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

Fighting Terrorists, Part II

How do we as a free society protect ourselves from terrorists without in the process losing our freedom to our protectors? To the extent that terrorists are part of organized groups, our counter terrorism agencies need to identify and track the members of such groups with tools and techniques that do not violate our individual privacy. As such groups often operate internationally, the information collected should be shared with similar agencies in other trustworthy countries, though this has been and will remain challenging given quite different data standards from one jurisdiction to another. Individuals identified as part of a terrorist network, or suspected of such involvement, or suspected of having potential interest in such involvement should be closely watched wherever they are. The risks of such state scrutiny to our civil liberties are obvious, but should be pursued with proper oversight and care. The careful balancing of these conflicting objectives is a critical aspect of successful, largely free societies.

The above measures can be helpful up to a point, but they cannot eliminate all risks of terrorism even if we should give up all of our liberties to a security garrison state, which hopefully we still have the courage to resist. Throwing up our arms and bunkering down every time a terrorist blows himself and others up only feeds the enthusiasm of the terrorists. Just as even the safest societies have and will always have some criminals, we can never be fully free of terrorists. Effective policing and a respected, fair, and efficient court system will minimize but not eliminate crime. Most mass murders in the U.S. have been the work of mentally disturbed individuals. While we can do better at identifying and helping those who might otherwise undertake mass murders, we will never succeed fully even if we lock up every person we think has such potential, and those Americans who still value their freedom enough to face such risks would not want to live in such a society.

In the past, terrorist attacks and mass murders in the U.S. have been perpetrated by a wide range of groups and individuals, including white supremacists, black extremists, anarchists, anti-Semites, Puerto Rican nationalists, anti-abortion radicals, and the emotionally disturbed, to name a few. Today’s best identified terrorist risks come from the Islamic State (Daesh) and the radical Islamists who join them or are inspired by them, though the vast majority of deaths in the U.S. from mass murderers since 9/11 have not been at the hands of Muslims.

The threat from Daesh is particularly challenging because it is built upon religious beliefs. The radical religious beliefs of Daesh are incompatible with modern civilization.[1] Killing non-believers, whether by suicide bombings or otherwise cannot be justified by the religious or moral beliefs held by most of humanity, whether Jewish, Christian, Muslim, humanist, or whatever. Virtually all terrorist attacks in the United States since 9/11 have been, and can be expected to be, committed by Americans. Of those few claiming to act in the name of Islam, we have benefited from American Muslims reporting radicalized, potential terrorists in their midst to the authorities. This helps explain why so few of these attacks have been by Muslims. Attempting to protect us from such attacks via the police methods noted above cannot stop those who are driven by what they believe is right in the eyes of their god (or those who are mad more generally). They are prepared and even eager to die for those beliefs. If some individuals are willing to blow themselves up for what they believe in, it will never be possible to totally prevent them from occasionally achieving their goal.

Deterring radicalized Islamist youth from their terrorist plans would require convincing them that their understanding of Islam is wrong. Given their willingness to die for their beliefs, undermining those beliefs is likely to be insufficient, though it is important. Virtually all young people seek an understanding of the purpose of their lives and moral values to guide their behavior. Muslims are best equipped and best placed to convince radical Islamists that their understanding of their religion is wrong. But all of us through our Churches, Mosques, Synagogues, schools and our culture more generally must do a better job teaching our young the moral values, and where appropriate the religious beliefs, that should guide their and our behavior toward our fellow man appropriate to living together in the modern civilized world. Coercion will not be enough.

[1] See my earlier blog: https://wcoats.wordpress.com/2015/12/18/fighting-terrorists/

Work-Leisure Choice and growth

A recent dinner companion inquired whether an economy that was not growing was necessarily a problem. What she had in mind was whether people choosing more leisure to enjoy their incomes rather than continuing to work the same or longer hours created an economic problem. The short answer is no. I will explore that issue further and then make a point about the propriety of governments making work/leisure choices for us rather than leaving the choice to us.

Our incomes grow when we work longer hours, acquire improved skills, work with more tools, or work with better tools. The economy as a whole grows without individual incomes necessarily increasing when more people work (i.e., when the population grows). Unless you are very pessimistic about the prospects for continued innovation and technical improvements in each worker’s productivity, our incomes will continue to increase even if we don’t work longer hours.

Over the last 65 years the average annual hours worked by employed Americans dropped from 1,910 to 1,710 while real disposable personal income per capita (in 2009 dollars) increased from $10,000 to over $38,000. Over the longer period of a century or two the drop in hours worked and the increase in per capital income have been much more dramatic. This dramatic increase in income reflects better skills, more capital (tools) and better capital. But it is less than in would have been if people had not chosen to enjoy that income by working less and playing more. The over all economy can adjust to any of these – growing, stagnate, or shrinking income.

While Bernie Sanders may think that the best way to increase the standard of living for the poor is to redistribute to them some of the high income of the wealthy, most everyone else would agree that only economic growth has and can continue to lift large numbers of the poor out of poverty. Global poverty (per capita income below $1.25 per day) dropped from 50% in 1980 to 20% in 2011, an astonishing achievement totally beyond what any amount of redistribution could have accomplished. Most of us think that the proper purpose of redistributing income is for the better off to finance a safety net floor for those unable to work. This dramatic increase in income was the result of improvements in worker productivity (i.e., better skills and more and better capital) not working longer hours.

But what about the choices workers have made and are making about the hours they work vs. the hours they play with the proceeds of that work once they are well above poverty? Over time as most people’s incomes have grown they have generally reduced the long hours worked six or more days a week. Employers and workers strike deals that maximize the profits of the firm and the happiness and well-being of employees. Why then do many governments feel that they need to legislate the matter? Why, for example, did French Socialists feel compelled to legislate a 35-hour workweek a few years ago?

In limited cases, a public safety argument might make sense to over ride the preferences of workers and their employers, for example, if truck drivers felt included to push themselves more hours than they could safely stay awake at the wheel. Mr. Hollande’s French government is now proposing to remove the 35-hour limit and relax other labor market restrictions. I hope they succeed, as leaving more of such decisions with the people themselves will result in happier workers and a more productive economy.

