In sharp contrast to the failings of public policy in the last two decades, trends in
automotive markets have been highly promising, as the average American passen-
ger vehicle went from getting 21.7 mpg in 1990 to 24.6 mpg in 2015, an increase
of over 13 percent in fifteen years.28 If that trend continues, in the year 2035 the
average American car would get 27.88 mpg, and by 2045 the average mileage
would be around 30.12 mpg. Fuel economy in the United States is now rising far
more rapidly for a simple reason: the rising price of gasoline, paired with contrac-

19
 tions in the economy, is driving American consumers to demand more efficient cars.
These trends drove changes in industry that led to the development of two major
fuel-efficiency technologies rolled out in the last decade: gasoline direct injection
and variable displacement. Clearly, the market-driven gains in fuel efficiency have
been increasing independently of policy changes regarding ethanol in the last half
century.

Policy Recommendations

Congress should take bold steps to remedy previous mistakes by eliminating dis-
torting policies on both sides of the ethanol market. The easiest change would be to
end the Renewable Fuel Standards that mandate the use of ethanol. The technical
impossibility of using “advanced” biofuels has become so evident that the EPA
has admitted to implementing laxer standards than those outlined in the original
legislation!29 The failures of the law and the benefits to consumers as a result of
terminating RFS make these moves politically desirable. Simply offering consumers
the option to put any blends of gasoline into their cars would be a substantial step
in the right direction.

The next most politically feasible set of reforms would be to eliminate the plethora
of infrastructure subsidies, including the 30 percent tax credit for installing etha-
nol refueling on commercial and residential properties, the loan guarantees and
grants extended by the Rural Energy for America Program created in the Food,
Conservation, and Energy Act of 2008, and the USDA’s loans that issued from
the Commodity Credit Corporation for ethanol-related purposes. Similar mea-
sures should be considered by state and local legislatures. While these legislative
changes would be uphill battles, some of them have been fought and won before.

In an ideal world, government at every level would push through even more ag-
gressive actions, namely ending the subsidization of corn itself. In the world of ag-
ricultural subsidies, corn is king. Tax breaks for corn are some of the most frequent
tax breaks claimed in the agricultural sector, not to mention numerous Department
of Energy and EPA programs that subsidize corn and ethanol production. The harm
that these economic policies create is far too great a cost to bear for the minor
upside of enriching farmers. Unfortunately, the political feasibility of these projects
is greatly restricted by the substantial influence that the agricultural lobby wields
in rural areas.

Potential Benefits

Calculating the savings to federal and local governments upon ending these pro-
grams is complicated. The spending threshold for the majority of these federal
programs is de minimis, meaning that the CBO doesn’t calculate the costs for these
programs. Even so, the federal government should save at minimum $541 million
per year by ending direct subsidies for ethanol, in addition to the extra $900 mil-

20
lion that the CBO estimates that we spend on the Supplemental Nutrition Assistance
Program and the Women, Infants, and Children Program as a result of higher corn
costs, totaling savings of $1 billion per year, and up to $6 billion based on the
CBO’s highest estimates.30

Given that the United States used roughly 25.7 quads of petroleum in 2016 in the
transportation sector,31 with about 260 million cars in the United States,32 forecast-
ing future energy usage with these changes is simple. Based on future population
projections from the Census,33 and knowing that roughly 80 percent of Americans
own cars,34 it can be expected that there will be roughly 308 million cars in the
United States by the year 2045. Based on the previously mentioned projections
of future efficiency gains, and a conservative estimate of a 3 percent gain of
fuel economy from switching all E10 to a lower ethanol blend, the average fuel
economy would be approximately 31.0236 mpg by 2045, implying a 26 per-
cent increase in fuel economy, or in overall usage, a fall in the United States to
25.378259554 quads, which would mark the first substantial fall in domestic fuel
use since the 70s.35

Lowering the costs of living by removing these ethanol policies will have a posi-
tive impact on domestic consumers as well. The increased use of corn for ethanol
production has crowded out acreage devoted to other important crops, like wheat
and soybeans. All else being equal, this means higher prices for those crops. One
salient example from researchers at Texas A&M estimated that the retail prices
of eggs, bread, and milk increased from corn price rises alone by 6.4, 4.6, and 4
percent, respectively, from 2005 to 2008.36 From 2003 to 2006, the Organisation
for Economic Co-operation and Development (OECD) estimated that US farm pol-
icy raised food prices enough to cost consumers an extra $12 billion annually—in
effect, an average annual food tax of $104 per household.37

