Category: Economics

Why does Turbo Tax want our data?

The usually helpful Geoffrey A. Fowler’s article in today’s Washington Post reveals that Turbo Tax and H&R Block want our tax data “to target you with “offers” — or, as they’re more commonly known, advertisements.” For them to take and keep these data we must agree. Mr. Fowler asks, “did you know that by clicking ‘agree’ to some of their privacy prompts, you may be letting them use you?”  “Tax Prep Privacy”  

Wow. Econ Prof Coats was immediately aroused.

Turbo Tax, like any other company, is in business to make money. It makes money by developing products we like enough to pay for. We are presumably better off as a result. In looking for tax assistance software, we can search the web for what we think would be useful. Or, if Turbo Tax has developed something they anticipate we would like but might not know about, they can advertise it in the hopes that we will be interested and try their new product. Or if they have information from our earlier tax returns that enable them to refine their list of who might benefit from their product, they can target only those specific individuals with their “ad” while sparing millions of others from getting the ads they have no interest in. Like most economic transactions, this would be win-win.

I clicked “agree.”

The Empire and the Dollar

Committee for the Republic Salon

March 24, 2022

Warren Coats[1]

In our multicurrency world, the U.S. dollar is widely used for pricing internationally traded goods, for international payments, and for denominating the assets governments and companies hold as reserves. Why is that and what are its implications for U.S. behavior? What would a better system look like?

In a world of many different national currencies, the payment for international trade has found economy in using an intermediate, so-called vehicle currency to facilitate the exchange of the buyer’s currency into and delivery of the seller’s currency. Following the collapse in 1971 of the dollar-based gold exchange standard overseen by the International Monetary Fund, the dollar continues to dominate in this role. This role has given the United States important political power and financial benefits.

I will quickly review these benefits, and how they have come to encourage the U.S. to exploit them in exercising its international power, the forces that are building to seek an alternative, and the potential for the IMF’s Special Drawing Rights (SDRs) to provide an alternative.

The Dollar’s International Reserve Status

Cross border commerce and investments require a common currency to price and denominate them and the mechanisms for cross border payments. While modern technologies continue to increase the speed and ease and lower the cost of domestic payments of domestic currencies, cross border payments remain relatively slow and costly.

The payment and receipt of a currency is ultimately reflected/settled on the books of that currency’s issuer. If I pay you for something and your account is in a different bank than mine, the transfer of funds from my bank to your bank and to you will pass through a Federal Reserve Bank. My bank’s account at the Fed will be debited and yours will be credited.  A fundamental difference between national and international currencies is that the central bank issuers of national currencies only hold deposits for banks that are domestically licensed, while the issuers of international currencies, such as the Special Drawing Right (SDR) of the International Monetary Fund, hold deposits from banks almost anywhere in the world, enabling the settlement of their payments to enjoy the efficiencies of domestic payments in domestic currencies.

The older gold standard functioned more like an international central bank issuer of currencies but without such an international central bank. Instead, national currencies were tied to gold by virtue of the commitment of central banks on the gold standard to redeem their currency for gold at a fixed price. Thus, any net flow of payments from one country to another was ultimately settled by transferring the ownership of the gold it was fixed to from the deficit to the surplus country. This could occur by debiting the deficit country’s gold account at the New York Federal Reserve Bank and crediting the surplus country’s gold account at the same place or by physically shipping the gold.

In today’s world, cross border payments generally involve the need to exchange one currency for another at exchange rates that fluctuate. To facilitate the comparison of prices of globally traded goods (e.g., oil, gold, copper, and other commodities) they are generally priced in one common currency. The U.S. dollar is the currency most widely used for this purpose (79%). This contributes to the use of the dollar for cross boarder payments as well even when the buyer’s currency differs from the seller’s ultimate currency (the currency paid to its workers, etc.). https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.htm

Some economy is brought to the markets for foreign exchange needed for cross boarder payments by using a common so called vehicle currency as a common go between. The adoption by airlines of a hub and spoke model for connecting all airports in a country or the world illustrates the economy of a single or small number of vehicle currencies (hubs) to exchange currency X for currency Y. The U.S. dollar is the most widely used vehicle currency for this purpose. This is supported by and reflected in the dominance of the dollar in invoicing internationally traded goods and in the foreign exchange reserves of banks (central and commercial) around the world. The Euro is the second most used currency in these ways.