This issue came up a few years ago in connection with the Greek financial crisis. Here are two of my blogs written three years apart on the situation in Greece: https://wcoats.wordpress.com/2012/02/26/saving-greece-austerity-andor-growth/,     https://wcoats.wordpress.com/2015/02/08/greece-debt-and-parenting/ To over generalize, it is often the case that people living in temperate climates (such as Greece and the Southern cone of the EU) work less and have lower incomes. If they are freely choosing to enjoy more leisure in the lovely climate in which they live, they are no doubt happier and better off because of it. Greece’s problem was not that its many Zorba’s had a great zest for life and played more than they worked. Its problem was that after getting away with playing on other peoples’ work/money, they thought they should be entitled to continue doing so. The balancing of work and leisure that is optimal is a person-by-person decision. The economy will be fine and will adjust to whatever these preferences are. People at different income levels and/or different preferences within the same economy will likely make different choices. There is no justification for the government to impose its notion of what is optimal uniformly on everyone. This is just another example of government over stepping its proper role.

 

Fairness or Envy?

After many decades of impressive and relatively steady increases in the standard of living (increases in real per capital income) of all quintiles of the American income distribution, since 2000 all quintiles have lost ground. In the run up to 2000 incomes in the top quintile increased more rapidly than those in the lower quintiles resulting in a less equal distribution income.

Mean income

The mean real incomes of each quintile are lower now (2014) than they were in 2000. However, the percentage decline has been larger for the middle and lower income quintiles (see table below) leaving the more unequal income distribution in place. Some of the relative gains of the top quintile are attributed to the growing premium for higher education, but as claimed by the Occupy Wall Street demonstrators, some have not been earned by providing higher valued products.

Income table

Most of us do not resent and in fact are grateful for those whose wealth resulted from inventing and giving us products we greatly enjoy. However, we are rightly angry at both political parties for increasingly supporting crony capitalists—those who benefit from their connection with and influence on the government—who benefit at the expense of the rest of us. They are capturing economic rents at the expense of the rest of us rather than enjoying the fruits of greater productivity.

The broad political consensus in the United States that we are each entitled to the wealth we each create, but must fairly share in the cost of providing our national defense, public goods and a satisfactory safety net for the poor, seems to be falling apart. In the economic sphere, the left increasingly favors one group, the working class represented by labor unions, against the professional and entrepreneurial classes. Classical liberals (i.e., economic conservatives) champion fairness – a level playing field – and the freedom to get rich if you work harder, or create a better product, or a more efficient way of producing what people want. They champion measures that facilitate entrepreneurship and economic growth without much regard for its impact on income distribution. Trade – globalization – is an essential part of promoting economic efficiency and thus growth, allowing, if not forcing, firms to shift resources into goods for export in which they are relatively more efficient in order to pay for the cheaper imports enjoyed by the average middle class consumer.

The Republican Party more so than the Democratic Party, though not by much, has increasingly been failing to preserve a level playing field in various areas (Wall Street, defense industry etc.). But the embrace of protectionism offered by Donald Trump reflects either class warfare or ignorance of globalization’s enormous contribution to our standard of living. The big trade and industrial unions of old—think of the United Auto Workers in Detroit—followed a different drummer. They were not interested in fairness but rather fought to bring economic rents (monopoly returns) to themselves at the expense of other workers via a deal with their employers to create, defend, and share monopoly returns. This worked with the auto industry, where auto workers earned at least double the prevailing wages for nonunion workers with comparable skills as long as GM, Ford and Chrysler could hold off competition from German and Japanese (plus a growing list) auto producers via a combination of tariffs and safety standards. Globalization gradually destroyed this monopoly arrangement and almost killed the American automobile industry until U.S. automakers relocated to southern, non-union states.

While good working conditions are win win for workers and employers, pushing up wages above their competitive level either drives firms to other locations (non union states or abroad) or kills them all together. Voters supporting protectionist policies either don’t understand that they lower the standard of living for most people (here and abroad) by lowering the overall productivity of workers or they seek to exploit monopoly rents for themselves at the expense of other workers.

Such thinking was dramatically illustrated by the recent strike of workers at Tesla Motor’s giga battery factory project in Nevada. As reported in the Washington Post on March 2: “On Monday, hundreds of workers walked off their jobs at the giant battery factory that Tesla Motors is building in the desert outside Reno, Nevada. It wasn’t your typical picket: They weren’t protesting bad working conditions, or making a show of force around contract negotiations. Rather, they were protesting other workers — specifically, the fact that they were from somewhere else.” Their complaint was that workers from out side Nevada were willing to work for less than the $35 per hour that members of the local union were making. These were not “foreign” workers from South of the border. These were workers from Arizona and New Mexico. The out of state workers obviously found their “low” wages with Tesla in Nevada better than the wages they would receive staying at home so they were better off coming to Reno.

The Post further reported: “That dispute explains an important debate underway right now in all sorts of skilled trades: Builders say there’s a labor supply problem, which needs to be fixed by bringing more people into the field from across the country and across the border. Worker groups say there isn’t a supply problem — it’s just that builders aren’t paying enough to make the jobs worth someone’s while.”

Trump’s pledge to protect America workers from cheap Chinese and other imports so they can produce them in the U.S. at a higher cost, is bad economics and bad policy. He is pledging to benefit one group of workers at the expense of other workers and at the expense of the standard of living more generally. This is not what the Republican Party has stood for in the past and not what it should stand for now. It should stand for fairness and equal opportunity for workers and entrepreneurs to benefit from doing things better and thereby raising their incomes and the income of the nation. The principle of fairness is widely held in the United States but has always had to battle for dominance against the temptation of the zero sum claims of special interests for government to serve their interests at the expense of others and at the expense of fairness. Donald Trump and Bernie Sanders are appealing to special rather than general interests at the expense of fairness.

A Modest Proposal—Helicopter Money and Pension Reform

It is possible to fix the bankrupt Social Security System and the Federal Reserve’s failure to achieve its inflation target painlessly. Yes, really.

The Fed has failed to raise inflation to its 2% target because over regulated banks can’t find over regulated firms wanting to borrow and invest. As a result, the increases in the Fed’s base money from its Quantitative Easing and other efforts to stimulate the economy has piled up as bank excess reserve deposits at the Federal Reserve Banks.[1] If the Fed pushes too hard (e.g., by lowering the interest it pays on these bank reserves, potentially even to negative levels) it feeds asset price bubbles (stock and housing prices), which do great damage when they burst.[2] If the Fed just printed more money and sprinkled it around to the general public—what Milton Friedman called helicopter money—there is no doubt that the public would spend more and drive up prices.

