Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon. I live in National Landing Va 22202

Econ 101:  How to help Afghans?

The world is rightly looking for ways to help Afghans without helping the Taliban (until or unless the Taliban forms a government the world is willing to recognize). Washington Post: “How to help Afghans without aiding Taliban”  In this Post article Anthony Faiola states that “The biggest problem isn’t a lack of food. Rather, it’s the disappearance of what had been the lifeblood of the Afghan economy — Western cash.” This mischaracterizes the problems of Afghans thus confusing our understanding. In this note I attempt to clarify the “cash” aspect of Afghanistan’s problems.

But first there is no escaping the fact that the cut back of foreign aid is reducing the income (and the goods that income buys) available to Afghans. Mention is often made of the approximately 10 billion US dollars of the Afghan government’s funds frozen in deposits abroad. These funds cannot be used until a new Afghan government is recognized with the authority to claim them. But these funds are not part of the lost revenue to the Afghan government. They are the wealth–the previous income saved–of the government (whoever that will turn out to be). The savings that we accumulate from our incomes for retirement or whatever is our wealth not our current income (though it can be drawn on to augment current income).

In recent years (prior to the Taliban take over) the Afghan government’s operating expenditures were 16 to 18% of Afghanistan’s GDP while its domestic revenue was 12 to 14% of GDP. The balance of its financing plus all development expenditures were from donors. The hope is that squeezing the Taliban “government” financially will add to the incentives for them to quickly form an inclusive government meeting international norms of human rights. Unfortunately, it is not possible to shut off the flow of funds to the government without also starving the Afghan people.

While the Ghani government has been replaced (temporarily) by Taliban leaders, the institutions (ministries and agencies) of government remain, but with new management. Of the government’s operating expenditures roughly 80% was for wages and salaries. Thus, the government could more or less finance its wage and salary expenses from its own domestic revenue without donor support. Indeed, all salaries have been and continue to be paid in the central bank (Da Afghanistan Bank — DAB) and presumably in the other government ministries as well, albeit with delays. However, the real value of these incomes is being reduced because of increased inflation (an indirect form of taxation). DAB and other government agencies have largely stopped providing economic and financial data since the Taliban take over.  IMF First-Review-Under-the-Under-the-Extended-Credit-Facility

None the less, freezing Afghanistan’s deposits abroad (DAB’s foreign exchange reserves held abroad) has created monetary problems within Afghanistan because of the inability to import the cash (dollar banknotes) on which the economy depends. Afghanistan remains a largely cash economy. Most payments are made in cash. Though inflation has been low in recent years (generally 2-4%), inflation in earlier decades was relatively high and thus Afghans held and transacted in US dollars quite extensively. Around 70% of bank deposits are in dollars. The availability of USD banknotes for local payments is thus very important. These were mostly supplied by the New York Federal Reserve Bank from the dollar deposits that DAB maintains there (and now frozen).

Prior to the Taliban takeover, the normal operation of DAB’s monetary policy consisted of receiving US dollars from the government (largely from donor grants) and depositing the equivalent value of Afghani in the government’s accounts. The government disbursed these Afghani to its employees in wage and salary payments (generally by electronic deposits to employee bank accounts). Without offset, the resulting creation and injection of these Afghani would be inflationary. DAB drains (buys back) this excess base money by auctioning some of the dollars it received from the government (sufficient to stabilize the dollar exchange rate) and capital notes of DAB. The government’s deposits of dollars with DAB took the form of credits to DAB’s dollar account with the New York Fed. From these deposits DAB pays the Federal Reserve to fly USD banknotes to Kabul as needed for DAB’s dollar auctions.

In mid-April 2021, when the U.S. announced its intention to withdraw the rest of its military personnel by September, an increased outflow of dollars by Afghans wanting to protect their wealth put the Afghani exchange rate under pressure. Acting DAB Governor Ajmal Ahmady (his appointment was never approved by Parliament) increased dollar auctions to stabilize the exchange rate. “Afghan central bank drained dollar stockpile before Kabul fell” As the amount of dollars in its vaults ran down, it used USD banknotes that it held on behalf of banks (approximately $700 million USD). The delivery of additional cash from New York expected in July never arrived and DAB’s balances at the New York Fed are now frozen until a new government is recognized so that no more dollar cash can be purchased from the Federal Reserve by DAB.

As an aside, I was surprised during a 2009 visit to Zimbabwe—as part of an IMF team following Zimbabwe’s dramatic hyperinflation during which it dollarized—to learn that there was an active private market in dollar banknotes supplying Zimbabwe from South Africa:  “Hyperinflation in Zimbabwe”

In the days just before and after the American evacuation in August 2021 public demands to withdraw dollar cash intensified but DAB had largely used up the dollars in its vaults (both its own and those held for banks). In response, on August 14 DAB imposed limits on the amounts that could be withdrawn each day. This fed public concern that their banks were running out of dollar banknotes and triggered runs on the banks. DAB was even running low on Afghani banknotes, which might have replaced dollars. Without access to its deposits abroad DAB is unable to purchase additional dollar cash nor pay for printing additional Afghani. For a largely cash and heavily dollarized economy this drying up of cash liquidity is very disruptive and the basis of the statement that people can’t buy the food that might be available.