In 2021 40.5% of international payments were made in US dollars.  The use of Euros in international payments and in reserves has moved up to second place behind the dollar at 36.7% of payments.  The Pound sterling is a distant third at 5.9%. Having passed the Japanese yen a few years back for fourth place the Chinese RMB achieved 3.2% of international payments in January of this year from almost zero a decade ago. “China’s currency scores a win during the Olympics”  The Federal Reserve has constructed an “aggregate index of international currency usage.” The dollar has remained in the neighborhood of 70% for the last two decades. https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.htm

To pay for things with a currency, one must hold some amount of that currency. It is this demand for dollar reserves resulting from the widespread international invoicing and payments in dollars, that underlies foreign financing of US debt. For starters, about half of dollar currency (actual banknotes) are held abroad. That is the extent to which we pay for imports with cash and the sellers just hold the cash. Foreign central banks hold almost 13 trillion dollars in foreign exchange reserves of which over 7 trillion is in U.S. dollars (much of that is held in the form of US government debt). About 60% of the foreign currency claims of banks are dollar claims.

The dollar grew into its vehicle and reserve currency roles because of the size of the U.S. economy and its extensive trade with the rest of the world, the size and liquidity of financial assets denominated in dollars, public confidence in the stability of the dollar’s purchasing power, and in its trusted contract enforcement (rule of law).

U.S. Benefits from reserve currency status

The so-called exorbitant privilege of a reserve currency–the ability to borrow abroad in your own currency–makes it easier for the U.S. government to finance its military and other expenditures with debt. For countries to accumulate dollar reserves they must have a balance of payments surplus, i.e., they must sell more to the U.S. than they buy from the U.S.. As a result, American’s enjoy cheaper imports and the excess of dollars paid for such imports over those paid back for US exports are held in foreign reserves (generally in the form of US treasury debt).

As an aside, it is simply wrong to attribute much of the so-called offshoring of our manufacturing to the above phenomenon. The somewhat lower exchange rate for the dollar needed to generate the surplus China and other countries need for the trade surplus with which they buy American debt, does make imports somewhat cheaper. However, even if the dollar was totally replaced in foreign reserves and trade balanced, we would continue to be better off producing what we export and importing what China and the others produce and sell to us. Freely pursuing our comparative advantages increases our incomes and the incomes of the Chinese and others selling to us. Free trade is win-win. Contrary to the myth, U.S. manufacturing is at an all-time high. (Manufacturing employment is lower because of increased labor productivity). https://www.macrotrends.net/countries/USA/united-states/manufacturing-output

The U.S. dollar’s dominance in global trade and finance contributes to the existence of the American Empire in two ways. It attracts foreign financing of the U.S. government and its military industrial complex thus reducing the burden of the empire on the American taxpayer and it provides a tool by which the U.S. can impose its will on other countries or individuals in managing its empire. Borrowing to pay our government’s bills is politically easier than raising taxes and avoids (or delays) a debate over guns versus butter. 

Three factors now challenge the dollars reserve currency role. 1) Cumbersome payment technology: Existing arrangements for cross border payments via the Society for Worldwide Interbank Financial Telecommunication (SWIFT) are technically crude and outmoded. 2) Weaponization of the dollar: The U.S. has abused the importance of its currency for cross border payments to force compliance with its policy preferences not always shared by other countries, by threatening to block the use of the dollar. 3) Growing risk of a decline in the dollar’s value: The growing expectation of dollar inflation and the skyrocketing increase in the U.S. fiscal deficit are increasing the risk of holding and dealing in dollars.