Leaving aside whether it is really a good idea to create a steady 2% rate of inflation, there is an easy way of doing it that would also facilitate badly needed reform of the government’s retirement system. Contrary to the myth that our Social Security pensions reflect what we paid in (saved) to the system, Social Security pension payments are now fully pay as you go. This means that the revenue from payroll taxes approximately matches the outflow for current pensions, i.e. nothing is being saved for the future. As our population continues to age and the number of retired pensioners increases relative to the shrinking number of workers paying into the system, the modest amounts that have been accumulated in the Social Security “Trust Fund” will be drawn down to zero in about 15 years at which time the government will not be able to meet existing promises.[3]

The following proposal combines helicopter money sufficient to bring the inflation rate to its target with badly needed reform of our government pension system. Under this proposal all individuals will receive a minimum government guaranteed pension for life whether they paid in anything or not. This might be implemented as part of a Friedman like negative income tax and other badly needed tax reforms,[4] or stand alone. Before retirement, individuals who are working but with incomes below the poverty level (to be politically established) will not pay a wage tax as they do now. The subsequent pensions of such people will be paid with helicopter money (the Federal Reserve will print the money to buy government bonds sufficient to finance these expenditures). All workers with incomes above the poverty level will be required (as they are now) to set aside the amount of income needed to finance their minimum guaranteed pension on a fully funded basis. They are free to save more if they would like a higher pension. The funds set aside must be invested in government licensed and approved private pension funds chosen by each worker rather than in the almost fictitious Social Security Trust Fund.

This would establish the three pillars of good pension policy proposed by the World Bank in 1998: a means tested minimum pension financed by the government’s general revenue, a mandatory minimum pension paid for and privately invested by all working individuals, and additional, optional, supplemental retirement saving privately invested. Such a model was first adopted in Chile over 35 years ago with great success. Central and Eastern European countries have adopted similar models as part of their transition from centrally planned to market based economies. Financing income subsidies to the poor from general revenues (via printing money), and a user fee approach to mandatory saving (mandatory saving matched to the actuarial value of the pension received), conforms more closely to the principles of good tax policy.[5] The alternative sometimes proposed of raising the income cap on the payroll tax is closer to general revenue financing (if the government guaranteed minimum is only paid to the poor), but leaves out non-wage income and thus fails the good tax criteria.

As new workers would be truly saving for retirement, their savings would not be available to finance those currently retired, as is now the case with our pay as you go system. Thus transitional arrangements will be needed (for several decades) to deal with existing unfunded promises. If the promises remain unchanged, the money to pay for them will have to come from somewhere (higher taxes or reduced defense or other expenditures). Usually, in such cases the government spreads the burden around (burden sharing). Two simple and sensible changes to the current promises would absorb the greater part of the shortfall. The first is to adjust the pensionable retirement age to the fact that the average person lives much longer than when the current retirement ages were fixed. People are living longer and can (and most would like to and do) work longer. The other is to change the index to people’s pensions from a wage index (which generally increases pensions in real terms over time) to the cost of living (CPI), which would preserve their real value against any inflation over time.

For today, this means that the wage tax on the poor would be abolished and paid for with new Fed money that would thus be put in the hands of those who would spend it, increasing employment (though we are really at full employment now) and/or wages and prices. It would both raise inflation a bit and launch a genuine, long over due pension reform.

[1] “US Monetary Policy–QE3” Cayman Financial Review, January 2013

[2] “The D E Fs of the Financial Markets Crisis” CATO Institute, September 26, 2008.

[3] https://wcoats.wordpress.com/2008/08/28/saving-social-security/

[4] http://www.compasscayman.com/cfr/2009/07/07/US-federal-tax-policy/

[5] http://www.compasscayman.com/cfr/2013/07/12/The-principles-of-tax-reform/

The Asian Infrastructure Investment Bank and the SDR

By Warren Coats and Dongsheng Di

Jin Liqun, President of the new Asian Infrastructure Investment Bank (AIIB) announced on January 17, 2016 that all of its loans would be in U.S. dollars, “signaling that Beijing will not use the development bank as a platform to promote renminbi internationalization.”[1] In this note we argue that the AIIB should make all of its loans in SDRs. Doing so would make a major contribution to promoting the replacement/supplementation of the U.S. dollar for international payments that was called for by People’s Bank of China’s Governor, Zhou Xiaochuan in 2009.[2] As the SDR valuation basket will include the Chinese renminbi after October 1, 2016[3] it will also contribute, but more modestly, to the international use of the renmimbi.[4]

As the AIIB is a Chinese initiative and is headquartered in China, it was initially thought by some that its operations would be denominated in RMB. However, denominating its loans in RMB and actually disbursing RMB would suffer several disadvantages for the AIIB and for its loan recipients. There was concern by some that the use of the RMB might further strain the already complicated US-China bilateral relationship. In might also force the pace of China’s financial and capital account liberalization faster than other conditions warrant. Moreover, with greater exchange rate volatility of late, loan recipients would be exposed to greater exchange rate risk. The AIIB’s choice of the U.S. dollar avoids these risks but continues to subject its borrows to exchange risks associate with the dollar, which has varied considerably over the years. For these reasons the IMF, for example, denominates its loans and other financial operations in its Special Drawing Right (SDR), whose value is based on the market value of specific amounts of the five freely useable currencies in its valuation basket.[5] Thus for most countries, the international value of the SDR is more stabile than is the value of the dollar or another of the other currencies in its valuation basket. This logic applies fully to the operations of the AIIB and other development banks. The case for creating “private” SDRs to disburse to AIIB loan recipients rests on the contribution it would make toward developing the SDR issued by the IMF into a global reserve asset to supplement or replace the U.S. dollar, Euro and other national currencies in countries foreign exchange reserves.

The development and use of private SDRs, SDR denominated bank liabilities, is described in detail in an article one of us wrote over thirty four years ago in the IMF Staff Papers.[6] The AIIB would establish SDR denominated deposits with its bank (e.g., the BIS) and instruct its loan recipients to establish SDR accounts with their banks. AIIB loans would be disbursed by transferring the appropriate amounts of its SDR balances at the BIS to the recipients’ account at its banks. The dollar value of these SDRs would be determined in the same way as is the IMF’s official SDR. Following the procedures used by the IMF when disbursing its SDR denominated loans, recipients could request to receive their loans in the equivalent value of a freely usable currency of their choice (or in any or all of the five currencies in the valuation basket). In the first instance, AIIB loan recipients are likely to be governments with accounts in their central banks. Thus these central banks would need, in addition to their SDR accounts with the IMF, to establish (private) SDR accounts for their governments and commercial banks. If the loan recipient is able to spend these SDRs (pay its contractors and suppliers) directly it would do so, but most often it would need to exchange them for the currency wanted the ultimate recipients. This exchange would most likely be executed by its bank providing the SDR deposit.

