Sarah Palin

I asked my UC Berkeley ATO fraternity brother, Steve Paliwoda, who now lives in Alaska, for his thoughts on McCain’s choice for his running mate. Here is his reply:


I think McCain’s selection of Sarah Palin as his Vice Presidential running mate could well prove to be the most savvy Vice Presidential choice in a very long time. Certainly the timing of the announcement of such an unexpected and interesting choice, coming as it did the morning after the end of the Democratic Convention did much to divert the public’s attention from Barak Obama. Thus, such well-known Friday evening news programs as "Washington Week" and "Bill Moyer’s Journal" spent a goodly amount of their air time discussing Sarah Palin, instead of talking about nothing else but Obama and Biden. Chalk one up for the Republican campaign.

Sarah Palin is arguably more of a political novice than Obama. Before being elected Governor of Alaska a year ago last November, she had served one — maybe two — terms as the Mayor of the town of Wasilla (pronounced just like it’s spelled: wah-SILL-ah — that is, I think it was Wasilla, which is a sizable strip-mall town about 40 miles north of Anchorage, and is the major town of that area, which is known as the Matanuska-Susitna (mat’n-NUS-ka soo-SIT-ka) Borough. Sarah is not new to the public eye, for I think that soon after she graduated from High School in the early 1980’s she won a local or regional beauty contest. She may have served on the MatSu Borough or Wasilla City Council for a term or two before being elected Mayor — I’m not sure about that.

I did not vote for Sarah in her run the Alaska Governorship; I voted instead for the Democratic candidate, Tony Knowles, who I felt was far more qualified. Tony is a Yale grad, originally from Oklahoma, and had served two 4-year terms at Mayor of Anchorage in the 1980’s, and two 4-year terms as Alaska’s Governor in the 1990’s. He then ran unsuccessfully for Senator, but was defeated by previous Senator Frank Murkowski’s daughter Lisa (that’s a long story). Tony then ran again for governor against an "unknown" Sarah Palin, who had defeated the corrupt incumbent Frank Murkowski in the Republican Primary, but it seemed that the Alaska voters were tired of the "old guard" of politicians, and welcomed someone new and fresh, like Sara (BTW, Tony served in all his offices with honor and distinction; however years before starting his political career, he worked for an oil company; and, however unjustly, that was what undid him in the last election).

…And BTW, I don’t know whether I ever communicated this to you before, but in August and September of 1982, I served in then-Senator Frank Murkowki’s Washington D.C. office (in the Dirkson Building) as a temporary volunteer "intern". Believe it or not, they assigned me to perform initial research into the legislative background of what was then an unknown subject: "Wetlands". (That’s another long story.)
Getting back to Sarah: She has impressed people since taking office with practically everything she’s done. She knows how not to tread on people’s toes. She is not owned by anybody. The women lover her. She dresses and carries herself like many of the women voters who like her so much. She is a "natural" when it comes to public speaking, and yet does not come across as overblown or affected. She has a good public presence, without the political bombast. Now, it will be a challenge to her to be able to present herself well to reporters during the campaign on such subjects as international relations — but she is not easily fazed, has a quick mind, and is very "believable" when she speaks. She has a couple young kids, and recently gave birth to a Down-Syndrome son — which was expected early in her pregnancy, but which she chose to have anyway. ….The debate between her and Joe Biden could conceivably be more interesting to watch than the debate between McCain and Obama. Certainly, the audience for the vice-presidential debate (I presume there will be one) will draw an enormous audience, for the public has had such a steady diet of McCain and/or Obama over the past several months that they’ll dying to watch somebody new.

She has some conservative leanings when it comes to religion, and if memory serves, has made anti-abortion statements, and (I’m not sure about this next one) is tolerant toward the idea of teaching "Creationism" in public schools. Even so, she has enough brains to know such subjects are controversial, and is not one to go around trumpeting publicly such beliefs.

This summer, her office has been the center of attention regarding a couple mini-scandals, whereby (1) The guy she selected as head of Alaska’s State Troopers (a local police chief) had previously been chastised for supposedly being too "familiar" with one of his female subordinates. The letter that was put in his file was eventually expunged. His "slip-up"? — He failed to tell Sarah about that letter when she interviewed him for the job. Sarah didn’t appreciate the "surprise" when reporters dug that one up, so about a week later, the newly-hired Troopers Chief resigned. He’s now trying to get his old Police Chief job back. …and (2) One or two of her aides made pointed remarks to the previous Chief of State Troopers that he should consider firing a particular Trooper who had been chastised in the past for a variety of misconducts. The interesting point here is that the guy is currently involved with Palin’s sister in a nasty divorce-and-child-custody lawsuit. Sarah claims she never knew about the suggestion made to the Trooper Chief, and has temporarily "suspended" (i.e., put on leave with pay) the person who had the discussion(s) with the Chief.