The single biggest beneficiary of ending the dominance of domestic ethanol is the
planet. A ranking of nine energy sources in relation to global climate found that
corn-based ethanol was the worst of nine technologies with respect to climate, air
pollution, land use, wildlife damage, and chemical waste.38 While all energy pro-
duction consumes water, ethanol particularly requires a lot. Researchers estimate
that refining a gallon of corn ethanol today requires thirty-five gallons of water,
while three times as much water is needed to grow the corn that yields a gallon of
ethanol. That brings the tally to 140 gallons of water per gallon of corn ethanol
produced.39 Furthermore, corn requires more fertilizers, pesticides, and herbicides
than most other biofuels, resulting in this runoff entering waterways, creating more
low-oxygen dead zones, and causing local shortages in drinking and irrigation
water. The National Academy of the Sciences concluded their ethanol brief with
the note that, regarding biofuels, “the increase in harm to water quality could be
considerable.”40

21
 Conclusion

The average American is thus hit with a triple dividend: reducing fiscal burdens
on both the federal government and state governments, savings at the pump, and
savings at the grocery store. Spending less on gas and cheaper groceries will help
all Americans, but especially the poorest Americans. Given that ethanol policy is
also unjustifiable on environmental grounds, Congress should work to eliminate bur-
densome regulations that hurt American consumers and the planet.

Shane Reed is from a small cornfield south of Grand Rapids, Michigan, that masquer-
ades as a town. He is currently pursuing his undergraduate degree from the University
of Michigan in economics & cognitive science. During the last two school years, he
worked as an intern for the Michigan football team in the recruiting department of
Team Blue. This past year he started working as a research assistant in the forecasting
arm of the Research Seminar in Quantitative Economics at Michigan. When he isn’t
cheering for Coach Harbaugh and the Team, he’s likely sinking his teeth into a burger
somewhere.

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1
Cole Gustafson, “History of Ethanol Production and Policy,” North Dakota State Universi-
ty, 2013, accessed December 7, 2018, https://www.ag.ndsu.edu/energy/biofuels/ener-
gy-briefs/history-of-ethanol-production-and-policy.
2
US Department of Agriculture Foreign Agricultural Services, Grain: World Markets and
Trade (Washington, DC: USDA, 2018).
3
Joseph M. Awika, “Major Cereal Grains Production and Use around the World,” in Advances