Cross border private SDRs payments would be cleared and settled in the same general way as are U.S. dollar payments. Net outflows of SDRs from the banks of one country via their central bank to another country via its central bank, would be settled by the transfer of official SDRs on the books of the SDR Department of the IMF. Alternative clearinghouse arrangements are also possible has suggested by Peter Kennan in his comments on the 1982 IMF Staff Papers article. When such loans are repaid, if the repaying government (or other loan recipient) doesn’t have sufficient balances in its private SDR account with its central bank to transfer to the AIIB’s account with the BIS it would use other currencies to buy additional private SDRs. It might also use its official IMF allocated SDRs to either buy private ones or to transfer directly to the AIIB (assuming that like most other development banks and the BIS it has become an “other holder” of official SDRs). Private and official SDRs would have essentially the same relationship with each other as do base money and bank money in national currencies.

China and the AIIB are in a strong position, working through the IMF or bilateral discussions, to urge central banks to open private SDR accounts for their governments and their commercial banks toward the fulfillment of their obligation under the IMF’s Articles of Agreement to make the SDR “the principal reserve asset in the international monetary system” (IMF Article XXII). Through their representatives at the World Bank, Asian Development Bank, and their New BRICS Development Bank they could press these institutions to disburse in SDRs (private and/or official) as well. As an important purchaser of oil and other globally traded commodities they could encourage their pricing in SDRs. In the first instance, many loan recipients would choose to convert their SDRs into one or more of its basket currencies. But as private SDRs and supporting clearing and settlement arrangements proliferated, holding and using SDRs for international transactions would become more convenient and would potentially grow rapidly. This is an opportunity that should not be missed.

References

Coats, Warren, 1982   “The SDR as a Means of Payment,” IMF Staff Papers, Vol. 29, No. 3 (September 1982) (reprinted in Spanish in Centro de Estudios Monetarios Latinoamericanos Boletin, Vol. XXIX, Numero 4, Julio–Agosto de 1983).

1983, “The SDR as a Means of Payment, Response to Colin, van den Boogaerde, and Kennen,” IMF Staff Papers, Vol. 30, No. 3 (September 1983).

2009, “Time for a New Global Currency?” New Global Studies: Vol. 3: Issue.1, Article 5. (2009).

2011, “Real SDR Currency Board”, Central Banking Journal XXII.2 (2011), also available at http://works.bepress.com/warren_coats/25

2014, “Implementing a Real SDR Currency Board”

_____. Dongsheng Di, and Yuxaun Zhao, 2016, Why the World needs a Reserve Asset with a Hard Anchor, http://works.bepress.com/warren_coats/34/

Footnotes

Dr. Warren Coats retired from the International Monetary Fund in 2003 where he led technical assistance missions to more than twenty countries (including Afghanistan, Bosnia, Egypt, Iraq, Kenya, Serbia, Turkey, and Zimbabwe). He was Chief of the SDR Division of the Finance Department from 1982-88. His PhD from the University of Chicago was supervised by Milton Friedman. He was part of the IMF’s program team for Afghanistan from 2010-2013 and is a U.S. citizen. Wcoats@aol.com

Dr. Dongsheng DI is an associate professor of International Political Economy with School of International Studies, Renmin University of China and also a Research fellow with International Monetary Institute of RUC. In 2015 he is a visiting researcher at Edmund A. Walsh School of Foreign Service of Georgetown University. His research interests include the political economy of global monetary affairs, RMB internationalization, and Chinese Domestic Reforms. He is also a policy advisor to NDRC and China Development Bank and is a citizen of the People’s Republic of China. didongsheng@vip.sina.com

[1] China’s New Asia Development Bank will lend in US dollars, Financial Times Jan 17, 2016 http://www.ft.com/intl/cms/s/0/762ce968-bcee-11e5-a8c6-deeeb63d6d4b.html#axzz3xWiTvQZD

[2] Zhou Xiaochuan, “Reform the International Monetary System”, Website of the People’s Bank of China, March 23, 2009;

[3] The amount of the China currency in the SDR valuation basket will be determined on September 30, 2016 such that its weight in the basket on that day is 10.92% of the total value of one SDR.

[4] Banks offering SDR denominated deposits will generally balance them with SDR denominated assets or assets in the five currencies in the SDR’s valuation basket similarly weighted.

[5] The RMB will be added to the existing basket of four currencies—USD, Euro, GBP, JPY—from October 1, 2016.

[6] Warren Coats, “The SDR as a Means of Payment,” IMF Staff Papers, Vol. 29, No. 3 (September 1982); “The SDR as a Means of Payment, Response to Colin, van den Boogaerde, and Kennen,” IMF Staff Papers, Vol. 30, No. 3 (September 1983).

Fighting Terrorists

A front-page article in the Washington Post announced that: “Saudi Arabia launches alliance to fight terrorism.”[1] This news truly gave me pause. If the irony of this does not hit you in the face, and even if it does, please read on.

Before exploring approaches to fighting terrorism, we need to define who or what our terrorist enemy is. The failure to do so clearly has badly undermined our efforts to defeat this enemy. Clearly the thousands of young men and women from around the world fighting in Iraq and Syria under the self designated Islamic State are terrorist enemies, as are Syed Farook and Tashfeen Malik, who killed 15 of Farook’s co workers in San Bernardino, California recently, and so are the French and Belgian Jihadists who killed 130 people in Paris on November 13th. Dropping bombs on San Bernardino or Paris or carpet bombing the Levant will not stop this enemy and the collateral damage, both human and physical,… well, you get the point.

If we understood why they were doing what they are doing, either at home or in far off places, we might be better able to deter them. What is their goal? Several steps are needed to reach such an understanding, but they all claim to be fulfilling what they understand to be their obligation to Allah to kill non-believers who refuse to convert to Islam:

I have been ordered by Allah to fight and kill all people (non-Muslims) until they say “No God except Allah.”