Bottom Line: Sarah Palin is a very interesting choice for McCain’s Vice President, and will be the subject of much attention and discussion — which is just what the Republican want, I’ll bet. Her ability to be President of the U.S., Commander-in-Chief of the U.S. armed forces, and leader of the free world, in case McCain’s cancer snuffs him out — well, that’s another matter.

Steve Paliwoda

Saving Social Security?

Without changes, the Social Security payroll tax will stop raising enough money to meet the system’s pension payment obligations in 2018, just 13 years from now. This funding shortfall can be corrected with only modest adjustments, if action is taken now. Indexing retirement benefits on the consumer price index rather than the average wage increases would eliminate most of the shortfall and modestly and gradually increasing the retirement age a few years would reduce the rest. Other adjustments are also being discussed. The change in the benefit index would reduce the planned increase in benefits and leave the real value of current benefits unchanged. Choose which ever way of saying it that sounds best to you. Both are correct.

The issue of privatizing or otherwise reforming the nature of the system is another matter all together. Evaluating such reforms calls for a clear understanding of the purposes we wish Social Security to achieve. Before we can intelligently debate whether SS should be a fully funded insurance program (whether with a defined benefit or a defined contribution) or continue as a pay-as-you-go entitlement, we need to debate the role we want it to play in our overall system of retirement income.

Traditionally most Americans’ retirement incomes come from employer based pensions and individual savings (home ownership, whole life insurance, and other investments). Schools taught the need for proper preparations. On August 14, 1935, when the country was still struggling to overcome the Great Depression, President Franklin D Roosevelt added a mandatory government pension when he signed the Social Security Act. In addition to old age pensions, the Act established unemployment compensation, and aid to children and to the ill.

Roosevelt intended for the old age pension provided by Social Security to be a mandatory, defined benefit pension financed by the contributions of the pensioner and his employers over his working life. The system provided a guaranteed minimum pension for those who worked and paid into it. However, the relationship between what a person paid in and ultimately received was never close. Those at or near retirement when the system started were allowed benefits that were financed by young workers who would not draw their own benefits for many years. Pay-as –you-go financing is the cause of the upcoming financing problem as baby boomers swell the ranks of the retired. “As a result, the ratio of workers paying Social Security taxes to people collecting benefits will fall from 3.3 to 1 today to 2.1 to 1 by 2031.”[1] It was over 8 in 1955. The tax burden on those currently working is raising fast.

In its current form, Social Security’s old age pension is a complicated structure that is neither a sound insurance or pension scheme nor a well-designed and targeted safety net. The payroll taxes that finance it “account for more than 25% of all federal revenue; its payments represent more than 20% of all federal spending. For almost two-thirds of American’s pensioners, Social Security payments make up over half their income.”[2] As a social safety net, it does not target benefits or redistribute income in a clear and defensible way. As a compulsory, government administered pension, it is not financially sound and is considered by many to be an inappropriate and unnecessary government intrusion into private life.

How the system should be reformed, if at all (rather than merely fixing its demographic based financing problems), depends on how as a nation we answer the following questions: “Is Social Security a planning vehicle that an individual uses for his or her own retirement, or is it a pooling of resources so that all of society can meet the needs of its older members? Is it about each person saving for himself, or is it a matter of young helping old and rich helping poor?”[3] Should Social Security be part of the social safety net that Ronald Reagan spoke of for a society in which individuals and families are basically responsible for their own lives, or should it be an instrument of collective social responsibility for public welfare? The attitudes behind different answers to these questions reflect the great divide that has always separated (in varying degrees) Republicans and Democrats. But there may be a proper place for each view.

World Bank research found “that financial security for the old—and economic growth—would be better served if governments develop three instruments, or ”pillars,” of old age security: a publicly managed pillar with mandatory participation and the primary goal of reducing poverty among the old; a privately managed, mandatory saving system; and voluntary savings. The first covers redistribution, the second and third cover savings, and all three coinsure against the many risks of old age. By separating the redistributive function from the saving function, the amount of spending in the public pillar—and the tax rate needed to support it—can be kept relatively small. Spreading the insurance function across all three pillars offers greater income security to the old than reliance on any single system.”[4]

“A central recommendation of the [World Bank] report is that countries should separate the saving function from the redistributive function and place them under different financing and managerial arrangements in two different mandatory pillars—one publicly managed and tax-financed, the other privately managed and fully funded—supplemented by a voluntary pillar for those who want more.