In addition to the cash shortage, Afghans are also lining up to withdraw their deposits out of concern for a possible bank failure. Aid cut offs and civil strife have damaged many firms resulting in arrears on their bank loan payments. This threatens to push bank illiquidity into insolvency. Even if DAB had USD and AFN cash to lend or sell to banks with fully performing loans, DAB is currently unable to buy or lend against these illiquid bank assets. Moreover, the Office of Foreign Assets Control (OFAC) of the U.S. Treasury has sanctioned payments to many Afghan entities and activities blocking many payments to and from abroad by Afghan banks and uncertainly about the application of the sanctions regime has made banks overly cautious about executing payments for their customers.

UN and other aid organizations have experience in other countries with delivering wages and other payments to targeted recipiences (teachers, healthcare workers and potentially even government employees) without the funds passing through the government’s hands. This approach is needed and is being developed for use in Afghanistan. OFAC sanctions are being modestly relaxed and UN and other aid agencies have begun funding the importation of dollar cash for humanitarian assistance projects. The use of digital mobile phone payments, such as M-Paisa and HesabPay, should be promoted and exploitation to the extent possible.  “Use of mobile phone payments” The United States needs to and has been gradually relaxing its payment restrictions to make this possible.

The Taliban leadership needs to take urgent steps to establish a new inclusive government that can and will be recognized internationally thus unfreezing Afghanistan’s (and DAB’s) deposits abroad and eliminating its cash shortage and restoring development assistance. In the meantime, in addition to the urgent need for humanitarian assistance that bypasses the Taliban, the New York Federal Reserve, or any other doners, should consider a loan to DAB to finance immediate shipments of dollar banknotes to Kabul. Da Afghanistan Bank Law adequately protects the central bank from government interference in its conduct of monetary policy and bank supervision. As a condition for restoring USD currency shipments to DAB, the Federal Reserve (and the UN) should obtain an agreement from the Taliban government to fully respect that law and appoint qualified people to its Supreme Council and Executive Board.

Until Afghanistan has a proper government, and its economic development can resume, Afghans, many of whom are very poor to begin with, will suffer unnecessarily depressed incomes. The lack of cash is adding a further, tragic, and quite unnecessary disruption to the lives of a long-suffering people. This can be and should be fixed urgently. Any such assistance will somewhat reduce the financial pressure on the Taliban, but a total financial squeeze on the government will fall on the people of Afghanistan as well.

________________________________________ 

I worked in Afghanistan as a member of the IMF program and technical assistant teams from January 2002 until mid 2015. I am grateful to Syed Ishaq Alavi for his insights and comments on this article. Mr. Alavi was Advisor to the governor of DAB from 2010 to early 2013, Director General Monetary Policy Department of DAB from early 2013 to mid 2018, and advisor to the Executive Director of the International Monetary Fund for Afghanistan, Algeria, Ghana, Iran, Libya, Morocco, Pakistan, and Tunisia from June 2018 to August 2020. For the sake of their security, I am not naming those who helped me with this article who remain in Afghanistan.

What to make of 2022?

Some ostensibly smart people believe some, well, unbelievable things.  Those who believe, I mean they apparently really do believe, that there are funny and dangerous things in the Covid vaccines are doing all of us harm. But the damage to the rest of us of such beliefs will be limited. Those tens of thousands of people who will die unnecessarily as a result of the unvaccinated, will largely, but not exclusively, be those refusing to get vaccinated.

But what about the 70% of Republican voters who still believe that Trump actually won the election despite the Trump team’s complete failure to present any credible evidence in any court, and even after the “Republican-dominated Arizona Senate hired Cyber Ninjas, a Florida cybersecurity firm with no prior election auditing experience, to review the 2020 election results in Maricopa County, where Phoenix is located,” which found that Biden actually won several votes more than the official count. “Fact-check Arizona audit affirms Biden’s win” Do such believers, in the face of the contrary evidence, constitute a danger to America?

“This isn’t some shrug-your-shoulders-and-roll-your-eyes partisan circus. How Americans understand Trump’s months-long, falsehood-fueled campaign to overturn the 2020 election, ultimately calling on supporters to march on the Capitol a year ago, remains a clear and present force shaping U.S. politics.” “Biden-Trump face off this week-jan-6”  Thousands of Trump supporters stormed the U.S. Capital on January 6 in an effort to get Congress to overturn Biden’s election in favor of Trump. “Federal prosecutors in the District have charged more than 725 individuals with various crimes in connection with the deadly Jan. 6 insurrection….” “Capitol deadly attack-insurrection-arrested-convicted”

While the investigation into this event is ongoing, public trust in the integrity of our elections has fallen. Laws in many states have been changed to take the oversight of state elections from public officials and give it to political bodies (state legislatures). What might happen in 2024 if Trump runs again and is again defeated? Or wins? Will the public accept the result or challenge it, and what form might that challenge take?