The above statement is a hadith collected and recorded by Sahih al-Bukhari and Sahih Muslim, the two most important compilers of the oral history of the words and deeds of Muhammad.

So our enemies are young Muslims who accept martyrdom and the prospect of early entry to paradise by fulfilling the commands of their religion as it has been taught to them. Those of us who live beyond this period of desperate searching for the meaning and purpose of our lives and make it to a more mature adulthood generally find less demanding objectives and meanings for our lives. Do most Muslims accept this version of their religion? This is a complicated subject but obviously we see the vast, vast majority of Muslims living in compliance with the laws and customs of whatever country they live in. Have they embraced a more peaceful understanding of Islam or have they managed to ignore those aspects of their religious beliefs that are clearly unacceptable in the modern civilized world?

Following 9/11, once I was able to return to the U.S., I asked a Pakistani colleague why he and his fellow Muslims did not speak out to condemn this barbaric act made in the name of Islam. He replied that it was very difficult for a Muslim to publically criticize a fellow Muslim. I only now think I understand what he meant. For a Muslim to criticize or renounce his religion is called apostasy. According to Dr. Tawfik Hamid in his very illuminating book Inside Jihad: “The portion of Sharia concerned with apostates is known as Redda law, and according to the literal implementation of Redda in Saudi Arabia, the punishment for apostasy is death.”[2]  Thus condemning Muslim’s who kill non-believers can be dangerous.

The proponents of this strict, fundamentalist form of Islam are called Salafists. According to Dr. Hamid: “Salafists desire a return to the Islamic Caliphate. They do not respect secular states or weak Islamic regimes. They believe Sharia law should constitute, ideally, the only legal system in any society, because it is the divine law…. For Salafists, the perfect world is one in which apostates are slain, adulterous women are stoned to death, enslavement of war captives is permitted, polygamy is admired and wives can be beaten when the husband deems it appropriate.”[3] Such views are not compatible with our Constitution or culture nor with any other modern culture and should be condemned as unacceptable.

According to Dr. Hamid, Salafist interpretations of Islam promulgated around the world by the Wahhabi sect of Sunni Islam financed by the Saudi Arabian government has come to dominate the understanding of the teachings of Muhammad by most Muslims. In exchange for the commitment of the Wahhabi leadership to respect and not politically challenge the Saudi royal family, the Saudi rulers financed the Wahhabi movement and its expansion. So the irony of Saudi Arabia launching an alliance to combat terrorism is that it is Saudi Arabia that continues to finance its primary cause, the Salafist version of Islam. For starters the Saudi government should cut off the funds it now provided to the promotion and spread of such teachings.

If the United States or any other military were able to kill every ISIS fighter in the Levant (Iraq and Syria), even if it could do so without destroying the cities and communities and kill their citizens that ISIS now occupies and controls, and even if it could leave behind or install a creditable, peaceful, and broadly accepted government that could prevent a new ISIS from arising, this would not end the threat of Islamic terrorism. As long as young men and women around the world continue to believe that their ticket to paradise entails fulfilling their religious duty to kill infidels, innocent people will continue to die at their hands and we will remain at risk.

Saudi Foreign Minister Adel al-Jubeir has the right idea, if he means it, that “we” must “stop the flow of funds to terrorists and confront the ideology of extremism that promotes killing of the innocent.”[4] But according to Dr. Hamid, this is not enough. “Islamic terror is not likely to decrease until Muslims cease being passive terrorist and become active defenders of hard truth, true peace and real tolerance.”[5] “For every jihadist in the world there is a much larger number of individuals who quietly approve of his conduct. Islamic terror often makes passive terrorist secretly proud.”[6] This is because the passive terrorist believes on the basis of Salafist teachings that the active terrorist is fulfilling the requirements of Islam. “In the case of passive terrorists the schism is one between the cultural mind and the religious mind.”[7]

Islam needs a reformation. While peaceful forms of Islam already exist (e.g., Sufism), Dr. Hamid argues that a more rigorous and scholarly reinterpretation can emerge from a refocusing on the Koran (the word of Allah), which does not contain many of the offending texts in the hadiths and Sunnah (the words and deeds of Muhammad), and placing certain commands and acts in the historical context in which they originally occurred as is generally done when interpreting the Bible.

The United States and other secular societies need the help of peaceful Muslims, those who have accepted the secular laws of their country (e.g. the U.S. Constitution) and thus rejected those Salafist teachings that contradict them. We need their help in attracting Muslims to its acceptable and peaceful versions and we need their help in isolating and exposing the few Islamic terrorists among them. These peaceful Muslims, in turn, need our condemnation of the intolerant and violent elements of Salafism, to help support their campaign for reformation. To ignore that Islamic terrorists are acting on their understanding of their religion, i.e. that they are Islamic, undercuts any effort and hope for the reformation that Islam needs in order to peacefully take its place in the modern world.

In his farewell speech to the Nation in 1988 Reagan spoke of America as a shinning city on the hill: “In my mind it was a tall, proud city built on rocks stronger than oceans, windswept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity. And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here.” Implicit in Reagan’s vision was that anyone “with the will and heart to get here,” had already embraced the laws and customs of their new land. Those who have and who satisfy our other requirements for immigration should be welcomed.

[1] https://www.washingtonpost.com/world/national-security/saudi-arabia-launches-islamic-military-alliance-to-combat-terrorism/2015/12/15/ad568a1c-a361-11e5-9c4e-be37f66848bb_story.html

[2] Tawfik Hamid Inside Jihad: How Radical Islam Works, Why it Should Terrify Us, How to Defeat it, Mountain Lake Press, 2015 page 83. http://www.tawfikhamid.com/

[3] Ibid.

[4] Washington Post Op. Cit.

[5] Hamid, Op. cit. page 98

[6] Ibid. page 87

[7] Ibid. page 102

What to do about Syrian refugees?

When frightened most people take or support steps to reduce risks to their security even at the expense of their liberties or other normally valued principles. Failure to do so might even be considered foolish if such steps might actually increase their safety. On the other hand, we regularly accept small risks in exchange for more interesting lives. The fact that 92 people died every day on average in the U.S. in traffic accidents in 2012 (about the same number who died from falling) has not kept most of us home, where we would have faced the risk that an average of 7 people per day died from home fires.