“The public pillar would have the limited object of alleviating old age poverty and coinsuring against a multitude of risks. Backed by the government’s power of taxation, this pillar has the unique ability to pay benefits to people growing old shortly after the plan is introduced, to redistribute income toward the poor, and to coinsure against long spells of low investment returns, recession, inflation, and private market failures.”[5]

For the United States, the World Bank’s advice suggests a much smaller public pillar (the existing Social Security system), targeted on the poor (means tested) whether they had worked and contributed to retirement income or not. It would be financed from the government’s general revenues, not from wages if there were any. This social safety net would be supplemented by the second, mandatory savings pillar, which should sharply limit the need to resort to the first pillar. This mandatory, defined contribution, second pillar would be satisfied by qualifying (and regulated as now) company pension funds, 401K plans, or social security tax contributions to private mutual funds. Reasonable, but not excessive, restrictions and safeguards would be required. Recent experiences with pensioner losses with defined benefit pensions when their employer goes bankrupt indicate that further reforms of the private pension system are still needed as well.

The system would insure that those who could, i.e. those with jobs, would save enough for minimally acceptable levels of retirement income, but would still protect those who had not adequately protected themselves, whether from inability, short sightedness, or bad luck. Allowing workers to manage more of their retirement savings has several advantages. More would be invested in stocks and private bonds, which historically have yielded more on average than government bonds. Such savings would be part of the pensioner’s estate and any unused part would be passed on to his/her heirs. Both the reduction in wage taxes and the real savings of private pensions would tend to increase the supply of labor and national savings and investment, and thus economic growth. Fully funded benefits from saving would be free of the demographic problems now besetting our pay as you go system. Benefits from the second tier would be closely related to contributions, which would tend to increase saving (and economic growth) and to be seen as fair. Workers would become capitalists and thus potentially more sensitive to the health of the economy. Those who could not contribute enough, or experience poor returns on their investments would be protected by the first, public pillar.

President George W. Bush’s current proposals for Social Security combine both financial fixes for the existing system and substantive reform of the system by introducing “personal accounts.” His recent proposals may be seen as transitional steps to the above system. However, like the existing system, current proposals constitute a mixed and rather incoherent collection of ideas. The final result will be more satisfactory to everyone if the details now being debated contribute to a coherent overall three pillar plan for the provision of retirement income and medical care.

[1] “Fast Facts and Figures About Social Security, 2004,” U.S. Social Security Administration.

[2] “How to mend Social Security,” The Economist, February 12 2005 p 10.

[3] Steven Mufson, “FDR’s Deal, In Bush’s Terms,” The Washington Post, February 20, 2005, page B3

[4] “Averting the age old crisis for the old,” World Bank Policy Research Bulletin, August – October 2004, Volume 5, Number 4.

[5] Ibid.

The Commanders Emergency Response Program in Iraq: Effective or Wasteful?

The Washington Post has published an outstanding report on the Commanders Emergency Response Program (CERP) in Iraq with the provocative title "Money as a Weapon" [1] CERP is an effort to be smarter about ‘winning hearts and minds” in Iraq by behaving more like a private charity. It has good and bad aspects and illustrates the inherent disadvantages of government employees spending tax payers’ money compared to spending their own money or private enterprise (or charity) employees spending the owners’ (donors’) money.

Any economic activity by groups larger than a family faces the challenges of coordination and monitoring the performance of the individuals within the group. If you are a parent, you know that this challenge exists even within the family. These challenges exist for private sector enterprises operating in free markets as well as for government bureaucracies. On several occasions I have noted that governments suffer serious disadvantages in these regards, but as there are some things only governments can do we need to put up with them while limiting government as much as possible to what only it can do.

Private enterprises have the advantages that they are risking their own money and are thus able to take greater risks (both in how they address the coordination and monitoring challenges and in what goods or services they choose to provide), and that they are forced by competition to make good decisions or parish. They are disciplined by their bottom line (profitability). Governments, on the other hand, must be accountable to the public for the use of tax money. Thus they require more rigid and intrusive performance monitoring procedures (more reporting than doing). In addition to adding an extra layer of cost, this tends to under value and thus stifle creativity. Civil service employees, for example, tend to be rewarded by length of service rather than performance evaluations to ensure that bosses do not show favoritism to friends and relatives. Public school teachers in many states in the U.S. suffer from the performance stifling impact of seniority systems with tragic results for the quality of public education. Even efforts to introduce merit pay for government employees are fraught with risks because of the absence of a bottom line and competition.[2]

In addition to being a smarter approach to overcoming terrorists and insurgents in Iraq, CERP also attempts to overcome the sluggish bureaucracy inherent in government programs. “Soldiers walk the streets carrying thousands of dollars to pay Iraqis for doorways battered in American raids and limbs lost during firefights. Sheiks appeal to commanders to use larger pools of money locked away in Humvees and safes at military bases for new schools, health clinics, water treatment plants and generators, knowing that the military can bypass Iraqi and U.S. bureaucratic hurdles.”[3]