I was shocked to read that 1 in 3 Americans say that violence against the government might be justified.  “1-3 Americans say violence against government can be justified”  Congress is sharply divided and unable to pass legislation reflecting traditional bipartisan compromises. Senator Ted Cruz has stalled the Senate’s consent to a large number of President Biden’s state department appointments at a time when the strengthening of our diplomacy is badly needed in the national interest. “Senate confirmations stalled by Cruz” The winning party is (or these days we must say “should be”) allowed to appoint its own government. How will the public react to all of this? Is increased violence in prospect? Is civil war in the 21st century America possible?

It is time for the Republican leadership, who have cowardly fallen silent to Trump’s steady stream of lies, to speak up for the traditional values of the Republican Party. It’s time for all of us of all political parties to present and debate our views civilly with a reasoned presentation of the pros and cons of what we believe. We must stop labeling our opponents as enemies. We must find common ground where possible and live graciously with policies supported by the majority. We will and should continue to promote what we each think best for our country but within the commitment that we are all one big family.  The radicals of the right and left will still be there but hopefully on the fringes of a broad moderate middle. There is no silencing the Marjorie Taylor Greene’s of the world, but few take her wacky conspiracy theories seriously. If more of us were willing to say so, few would pay attention to such nut cakes.

Our diversity has been a strength and will be again when we recover our manners and treat one another respectfully and courteously even when we hold different views. The large sphere left to us each individually to do and live as we choose enables and supports that diversity. But we must change our tone and speak up in defense of our neighbors’ rights to their views. And we must ignore, if not condemn, the hopefully limited number of truly bad apples among us.

Econ 101: Erdogan’s Turkey

President Erdogan believes that by cutting interest rates on the Turkish lira the resulting depreciation of its exchange rate will cheapen Turkish goods and thus increase their exports and promote growth (the China model, he thinks). Accordingly, he has replaced four central bank governors who could not bring themselves to accede to his demands. “Revolving door-Turkeys-last-four-central-bank-chiefs”

In an earlier disastrous cycle, the Central Bank of Turkey (CBT) reduced its policy rate from 24% in 2019 in steps to 8.5% in mid 2020 only to raise it again to 19% in March 2021 until the latest cuts started in September of this years. In November, “The Monetary Policy Committee (MPC) has decided to reduce the policy rate (one-week repo auction rate) from 15 percent to 14 percent.” “Press Releases/2021/ANO2021-59”  

When I was part of the IMF team in 2000-1 working with the Turkish authorities to regain control of inflation (which ranged from 60 and 100 percent between 1980 and 1999) and clean up the banking sector (they closed 13 banks in 2000), the CBT policy interest rate was briefly raised to 100% (ala Paul Volcker in the US). Inflation declined rapidly to single digit levels (until the last four years) with interest rates quickly following.

The dollar price of the Turkish lira has fallen in half since February of this year (i.e., a dollar will buy twice as many lira–one lira cost 0.14 dollars in February and 0.061 dollar on December 17).  Erdogan seems to think he is choosing to benefit workers (exporters) over consumers (importer), though they are generally the same people.  If the lira depreciates, the rest of the world can buy lira more cheaply and thus (according to Erdogan) will buy more cheaper Turkish exports. This should increase the demand for Turkish good and the jobs that produce them and increase the growth of the Turkish economy.

As any economist can explain to Mr. Erdogan, depreciating the exchange rate with lower interest rates in Turkey than in the rest of the world is achieved by printing more money with which to buy foreign currencies. Broad money (M2) increased almost 48% in November 2020 from a year earlier and 24% from a year earlier this November. But such a rapid increase in the money supply will increase prices in Turkey over and above the increase in the price of imports from the lira’s depreciation. “Turkey-central bank-Erdogan”

Inflation in Turkey has risen from single digits between 2004 to 2016 to “21.3%” in November 2021 (annual rate from a year earlier). According to the Central Banking Journal “Official figures show Turkish inflation reached 21.31% year-on-year in November, but there is considerable controversy over whether these figures are accurate. Several well-informed observers, have told Central Banking that they believe the official figures understate actual inflation.”  “Turkey’s currency hits new low after further rate cut”  Steve Hanke reports the actual rate at around 100%  “Steve Hanke’s estimate of Turkey’s inflation rate”

In short, Mr. Erdogan’s crazy policy of reducing interest rates has not made Turkish goods cheaper for the rest of the world. As the lira became cheaper for foreigners (depreciation), the lira price of those goods became more expensive (inflation). The real effective exchange rate (which takes account of both) is not being significantly reduced because Turkey is experiencing higher and higher inflation along with the lira’s depreciation. Monetary policy works in Turkey the same way as in every other place.  The CBT’s inflation target, by the way, is 5%. “Turkey-Erdogan currency crisis”

Where Does Senator Josh Hawley Stand?