The first factor–payment technology–is temporary. It is being modernized. While payment technology (ease, speed, security, and cost of making cross border payments) is important, it is not as important as the features of the currency being paid. As a currency, the dollar excels for the reasons given earlier.

The second factor–weaponization of the dollar–has been growing in importance as the U.S. has increasingly sanctioned trade and dollar payments without broad international support–Iran, etc.  The EU has sought work arounds in Euros. China and Russia are building alternative payment arrangement using China’s Renminbi. Even with the dramatic increase in coordinated sanctions against Russia, restricting the use of dollars is less effective than directly blocking trade. https://wcoats.blog/2022/03/04/how-to-stop-russia-in-ukraine/  The broad support for sanctions on Russia more likely increases support from the dollar as the dominant international currency rather than reducing it. On the other hand, those on the other side (e.g., Russia and China) will work harder to find alternatives. The balance of these contradictory forces is difficult to assess.

The third factor has never been taken very seriously until now. At the end of February (2022) the US national debt was over 30.1 trillion dollars or 125% of US output (GDP). Federal government interest payments on its net debt were $426 billion per annum. But with the increase in inflation, interest rates are rising. Uncle Sam’s debt service payments are likely to double or triple over the next five to ten years, rising to 15% to 20% of the Federal budget. The world still expects the US to regain control of its spending, but the risks of default are creeping up. Paul “Samuelson stated in 2005 that at some uncertain future period these pressures would precipitate a run against the U.S. dollar with serious global financial consequences.” https://en.wikipedia.org/wiki/International_use_of_the_U.S._dollar

It is the second factor, US abuse of its ability to sanction the use of the dollar that is most threatening to push the dollar over the cliff.

The Alternative to the dollar

An internationally defined and issued currency would have a number of advantages over the use of a national currency for cross border payments.

While the value of the dollar has been quite stable for many years, using a basket of major currencies for pricing internationally traded goods and financial instruments would be even more stable. This is what the International Monetary Fund’s unit of account–the Special Drawing Rights (SDR)– offers. The value of one SDR is equal to the current market value of fixed amounts of the US Dollar, Euro, British pound, Japanese yen, and Chinese yuan. Thus, its widespread use for pricing internationally traded goods and financial instruments would provide even greater stability than would any one of these currencies. Every morning when I check movements in the price of oil, I must ask myself whether it was really a change in the price of oil or in the exchange rate of the dollar. See my: “Why the World Needs a Reserve Asset with a Hard Anchor”

The IMF’s SDR can only be held and used by member central banks and a few international bodies. Thus, private SDRs–so called Market SDRs–are needed for payments by the private sector (perhaps issued by the IMF or the BIS). Being issued by an international body, such Market SDRs would have the equivalent of a central bank for settling cross boarder payments allowing the simplifications and economy increasingly available for domestic payments in the domestic currency. `

Moreover, as an internationally issued currency the SDR would be far better protected from the political abuse increasingly experienced with the US dollar and might be expected with the Chinese RMB or other national currencies.

Getting from here to there

But first things first. Before considering the reform of the international monetary system, let’s consider the reform of the dollar–the reform of U.S. monetary policy. The price of the dollar should be fixed to a hard anchor and issued according to currency board rules.

During the heydays of the gold standard (1820-1913) international trade flourished dramatically increasing global incomes and reducing poverty. According to Antoni Estevadeordal, Brian Frantz and Alan M. Taylor “Until 1913 the rise of the gold standard and the fall in transport costs were the main trade-creating forces.” https://www.jstor.org/stable/25053910  However, to cope with WWI, the Great Depression, and WWII, the gold standard failed and was abandoned because of weaknesses in banking systems and because the countries that fixed the value of their currencies to gold did not fully play by the gold standard’s rules.