CERP “has so far spent at least $2.8 billion in U.S. funds.”[4] That will pay for a lot of battered doors. All of it was handed out in U.S. dollar bank notes by American soldiers. “The program is intended for short-term, small-scale ‘urgent humanitarian relief and reconstruction.’ But as the broader $50 billion effort to rebuild Iraq with big infrastructure projects runs dry, CERP is by default taking on more importance as a reconstruction program, something it may not be equipped to do in a coordinated, nationwide way.”[5]

It is obvious that solders walking the streets can make quick and beneficial judgments about where a few bucks will get the best result in ways that more bureaucratically controlled procedures could never dream of. Most of the solders I met in Baghdad were fine people and could be counted on to serve their country’s interests first. I seriously believe that very little of this cash found its way into our solders’ pockets (but reread Catch 22 or M*A*S*H for a different perspective). Thus the broken door and missing limbs payments and candy and t-shirts for the kids are surely some of the best money we are spending in Iraq. However, it suffers at the end of the day what all government programs suffer from: the solders are giving out taxpayers’ money and thus are not guided by a bottom line of their own. This particular innovative, responsive, and flexible program also suffers a lack of coordination with broader efforts to pacify and rebuild Iraq.

I have an additional problem with the way this program is implemented, which is modest but not trivial, which is that U.S. dollar bills are being used rather than Iraq’s own currency. Doing so undercuts the development of Iraq’s monetary system, makes the monetary policy of the Central Bank of Iraq more difficult, and pours hundreds of millions U.S. dollar bank notes into the country in ways the make anti money laundering and combating the financing of terrorism measures impossible. When Iraqis exchange these dollars for dinars, where do the dollars wind up? Iraqi dinars could and should be used for this operation.[6]

“CERP is, in fact, a reconstruction program in addition to being a counterinsurgency weapon.”[7] The real problem with the program comes with the larger expenditures—the “schools, health clinics, water treatment plants and generators, etc.” These are all good things potentially but schools with no teachers, health clinics with no medicine, are a waste of money. “A $33 million hotel, office and retail complex at Baghdad International Airport” may be the best use of that money, but it is very unlikely that the mechanisms for allocating CERP cash resulted in valuing this project against all others being financed by the U.S. or Iraqi governments. That is exactly what government budgeting is all about (or should be)—setting priorities. Resources (money) are limited and thus projects must be prioritized in order to finance the most valuable ones to get the highest value per tax payer dollar (or dinar). Furthermore, the value of one project, a farm irrigation system say, may depend on other projects, such as the roads needed to transport farm output to market. Thus an overview of all projects and coordination among them may also be important, which CERP does not provide but USAID does (or at least tries to).[8]

“Outside Kirkuk, in northern Iraq, an $8.3 million water treatment project completed in February with CERP funds took more than two years and was $1.7 million over budget — and it is not far from another water treatment system that USAID paid $4.1 million to build two years ago.” In another more successful example, “In the violence-prone city of Ramadi, Army Capt. Nathan Strickland and his battalion used CERP money to hire day laborers to clear away trash and rubble. The military strategy: Get young men to pick up shovels instead of guns.”[9] I remember in the early months of American occupation of Iraq Peter McPherson, assigned to the Coalition Provisional Authority to oversee the reconstruction of Iraq, killed a similar idea as wasteful welfare.[10]

Over a trillion dollars or more later we have learned a lot, made many adjustments, and things are going better in Iraq. The Post article is full of fascinating examples of successes and failures and the difficulties of making the government function more like the private sector. Of course, it raises the question that should always be raised of whether this was really something our government should be doing in the first place.

[1] Dana Hedgpeth and Sarah Cohen, “Money as a Weapon”, The Washington Post, August 11, 2008, Page A01.

[2] “David Whitman, in his book "Sweating the Small Stuff: Inner-City Schools and the New Paternalism," reports that in Chicago from 2003 through 2006, just three of every 1,000 teachers received an "unsatisfactory" rating in annual evaluations; of 87 "failing schools" — with below-average and declining test scores — 67 had no teachers rated unsatisfactory; in all of Chicago, just nine teachers received more than one unsatisfactory rating, and none of them was dismissed.” Quoted by George F Will in "Where Paternalism Makes the Grade", The Washington Post, August 21, 2008, page A15.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] A modest problem with doing so currently is that the largest ID bill (25,000 ID) has a dollar value of only about $20.00.

[7] Ibid.

[8] In the interest of full disclosure, I am BearingPoint’s Senior Monetary Policy Advisor to the Central Bank of Iraq under a consulting contract financed by USAID. I am expressing my own views here only.

[9] Ibid.

