Category: Government

New tools require new rules?

A hammer can hit a nail on the head, or it can hit you (or your enemy) on the head. Most, if not all, tools have multiple uses, some good and some bad.  Societies adopt rules to promote the beneficial uses of technologies and discourage harmful uses. New tools/technologies necessitate a discussion of what the rules for their proper uses should be. We are now having that discussion for the uses of social media to promote and propagate ideas and information (some true and some false).

Free speech is revered in America for good reason. Like many other aspects of our preference for self-reliance (personal freedom), it requires that we take responsibility for sorting out what is true from what is false rather than giving over that task to government (and whoever leads it at the time). This can be a challenging task.  We must sort out who we trust to help us. Those of you my age will appreciate that we no longer have Walter Cronkite, and Huntley and Brinkley to help us filter real from fake news.

Our commitment to free speech is so fundamental to the character of America that I have written about it a number of times. https://wcoats.blog/2012/09/14/american-values-and-foreign-policy/    https://wcoats.blog/2012/09/15/further-thoughts-on-free-speech/ https://wcoats.blog/2012/09/29/freedom-of-speech-final-thoughts-for-a-while-at-least/

Various social media platforms present us with another new tool and the need to sort out how best to use it. The answer(s) will take the form of social conventions and government regulations. It is important to get the balance right.

Facebook, Twitter, Google, YouTube, Instagram, Tiktok and other platforms do not generate or provide content. They provided a very convenient and powerful means for you and me to share the content we produce. What responsibility should Mark Zuckerberg, Jack Dorsey, Larry Page, Sergey Brin, etc. have for regulating the content we post to their own platforms, which are after all private. As you saw in my earlier blogs on this subject, publishing and broadcasting our words are limited when they endanger or slander others. But these limits do not and should not limit our advocacies for policies and political beliefs as I am doing now.

The big issue today is fake news (out right lies). If you create or repeat lies, you must be responsible for what you do (but we don’t generally punish lying unless under oath). You are allowed, for example, to state on Twitter or Facebook that you believe Obama was born in Kenya despite thorough documentation that he was born in Hawaii. Perhaps you are gullible enough to actually believe it though it is false. But should Facebook and other platforms have a responsibility to block clearly fake news? What if their own biases lead them to block more Democratic Party “fake news”, or vice versa?

As a private company Facebook can more or less do what it wants but it has a strong business/financial incentive to build a reputation of fairness and to provide a platform that attracts as many users as possible. Here are their rules from their website:

“To see the full list and learn more about our policies, please review the Facebook Community Standards.  Here are a few of the things that aren’t allowed on Facebook:

  • Nudity or other sexually suggestive content.
  • Hate speech, credible threats or direct attacks on an individual or group.
  • Content that contains self-harm or excessive violence.
  • Fake or impostor profiles.
  • Spam.”

The debate at the moment is focused on political ads. Facebook has said that it will not fact check political ads and Tweeter has said that it will not run them at all.  A Washington Post editorial stated the issue this way: “Politicians should, for the most part, be able to lie on Facebook, just as anyone else is, and the public should be able to hold leaders to account. But that’s a different question from whether politicians should be able to pay to have their lies spread, based on unprecedentedly precise behavioral data, to the voters who are most likely to believe their lies.”  “Google’s reply has been more nuanced. The company will limit the criteria campaigns can use to “microtarget” ads to narrow audiences based on party affiliation or voter record. The aim is to increase accountability by letting more people see ads….”  “Tech-firms-under-fire-on-political-ads”

No one, thank heavens, wants the government to vet ads for truthfulness. Some facts are obvious and some are less so. The potential danger to free speech is illustrated by Singapore’s “fake news” law.  Singapore claimed that a post by fringe news site States Times Review (STR) contained ‘scurrilous accusations’.  Giving in to the law, Facebook attached a note to the STR post that said it “is legally required to tell you that the Singapore government says this post has false information”.  “Facebook’s addition was embedded at the bottom of the original post, which was not altered. It was only visible to social media users in Singapore.” https://www.bbc.com/news/world-asia-50613341