Under a strict gold standard, the central bank would issue and redeem its currency whenever anyone bought it for gold at the official price of gold. In fact, however, by actively buying and selling (or lending) its currency for other assets whenever it thought appropriate, the Federal Reserve’s monetary liabilities (base money) were partially backed by U.S. treasury bills and other assets. In addition, the fractional reserve banking system allowed banks to create deposit money that was also not backed by gold. The market’s ability to redeem dollars for gold kept the market value of gold close to its official dollar value. However, the gap between the Fed’s monetary liabilities and its gold backing grew until the market (most conspicuously, France) lost confidence in the Fed’s ability to honor its redemption commitment and President Nixon closed the “gold window” in 1971 rather than tighten monetary policy.

Currency Board Rules

A reformed monetary system that returns to a hard anchor (firmly fixed price of the currency for gold or some other asset) should require the Fed to adhere strictly to currency board rules. Such rules oblige a central bank to buy and sell its currency at a set price in response to public demand. Under the Gold Standard, the price of the currency was set as an amount of gold (a gold anchor). For existing currency boards, the price is typically an amount of another currency or basket of currencies. See my book on the establishment of the Central Bank of Bosnia and Herzegovina (“One currency for Bosnia-creating the Central Bank of Bosnia and Herzegovina”).    The Fed would provide the amount of dollars demanded by the market by passively buying and selling them at the dollar’s officially fixed price for its anchor. All traditional open market operations by the Fed in the forms of active purchases and sales of T-bills or other assets would be forbidden.

The Anchor

Another weakness of the historical gold standard was that the price of the anchor, based on one single commodity, varied relative to other goods, services and wages. While the purchasing power of the gold dollar was relatively stable over long periods of time, gold did not prove a stable anchor over shorter periods relevant for investment.

Expanding the anchor from one commodity to a basket of 5 to 10 commodities with greater collective stability relative to the goods and services people actually buy (as measured by, e.g., the CPI index), would reduce this volatility. The basket would consist of fixed amounts of each of these commodities and their collective market value would define the value of one dollar.  There have been similar proposals in the past, but the high transaction and storage costs of dealing with all the goods in the valuation basket doomed them. However, with indirect redeemability discussed next, the valuation basket would not suffer from this problem.

Indirect redeemability

Historically, gold and silver standards obliged the monetary authority to buy and sell its currency for actual gold or silver. If the dollar price of gold in the market was higher than its official price, people would buy gold at the central bank increasing its market supply and reducing the money supply until the market price came down again. These precious metals had to be stored and guarded at considerable cost. More importantly, taking large amounts of gold and silver off the market distorted their price by creating an artificial demand for them. A new gold standard would see the relative price of gold rising over time due to the increasing cost of discovery and extraction. The fixed dollar price of gold means that the dollar prices of everything else would fall (deflation). While the predictability of the value of money is one of its most important qualities, stability of its value, such as approximately zero inflation, is also desirable.

Indirect redeemability eliminates these shortcomings of the traditional gold standard. Indirect redeemability means that currency is issued or redeemed for assets of equal market value rather than the actual anchor commodities.  Market actors would still have an arbitrage profit incentive to keep the supply of money appropriate for its official value.  As the economy grows and the demand for money increases, this mechanism would increase the money supply as people sell their T-bills to the Fed for additional dollars at its official (gold or whatever) price.

Towards a global anchor

The United States could easily amend its monetary policy to incorporate the above features – adopting a government defined value of the dollar as called for in Article 1 Section 8 of the U.S. Constitution and a market determined supply. The Federal Reserve would be restricted by law to passive currency board rules. Additional financial sector stability would be achieved by also adopting the Chicago Plan of 100% reserve requirements against demand deposits. This would be a natural byproduct of the Fed creating a two-tier Central Bank Digital Currency (CBCD) now under consideration.

The gold standard was an international system for regulating the supply of money and thus prices in each country and between countries and provided a single world currency (via fixed exchange rates). Balance of trade and payments between countries was maintained (when central banks played by the rules) because deficit countries lost money (gold) to surplus countries, reducing prices in the former and increasing them in the latter. This led to a flourishing of trade between countries. This was a highly desirable feature for liberal market economies.

The United States could adopt the hard anchor currency board system described above on its own and others might follow by fixing their currencies to the dollar as in the past. The amendments to the historic gold standard system proposed above would significantly tighten the rules under which it would operate and strengthen the prospects of its survival.