[10] Warren Coats and Kenneth Weisbrode, "The Strange Tale of Financial Reconstruction in Iraq" October 25, 2003.

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina

What follows is blatant self interested commercialism. Here is what my latest book (kind of makes it sound like I have a lot of them) is about and how to get it.

F O R  I M M E D I A T E   R E L E A S E

Book Launch:

Warren Coats’ One Currency for Bosnia:

Creating the Central Bank of Bosnia and Herzegovina.

349 pages


Jameson Books

August 3, 2007

Washington, DC – Bosnia and Herzegovina has arisen from war-torn ruins to relative national stability in just ten years – in compelling contrast to the chaos of nation-building efforts elsewhere in the world. The story of rebuilding the monetary and banking systems from these ashes and their contribution the country’s healing and rebirth is a story of national triumph and world hope.

An architect of this historic feat, Dr. Warren Coats of the International Monetary Fund, now offers a chronicle starting before the fighting had stopped — and concluding with reflections about the on-going challenges of establishing stable monetary systems in post conflict countries.

For those who know of Coats’ reputation, the especially good news is that Coats provides insights into human and practical aspects monetary systems, and he offers lessons for those who would undertake similar quests.

What people are saying about One Currency for Bosnia:

  • Michael Lind, Author of The American Way of Strategy: “Now that the challenges of rebuilding failed states and shattered societies are central to U.S. foreign policy, his [Coats] lively and fascinating account of one effort at national reconstruction is as timely as it is informative.”
  • Mario I. Blejer, Director of the Centre for Central Banking Studies at the Bank of England: “His book not only clarifies potentially obscure economic concepts for the laymen but also illuminates the important interconnections between the economic and political aspects of post conflict reconstruction.”

About the author: Warren Coats is currently an advisor to the central banks of Afghanistan, Iraq, and Kazakhstan and is a director of the Cayman Islands Monetary Authority. During his twenty-six years at the International Monetary Fund he has provided IMF technical assistance to central banks around the globe including in Croatia, Bangladesh, China, Egypt, Nigeria, Turkey, the West Bank and Gaza Strip. He lives in Bethesda, Maryland.

  • Monetary stability is a necessary precondition to a healthy economy. The author demonstrates in plain language the means to achieving this goal.
  • Bosnia remains in the world’s headlines as a flashpoint of ethnic and religious conflict, especially the suffering of its Muslim inhabitants.
  • Beneath the political rhetoric of peace, democracy and nation-building are the hard realities of economics. Policy writers and academics will find this book an invaluable guide.
  • For all academic library collections dealing with history, foreign policy, economics, banking, and the Balkans.
  • The Berkeley, Chicago, New York, Boston, and Washington, DC top bookstores should have this on their history, foreign policy and economics shelves.
  • Milton Friedman’s more than 2,000 economics PhDs, like Coats, are a formidable market for serious works of economics and are likely avid reviewers.


One Currency for Bosnia


Creating the Central Bank of Bosnia and Herzegovina


Warren Coats, Ph.D. of Bethesda, Maryland

Author Bio

Warren Coats received his undergraduate degree at U.C. Berkeley and his Ph.D. at the University of Chicago. Currently advisor to central banks in four countries, he has led technical assistance missions to more than twenty countries, including China, Israel, Egypt, Iraq and the Czech Republic. For 26 years he held various positions at the International Monetary Fund.

This is both a fascinating personal narrative of the often colorful warriors rebuilding a part of war-torn Yugoslavia, and a detailed inside look at how experts can stabilize a nation’s currency and banking system. Written by an American who has led International Monetary Fund advisory missions to the central banks of more than twenty countries, this book, crafted in layman’s language — but of immense value to specialists in monetary and foreign policy initiatives — is an account of the behind-the-headlines work American and other economists do to bring peace and prosperity to former failed states.
Coats was involved in the creation of the Central Bank of Bosnia from before the Dayton Peace Accords. His “currency board” rules for monetary policy, and the creation of the bank, have resulted in the most successful state institution in the country.
Marking the tenth anniversary of the bank, the technical world of economics comes alive as the book unfolds like a mystery novel full of colorful and determined people determined to escape the disaster of a bloody civil war.

Order from Amazon:

Bosnia book endorsements


Front cover:


“Warren Coats’ well told account of the establishment of a currency board in war torn Bosnia and Herzegovina is fascinating and insightful reading.”


Robert Mundell, Nobel Prize in Economics in 1999


Inside before the title page


Robert Mundell,    Nobel Prize in Economics in 1999, Professor of Economics, Columbia University


“Currency board systems have become more popular since the collapse of the Soviet Union and with good reason: they provide a good option for monetary policy formation in countries where a suitable anchor currency is available. Warren Coats’ well told account of the establishment of a currency board in war torn Bosnia and Herzegovina is fascinating and insightful reading. His mastery of detail and intimate knowledge of that unusual environment, both political and economic, challenge and deepen our understanding of monetary systems and policies.”