However, the government should provide the broad framework of a platforms responsibilities.  For example, the U.S. government requires transparency of who pays for ads in print and TV ads. The same requirement should be imposed on Internet political ads. To qualify for Facebook’s say whatever you want in a political ad policy, the candidate being supported should be required to attach his/her name as approving the ad. Limiting the use of micro targeted ads broadens the exposure and thus discipline on truth telling.  According to The Economist: “To the extent that these moves make it harder for politicians to say contradictory things to different groups of voters without anybody noticing, they are welcome. “Big-tech-changes-the-rules-for-political-adverts”

Knowing what sources of news to trust is no trivial matter. Knowing the source is helpful. Rather than fact checking the content of posts, Facebook attaches an easily viewed statement of the source.  Establishing standards for and establishing boundaries between categories of posts sound easier than they really are, but insuring transparency of who has posted something should play an important role. Flagging questionable sources, without changing the content of a post, as Facebook does, is also helpful. I hope that the discussion of the best balance (and not every platform needs to adopt the same approach) will be constructive.

Should we subsidize college educations?

“According to a national report by the State Higher Education Executive Officers Association (sheeo.org), high school graduates earn an average of almost $30,000 per year. Bachelor’s graduates earn an average of just over $50,000 a year. And those with a higher level degree (master’s, doctorate or professional) average nearly $70,000 per year. This translates to a significant earnings gap over the course of one’s life.” https://www.educationcorner.com/benefit-of-earning-a-college-degree.html “According to the SSA, the average wage in 2017 was $48,251.57.” https://wallethacks.com/average-median-income-in-america/  Moreover, college graduates generally have more interesting and secure jobs.

Who should pay for those advantages? The students themselves, or their families, have often borrowed the money to cover their educational expenses. Currently they owe $1.6 trillion  “Here’s-what-trillion-student-loan-debt-is-doing-US-economy”. Democratic party presidential candidate Bernie Sanders proposes to cancel all of it. He would also make all public colleges and community colleges tuition free.

Is that a good idea? Is it fair and does it encourage or enable a better use of our human resources? A proper evaluation requires indicating who would pay for it if not the students themselves. From the above data we see that college graduates make a lot more than everyone else on average—almost double the income of high school graduates.

If the $1.6 trillion in education debt is cancelled, the burden of repaying it (most of it was lent by banks, often guaranteed by the government) will be shifted from the better off (students who will receive higher incomes in the future because of their college educations) to tax payers. Total tax collections by the federal government in 2018 were $3.3 trillion, half of which was income tax, 35% was payroll tax (social security) and only 6% was corporate income tax.  https://www.pgpf.org/budget-basics/who-pays-taxes

Senator Sanders says he will cancel all student debt within six months. Does he plan to cut spending on other programs by $1.6 trillion, a 36% cut, or to increase taxes by $1.6 trillion (the deficit for FY 2019 is already forecast to be $0.9 trillion), or some mix of these?  According to Charles Lane: “Sanders and other left-leaning Democrats promise to pay for tuition-free college and Medicare-for-all with higher taxes on the top 1 percent of earners. Most Nordic countries, by contrast, have zero estate tax. They fund generous programs with the help of value-added taxes that heavily affect middle-class consumers…. The Nordic countries tried direct wealth taxes such as the one that figures prominently in the plans of Sen. Elizabeth Warren (D-Mass.); all but Norway abandoned them because of widespread implementation problems.”   “Democrats-use-Nordic-nations-as-models-of-socialism”

The Tax Policy Center “estimates that 69 percent of taxes collected for 2019 will come from those in the top quintile, or those earning an income above $157,900 annually. Within this group, the top one percent of income earners — those earning more than $783,300 in income per year — will contribute over a quarter of all federal revenues collected.”  Can we and should we try to squeeze even more out of them?

The effective federal tax rate for the top 1% income earners in 2018 was 29.6%, compared to 12.1% for the middle quartile of income earners and 2.9% for the bottom quartile (almost none of which was income tax). It is not obvious where the burden of this gift to the prospectively better off college grads will fall. But it seems to involve a lot of income transfers, which seem to sound nice to our new “socialists.”