However, there would be significant benefits to developing such a standard internationally. One way or the other, replacing the fluctuating exchange rates between the dollar and other currencies with the equivalent of a single currency would be a significant boon to world trade and world prosperity.  Replacing the U.S. dollar as the world’s reserve currency with an international unit would have additional benefits for the smooth functioning of the global trading and payments system.  

In a small step to create an internationally issued currency the IMF created its Special Drawing Right (SDR) in 1969 in the expectation of supplementing the gold-based US dollar. But in today’s world of fiat currencies with floating exchange rates the SDR has several limitations as a reserve currency, most of which can be lived with for a while. The SDR allocated by the IMF can only be held and used by the central banks of IMF member countries and a few international organizations such as the World Bank and BIS. The SDR falls short as a challenger to the US dollar because of the absence of widespread private market use of the unit.

To become a serious supplement to, if not replacement for, the US dollar in the international monetary system the SDR would need to be usable for payments by private sector parties. This would require the creation of private or Market SDRs. This could be done in much the same way banks now create dollar deposits.

Digital SDR currency

As with national currencies, the internationally issued SDR needs a central issuer of the base money version of market SDRs (M-SDRs). The IMF should oversee the develop of a procedure for issuing M-SDRs following currency board rules and backed 100% by official SDRs or by an appropriate mix of sovereign debt of the five basket currencies.

The IMF might establish an IMF trust fund that would issue M-SDRs to AAA or AA international banks upon their request and payment of the equivalent value of one or more of the five basket currencies (and would redeem them under similar arrangements). As with other IMF trusts, the IMF might approach the BIS to operationally manage the issuance and redemption of M-SDRs and the maintenance of the official SDR asset backing (or its equivalent in the five currencies in the valuation basket).

Banks offering M-SDR deposits/currency to their customers would hold an M-SDR reserve backing with the IMF SDR trust fund. The base money M-SDRs issued by the IMF trust fund would perform the same payment settlement function as do central banks for the base money they issue, with the critical difference that its depositors/participants would be global rather than national. This would enable virtually instantaneous final settlement of M-SDR payments globally.

An M-SDR would facilitate and be facilitated by invoicing internationally traded goods and financial instruments in SDRs. More, if not most, internationally traded commodities could and should be priced in SDRs. Cross border borrowing can and should be denominated in SDR starting with bond issues and lending by international development institutions (as is now the case with the IMF, and to a very limited extent the World Bank).  https://www.brettonwoods.org/article/proposal-for-an-imf-staff-executive-board-paper-on-promoting-market-sdrs

To go all the way with SDRs, the IMF’s Articles of Agreement would need to be amended to replace the allocation of SDRs with issuing them according to currency board rules as discussed earlier. Furthermore, the valuation basket that now consists of key currencies would need to be replaced with a commodity basket as outlined in my Real SDR Currency Board proposal: (http://works.bepress.com/warren_coats/25/).

The shift from dollar to SDR international reserves, payments, and invoicing would give the world a more stable currency for all of these purposes. This would further promote trade because of more efficient cross boarder payments thus further lifting incomes around the world. Being an internationally issued and controlled currency, the potential for its political abuse by the U.S. would be greatly reduced. But eliminating the seigniorage that the U.S. now enjoys supplying its currency to the rest of the world, i.e., the foreign financing of some of its debt, would remain without further measures.

As central banks and foreign firms shifted from dollars to SDRs they might simply transfer the US treasury bills (and other US investments) that they now hold to the issuers of the M-SDRs. In that case the U.S. would continue to enjoy its exorbitant privilege of foreign financing in exchange for holding its currency. In this case M-SDRs rather than USD would also be backed by US debt. Thus, rules are need for what currency or assets must be paid to buy M-SDRs and/or what assets M-SDRs are backed by. This could take the form of buying M-SDRs with USD but the issuer exchanging the dollars for a more balanced portfolio of assets. While the SDR value continues to be defined by a basket of currencies, the assets backing issued SDR might reflect the same proportions of the same currencies.