Richard Rahn, Director of Cayman Islands Monetary Authority, former Chief Economist of the U.S. Chamber of Commerce, and syndicated columnist and author.


“If you were going to build a monetary system that would heal the wounds of a civil war devastated country and help lay the foundation for economic recovery and development, what would you do? Warren Coats provides the answer given for Bosnia and Herzegovina in his well told story of the establishment of the Central Bank of Bosnia and Herzegovina. Readers of his book will follow the detective like uncovering of the workings of the unique Yugoslav banking and payment system and the challenges faced and overcome in replacing it with a modern, market based system.”


Mario I. Blejer,  Former Governor of the Central Bank of Argentina (2001 to 02) and Senior Advisor in the IMF (1980 to 2001). Currently Director of the Centre for Central Banking Studies at the Bank of England.


“Warren Coats describes and analyzes the very complicated and extremely relevant process of the establishment of Bosnia’s present monetary system in clear, highly readable prose. His book not only clarifies potentially obscure economic concepts for the laymen but also illuminates the important interconnections between the economic and political aspects of post conflict reconstruction.”


Back dusk jacket:


Carl Bildt, Former High Representative of the UN in Bosnia, Former Prime Minister of Sweden, Current Foreign Minister of Sweden


“The democratization process in Bosnia was one of the most exciting periods of my life. And in the lives of all the courageous people who were involved.  The history deserves to be told over and over again. I told parts of it in my own book. Now, Dr Coats has taken the trouble to recall his own fascinating experience with the establishment of the Central Bank of Bosnia and Herzegovina. His account is an invaluable contribution to the never ending story of the Balkans.”


Serge Robert, First Governor of the Central Bank of Bosnia and Herzegovina (Oct 1996 to October 1997)


“This excellent book written by Warren Coats about the creation of the new Central Bank of Bosnia and Herzegovina is well worth reading. The author meticulously relates various aspects of history, monetary policy and human behavior in a clear, lively, humorous and enthralling style. The book reports how, after a grueling war, some men – still impregnated with rancor and distrust – bridled their own resentment, working together to build a monetary institution vital to their common future. Warren, with a great IMF team, played a major role in encouraging mutual understanding and co-operation. Today, on the eve of its 10th anniversary, the Central Bank has proved to be a real success. Warren Coats’ book will be an appropriate gift to mark such an event.”


Michael Lind,  Whitehead Senior Fellow, The New America Foundation and Author of The American Way of Strategy (Oxford, 2006) and other history and policy books and articles.


“The mission of Warren Coats in Bosnia was as much diplomatic as economic.  Now that the challenges of rebuilding failed states and shattered societies are central to U.S. foreign policy, his lively and fascinating account of one effort at national reconstruction is as timely as it is informative.”


Steve Hanke, Professor of Applied Economics at Johns Hopkins U Baltimore MD and leading authority on currency boards.


“The newly independent Bosnia and Herzegovina emerged in shambles from a bloody civil war in late 1995.  Warren Coats, a premier emerging market monetary expert, was central to the design and implementation of the currency board system that restored Bosnia and Herzegovina’s economy.  His book represents a scholarly and comprehensive, yet readable, realistic, and insightful account of one of the world’s most successful modern currency reforms.  One Currency for Bosnia should be required reading for all those who are serious about stable money.”



The Death of the Right?

Political sentiments go through cycles. I have been listening to a growing number of people declaring the end of the Republican Party dominance and the Reagan Revolution.[1] Following eight years of George W Bush, I am not sure that the defeat of the current crowd would be much of a loss to the Republican Party I joined in 1964, but whatever else the end of this era means, it means replacement of Republican leadership in government (certainly the congress, and probably the White House) by Democrats. But what does it mean for the “Reagan Revolution?”

I am a Barry Goldwater Republican. I believe that we and our families and friends are largely responsible for our own well being, that government should be kept small and focused on what only it can do well, that free markets are the most effective way to create and allocate wealth, that the individual freedoms, checks and balances on government, and separation of church and state in our constitution and its Bill of Rights provide the best environment for my personal moral and material development and in which I can live in harmony with my neighbors, and that if I work hard (which almost always means serving the needs of others) I have the best chance of doing well for myself and family. I believe in a strong national defense (but not empire building) and international collaboration and cooperation in today’s globalized world. In order to keep them relatively honest, governments operate under significant disadvantages relative to private enterprises with free trade, but there are some things that only government can do or do best and therefore they should be done well.