I am prompted to return to this subject (for an earlier blog see: https://wcoats.wordpress.com/2013/08/06/are-we-becoming-a-nation-of-cowards/) by a recent Bloomberg poll in which the majority of adult American’s surveyed (53%) following the recent terrorist attacks in Paris that killed 129 people said that “the nation should not continue a program to resettle up to 10,000 Syrian refugees.” Leaving aside that this is an almost unnoticeable share of the more than 3 million Syrians who have fled their country and the 6.5 million displaced within Syria, and leaving aside the causes of the horrors from which they are fleeing, are we justified in refusing to accept refugees if it makes us safer? But before taking that on, we should have a clear understanding of whether it is likely to make us safer.

The concern, of course is that among these poor desperate souls, terrorist might pose as refugees in order to gain entry to the U.S. (or Europe) in order to wreak havoc. Despite best efforts this possibility cannot be ruled out any more that we can rule out dying by fire if we lock ourselves in our homes. But the recent Paris attacks were carried out by French and Belgian citizens, not refugees. “Then there was the curious case of the Syrian passport found near the body of a suicide bomber. Who takes a passport to a terrorist operation? Someone who wants it to be found.” (Frida Ghitis, CNN, November 18, 2015: http://www.cnn.com/2015/11/18/opinions/ghitis-isis-self-destructive/index.html)

Gaining entry to the U.S. as a political refugee is a time consuming and difficult process. I have written a number of letters in support of applications by Iraqis and Afghans I have worked with and that is a very small part of what is required. Ms. Ghitis’ very interesting article continues: “The Paris operation had multiple objectives. The passport was a way of provoking the West to turn against refugees. The attack sought to provoke France, NATO and Europe to fight ISIS and the public to turn against the Muslim population and against refugees. ISIS wants a war between Islam and the rest of the world, with Muslims on its side, as a way of creating and expanding its so-called ‘caliphate.’ ISIS wants the world’s Muslims to feel they are at war with the modern world. It also wants to stop the flow of Syrians to the West, because it’s more than a little embarrassing that Muslims are fleeing its utopian Islamic ‘state.’”

In short, the risks of terrorist attacks (or attacks by deranged students at schools, etc.) in the U.S. come almost totally from our own citizens, just as do virtually all other crimes, violent or otherwise, in the U.S.  We call their perpetrators criminals and have vast and expensive programs to minimize such acts and to protect us to the extent compatible with our values from the crimes that nonetheless still take place. Aspects of these programs are the promotion of respect for the rights of others and for law and order and addressing and minimizing injustices toward individuals or groups that might provide the basis for grievances and hostility. For the rest we rely on the police to maintain order and arrest those who persist in crime (violent or otherwise). Crime and its perpetuators have always been and always will be with us. Some approaches to containing them have worked better than others and we should continuously strive to find the most effective balance between our freedom and our security.

So will ending the already negligible immigration of Syrians or Muslims improve our safety? If anything at all, it will worsen it by alienating and angering some of the almost 3 million Muslim’s already living here. The cry by some Governors and Presidential candidates and others to close the door to Muslims is much more likely to turn an American Muslim into a terrorist than to prevent one from entering the country from abroad. Thus these ugly cries by understandably frightened people fail on all counts (the promotion of American values and the promotion of security).

We need champions of the “Land of the free, home of the brave.” We have been the “Home of the free because of the brave;” not the brave young men and women sent off as cannon fodder to fight wars all over the place by deranged neocons but those brave enough to stand tall for the values of human respect and freedom that have (and hopefully still will) define America.

 

What is wrong with PC?

Almost five years ago I wrote about political correctness (PC, politeness and caondor): https://wcoats.wordpress.com/2011/01/11/pc-politeness-and-candor/. In short, I said that what would normally be considered “good manners,” — values and behavior of free individuals– was becoming a stifling imposition of expected behavior by various authorities, another manifestation of the nanny state. Given our laudable propensity to generally rebalance excesses in one direction or another, I assumed that PC would be fading by now.

In 1964 at the University of California at Berkeley, I participated with other students from the far left to the right (University Conservatives and Young Republicans– we didn’t have far right students at Berkeley) in demonstrations AGAINST the University administration’s efforts to limit our freedom of speech. This was the famous Free Speech Movement. Thus I am shocked to read that today’s students are demanding restrictions on speech by the authorities. What is going on here?

On November 9 the WSJ reported that: “On Oct. 28 Yale Dean Burgwell Howard and Yale’s Intercultural Affairs Committee blasted out an email advising students against ‘culturally unaware’ Halloween costumes, with self-help questions such as: ‘If this costume is meant to be historical, does it further misinformation or historical and cultural inaccuracies?’ Watch out for insensitivity toward ‘religious beliefs, Native American/Indigenous people, Socio-economic strata, Asians, Hispanic/Latino, Women, Muslims, etc.’ In short, everyone.

“Who knew Yale still employed anyone willing to doubt the costume wardens? But in response to the dean’s email, lecturer in early childhood education Erika Christakis mused to the student residential community she oversees with her husband, Nicholas, a Yale sociologist and physician: ‘I don’t wish to trivialize genuine concerns,’ but she wondered if colleges had morphed into ‘places of censure and prohibition.’

“And: Nicholas says, ‘if you don’t like a costume someone is wearing, look away, or tell them you are offended. Talk to each other. Free speech and the ability to tolerate offence are the hallmarks of a free and open society.’

“Some 750 Yale students, faculty, alumni and others signed a letter saying Ms. Christakis’s ‘jarring’ email served to ‘further degrade marginalized people,’ as though someone with a Yale degree could be marginalized in America” Read the whole sickening story: http://www.wsj.com/articles/yales-little-robespierres-1447115476

It is hard for me to grasp that some Universities now carve out limited spaces within which students may freely express their opinions on controversial issues. Charles Murray’s reaction resonates with me: “Safe space. That’s the POINT of a university. To be a safe space for intellectual freedom in a world largely hostile to that concept.” FACEBOOK, Nov 10, 2015.

It is a good thing that today’s students are more sensitive to bad behavior among their peers and hopefully better behaved themselves. However, the swing from students demonstrating to defend free speech to students demonstrating to restrict it represents, in my view (as correctly noted by the brave Mr. Christakis in the above article) a swing from each or our personal responsibilities to exhibit, defend and promote good manners to a wide ranging state—big brother—to oversee and enforce all that in its wisdom we should believe and do. We will be a weaker and more subservient country as a result.