 

Oslo: the Play

IMG_2150Yessar Arafat and Warren Coats in the PLO office in Gaza in February 1996.

Last night I saw the Round House Theater’s magnificent production of Oslo, the story of the secret meetings in Norway that led to the establishment of the Palestinian Authority.  It was a moving (heart wrenching) and balanced recounting of how these meetings achieved agreement between Israel and the Palestinian Liberation Organization on “land for peace” as it was called at the time after many years of failed official negotiations. I urge you to see it.

We heard the PLO negotiators lay out the Israeli theft of their homes and killings of their people and we heard the Israeli negotiators lay out the Palestinian attacks on Israelis and on the efforts of Jews to establish and secure an Israeli homeland.  For perspective, since the second intifada (between September 29, 2000 and January 31, 2018) at least 9,560 Palestinians have been killed by Israelis and 1,248 Israelis have been killed by Palestinians.  “The View from the West Bank”

The play focused on the unusual approach of these negotiations, which built on the development of trust and respect between the opposing negotiators and the agreement on achievable steps one step at a time. Between their long negotiating sessions in an isolated room near Oslo, they dinned, drank and bonded together. Unfortunately, the play fails to provide us with an overview of the resulting agreement, which applied the same step by step confidence building approach to the incremental establishment of a Palestinian government (the Palestinian Authority) and withdrawal of Israeli troops from the West Bank and Gaza. The PA was given governance authority for a limited number of functions in order—step by step—to build both institutional capacity and trust.

One of those functions was the establishment of the monetary authority (central bank). I led the IMF team that helped establish the Palestinian Monetary Authority and have many stories to tell of my many visits to Israel and the West Bank and Gaza in 1995-6 plus a number of visits in later years (most recently in December, 2011).

The PMA has developed into a well-run organization of which Palestinians (and those Israelis who see a successful Palestine government as important and necessary for their own security) can be proud.  It helped a great deal that the Bank of Israel and PMA developed good relations. Stanley Fischer was the governor of the BoI from 2005-13 and George Abed was governor of the PMA from 2005-7. They had both previously been colleagues at the IMF. “Jerusalem in August 2006”

It is with a broken heart that I watch Israel’s Prime Minister, Benjamin Netanyahu, with help from American President Donald Trump, increasingly abandon the two state solution of the Oslo Agreement for an apartheid single state regime in which “democratic” Jewish control is preserved by denying what would become the majority Palestinian residents their right to vote. “The Future of Israel and Palestine”

 

Attorney General Barr’s News Conference

I, and everyone I know, want to know the facts of any collusion between Trump and his associates and Russia. I am confident that the Mueller investigation provides them as well as we could expect. Attorney General Barr’s news conference this morning summarizing that report was clear and transparent. He did an exemplary and impressive job. The complaints from some Democrats on the Hill that Barr should not have held this press conference until after they had read Mueller’s report were unfounded and frankly embarrassing. Please let’s move on.

My assessment of Trump’s administration today, which is what we should be debating, is very mixed. Adjusting and lightening the regulatory burdens that have been holding our economy back is largely good in my view (though each must be judged individually) as are the tax reforms making the system simpler and fairer. While the tax reforms did not go far enough, they were a big improvement over the existing tax law.

Trump’s attitude toward trade and the protection of inefficient American firms is ill informed and damaging to American’s economy as a whole (as opposed to coal and steel producers). His bullying and unilateral approach is clumsy, amateurish, and counterproductive. The EU, Canada, Japan and others would be happy to join us in confronting China’s bad trade behavior, if Trump were willing to work together and not busy attacking them as well.

