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

Ukraine- Monetary Regime Options

I visited Kyiv March 11 – 14 and participated in the Emergency Economic Summit for Ukraine at which I discussed the pros and cons of the central bank following currency board rules or inflation targeting. My paper on the subject will appear in a few weeks in the Cayman Financial Review, but the introductory paragraphs give a quick picture of the domestic (not external Russian issues) political situation. I reproduce those here:

The recent protests leading to the replacement of the government of Victor Yanukovych, reflect a widely held desire for the rule of law and normal individual freedoms and dignity. The few thousands who demonstrated in the Maidan (Independence Square) in Kyiv starting November 21, 2013 following the surprise refusal of then President Yanukovych to sign Association and Free Trade Agreements with the EU, swelled to almost one million by early December in response to deadly police attacks on the demonstrating students. The Ukrainian public, countrywide, is outraged at the corruption of its government and wants a new direction more reflective of western values.

President Yanukovych was removed from office on February 22 by a vote of 328 of 447 members of the Ukrainian parliament. Ukraine’s leadership has changed a number of times since the collapse of the Soviet Union without any significant or enduring change in governance and corruption. More than the head of state needs to change. Having been disappointed by the outcome of the Orange revolution, the demonstrators remain distrustful of any new government with old faces. The barricades and tents of the Euromaidan demonstrators remain in place, and their occupants vow to stay to monitor the new government at least until the Presidential elections scheduled for May 25.

Maidan tent city IMG_0162IMG_0160

The Future of Ukraine

Bordering Moldova, Romania, Hungary, Slovakia, and Poland to the west, and Russia and Belarus to the East, Ukraine should be well placed to benefit from the trade opportunities in both directions. Although the 47 million population of modern (post WWII) Ukraine is overwhelmingly ethnically Ukrainian (about 78%) followed by 17% Russian (concentrated in the industrial eastern and southern areas), Ukraine’s educated citizens are almost universally bilingual in Ukrainian and Russian. Ukraine’s western half naturally leans toward Europe while its eastern half leans toward Russia. The country’s presidency has shifted between favoring one then the other. The tensions between the two are real but can easily be exaggerated.

Many of us wonder why President Putin seems to want yet another unproductive, loss-making territory added to Russia’s care, something it increasingly cannot afford. As with Transnistria, the inefficient, loss-making, industrial, secessionist, eastern part of Moldova (now largely a gangster haven), the eastern part of Ukraine is saddled with former Soviet, industrial, white elephants, which sooner or later must be dismantled. Why is Putin flirting with isolation from the world community with ultimately devastating economic costs to Russia to take over more industrial dinosaurs? Why, in short, is Russia giving up joining the “civilized” world it seemed to once aspire to?  The only tangible benefit for Putin seems to be great popularity at home. Having almost totally snuffed out significant political opposition and a free press in Russia, and then convinced the vast majority of Russians that he is defending Russia from its many enemies, his moves against Ukraine have sent his popularity soaring at home.( “Putin wins in Russia only by escalating his war rhetoric” Washington Post /2014/03/14/ )

Just as President Victor Yanukovych’s brutal repression of the Ukrainian protesters following his switch from signing the Association and Free Trade Agreements with the EU to signing a trade and financing agreement with Russia backfired, resulting in his removal from office by an overwhelming vote of the Ukrainian Parliament, Putin’s thuggish maneuvers against Ukraine seem to have backfired as well. By all accounts (except those broadcast by Russian media) almost all Ukrainians, ethnically Russian as well as Ukrainian, are uniting in their opposition to a Russian take over. Just because many Ukrainians in the eastern parts of the country are native Russians doesn’t mean they want to be annexed by Russia. It reminds me of the large number of Mexicans now living in southern California. No one would imagine that they would vote in a referendum to become part of Mexico (again). “Putin’s interference is strengthening Ukraine” Washington Post /2014/03/13/, “Russia supporters in eastern Ukraine pose challenges to pro western government” Washington Post/2014/03/14/.

I found it interesting that the Ukrainian Minister of Economy, Pavlo Sheremeta, switched from English to Russian during the “Emergency Economic Summit For Ukraine” in which I participated in Kyiv on March 12, for the benefit of the two Russian panelists to whom he was speaking. The Russians, Andrei Illarionov, former Economic Advisor to President Putin, and Kakha Bendukidze, fomer Minister of Economy of Georgia, both speak English as flawlessly as does Minister Sheremeta. The real point was to show affinity with Russia and Russian Ukrainians, while criticizing President Putin’s bullying.