Keystone XL pipeline madness

By his own admission President Obama’s rejection of the Keystone XL pipeline project is political rather than scientific.

Two environmental concerns have been raised. The first is that the emissions of greenhouse gases are about 17% higher for oil from oil sands compared to conventional sources. However, the rejection of the pipeline proposal will not materially change the production and consumption of Canada’s oil shale crude, which will now be transported to market by more expensive means. “Rail transport has expanded to carry oil sands to the United States, soaring from just 16,000 barrels in 2010 to 51.2 million barrels in 2014 before dropping somewhat this year. But rail transport is more expensive than pipeline transport…. Royal Dutch Shell’s chief executive, Ben van Beurden, said last year that the company had bid for space on another pipeline to move its oil-sands crude to Canada’s east coast and from there to world markets, including Gulf Coast refiners. ‘We’re covered. I’m good,’ he said in an interview. He said that ‘the argument that Keystone is a bad idea because it will somehow enable development of resources in Canada is to some extent flawed,’ adding that other alternatives would emerge.” (This and other quotes are from today’s Washington Post in the article linked below)

The second environmental concern arises from the possibility of oil spills from breaks in the pipeline. This possibility needs to be compared with the possibility of spills from rail accidents or breaks in alternative pipelines.

Because the pipeline would cross international boundaries it must be approved by the State Department. As the application was being reviewed, then Secretary of State Hillary Clinton stated on October 15, 2010 that the department was “inclined” to approve project. “We’re either going to be dependent on dirty oil from the Gulf or dirty oil from Canada,” she said. On August 26, 2011 the State Department issued its final environmental impact statement determining “there would be no significant impacts to most resources along the proposed project corridor.” And again on March 1, 2013 the State Department issued another environmental review that raised no major objections to the Keystone XL oil pipeline saying that other options to get the oil from Canada to Gulf Coast refineries were worse for climate change.

Canada’s new liberal Prime Minister, Justin Trudeau, supported the project. “TransCanada’s president and chief executive, Russ Girling, issued a statement saying his company was ‘disappointed. Today, misplaced symbolism was chosen over merit and science — rhetoric won out over reason,’ Girling said…. Terry O’Sullivan, general president of the Laborers’ International Union of North America, said Friday that ‘Obama has also solidified a legacy as a pompous, pandering job killer.’” (same Post article).

“As Obama rode from the White House to the campus [Georgetown on June 25, 2013, he], said he would approve Keystone XL only ‘if it does not significantly exacerbate the climate problem.’” But his own State Department found that it does not. So what is going on?

“By late 2013, Obama and Kerry had concluded that the pipeline failed their climate test — not because blocking it would guarantee that Canada’s fossil fuels would remain in the ground, but because denying the permit would strengthen America’s position in international climate negotiations…. ‘The reality is that this decision could not be made solely on the numbers — jobs that would be created, dirty fuel that would be transported here, or carbon pollution that would ultimately be unleashed,’ Kerry said in a statement. ‘The United States cannot ask other nations to make tough choices to address climate change if we are unwilling to make them ourselves.’”

In short the President lied (not an uncommon practice among politicians, but we might hope for a higher standard from American Presidents). But apparently not. The Obama administration has authorized the selling of coal owned by the U.S. government that would not meet our C02 emission standards to third world countries, which helps our emission record but not the world’s. https://www.washingtonpost.com/world/us-exports-its-greenhouse-gas-emissions–as-coal-profitable-coal/2015/10/08/05711c92-65fc-11e5-bdb6-6861f4521205_story.html

“The Washington Post’s editorial on the pipeline today began: “President Obama rejected the Keystone XL oil pipeline on Friday, ending an unseemly political dispute marked by activist hysteria, GOP hyperbole, presidential weakness and a general incapability of various sides to see the policy question for what it was: a mundane infrastructure approval that didn’t pose a high threat to the environment but also didn’t promise much economic development. The politicization of this regulatory decision, and the consequent warping of the issue to the point that it was described in existential terms, was a national embarrassment, reflecting poorly on the United States’ capability to treat parties equitably under law and regulation.”

https://www.washingtonpost.com/blogs/post-partisan/wp/2015/11/06/obama-ditches-evidence-to-capitulate-on-keystone-xl/

https://www.washingtonpost.com/news/post-politics/wp/2015/11/06/obama-set-to-reject-keystone-xl-project-citing-climate-concerns/

Two approaches to American governance–The case of higher education financing

Hillary Clinton deserves credit for setting out her positions on individual policy issues so that we can have an intelligent discussion of their pros and cons. She is nothing if not a tireless policy wonk. Think of her exhaustive but failed effort to “fix the provision of health care in America” during her husband’s presidency. While the Clinton’s are Democratic Party centrist, they still embrace a top down government/regulatory approach to dealing with many of societies challenges/problems. Mrs. Clinton’s plans to make college affordable provide a recent example of this approach. It is thoughtful and balanced from a left of center, regulatory approach perspective. I prefer a difference, right of center, more market oriented approach.

I have not read Mrs. Clinton’s detailed proposal and rely completely on the following Washington Post summary: http://www.washingtonpost.com/news/wonkblog/wp/2015/08/10/clinton-proposes-a-350-billion-plan-to-make-college-affordable/

Background

Americans believe in equality of opportunity rather than equality of outcomes. We are not egalitarians. There is nothing we can do about the fact that each person is born with different predispositions and capabilities. But it has been a long-standing, broadly shared principle that everyone should have access to the education she is capable of. We have lived up to this goal very imperfectly. Tuition vouchers and school choice are moving us closer to this goal for K-12 by making the state’s financial contribution to education more equal for each student and subjecting schools to greater competition in producing good results. Unlike primary and secondary education, however, which in the United States is financed by the states (generally by municipalities), college is not for everyone. An important public policy issue is who should pay for higher education for those who do go.

When the government began to supplement private universities and colleges with state run, public ones, it generally funded the cost from tax payers charging only nominal tuitions, if any, to those attending. Milton Friedman and others pointed out that this resulted in a perverse redistribution of income from lower to higher income people. University graduates enjoy incomes two or three times the average of non-college graduates. In response to this criticism, state colleges and universities in recent decades have raised their tuitions in order to finance more of the cost of the education by its beneficiaries.