Upon what basis should we make our decisions to do or not do something? Upon what basis should the government take the right to make decisions for us? The quality of our individual choices depends on the values and principles that guild us. These profoundly influence the quality of our lives in our given or chosen societies.  I have discussed this issue before:  “The great divide-who decides” 

The issue of Covid-19 vaccination mandates and related issues are currently providing vivid and noisy examples of these questions. A few of my reactionary libertarian friends (in contrast with more thoughtful libertarians) insist that it is their right to decide whether to get vaccinated or not. Perhaps, but it is not their right to knowingly infect others (the freedom to swing my fist ends at your face). Specifically, the unvaccinated do not have the right to be where they are not wanted or permitted by private establishments. Businesses (restaurants, theaters, sports events, etc.) should have the right to determine who they serve (subject to the sometimes problematic limitations imposed by the 1964 Civil Rights Act Virtually all such businesses wisely go out of their way to reassure potential customers that they are save places to visit. This generally takes the form of mandating that their employees and customers are vaccinated for Covid. In my opinion the government, in addition to collecting and disseminating the best possible information on Covid risks and how to minimize them, should protect the freedom of businesses to make Covid policies they consider appropriate to their own business and should mandate that all of the government’s own employees be vaccinated. Only specific health issues should qualify for potential exemption. Religious and other beliefs should not.

Sports, and the Beijing Winter Olympics in particular, also raise the issue of who decides to participate in the face of serious Chinese human rights violations. I generally think that sporting competitions should not be influenced by politics. So, should athletes participate in the upcoming winter Olympics and who should decide?

In his December 9 column in the Washington Post Josh Rogin makes a strong case for each of us to speak out against violations of our principles: “Enes Kanter Freedom takes bold stance on China” “’We must always take sides,’ Holocaust survivor Elie Wiesel said while accepting the Nobel Peace Prize in 1986. ‘Neutrality helps the oppressor, never the victim. Silence encourages the tormentor, never the tormented. Sometimes we must interfere.’”

President Biden recently declared a diplomatic boycott of the China games, meaning that the U.S. government will have no representatives there, though the American Olympic teams and individual athletes are free to make their own decisions. The Economist reported that “France will not join the partial boycott that America, Australia, Britain and Canada are calling against the Beijing Winter Olympics in protest at China’s treatment of its Uyghur minority and of Peng Shuai, a tennis star. President Emmanuel Macron complained that the Anglophone countries’ merely withholding diplomatic representation—while their athletes compete—is not an effective way to alter China’s objectionable policies.” “The Economist Morning Brief”

“Sen. Josh Hawley, R-Mo., [also] ridiculed the Biden move, echoing Hagerty’s claim that the diplomatic boycott did not go far enough.  ‘A diplomatic boycott of the Beijing Olympics is a joke,’ Hawley told the Daily Caller Monday. ‘China doesn’t care if Biden and his team show up. They want our athletes.’”  In short, Hawley wants a presidential mandate forbidding participation of American athletes in the Beijing Winter games. “Republicans blast Biden apos diplomatic”

On the other hand, Sen. Hawley opposes President Biden’s proposed mandate that every eligible person must receive an approved Covid-19 vaccination.  “Senator Hawley-Biden vaccine mandate shows contempt for religious liberty”  In this area the good Senator puts “choice” over “life.”  With regard to abortion Senator Hawley sides with “life” over “choice.”

“U.S. Senator Josh Hawley (R-Mo.) issued a statement in support of Missourians who traveled to Washington, D.C., today to participate in the 46th Annual March for Life. The group of nearly 3,000 Missourians represented all ages, from high schoolers to retirees and came from all over the state including Cape Girardeau, Jefferson City, Kansas City, Sedalia and St. Louis.

“’It’s incredible to see people of all ages and backgrounds, from Missouri and across the country, who have made the trek to our nation’s capital to speak their hearts, their minds, their faith – to tell their elected leaders that this nation was founded on the dignity of every person and that every life is worth fighting for,’ said Senator Hawley. ‘I am proud to stand for the right to life. Always.’”

“Senator Hawley commends missourians participating in march for life”

Where is Senator Hawley coming from and where is he going?  Regarding health and vaccination against Covid-19, Hawley is “pro choice” rather than “pro life.” Regarding the abortion of non-viable fetuses, Hawley is pro (potential) life rather than pro choice.  What are the principles guiding when he is one and when he is the other (beyond political expediency)? When should government mandate our choices and when not?

Which is it for gas prices?