Ukraine has much to do to clean up its government and to liberate the entrepreneurial energies of its economy. But such reform efforts could be interrupted if Putin moves Russian troops into Ukraine beyond the Crimea. It is certainly desirable to dissuade them from doing so if possible. The question for the U.S. and Europe is what measures should they be willing to take against Russia for violating Ukraine’s sovereign territory. The West’s objective should be to deter further Russian aggression if possible or to diminish its ability to continue to misbehave in the future if it persists in violating or threatening to violate the sovereignty of its neighbors.

Putin’s justification for its invasion of the Crimea and potentially more of Ukraine, the need to protect ethnically Russian citizens of Ukraine, is reminiscent of Hitler’s take over of the Sudetenland (the largely German-speaking western areas of Czechoslovakia). “Putin-the mask comes off but will anybody care” American Interest 2014/03/15/3.  Particularly egregious is Russia’s disregard of its commitments made on December 5, 1994 in Budapest, Hungary Budapest Memorandum on Security Assurances (also signed by the U.K. and the U.S.). In exchange for Ukraine’s giving up its nuclear weapons stockpile (then the third largest in the world) Russia and the U.S. provided assurances against the use of force against the territorial integrity or political independence of Ukraine.

Henry Kissinger has set out reasonable terms of an agreement with Russia (on the assumption that Putin is pursuing genuine Russian interests in the area) but offered no suggestions for how to encourage Russia to accept them. “To settle the Ukraine crisis start at the end” Washington Post /2014/03/05/.  The West’s strategy should be explicit and transparent and should escalate with continued Russian aggression. It should begin with measures that will command the most attention in Russia at the least cost and risk to the West. We should not make threats that we are not willing to carry out. No Obama red lines that are later ignored.

President Obama has already ordered the freezing of U.S. assets and a ban on travel into the United States of those involved in threatening the sovereignty and territorial integrity of Ukraine. No individuals have been named yet. It is a tool that can easily be expanded to a larger number of people if and when Russian intrusion expands. These measures are aimed at those in Russia with the greatest influence with Putin and would diminish the joys of their ill-gotten wealth (extravagant vacations in London, etc.). But unless the EU joins the U.S. in applying such sanctions, they will obviously be far less effective.

If Putin is unwilling to reverse course or at least stop advancing even in the face of targeted sanctions, the West’s strategy should be to reduce or limit Russia’s financial capacity to reestablish its former empire. Putin’s hold on power rests on the wealth he has directed to his friends, and wage and pension promises to the general public. About one half of Russia’s federal budget financing comes from its exports of oil and gas. The price of oil needed for Russian fiscal balance is in the neighborhood of $120 per barrel. This so-called breakeven price increases with expenditures by the Russian government and with the cost of producing its oil and gas. Brent crude is currently trading for around $108 per barrel. Russian exports and government revenue have become overly dependent on oil and gas and its supply of cheap oil is running out. It has not kept up with the investment in newer technologies and while its output can be sustained for some time its cost of production is rising.  Acquiring the Crimea or eastern Ukraine would add to Russia’s budgetary costs.  “Crimea as consolation prize-Russia faces some big costs over Ukrainian region” Washington Post /2014/03/15/

Europe is more cautious than the U.S. about trade sections in part because of its heavy reliance on Russian gas delivered though pipelines running through Ukraine and large investments by some of its companies in Russia. One of the interesting and beneficial things about increasing trade interdependence is that it cuts both ways and thus tempers the behavior of all sides. Russia is reluctant to shut off its gas sales to Europe as it did in 2006 and 2009 because it needs the money. Europe is less dependent on Russian gas than it was then and could replace it all together if it got over its aversion to the use of fracking technology. The U.S. should be doing everything possible to bring oil prices down in any event. Obama’s long delay in approving the Keystone Pipeline project to deliver Canadian oil to and through the U.S. is more than embarrassing. And all U.S. restrictions on shipping natural gas to Europe or elsewhere should be removed. In addition, oil supplies globally are expected to improve as the embargo on Iranian oil is lifted and production in Iraq, Libya, and South Sudan increases. Liberalization in Mexico promise increases in its oil production. Russia can’t afford to expand its empire of inefficient industries.