The reduction in this way of the role of the dollar as a reserve currency would be win win. It would provide for more stable and more efficient international trade and payments. It would help demilitarize money and it would modestly increase the cost of US debt finance, hopefully encouraging more careful spending.

[1] Dr. Coats retired from the IMF after 26 years of service in May 2003 to join the Board of Directors of the Cayman Islands Monetary Authority. He was chief of the SDR division in the Finance Department of the IMF from 1982–88 and a visiting economist to the Board of Governors of the Federal Reserve in 1979.  In March 2019 Central Banking Journal awarded him for his “Outstanding Contribution for Capacity Building.”  His 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. He has a B.A. degree in Economics from U of California, Berkeley, and a Ph.D. in economics from the U of Chicago. He is a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

Russia: How should we fight back?

Russia’s attack on Ukraine has rightly outraged most of us. Leaving aside the history that brought us to this present conflict, Russia’s attack is totally unjustified. Our natural instincts are to help Ukraine resist its aggressor. As we watch the destruction of lives and property, it is natural to want to send in our boys or planes to help. Surely, we can stop this by using the might of our military and advanced weapons. Wars tend to look like that in the beginning. Vietnam, Afghanistan, Iraq (I still can’t sort out what Bush/Cheney thought was America’s interest in attacking Iraq) looked like slam dunks going in. The realities were invariably very different by the end. How should we help Ukraine?

The U.S. and Ukraine’s NATO neighbors have been supplying Ukraine with weapons but left them to fight on their own. This was my assessment a month ago: “Ukraine-Russia-NATO”  As much as it strains against our impulse to help, President Biden is absolutely correct in ruling out our joining the war. For most of us, war, and the incredible pain it inflicts on those directly involved, is fought elsewhere by others. It is far too easy to say “sure, lets go to war.” “Ukraine-how should we help?”

But wars can be fought economically as well as militarily. Much of the West (the designation seems relevant again) has joined together to impose severe economic sanctions on Russia. But the objectives of these sanctions are not clear. They are too late to deter Russia from its invasion of Ukraine, though perhaps they provide an example of the potential cost to China if it decides to invade Taiwan. Are they meant to pressure Russia to come to the negotiating table? But it takes two to tango–Zelensky must be there as well. I have heard no statement of what Russia must do for the sanctions to be lifted.

The sanctions seem designed to cripple the Russian economy. Sadly, the pain will fall mainly on the Russia people rather than its government. Considerable pain will also fall on those imposing the sanctions. “The war in Ukraine and globalization”

Supply chains and financial channels will be disrupted for many years. But like military wars, the collateral damage an economic war is hard to predict. China and Russia and maybe India and much of Africa are being driven together to establish new trading relationships and non-dollar payment channels that don’t seem to serve American interests. If they are not explicitly linked to accelerating a negotiated peace, what are the sanctions for?  I don’t necessarily believe that our military industrial complex deliberately promotes the perpetuation of war, but as an economist I can’t ignore the fact that they have an economic incentive to do so.  

Missing from all of this seems to be the skillful deployment of diplomacy. The first priority, of course, is to end the fighting in Ukraine. But any peace agreement must look beyond the immediate war to the conditions that will promote peace and prosperity for Ukraine, Russia, Europe, and the world well into the future. As is often the case Chas Freeman says it best: https://www.youtube.com/watch?v=0vxufUeqnuc

The War in Ukraine and Globalization 

We will cripple the Russian economy by cutting off their access to world markets. They will have to buy Russian.

We will strengthen the American economy by cutting off our own access to world markets. Buy American!

Both sentiments are circulating in the U.S. at the same time. If you don’t see the contradiction, you should probably stop reading. Cutting Russia off from external markets will definitely make it poorer but it will also hurt its former trading partners.