I think that these principles best serve the establishment of a just and prosperous society for all. Over the years considerable evidence has been developed and presented to support these views. Developing an economic and civil society that reasonably approximates these ideals has made us (and the increasing number of countries that have adopted similar principles) the enormously wealthy country that we are today. Even the poorest in our midst live better and healthier lives than the average person in the rest of the world. This is not because every one is “successful” and does well in free market capitalist economies, but because allowing the clever, energetic, and hard working among us to benefit from their efforts generates the enormous wealth from which the losers or handicapped can be compensated or looked after (charity—for which America is famous—and social safety nets.) Goldwater/Reagan republicans helped advance these principles and Clinton’s New Democrats largely embraced them as well. So what era is coming to an end and why is it happening?

While it seems pretty clear that American politics has started to swing to the “left,” I think that the next political cycle will take the form of corrections of some problems and excesses of the Reagan Revolution, not an abandonment of our general preference for market over government production and distribution. Bill Clinton’s New Democrats moved the center of the Democratic Party to the right of Richard Nixon. Even if the swing left overshoots that new center, it is likely to remain to the right of LBJ and Hubert Humphrey.

Important and fundamental arguments between communism and capitalism or socialism were won by the champions of free markets long before the collapse of the Soviet Union (though that was the final nail in the coffin). As a student at UC Berkeley in the mid 60s, it was a rather uphill argument that prices (incentives) mattered and that therefore the market generally allocated resources efficiently and that public policy needed to build on and take seriously the incentives it created for people to behave this way or that. This is no longer questioned by any serious person. Consider Barack Obama’s recent statement that “the market is still the best way to allocate resources productively, that some of the [regulatory] excesses of the 60s and 70s may have hampered economic growth, [and] that we don’t want to return to marginal tax rates of 60 or 70 percent.”[2]

Nonetheless a significant number of people are uneasy or unhappy about the economy and not just because of the current housing crisis. Middle and lower level incomes have stagnated over the last decade (when excluding the large increase in benefits, where most of the increases in wage costs have gone) as salary increases have increasingly gone to those with higher educations.[3] These insecurities and rising health costs have turned many sour on immigration and trade, both of which have benefited us and the rest of the world enormously.[4] Public sentiment does not always favor Democrats. In the face of dramatically increased gasoline prices, “Americans want to lift the moratorium preventing drilling on the Outer Continental Shelf by an overwhelming margin of 2 to 1.[5] While a Post/Kaiser/Harvard survey of low-wage workers found that “Nearly half of low-wage workers said their personal financial situations have deteriorated under President Bush,” it also found that “More than half said that government programs aimed at helping working families ‘aren’t having much impact,’ while another 2 in 10 said they are actually making things worse.”[6]

As public sentiment swings back to the left what the public wants (domestically), I think, are largely free but better regulated markets and a better social safety net (health care and pensions). Those like me who think that too much regulation stifles beneficial market innovation and worry about the work incentive stiffing effects of excessive or poorly designed safety nets need to take note of these sentiments. The freedom for me to lead my life largely as I choose and to enjoy the fruits of my labor depends heavily on the willingness of my neighbors (fellow citizens and residents) to accept those rules of the game. Our society functions as it does because of a broad social consensus on the rules of public behavior. This consensus rests in part on each player’s confidence that if he fails there is a safety net that makes it worth his taking the risk of playing. We need to compromise what we consider first best for society (and Republicans and Democrats tend to differ on what this is) to the extent needed to preserve that broad consensus.

Republicans tend to emphasize opportunity and self reliance and keeping government small (it is hardly that), short shifting attention to effective safety nets and efficient government. This is coming back to bite us.

President George W Bush seems to have forgotten that once elected he governs for the whole country, not just those who voted for him. Presidents are elected, presumably, because the majority of voters supported the policies they advocated during the campaign. But once elected it is incumbent on the President to make those compromises with his preferred policies needed to gain broad public support. Instead Karl Rove and company set about turning the government into an adjunct of the Republican Party. Bush’s shoddy governance put inexperienced political hacks in positions needing professionals. The illegal hiring practices of Monica Goodling under Attorney General Gonzales, himself a disgrace to the office, “by letting politics influence the hiring of career prosecutors and immigration judges at the Justice Department,…”[7] is but one of many examples of the over politicization of the executive branch of government that is polarizing our country.

In addition, small government Republicans like me often fail to give enough attention to the public’s interest in good government. Small government still needs to be efficient and responsive to the public’s needs in the areas we have assigned to it. President Bush’s impulse to reorganize (e.g., the intelligence agencies, and what is now known by the un-American name of “Homeland Security) rather than improve accountability and transparency have made the government less efficient and no smaller.