If we went all out, Russians and Russian companies could be locked out of the use of the U.S. dollar, a tool that has brought increasing pain to Iran. It is an effective tool because of the dominance of the dollar and dollar financial instruments in international commerce.  But like Russia’s shutting its gas pipelines to Europe, every use of such tools reduces its future effectiveness as those affected take measures to reduce their dependence on the products involved (Russian oil, or the U.S. dollar and financial system).

If in the hopes of preventing a Russian attack, the United States threatens to respond militarily in any way, it had better be prepared to do so. But should it? Clearly the American defense umbrella over our NATO allies should not be questioned and deploying additional aircraft and military capacity to Europe (especially the Baltic members) makes sense. Ukraine is not a member of NATO and I agree with Henry Kissinger that they should not be. If Russia grows up and behaves like a responsible adult we should not unnecessarily provoke insecurity on its part.

But if Russia, despite all, invades mainland Ukraine, should we militarily assist Ukraine and if so in what ways? Or should we prepare for a new cold war of containment, isolation and the eventual economic collapse of the new Russian empire? This, as they say, is above my pay grade. However, an invasion of Ukraine would be quite different from the invasions of Iraq and Afghanistan because we wouldn’t be the invaders. It would be different from the situations in Syria, or Libya because we would not be joining one group or another in a civil war.

The new interim government in Ukraine is promising but unproven. The distraction from the reforms needed that would result from a Russian invasion of Ukraine would be a tragedy for Ukraine as well as Russia. Excessive external aid (financial and/or military) from the West would likely prolong Ukraine’s history of corruption and deepen ethnic tensions. The external financial assistance now planned would largely address external debt service and would allow a more gradual reduction in government spending than would be required by a debt default. This would allow Ukraine itself to strengthen its governance and economy, but would not guarantee such a result. The West can encourage the adoptions of helpful reforms but cannot impose them on an unwilling or unready Ukraine. Russia is in a position to destroy or undermine these efforts, if that is Russia’s role in history that Putin wants.

Arizona and Religious and Personal Liberty

A successful society balances the interests of individuals and society. In the area of personal liberty and public tolerance, all low hanging fruits (all win – win policies) have been picked. Thus remaining discussions of the best boundary between the sphere of private belief and behavior and social behavior involve trade offs that are more difficult to evaluate. This is illustrated by the recent controversy in Arizona over the bill just vetoed by Arizona Governor Jan Brewer that would have allowed businesses to deny service to gay and lesbian customers on religious grounds.

The point I want to make here (yet again) is that our society functions best when it favors persuasion over coercion (voluntary action over legal compulsion). Should a professional photographer who objects to same sex marriage be required by law to accept business from a same sex couple to photo graph their wedding? My first reaction to this question was why in the world would the couple at issue want to give their business to a bigot. Examples of my earlier discussions of such issues are: https://wcoats.wordpress.com/2013/08/30/liberty-and-the-overly-prescriptive-state/  https://wcoats.wordpress.com/2010/04/18/when-values-clash/

I abhor prejudice of any sort both on moral and on economic efficiency grounds. People should be judged on the basis of factors relevant to the situation. A job applicant should be judged on the basis of whether she has the best qualifications for that particular job, rather than whether she is Irish, Ghanaian, Muslim, Christian or Korean (though if the job is to wait on tables in a Korean restaurant, being Korean might be relevant). I strongly believe that it is more effective to persuade people of this view than to legislate it (just as I think persuading teenagers and others of the dangers of some drugs would be more effective than has been our very costly and damaging War on Drugs). For one thing businesses that express their prejudices in the market place pay a price in the form of less qualified, more expensive employees and/or fewer customers.

I am obviously a bit out of the mainstream on this as I shared Senator Barry Goldwater’s reservations about the 1964 Civil Rights Act’s restrictions on the right of “public” business to choose their customers (especially Title II on public accommodations). I prefer, both for philosophical and pragmatic reasons, the legal approach taken with regard to the Boy Scouts of American. As a “private” organization they are entitled to whatever membership criteria they want. Public discussion and evolving attitudes is gradually leading them to amend their membership requirements, which now allow gay boys to join. This is a better way to bring about that result in my view in our very heterogeneous society.