Without specialization and trade, we would all (the 99% of us) be poorer than dirt. See my very elementary explanation: “Econ-101-Trade in Very Simple Terms” This is why reducing Russia’s access to trade beyond Russia’s borders (cross border trade) will punish Russia and make it poorer. But this is often not properly understood even by very smart people: “Tony Judt on trade”

Trade is win-win, meaning that both the seller and buyer are better off as a result of their trades (assuming that their transactions are voluntary). Obviously then, restricting trade is lose-lose. Both sellers and buys are worse off as a result of restricting trade. I note this fact in my discussion of restricting trade with Russia: “How to Stop Russia in Ukraine” However, the rest of the world will have to scramble to replace Russian oil, gas, Ukrainian wheat, etc, and will pay higher prices for the substitutes.

Countries that impose trade restrictions on themselves (e.g., via tariffs) are often indulging in a form of corruption by enriching (“protecting”) favored industries or firms by reducing the competition they face from abroad (so called cheap Chinese labor, etc.). But trade policies and decisions can be more complicated than that.

Trade creates interdependencies. If a truck strike, or bad weather, or a cow disease, prevents the yogurt you no longer produce yourself from reaching your market (the local Safeway), you will go without it for a while. If semiconductors produced in Taiwan can’t reach American auto manufacturers on time and in sufficient numbers, car production is slowed. In short, supply chains that generally lower the cost of producing whatever, thus benefiting consumers, also increase the risks of supply chain interruptions. Businesses must (and do) evaluate the cost-risk trade off seeking a reasonable (profit maximizing) balance.  

Some products, e.g., those related to our national defense, are sufficiently critical that the government forces producers to forgo the economic efficiencies of importing them in order to minimize the risks of supply interruptions, especially in war time. While this is often justified, the line between risk reduction for national defense and corruption to buy votes or benefit friends is sometimes fuzzy. But no one can believe that buying steel from Canada is a national security risk as Trump claimed and as I note here: “Econ-101- Trade Deficits”  Buy American policies are more often in the corruption rather than the national interest category.

There is also an interesting political dimension to trade currently in our faces. The dramatic growth in trade in goods and services (from $63 billion in 1950 to $17,249 billion in 2020 “Worldwide export volume in trade since 1950”), has produced a dramatic reduction in poverty around the world (from 76% of the global population in extreme poverty in 1820 to 10% in 2018 “Extreme poverty in brief”’). It has also created significant interdependence between countries. This has positive and potentially negative aspects. While depending on Russia, China, Mexico, etc. for many of the things we enjoy (and sometimes even need) creates economic incentives to retain peaceful relationships, it also (the other side of the same coin) creates vulnerabilities and thus economic weapons to punish bad behavior. If the trade didn’t exist in the first place, cutting it off couldn’t be used to punish Russia. While we can inflict economic pain on Russia for its war on Ukraine by cutting off its access to our goods and services, Russia can and is inflicting pain on those of us who invested in Russia and who depend on Russian oil and enjoy Russian caviar.  

The pain some in the West have inflected on themselves (and the rest of us) out of their anger at Putin by canceling our enjoyment of Russia’s rich culture, is beyond comprehension coming from so called adults. “Russian musicians, artists, athletes and other cultural figures are facing broad backlash as Russian President Vladimir Putin has continued to press his relentless and increasingly brutal invasion of Ukraine.” “Ukraine war-be careful canceling Russia”

Among the tragedies of the physical and human losses in Ukraine, and the disruption of the lives of millions of Ukrainian refugees, are the damage to trading relationships and the global order. See my commons in:  “Ukraine-Russia-Nato”  We failed to deal properly with Russia and its concerns the first time around after the USSR was dissolved. It will take a long time to repair the damage done to the international order by Russia’s attack on Ukraine. We need to do a better job next time around.  “Western sanctions on Russia are like none the world has seen” We also need to better address the costs to those who must seek out new jobs and skills as a result of new technology and greater labor productivity, to which trade contributes. “Our Social Safety Net”

Development with Dignity

Human dignity is the central focus of a fascinating new book written by Tom Palmer and Matt Warner Development with Dignity–Self-determination, Localization, and the end to Poverty.  They spotlight the treatment of every person with the dignity due all people as a critical factor in unleashing the innovation and entrepreneurship that has dramatically raised the standard of living to virtually the whole world over the last three hundred years after thousands of years of no progress. The book is rich with interesting examples.