“President Biden on Wednesday called on the Federal Trade Commission to launch an investigation into oil and gas companies, alleging that their “anti-consumer” behavior has led to higher gas prices…. ‘The bottom line is this: gasoline prices at the pump remain high, even though oil and gas companies’ costs are declining,’ Biden wrote in a letter to FTC Chair Lina Khan.” “Biden-FTC-gas-prices–Washington Post”

On the other hand, the Whitehouse website states:

“The United States has set a goal to reach 100 percent carbon pollution-free electricity by 2035,… America’s 2030 target picks up the pace of emissions reductions in the United States, compared to historical levels, while supporting President Biden’s existing goals to create a carbon pollution-free power sector by 2035 and net zero emissions economy by no later than 2050.”  Whitehouse fact sheet: President Biden sets 2030 greenhouse gas pollution reduction target

Which is it?  Does Biden intend to replace oil and gasoline (and coal) with carbon free energy, which would increase oil and gas prices (ultimately to infinity), or does he want to keep oil and gas prices low?

A market approach to phasing out petroleum products would be to increase their cost via a carbon tax–an approach that I support.

American policy on Taiwan

Following President Richard Nixon’s famous visit to China in 1979 the so called One-China policy was first stated in the Shanghai Communiqué of 1972: “the United States acknowledges that Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is a part of China. The United States does not challenge that position.” “One China policy – U.S. policy”  However, in the Taiwan Relations Act (April 10, 1979), the U.S. stressed its opposition to any effort by the People’s Republic of China (PRC) to change conditions in Taiwan by force. Just how that opposition might be expressed has remained ambiguous ever since.

The United States has no treaty obligation to help defend the Republic of China (ROC–Taiwan) against a military attack by the PRC. It is doubtful that the U.S., located thousands of miles from Taiwan, could win an encounter with the PRC only 100 miles away. In recent simulated war games with China the U.S. has lost. “As the US and China continue to posture the key will be Taiwan” A military intervention by the U.S. would create a significant risk of escalation into nuclear war. 

China experts such as Chas Freeman have argued that since Washington long ago agreed that ‘there is only one China and that Taiwan is part of it,’ any mainland invasion would simply be a civil war in which America has no right to intervene.” Moreover, risking nuclear war to defend Taiwan would not be in America’s or anyone else’s interest.

Until quite recently, Taiwan’s efforts to build its capacity to defend itself from a mainland attack rested heavily on the presumption that its defense would come from the U.S. “Taiwan’s military has closely mirrored its U.S. counterpart in miniature for years…. The problem with copying the American approach to warfare is that the U.S. military’s doctrine is to project power over great distances and to maximize mobility and networks to take the fight to the enemy with overwhelming superiority. Taiwan, on the other hand, needs the opposite: short-range and defensive systems that can survive an initial bombardment from a larger adversary and that are suitable for deployment close to home in defense of the island should it come under blockade or attack.” “Winning the fight Taiwan cannot afford to lose”

Taiwan’s almost $17 billion-dollar annual defense expenditures keep American weapon’s companies happy but didn’t contribute seriously to Taiwan’s defense. “Taiwanese military analysts have criticized the island for spending too little on defense, and for spending money on eye-catching purchases such as F-16 fighter jets rather than less-flashy weapons systems that would better enable Taiwan to wage asymmetric warfare against the PLA’s superior strength.” “Concerns about Taiwan put focus on islands defensive weakness” This has begun to change in the last few years toward weapons more appropriate to defending Taiwan against a ground assault.

While it is in America’s interest for Taiwan, as well as every other country in the world, to be peaceful, democratic, and prosperous, that interest is not sufficient to risk going to war–not even close. We should hope that the relations between Taiwan and the Peoples Republic of China remain peaceful and consensual whatever form they ultimately take. But should China attempt to “change conditions in Taiwan by force,” how should the U.S. express its opposition.  It is a very sad commentary on the state of American international policy that so many American policy makers routinely conceive of expressing American opposition militarily. We have done so too often to the detriment of American interests.

On the other hand, a Chinese military attack on Taiwan would be a violation of its commitment not “to change conditions in Taiwan by force.” In such an event the U.S. should oppose such actions vigorously with coordinated diplomatic measures. A U.S. China war would certainly stop all trade with China. This would badly hurt both of us. But even without war, if a total trade embargo by the U.S. were joined by the EU, Australia, Japan, Korea, Canada, UK, and most other UN members it would be devastating to China. China could be expelled from all the international organizations it has so proudly joined in recent years. Its global ambitions would be destroyed. Such prospects would surely be as powerful a deterrent to China’s invasion of Taiwan as would the prospect of U.S. military intervention in defense of Taiwan.

American interests are better served by being the best that we can be, i.e., by strengthening our own economy and political system (which is in a dangerous mess at the moment). It would also be helpful if Ted Cruz would stop blocking President Biden’s State Department appointments so that we can strengthening our use of diplomacy and return our military from its foreign adventures to the defense of our homeland.