I supported Trump’s campaign promises of restraint in deploying American troops around the world, but he has not delivered. His message to the Senate accompanying his veto of the bill passed by both houses of Congress (54-46 in the Senate and 247-175 in the House) a few weeks ago invoking the War Powers Resolution to end U.S. support of Saudi Arabia’s war in Yemen reflects a truly shocking affront to our Constitution: “This resolution is an unnecessary, dangerous attempt to weaken my constitutional authorities, endangering the lives of American citizens and brave service members, both today and in the future.”  The truth is just the opposite. The constitution gives the power to declare war to Congress and the almost blank check congress gave Presidents following 9/11 cannot meaningfully be stretched to include what we are doing in Yemen.

Trump continues to undercut and weaken American leadership in the international organizations and agreements that have contributed so much to post WWII peace and prosperity. This will be increasingly harmful to our and the world’s legitimate interests.

In his spare time, the President thoughtfully advised the French on fighting the fire in Notre Dame. What an embarrassment and fire experts say that his advice was wrong.

Please, let’s fight the real battles and stop wasting time on the phony ones.

The College Admissions Scandals

A few weeks ago, Ito and I went to “Admissions,” the very well performed and thought provoking play by Joshua Harmon about affirmative action, at Studio Theater. Several friends had independently attended the play and suggested that we get together for one of Ito’s superb dinners and discuss it.  So we enjoyed an evening discussing the pros and cons of “affirmative action,” the “temporary” suspension of nondiscrimination legislation meant to repair and make up for discrimination against blacks that made them less prepared for college. It is a complex issue without obvious solutions. The play did an excellent job of fairly presenting all perspectives on this issue.

My opinion is that suspending, even temporarily, equal treatment (merit-based college admissions) of applicants to universities and colleges, as is done with affirmative action, is not the best approach to achieving equal treatment of all. It attempts to treat the symptoms of racial discrimination rather than the disease. First of all, private universities (unlike state schools using tax payers’ money) should be free to establish whatever admission policy they want.  Any school I would want to attend will want to include an element of diversity in its student body as an important element of the education they offer and will build that into its admission policy in whatever way it considered sensible.

And now we are confronted with the revelation that some of the rich and famous paid bribes to get their underperforming children into top schools. As stated in the Washington Post: “the scope and sheer shamelessness of an elaborate scheme in which some of the country’s richest people allegedly paid bribes to get their children into top U.S. universities is truly mind-boggling.” https://www.washingtonpost.com/opinions/the-college-admissions-scandal-should-prompt-broader-soul-searching/2019/03/13/f67aa986-45b5-11e9-aaf8-4512a6fe3439_story.html

This is shocking and unacceptable for the same reason I oppose affirmative action. It violates the principle and standard of merit in hiring people or admitting them to college. Our country is one of the wealthiest and most respected in the world because firms and organizations allocate jobs, positions, and resources in general on their merits (i.e. qualifications for the job, etc.). In short, people and other resources are put to their most productive use.  Obviously, this is not always the case. But firms that fall short of this standard suffer lower profits than if they had adhered to it. In short, in the private sector there is an economic incentive to employ the resources (including people) that best fit the needs being filled. Companies that employ their under-qualified relatives suffer lower profits as a result. Hiring or admitting people on the basis of merit is also our standard of fairness that is widely admired throughout the world.

Affirmative action is a deliberate departure from this standard as are the recently revealed bribes and test score cheating for college admission. In the first case it is an effort to overcome the damage of earlier discrimination against a once enslaved people. In the second case it is an effort to overcome the deficiencies of intelligence or character in our own children. A world in which we acquiesce to standards other than merit will always favor the already well off. We will never fully achieve the high standards of merit based appointments we have set, but we should never stop trying. A powerful strength of the private sector in a competitive free market economy is that the economic incentives are in the right direction.

American universities may never achieve a perfect admissions system completely based on merit and devoid of personal bias, but we should encourage them aim for it. The world outside of the academic environment is unfair enough when it comes to race, gender, sexual orientation and religion to name a few. Let us try to instill in the younger generation the understanding that hard work and smarts are what gets you ahead– not money, influence and certainly not the color one’s skin. And let’s promote attitudes and policies that encourage and reward such a reality.