That said, if we must have laws against discrimination, gays and lesbians surely must be given equal protection under those laws.  E. J. Dionne makes some good points in today’s Post: “Arizona’s anti-gay bill hurts religious people” Washington Post /2014/02/26/

Teachers of the Poor

The raging debate about income inequality has focused on the growing demand for well-trained workers and the declining quality of American education. The mismatch is contributing to rising incomes for the well-educated and stagnant incomes for the poorly educated. Improving the education of the poor is thus a sensible and promising target for improving the incomes of the poor.

Thus the case getting underway in California attacking teacher tenure as a source of poor teachers being assigned to the poorest schools is timely and important. Teacher tenure goes on trial in Los Angeles courtroom/2014/01/26/

The issue of the unionization of public sector workers more generally is contentious. In the private sector unions can balance the market power of employers and are restrained in their demands by their impact on an employer’s bottom line. If excessive wages make a company uncompetitive and it losses market share or goes out of business, the jobs go with it. In fact, a constructive relationship between unions and their employers can potentially improve wages and the bottom line.

Public sector workers, on the other hand, are not constrained by the government’s bottom line (tax payers). Charles Lane provides a good discussion of this issue in today’s Washington Post: Public Sector Unions Interfere with the Public Interest/2014/01/27/.  Unionized or not, public sector workers have long been protected from political interference by the Civil Service system. These protections were established in order to reduce the role of political favoritism in public sector hiring and promotion. However, the trade-off was the creation of a system in which promotion had much more to do with years of service than performance and in which it was difficult to fire anyone thus sheltering mediocre workers.

These trade offs are not easily resolved. If government supervisors can evaluate performance and reward it appropriately, they can also be easier prey for political interference. If they can’t, the worst performing employees rise to the top over time just as fast as the best performing and we get the civil service that we know and love. The plaintiffs in the California case “are nine students who say they were trapped in classrooms with “grossly ineffective teachers” who could not be fired because of the job protection laws.” (W.Post)

The solution, of course, is to leave as much in the private sector as possible. Private schools, including government funded but privately run charter schools systematically produce better results than public schools, especially for the poor.

In an interesting footnote, the plaintiffs legal team includesformer U.S. solicitor general Ted Olson and Theodore Boutrous, who most recently paired to win a U.S. Supreme Court decision that struck down California’s prohibition against same-sex marriage.  Olson and Boutrous had famously represented opposing sides before the Supreme Court in Bush v. Gore, which halted the Florida vote recount and resulted in Bush capturing the presidency. Olson’s wife Barbara died on September 11, 2001 when American Airlines flight 77 crashed into the Pentagon.

Democracy vs the Rule of Law

Tunisia is providing a hopeful example of how countries can transition to freer societies for the general good. In the following Washington Post Op-Ed David Ignatius provides an excellent account of the process followed and still underway there. From Tunisia-Hopeful Signs/2014/01/24/ It contrasts sharply with the sadly confused and muddled account of “democratic transition” in Egypt presented by Michael Dunn and Thomas Carothers of the Carnegie Endowment for International Peace in the Post three days earlier. Egypt’s Evolving Governance is no Democratic Transition.  They speak of democracy and human rights as if they are the same thing.

Literally democracy means rule of the majority. In fact, the majority of Egyptians voting in the first free elections in memory chose Muslim Brotherhood candidate Mohamed Morsi as their President who proceeded to rule on behalf of Egypt’s majority religious group in disregard for the interests of minority Christians and other groups. That is democracy in its literal sense. Modern democracies, however, are not pure in that the majority is limited in what it may do in order to protect the rights of minorities. From an imaginary “veil of ignorance” the citizens of most modern democracies have written into their constitutions limitations on what they may do even when in the majority. The rule of just laws is more important than, and often in conflict with, democracy.

The bigger government gets the more it’s necessarily uniform treatment of all tends to reduce the freedom of individual citizens to behave differently. The United States from its beginning favored individual freedom over state authority and thus struck a balance between the two that imposed more limits on the role of government than had existed up to that time. Every special interest that gains government favor becomes an entrenched interest that is very difficult to reverse (farm subsidies and defense contractors leap to mind). Keeping government limited to what is really important is a never-ending but critical battle.