See Jon Schwarz’s interesting review:  WE’VE ALL PRETENDED ABOUT TAIWAN FOR 72 YEARS. IT MAY NOT WORK ANY LONGER   “Taiwan, China, nuclear weapons”

Broadband for All

The just passed Infrastructure Investment and Jobs Act provides $65 billion for high-speed internet to make sure that every household can access reliable broadband service. This raises, or should have raised, the question of the most cost-effective way of providing it. Many rural areas enjoy high speed internet access from satellites. These can easily be expanded to cover the entire country and are significantly cheaper than running cables to remote areas. But the other approach is for families wanting such high-speed internet access to live in areas that provided, e.g., cities.

When I taught at the University of Virginia, I choose to live ten miles out of Charlottesville on Piney Mountain. I did have electricity but no water or sewage disposal for which I had to drill a water well and dig a septic tank and system. That was an understood part of the deal of living in a semi remote area and a factor in its cost. Should everyone who chooses to live in remote areas be entitled to electricity, water, sewage, broadband, or whatever other modern convenience comes along or should those wanting such convenances have to live where they are efficiently provided?

Social media and false information

America is suffering from the wide dissemination of misinformation.  The advent of social media on the Internet, such as Facebook, has introduced new means for the rapid and widespread dissemination of potentially deadly lies. Most of us retweeting or “sharing” lies believe them to be true. The motives of those who invent them are another matter.

Determining what information to trust has always been a bit of a challenge but social media has certainly upped the game. “What to do with social media”   “New tools require new rules”

A great deal of attention has focused on Facebook. What should it do to protect us from misinformation and who should set the rules? Facebook is a private platform on which we post our thoughts and pictures or repost information supplied by others. It does not provide content of its own. Facebook’s business model is to attract as many users/viewers as possible and to keep them happy in order to connect them with advertisers selling products that might interest them.

Some have claimed that the Facebook “like” button and other reaction indicators has enabled Facebook to direct posts that are liked or that create a strong reaction to the reacting users, thus creating echo chambers (bubbles) in which people increasingly only hear what they already agree with. If they are viewing misinformation, it risks going unchallenged.   “Must Read on Facebook”  

Without delving (again) into how well or poorly Facebook is doing its job of bringing useful information to its users, I want to address (again) the question of who should be responsible for rejecting and filtering out false information. “Facebook covid misinformation” 

Should it be the government (the Xi, Putin model only with Trump or Biden at the helm), social media themselves (the charming Mark Zuckerberg), or its users (us)?

Anyone who has read more than one of my blogs knows where I stand. America’s greatness derives from the fact that sovereignty in America resides in each individual (us) and we delegate rule making upward (to our family and friends, then our clubs and villages, then our cities and states, then to the Federal government, and finally, on a very limited basis, to the world community) as needed to protect ourselves and our property and to facilitate cooperation and commerce among us. In short, while Facebook and other social media platforms should continue to work at improving their game, the choice of what to believe should rest with each of us.

We should learn from our parents and schools how best to evaluate information and where to look for trustworthy information. The success of American democracy will depend, in part, on how well we each perform this duty. I recommend that you start with the new book by Jonathan Rauch: The Constitution of Knowledge: a defense of truth.  “Trust”

Econ 101: Inflation –Temporary or Longer Lasting?

Prices of many goods and services have increased in recent months. Are these increases permanent or temporary or will they continue rising in the future? Before exploring those questions, it is important to understand the measures of inflation we are considering. What is the current rate of inflation in the United States? U.S. inflation in September was 3.0% (Compound annual rate of change for Consumer Price Index without food and energy prices over the month of September), or 4.0% (percent change from a year ago) or 5.4% (percent change from a year ago including food and energy prices). What does it mean if this is temporary or long lasting?

If prices remain where they are today after the 5.4% increase from a year ago, inflation going forward would be zero even though the cost of living would be permanently higher. If inflation is long lasting it means that prices will continue to rise for some time (years). What are the factors that influence the future behavior of prices? What should we expect in the U.S.?

The price of a good or service increases when its demand exceeds its supply and similarly for prices in general (when aggregate demand exceeds aggregate supply). As prices are measured in a country’s currency, supplying too much of the currency (generally when the money supply grows more rapidly than the supply of goods and services) causes its value to fall (i.e., prices in the country’s currency to rise).

On the cost side, firms will hire workers and pay them a particular wage (and related benefits) when it adds more to the company’s income than it costs, which includes the cost of the tools they use (capital). Workers will accept a job when its benefits (pecuniary and nonpecuniary) are the best they can find. The inflation expected by the employer and the employee over the period of the wage contract is an important factor in determining what will be offered and what will be accepted.