Brett Michael Kavanaugh

The mash up between Christine Blasey Ford and Brett Kavanaugh has produced very strong opinions for and against the claims of each. Our views on the veracity of each are based on our emotional assessments of the testimony of each. Unless the FBI interviews contain new facts, there is no evidence to confirm Prof. Ford’s claim that Kavanaugh sexually assaulted her nor evidence to confirm his claim that he didn’t. This is the horrible fact for acts, or alleged acts, with no witnesses (Ford claims Mark Judge witnessed the events she describes but he denies it).

This is the sad situation of “She said—he said” for which there seems no easy remedy. Actual rape generally produces evidence (semen) if promptly reported. But we have come to understand why many women do not promptly report their assaults. Memories and evidence fade with time. The sworn statements of Prof. Ford and Judge Kavanaugh have holes and inconsistencies and you will believe the one you choose, for whatever reasons, to believe. Prof. Ford can’t remember where or when her assault occurred or how as a 15 year old girl she got there or returned home. Her fear of flying didn’t prevent her from doing a lot of it, etc. Judge Kavanaugh’s choirboy depiction of his youth doesn’t square with the police report of a bar brawl he started in college and testimony of roommates and classmates of his hot temper when drunk, etc.

“Democrats, the left, and various other anti-Kavanaugh persons can thank attorney Michael Avenatti for this outcome, at least in part.

“The spotlight-stealing lawyer, who also represented Stormy Daniels, is responsible for drawing the media’s attention to Julie Swetnick, an alleged victim of Kavanaugh who told an inconsistent and unpersuasive story. Swetnick’s wild accusation provided cover for fence-sitting senators to overlook the more plausible allegation leveled by psychology professor Christine Blasey Ford, and to declare that Kavanaugh was being subjected to false smears.” “Brett Kavanaugh-Michael Avenatti Collins”

The sad consequences for the reputations of Ford and Kavanaugh, tragic as they are, are compounded by the despicable behavior of both the Republican and Democrat parties. The refusal of the Republican controlled Senate to confirm President Obama’s Supreme Court nominee, Merrick Garland, was a shocking breach of protocol. “Even before Obama had named Garland, and in fact only hours after Scalia’s death was announced, Senate Majority Leader Mitch McConnell declared any appointment by the sitting president to be null and void. He said the next Supreme Court justice should be chosen by the next president — to be elected [eight months] later that year.” “What-happened-with-merrick-garland-in-2016”-NPR

The Democrats have behaved as badly: “Sen. Bob Casey and Senate Minority Leader Chuck Schumer also announced that they opposed Trump’s pick without knowing whom the president had selected.” “Democrats-race-to-oppose-trumps-scotus-nominee-even-before-name-announced” Senator Feinstein’s withholding of Prof. Ford’s letter accusing Kavanaugh until the last minute was either stupid or malicious.

Sadly we didn’t have much of the debate we should have had about Kavanaugh’s judicial qualifications and judicial philosophy. He is clearly highly qualified as was Judge Garland who as Chief Judge of the United States Court of Appeals for the District of Columbia Circuit headed the same court on which Kavanaugh has sat for the last 12 years. His job, he says, is to fairly interpret and enforce the law, not make it. Is he an originalist or texturalist and what do those mean?

Since 9/11 and The Patriot Act we have lived in a semi surveillance state that violates our constitutional rights to privacy and due process. As an official in the W Bush White House, Kavanaugh helped write the Patriot Act and later as a Federal judge he ruled to uphold parts of it that many of us consider unconstitutional:

“In a ruling in the U.S. Court of Appeals for the D.C. Circuit, Kavanaugh ruled that ‘the Government’s metadata collection program is entirely consistent with the Fourth Amendment.’ He also later stated ‘that critical national security need outweighs the impact on privacy occasioned by this program.’ Again, a rather odd conclusion for a staunch ‘constitutionalist’ to support.” https://fee.org/articles/the-constitutional-reasons-to-oppose-kavanaugh-for-the-supreme-court/?utm_campaign=FEE%20Weekly&utm_source=hs_email&utm_medium=email&utm_content=66477479&_hsenc=p2ANqtz–ZykcA0d1RgLgdKULIW6mqsBca_Mo6JDsC32-QU_CuMj4Tjcd7zNZA3lLuA0j1VucrH83ejT1Zrte2fKpGKnJS7qGN6w&_hsmi=66477479