It is desirable for those from low-income families with the intelligence and desire to pursue careers requiring a college education to have that opportunity. This accords with our belief in providing an equal opportunity to all and increases our individual and national wealth by facilitating the maximum productivity of every citizen. But how can we best accomplish this goal without perversely redistributing taxpayers’ money to the better off? Along with higher tuitions, many universities offer financial assistance to such students in order to attract and graduate the best students. Having the best graduates enhances their reputations. A number of private organizations provide fellowship to promising low-income students. America is renowned for its extensive private charities. Many companies do the same, generally for the children of their employees. These have the substantial advantage over government bureaucrats of being closer to the beneficiaries of their largesse and thus better able to determine who in their communities will benefit the most from such assistance.

Determined students often work while studying and/or borrow from their families and friends (this was my approach). In business, future benefits from current investments are normally financed with borrowed money or by giving investors a stake in the outcome (selling shares in the hoped for profits). Unless they are family or friends, lending to someone with potential future human capital as collateral (i.e. lending to a student based on the expectation that she can repay out of higher future income) is a riskier proposition than, say lending to someone with a job to buy a car or a house (both of which can be use as collateral). So bank lending to college students was rather limited and expensive (interest rates high enough to cover the higher risks to the lender) until the government began to guarantee such loans.

Solutions

To address this problem, and building on the experience with financing college for veterans of World War II in the “GI Bill” of 1944, Congress adopted what became known as Pell Grants, financial aid to low-income students in undergraduate college programs, in the Higher Education Act of 1965. This Act also provided limited government loans, which over time expanded in various ways to include students from middle-income families (Middle Income Student Assistance Act of 1978) and studies at graduate and professional schools. Over time the scope and terms of government assistance continued to expand. Grad PLUS was added by that spend thrift George W Bush in 2006 to help finance graduate education. “For the first time, it gave professional and graduate-school students unlimited access to below-market-rate loans from the government, which, of course, borrows the money to begin with.”[1]

This has enabled more American’s to go to college– a potentially good thing. The increased demand for places in colleges is likely to increase the cost of supplying more (higher salaries for college professors in order to attract more into teaching), but hardly justifies what has happened. According to The Economist “Tuition fees have doubled in real terms in the past 20 years. Student debt has trebled in the past decade, to $1.2 trillion.” Seventeen percent of these loans are now in default or seriously delinquent. Many of these students have dropped out of school or not found the jobs they were trained for.

The government (Secretary of Education Arne Duncan) has established a number of programs to help and Hilary Clinton “proposes capping the repayment of college loans at a maximum of 10% of income over 20 years. If a loan is not paid off by then the government will pick up the tab. The estimated bill for her scheme…, comes to $350 billion over ten years.”[2] This may be sensible within the context of government aid. But this top down government approach suffers from a number of weaknesses. One is the propensity for such programs to grow as different special interests succeed in getting added to the list: “Despite all the talk about the government’s $1.1 trillion student loan portfolio, and the burden it represents for college students, some 40 percent of the money is owed by graduate and professional school students — who make up only 16 percent of all student-loan borrowers.”[3] Another is the inferior ability of government bureaucrats, with no financial stake in the outcome, to evaluate the appropriateness of each individual loan or grant. A third is the limited incentive for government to find new innovative ways to deal with the problems that invariably arise.

The policy challenge in my view is to bring more effective competitive pressure on colleges and universities to deliver more for less, to facilitate more careful and better informed decisions by potential students of what education they need and will benefit from and the best place for them to get it, and insuring at the same time that initial poverty does not prevent them from getting it.

Leaving the GI Bill aside as a special case, the arrangements for financing college and advanced degrees that existed prior to the Federal government’s involvement worked pretty well. Those of us needing financial assistance paid a great deal of attention to the cost and value of the educations we sought. We were also more careful about whether and what sort of higher education would benefit us. I have no doubt that the incipient revolution of on-line courses, perhaps supplemented with class room discussions, will dramatically reduce the cost of higher education without significantly sacrificing its quality. Everyone’s professors can be the best that exist. Universities will be forced by such competition to exploit these new technological tools to dramatically reduce the costs of their offerings. The very best students will still pay the premium to attend the University of Chicago’s of the world (pardon my bias). Hopefully they will be the best and not just the wealthiest.

Market based financing innovations are also more likely to come from basically private funding of education. The suggestion made by Milton Friedman in 1955[4] and repeated in Capitalism and Freedom in 1962 for sharing the risk of investing in higher education between the borrowing student and the lender is now being explored in the private sector. “Enter income-share agreements ( ISAs ), which are essentially equity instruments for human capital. Investors finance a student’s college education in return for a percentage of their future income over a fixed period. ISAs are not loans and there is no outstanding balance. If students earn more than expected, they will pay more, but they also will pay less—or nothing—if their earnings do not materialize.”[5] Sharing the risk in this way insures a financial interest by both borrowers and lenders that collage choices maximize the expected return to both. A lender, (especially loans made or guaranteed by the government) is not well placed to determine the career intentions of the borrower leading to what economists call adverse selection. Income sharing agreements overcome this problem because the student being financed has a large stake in making the best choices.

Government always has an important role to play. The issue is what the nature of that role should be. Private contracts such as loans or the ISAs described above require a legal framework of enforcement. Such framework for ISAs is currently rather unclear. Sen. Marco Rubio (R., Fla.) and Rep. Tom Petri (R., Wis.) recently introduced the Investing in Student Success Act, which would set basic standards for ISA contracts. In addition their bill would provide for the collection and publishing of information on the cost and average earnings of graduates of different colleges and fields, which would help students choose where and how to invest in their futures.

Clinton’s and Rubio’s approaches represent very different concepts of how government can most constructively contribute to our flourishing. I prefer the approach of a more limited, legal framework role for government.

[1] Charles Lane, Washington Post Aug 26, 2015 https://www.washingtonpost.com/opinions/how-student-loans-help-keep-expensive-schools-in-business/2015/08/26/e7d7f83a-4c11-11e5-902f-39e9219e574b_story.html

[2] The Economist, August 22, 2015.

[3] Charles Lane op. cit.

[4] Milton Friedman, “The Role of Government

in Education,” in Economics and the Public Interest ,

  1. Robert Solo, (Rutgers: Rutgers University

Press, 1955).

[5]   Miguel Palacios And Andrew P. Kelly, “A Better Way to Finance That College Degree” WSJ April 13, 2015, http://www.wsj.com/news/articles/SB10001424052702303456104579485801253355622