Because of changes in consumer demands, worker preferences, halving of work visas for immigrants, and supply chain disruptions, labor markets are temporarily in turmoil. September unemployment in the U.S. was 7.674 million while there were 10.4 million job vacancies. Employers are raising wages in an effort to fill those vacancies. As reported by Scott Lincicome: “Goldman Sachs analysts saw a ‘perfect storm of factors that have significantly reduced the supply of workers who are currently looking for jobs at the same time that labor demand—as measured by job openings—has risen to an all-time high.’ This includes… state and federal benefits, early retirements, severely restricted immigration, a switch to self-employment, fear of COVID, and a geographic mismatch between unemployed workers and available jobs. Combined, these factors account for most of the missing workers out there.”  “What if the labor shortage isn’t transitory?”

In short, the labor force has shrunk just as the demand for output is increasing. This excess demand for workers is driving up labor costs and thus pushing up output prices. If the 5 or 6 percent price increase experienced over the present year is expected to be temporary, i.e., if prices are expected to return to their level a year ago, because the supply of labor returns to its pre-pandemic level, wage increases should be temporary as well, falling back to their pre pandemic level and growing thereafter on average with labor productivity plus the 2% inflation target of the central bank once there is full employment and better labor market balance.

More likely, if the inflation is expected to be temporary, i.e., the current 5 to 6 percent inflation stops but prices remain at their increased level, wages will remain at the increased level, but their real (inflation adjusted) value will fall back to their original level. In other words, if these higher prices are expected to be “permanent,” the nominal wage increases now being experienced will not result in any increase in real wages and the worker short fall might remain.

While some of those who withdrew from the labor force will probably return, it is not likely to fully satisfy the demand for various reasons (early retirement, fall in immigration, etc.). Filling (or attempting to fill) the remaining labor shortage will require additional wage increases (unless the public’s demand for goods and services falls–see below). In that case, firms will plan to pass on their higher cost of labor to their customers. If we, the customers, can continue to pay the higher prices, the inflation will continue. Expectations of higher prices and or inflation will be realized.

The Covid-19 pandemic caused a sharp fall in output and thus to most people’s incomes. The government provided extraordinary financial support to temporarily fill the resulting income gap. Such support did not increase the output of goods and services or even prevent their decline but rather temporarily redistributed income from those saving it to avoid hunger and defaults on rents, mortgages, and other financial obligations by those who lost it.  “The new covid-19 support bill”  Because personal incomes were substantially maintained while actual output fell, personal savings rates increased dramatically and continue to be well above pre pandemic levels.

The Federal Reserve pitched in by buying up huge amounts of the resulting government debt increasing its balance sheet from $3.5 trillion in February 2020 to $6.3 trillion in August 2021 (measured by the monetary base, M0). This fueled an increase in board money (M3–M0 plus bank deposits and similar liquid assets of the public) from $15.5.0 trillion in February 2020 to $20.8 trillion in August 2021. This increase, though substantial, was significantly less than the increase in M0 (which almost doubled) because the Fed paid interest to banks for keeping the new base money with the Fed (excess reserves) rather than lending it to the public, by paying banks interest on all bank reserves kept with the central bank.

Historical experience is that the public will not be willing to hold these larger amounts of money for ever. They will eventually attempt to spend them down to their traditional (normal) levels, thus adding to aggregate demand for goods and services (and inflationary pressure).

Eventually, the demand for goods and services (aggregate demand) must fall to match real output, or output must rise to match demand. But if the Federal Reserve continues to print money faster than its real value is being inflated away, the inflationary process will continue or accelerate. Similarly, if the government continues to redistribute income from those with a lower propensity to consume (generally higher income families with a higher savings rate) to those with a higher propensity to consume (generally lower income families that save little), aggregate demand will remain excessive perpetuating inflation.

Historically, hyperinflation episodes invariably exploded in the collapse of the currency.  “Hyperinflation in Zimbabwe”  Turkey has come closest to a high inflation “equilibrium.” From the mid 1980s to the end of the 1990s Turkey’s inflation rate varied between 80 and a 120 percent. A high inflation “equilibrium” would be characterized by nominal interest rates and wage rates that fully incorporate the ongoing expected rate of inflation in order to preserve the appropriate real (inflation adjusted) rates. Interest rates in Turkey in this period generally exceeded 100%, as did wage growth.

In its most recent World Economic Outlook, the International Monetary Fund stated that: “In settings where inflation is rising amid still-subdued employment rates and risks of expectations de-anchoring are becoming concrete, monetary policy may need to be tightened to get ahead of price pressures, even if that delays the employment recovery.” “World Economic Outlook-October 2021”

As stands out clearly from the increasingly but unevenly rising inflation in the 1970, the process of increasing inflation is not linear (see the chart above).  As inflation increased, the Federal Reserve tightened monetary policy (raised interest rates to slow monetary growth) to slow inflation, causing real output to slow or decline. Policy then eased prematurely, and inflation and the expectation of higher inflation took off again, each time reaching a higher peak (until Paul Volcker stepped on the breaks and ended the game in 1979-80–the exciting year I worked at the Federal Reserve Board).