Congressman Barney Frank, Chairman of the House Financial Services Committee, epitomizes the best of the new left wing reaction to the Reagan Revolution. Frank is fully aware of the virtues of the market and enterprise and the need to get the incentives right, but insists that market excesses and rough edges should be removed with limited and well focused regulation. His collaboration with Republican Treasury Secretary Henry Paulson to fashion a Housing Rescue and Foreclosure Prevention Law (now called the Housing and Economic Recovery Act of 2008 (HERA)) enjoyed sufficient bipartisan support to gain the President’s signature on July 30. The bill’s many provisions were generally sensitive to moral hazard problems and market incentives, for example by placing the decision to refinance “nonviable” mortgages fully in the hands of the lenders. In exchange for a certain but limited loss to lenders, borrowers would gain better and more manageable monthly payments rather than be foreclosed. There were things for both Republicans and Democrats to like and to dislike in this bill.[8]

Frank is a pragmatist who is willing to sacrifice his version of “the best” for “the good.” He sees a major victory for his preference for limited, market friendly regulations in the Federal Reserve’s new rules (Regulation Z – Truth in Lending) to prohibit “unfair, abusive or deceptive home mortgage lending practices.” For example, the new rules “Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.”[9]  “For years Greenspan refused to regulate mortgage lending, and now at last under Bernanke they have done so with common sense restrictions,” said Frank.[10] When you cut through all of the complex financial instruments by which wide spread investors provided money to home owners in mortgages, the subprime mortgage crisis resulted largely from mortgage defaults by borrowers who should never have received housing loans in the first place. The new Fed lending regulations, while adding some costs to acquiring a mortgage, probably would have prevented the crisis we are now in. According to Frank, “We forced some mortgages on people who should really be renters. Not everyone is suited to be a home owner.”[11] These are not the sentiments of a wild eyed socialist and this is not a return to the heavy handed economic (as apposed to prudential) regulations of the 50s and 60s when government regulated, e.g., capital flows and interest rates on bank deposits. When asked why congress refuses to pass the no brainer free trade treaty with Columbia, which Frank has visited several times, he replied that “it has nothing to do with Columbia, nor the failure to recognize the benefits of trade. No trade liberalization deal will be passed by this Congress until more attention is given to compensating the losers. And don’t forget that today when someone losses their job, they also loss their health insurance.”[12]

For the next few years, maybe even a decade, until the next swing back in the political center, we can expect more regulation and more extensive safety nets. If we collaborate with market friendly Democrats like Frank, we can not only fix some of the genuine deficiencies with existing arrangements, but we can probably prevent some of the worst excesses of the over extension of government, until it is our turn again. This would be a worthwhile contribution to the welfare of the Nation.

[1] Greg Anrig, “McCain’s Problem Isn’t His Tactics. Its GOP Ideas.”, The Washington Post, Aug 3, Page B01; Sidney Blumenthal, “Did American Shift Too Far to the Right?” New America Foundation, July 31, 2008; Grover Norquist, "The Next Republicanism" New America Foundation, May 15, 2008; Steven Pearlstein, "Wave Goodbye to the Invisible Hand", The Washington Post, August 1, 2008, Page D01.

[2] Ruth Marcus, "Pivoting to Populism", The Washington Post, August 7, 2008, Page A21.

[3] 52% of low income workers said they felt somewhat to very insecure. “Nearly half of low-wage workers said their personal financial situations have deteriorated under President Bush…” Michael A. Fletcher and Jon Cohen, "Hovering Above Poverty…" The Washington Post, August 3, 2008, Page A01. See also: The Economist, "Cheap and Cheerful:  The long-term rise in American inequality may have been smaller than it appeared”, July 24, 2008; Alan Reynolds, "Has U.S. Income Inequality Really Increased?" CATO Institute, Policy Analysis no. 586, January 8, 2007.

[4] In a recent poll only 16% of the respondents favored NAFTA (the North American Free Trade Agreement), Rasmussen Reports, "56% Want NAFTA Renegotiated", June 20, 2009.

[5] Charles Krauthammer, "No will to drill", The Washington Post, August 8, 2008, Page A17.

[6] Fletcher and Cohen, Op cit, Page A13.

[7] "Justice Dept: Hiring Scandal Violated Law" CBS News, July 28, 2008

[8] Secretary Paulson, who worked closely with Frank in developing the bill and urged the President to sign the resulting law stated that "There were parts of this legislation that just got passed that a number of us found objectionable, unnecessary, extraneous, too much government involvement," David Cho and Neil Irwin, "Credit Crisis Triggers Unprecedented U.S. Response", The Washington Post, August 9, 2008, Page A01.

[9] Board of Governors of the Federal Reserve System, Press Release, July 14, 2008.

[10] Barney Frank in private conversation August 1, 2008.

[11] Ibid.

[12] Ibid.