The Year of Edward Snowden

I am increasingly in awe of what Edward Snowden, at great personal risk, has done for our country. One of the three original journalists to whom he gave documents, Barton Gellman, has written the following article for the Washington Post. Edward Snowden after months of NSA revelations says his missions accomplished/2013/12/24  Every American who cares about the future of our country should read it. I have blogged a number of times this year about Snowden if you would like to read more.

Some people confuse the technical and legal ability to collect personal information about targeted individuals under well-developed controls, with the data mining searches for needles in haystacks Snowden exposed. Here are just two of his statements from the article:

“I don’t care whether you’re the pope or Osama bin Laden. As long as there’s an individualized, articulable, probable cause for targeting these people as legitimate foreign intelligence, that’s fine. I don’t think it’s imposing a ridiculous burden by asking for probable cause. Because, you have to understand, when you have access to the tools the NSA does, probable cause falls out of trees.”

“I believe the cost of frank public debate about the powers of our government is less than the danger posed by allowing these powers to continue growing in secret,”

Snowden likened the NSA’s powers to those used by British authorities in Colonial America, when “general warrants” allowed for anyone to be searched. The FISA court, Snowden said, “is authorizing general warrants for the entire country’s metadata.”

More on the balance between the public and private sectors

Private sector rights.

I strongly support the right of the Boy Scouts of America’ to define who it will accept as members (i.e. its right to exclude gays). I don’t have to agree with how people use their freedom to believe passionately in their right to be free including who they join with in clubs. I was happy to see that organization relax its rules and open its doors to gay boys. But that door was not opened very wide and the BSA still has a way to go. I was thus very happy to see Lockheed-Martin end its donations to the Boy Scouts until remaining discriminations are ended.

Richard “Guglielmetti, 66, who led Troop 76 in Simsbury, Conn., for a dozen years until 2005, said leaders and members of his troop ignored the national organization’s prohibition on gays as scouts or leaders because they felt it was wrong.” (US Today, January 28, 2013)  It would have been counterproductive and morally wrong in my view for the government to have forced this result or to push it further.

As another example, Duck Dynasty star Phil Robertson (I never heard of him) said some perfectly ignorant and offensive things about gays. We should all defend his right to say what he wants to. We should also defend the right of A&E to suspend his show, though I am not particularly happy about mixing up commerce and politics or moral issues. Fortunately, A&E is a cable show. Cable programs are not subject to the government regulations covering over-the-air shows and are free to pretty much do what they want. This helps explain why cable shows are often much more interesting.

A process of public discussion and education best sorts out touchy issues such as these. The government is not needed or wanted here.

Domestic spying

Whistle blower Edward Snowden received further confirmation of the legitimacy of his belief that the government has over reached in its domestic personal data collection (see my several earlier blogs on this subject). In ruling that NSA’s massive metadata collection for all domestic phone calls (numbers called, date/time, and duration) was unconstitutional, Federal Judge Richard J. Leon stated that the government had failed to “cite a single instance in which analysis of the NSA’s bulk metadata collection actually stopped an imminent attack.” (Washington Post, December 20, 2013).

Equally damning was the just released report of a panel appointed by President Obama to investigate charges of NSA abuse, which included among its members former deputy CIA director Michael J. Morrell. The review panel said the program “was not essential to preventing attacks and could readily have been obtained in a timely manner using conventional [court] orders.”

Snowden has performed an enormous public service at great personal risk. Thank you Mr. Snowden

Maybe our ship is starting to right itself.

More on cell phones in planes

My blog Friday was meant to contrast two attitudes toward the desired role of government—regulating our behavior for our own good (Big Brother), or regulating our behavior when necessary for the protection of third parties.  But the more I thought about the cell phones in airplanes issue, the more convoluted it seemed.

There is no evidence, despite lots of testing, of any danger from cell phones, iPads, PCs, etc. for the operations of airplanes. See the article by a WSJ staff reporter: http://www.cs.ccsu.edu/~pelletie/local/news/telecom/Cell_phones_on_planes.html. The Big Brother argument that it protects those of us preferring quite from the conversations of other passengers is also bogus. Not only are people free to carry on conversations with other (willing) passengers, but we have been able to talk to people on the ground from phones in our arm rests for well over two decades. So what is going on? Without denying that many well-meaning, public-spirited people go into government service, the answer seems to lie in the usual place. Government regulations very often come to protect the interests of the incumbent members of the industry being regulation. Most monopoly power of private companies is bestowed by government. Please save me from Big Brother.