Palmer and Warner argue that the top-down approach of most development agencies and aid projects of “teaching them how we do it in our developed countries,” often fails as a result of overlooking and/or ignoring the knowledge and ways of social organization found in the local communities aid is meant to uplift.  Such knowledge is important to understand where the problems are and what is working well in a community. Any improvements must start from there and be embraced by the people we want to help. The IMF calls this “ownership.” It must start with treating every individual with dignity.

A wonderful example of the importance of understanding and building from local knowledge and practices is provided by Jennifer Brick Martazashvili and Ilia Martazashvili in their recent book on common law property rights in the villages of Afghanistan: “Land, the State, and War –Property Institutions and Political Order in Afghanistan.”  They argue very convincingly that the common law traditions of many Afghan villages can provide satisfactory property rights until there is a central government that can be trusted and has sufficient administrative capacity to administer the registration of legal land titles.

Both books reflect an attitude toward individuals and the importance of their agency for prosperous, liberal societies. I am struck by the similarity of attitudes in the above approaches to development aid and our approaches to social welfare in the United States. Our Federal, State, and local governments provide a wide range of programs to assist the poor or temporarily unemployed.  The food stamp program, for example, epitomizes the attitude that people “on the dole” can’t be trusted to make their own decisions about how to use such assistance. I don’t want to ignore the fact that there are people we shouldn’t trust to make their own decisions (drug addicts, the emotionally unstable, etc.). But the view that government can make better decisions about how food aid should be used than the hungry who receive it is at the heart of the Palmer – Warner discussion about the importance of dignity.

Those of us who support Universal Basic Incomes (UBI) are on the side of those who believe that most people know better than government bureaucrats or even well-meaning social workers what their needs are–i.e., how best to spend their money. UBI payments are made to every person with no strings attached. Unlike current unemployment assistance and other safety net programs UBI would not diminish the financial incentive to work, though the incentives to work include more than just money. With a UBI any additional income from work is kept. The UBI is not reduced by work. See my: “Our Social Safety Net”

Pilot tests of the impact on recipients and on their incentives to work are being carried out in a number of countries and cities with generally very promising results. A two year pilot that was recently concluded in the Washington DC area is typical:

“Placing money into people’s hands without restrictions empowered them to address their needs, program administrators said, and removed the typical layers of bureaucracy and eligibility requirements that can frustrate recipients and hamper the effectiveness of aid efforts. The study’s quantitative and qualitative data showed that “participants often struck a thoughtful balance between addressing immediate survival concerns like paying rent and longer-term concerns like accumulation of debt,” analysts concluded. Recipients surveyed for the study, which was released Thursday, reported lower rates of mental health stressors and food insecurity than people with comparable incomes in the District and nationally.” “Guaranteed basic income-dc-poverty thrive”

When Universal Basic Incomes are combined with the replacement of income taxes (both individual and corporate) by a flat consumption tax, the result is a nicely progressive tax rate relative to income. See rough estimates here:  “Replacing Social Security with a Universal Basic Income” It also simplifies the process of financing the government expenditures that we want.

Trusting the choices of individuals about their own lives doesn’t mean that we (government or private institutions) shouldn’t offer information to help inform and guide their choices. But it does mean that we do not make those choices for them. We give them the dignity with which free societies can and have flourished.

Econ 101:  How to help Afghans?

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

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

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

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

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

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

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

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

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

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

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

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

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

________________________________________ 

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

Econ 101: Erdogan’s Turkey

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

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

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

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

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

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

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

Where Does Senator Josh Hawley Stand?

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

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

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

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

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

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

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

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

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

“Senator Hawley commends missourians participating in march for life”

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

Which is it for gas prices?

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

On the other hand, the Whitehouse website states:

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

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

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

Broadband for All

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

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