24
in Cereal Science: Implications to Food Processing and Health Promotion (Washington, DC:
American Chemical Society Symposium Series, 2011), 1–13.
4
Ibid.
5
Thomas Capehart, “Feedgrains Sector at a Glance,” Economic Research Service, US De-
partment of Agriculture, November 28, 2018, accessed August 31, 2018, https://www.ers.
usda.gov/topics/crops/corn-and-other-feedgrains/background.
6
Jesse Stolark, A Brief History of Octane in Gasoline: From Lead to Ethanol (Washington,
DC.) : Environmental and Energy Study Institute, March 2016).
7
International Energy Agency, “Energy Tax Act of 1978,” March 14, 2013, accessed August
31, 2018, https://www.iea.org/policiesandmeasures/pams/unitedstates/name-22517-en.
php?s=dHlwZT1yZSZzdGF0dXM9T2s,&return=PG5hdiBpZD0iYnJlYWRjcnVtYiI-PGEgaH-
JlZj0iLyI-SG9tZTwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG9saWNpZXNhbmRtZWFzdX-
Jlcy8iPlBvbGljaWVzIGFuZCBNZWFzdXJlczwvYT4gJnJhcXVvOyA8YSBocmVmPSIvcG-
9saWNpZXNhbmRtZWFzdXJlcy9yZW5ld2FibGVlbmVyZ3kvIj5SZW5ld2FibGUgRW5lcm-
d5PC9hPjwvbmF2Pg.
8
Wallace E. Tyner, U.S. Ethanol Policy—Possibilities for the Future (West Lafayette, IN: Pur-
due University, Department of Agricultural Economics, 2007).
9
K. Fehernbacher, “What You Should Know about Ethanol and the Iowa Caucus,” Fortune,
February 1, 2016.
10
Energy Information Agency, Almost All U.S. Gasoline Is Blended with 10% Ethanol (Wash-
ington, DC: EIA, 2016).
11
Energy Information Agency, “How Much Ethanol Is in Gasoline, and How Does It Affect Fuel
Economy?,” June 12, 2018, accessed August 31, 2018, https://www.eia.gov/tools/faqs/
faq.php?id=27&t=10.
12
“Ethanol (E85) Fuel Alternative,” Consumer Reports, January 2011.
13
Congressional Budget Office, The Renewable Fuel Standard: Issues for 2014 and Beyond
(Washington, DC: CBO, 2014).
14
Ibid.
15
R. Keefe, J. Griffin, and J. D. Graham, The Benefits and Costs of New Fuels and Engines for
Cars and Light Trucks (Santa Monica, CA: RAND, 2007).
16
S. Nelson, “Analysis—Ethanol No Longer Seen as Big Driver of Food Price,” Reuters, Oc-
tober 23, 2008.
17
Congressional Budget Office, The Impact of Ethanol Use on Food Prices and Greenhouse-Gas
Emissions (Washington, DC: CBO, 2009).
18
Ibid.
19
Ibid.
20
Ibid.
21
J. M. DeCicco et al., “Carbon Balance Effects of U.S. Biofuel Production and Use,” Climatic
Change Ann Arbor (2016): 667–80.
22
Congressional Budget Office, The Renewable Fuel Standard.
23
R. Sims and R. S.-N Schaeffer, “Transport,” in Climate Change 2014: Mitigation of Climate
Change; Contribution of Working Group III to the Fifth Assessment Report of the Intergovern-
mental Panel on Climate Change, ed. O. R.-M. Edenhofer (New York: IPCC, 2014), chap. 8.
24
Sierra Club, “EPA Turns a Blind Eye to Ethanol’s Environmental Impacts, news release,
November 30, 2017.
25
T. Mason, “Ethanol Responsible for This Year’s Expected Record Dead Zone, Researcher
Says,” Times-Picayune, July 10, 2013.
26
A. E. Elobeid et al., Greenhouse Gas and Nitrogen Fertilizer Scenarios for U.S. Agriculture
and Global Biofuels (Ames: Iowa State University, Center for Agricultural and Rural Devel-
opment, 2011).

25
 27
M. Z. Jacobson, Effects of Ethanol versus Gasoline Vehicles on Cancer and Mortality in the
United States (Palo Alto, CA: Stanford Univeristy, Department of Civil and Environmental
Engineering, 2007).
28
Environmental Protection Agency, CO2 and Fuel Economy Trends Report, 1975–2016
(Washington, DC: EPA, 2016).
29 Environmental Protection Agency, 2018 Announcements for the Renewable Fuel Standard
(Washington, DC: EPA, 2018).
30
Congressional Budget Office, The Impact of Ethanol Use.
31
Lawrence Livermore National Laboratory, Estimated US Energy Consumption in 2017 (Liv-
ermore, CA: LLNL, 2018).
32
Bureau of Transportation Statistics, Number of U.S. Aircraft, Vehicles, Vessels, and Other
Conveyances (Washington, DC: US Department of Transportation, 2018).
33
US Census Bureau, 2014 National Projections (Washington, DC: US Census Bureau, 2014).
34
Jacob Poushter, “Car, Bike or Motorcycle? Depends on Where You Live,” Pew Research
Center, April 16, 2015, accessed December 7, 2018, http://www.pewresearch.org/fact-
tank/2015/04/16/car-bike-or-motorcycle-depends-on-where-you-live.
35
Energy Information Agency, History of Energy Consumption in the United States, 1775–
2009 (Washington, DC: EIA, 2011).
36
Agricultural and Food Policy Center, The Effects of Ethanol on Texas Food and Feed (Col-
lege Station: Texas A&M, AgriLIFE Research and Extension, 2008).
37
Organisation for Economic Co-operation and Development, Agricultural Policies in OECD
Countries: At a Glance—2006 Edition (Paris: OECD, 2006).
38
Mark Z. Jacobson, “Review of Solutions to Global Warming, Air Pollution, and Energy
Security,” Energy and Environmental Science 2 (2009): 148–73.
39
J. F. Kreider and P. S. Curtiss, Comprehensive Evaluation of Impacts from Potential, Future
Automotive Fuel Replacements (Boulder: University of Colorado, 2007).
40
Ibid.

26
NOTES

27
 #HISPBC

Hoover Institution, Stanford University

434 Galvez Mall
Stanford, CA 94305-6003
650-723-1754

28