The Federal Reserve is smarter today than it was in the 1970s and has the tools to prevent the acceleration of inflation and the unhinging of inflation expectation. But the excess money balances and personal saving are very large and the government’s seeming willingness to run up unprecedented deficits create a powerful inflationary head wind. The tightening of monetary policy that will be needed (sooner rather than later in my view) will reduce the Fed’s purchases of Treasury debt and increase interest rates. Higher interest rates will increase government spending for debt service on its very large stock of debt, which will further increase government borrowing and debt or require cuts in spending for other programs. This must be added to the economic challenges of confronting climate change, the continuing recovery and adjustments from the Covid-19 pandemic, the deepening and destructive partisan divide that is stifling Congress, and the growing lack of public trust that drives it.

Whether our current inflation is temporary or longer lasting depends on how quickly and decisively the Federal Reserve tightens monetary policy and how quickly people go back to work. Whether the U.S. economy and the government’s large stock of debt continue to enjoy safe haven status around the world depends heavily on whether our government brings its spending and tax policies under better control.

Who is to blame?

Did you know that the first Covid-19 vaccine shot reduces your body’s ability to produce white blood cells by 50% and the second shot reduces it by an additional 25%? For good measure these shots contain poisonous ingredients as well.  Did you know that “former” President Trump actually won the 2020 election? Or that former President Donald Trump’s grandfather was, “a pimp and tax evader,” and that his father was a member of the KKK. Or that Rep. Alexandria Ocasio-Cortez proposed a ban on motorcycles, and that House speaker Nancy Pelosi was diverting Social Security funding for the Trump impeachment inquiry. None of these claims are true but they were viewed and often believed by millions of Americans, often on Facebook.

Granted that it is often hard to know who or what to believe, many of these claims don’t pass the laugh test (though they are rarely funny). A debate is now underway in the U.S. over whether social media should do more to weed out such lies. (“What to do with social media”) While the best answer to this dilemma probably requires balancing several approaches, I want to focus on our own responsibility vs the government’s to sort out the “truth”. To what extent should we rely on protection by government (forgive me for referring to it as “Big Brother”) or on our own efforts to identify reliable (trusted) sources of information (“Trust”) and to develop the capacity to spot obvious or likely lies.  Where do we want the dividing line between what we do for ourselves and what we want the government to do for us?

Over the years I have defended free speech as the best way to challenge bad ideas. “Do we really need free speech”  So naturally I resist giving the government much of a roll in protecting us from offensive, or “wrong” speech. Controversies over vaccines, facemasks, climate change, oil pipelines, etc. often involve serious claims on each side that are best tested in open debate.  In my view, Facebook and other social media platforms should be free to set their own rules and standards for posts. According to The Economist “Nick Clegg, Facebook’s vice-president of policy and global affairs,… pointed out that last year the company removed 30m posts that violated its policies on terrorism and 19m posts that crossed company lines for inciting hatred.” “Facebook flounders in the court of public opinion” Their users can decide whether they agree or disagree with these rules and either stay or opt out of the social platform.

But we have an interest in and responsibility to evaluate the many claims that come our way. We can do a better job of providing our children with the tools for spotting fake or potentially fake information. Along with civics and home economics (how to cook etc.) that are (or should be) taught in high school, students should be taught how to spot and challenge highly improbably statements.

For example, it does not require any medical knowledge at all to spot the vaccine video referred to above as a fake. The medical “expert” who presents her shocking claims is anonymous, as are her credentials and medical affiliations. The vaccine she reports on and claims will kill 20 to 30% of those who take it is unnamed. All the animals it was tested on died, she said. While many of us have lost confidence in the veracity of the information provided by the Food and Drug Administration and the Center for Disease Control (drugs might be approved too slowly or too quickly, etc.) none of us would (or at least should) believe that they would approve a vaccine with the properties alleged in the video.

I have seen much better produced videos the were totally fabricated stories for reasons I find hard to understand (we shouldn’t blame Russia for everything). One very well done and potentially convincing video claimed that no plane actually crashed into the Pentagon on 9/11. Any sensible person should have doubts about claims that are so directly contradicted by pictures and reports to the contrary. But I must admit that my rejection of its big lie was fortified by the fact that at that time I lived next to the Pentagon and saw the damage to the building, and I witnessed the wreckage of the plane laid out for months in the Pentagon parking lot. I also knew a woman who died in that plane.

More could be done by social media platforms to flag potential misinformation, but it should not be censored by the government. We should strengthen our personal capacity to evaluate propaganda but most importantly we need to carefully establish news sources that we trust. Knowing that the Facebooks of the world feed us what they think we like, thus creating an information bubble, we should make the effort to check other sources for their views. We have not flourished as a nation because we turned over our care to the government even if it must provide a critical foundation for our security and interactions.