But in most areas of protecting constitutionally protected rights or constitutionally mandated restraints on government, Judge Kavanaugh has been on the side of strict constitutionalism. While constitutional scholars are divided over just what a proper adherence to the constitution in the twenty first century should means, there is almost universal agreement that former justice Antonin Scalia helped sharpen the debate around that question.

The left wing historian and activist Howard Zinn puts the issue of judicial philosophy of SC judges in perspective in the following article. https://progressive.org/op-eds/howard-zinn-despair-supreme-court/

I assumed that he was writing about Judge Kavanaugh. After reading it I was surprise to realize that it had been written thirteen years ago. Mr. Zinn died in 2010.

Britt Kavanaugh’s scrutiny by the Senate has been ugly and painful. The Senate’s abandonment of traditional procedures, with their checks and balances, first by the Democrats and now by the Republicans is shortsighted and regrettable. The lack of deference to the President when consenting to his or her choices for her government is recent and regrettable. But most regrettable of all is the divisive lack of commitment to service to the nation as a whole rather than narrow partisan interests by our congressional representatives and our tweeting President.

Feeding the Swamp

During his filibuster leading to last week’s brief government shutdown, Sen. Rand Paul (R-Ky.) stated that: “When Republicans are in power, it seems there is no conservative party…. The hypocrisy hangs in the air and chokes anyone with a sense of decency or intellectual honesty.” He was protesting the compromise two-year budget just passed by the Senate and awaiting passage in the House. This budget, now signed into law by President Trump, adds over $300 billion in additional government spending this year alone on top of the $1 trillion dollar deficit created by the recently passed tax cut. “Why-did-the-GOP-vote-for-a-budget-busting-spending-bill-because-voters-dont-seem-to-care”

A few congressmen reacted with more principle. “’I’m not only a ‘no.’ I’m a ‘hell no,’ ” quipped Rep. Mo Brooks (R-Ala.), one of many members of the Tea Party-aligned Freedom Caucus who left a closed-door meeting of Republicans saying they would vote against the deal.

“It’s a “Christmas tree on steroids,” lamented one of the Freedom Caucus leaders, Rep. Dave Brat (R-Va.).” “Right-revolts-on-budget-deal”

Why should we worry about adding to the public debt? The “deficit” is the shortfall of tax revenue below expenditures in one year. This is now forecast to average about one trillion dollars in each of the next two years. “Bipartisan-budget-act-cements-return-trillion-dollar-deficits”. Each year these annual deficits add to the outstanding U.S. national “debt” currently at $20.6 trillion dollars. Even before the recent tax cuts and last week’s expenditure increases, the Congressional Budget Office projected Federal debt held by the public at $25.5 trillion or 91.5% of GDP by 2027. But that figure omits debt held by the Federal Reserve, Social Security “trust” fund, and other government entities, which must also be serviced and repaid. When these are included as they should be, gross federal debt is projected to be $30.7 trillion or 110% of GDP by 2027 and 150% of GDP in thirty years and climbing. And to repeat, this is before the recent tax cuts and budget increases.

As our economy grows so does the government’s capacity to carry and service (pay the interest on) the debt. But on the basis of existing laws and policies our debt will grow faster than the economy forever. But of course that is impossible. At some point taxes must be increased or expenditures cut, or the government defaults on its debt. In fact the problem is worse than these figures suggest because they fail to include the future taxes or borrowing needed to cover unfunded government liabilities. These are commitments, such as future Social Security pension payments, for which existing financing falls short. For example, Social Security payments already exceed its annual revenue from the wage taxes of current workers and the so-called trust fund will run dry in fifteen years. That will add still more to the deficit and the debt.

Indeed, there are times when deficits are ok and even helpful. When the economy goes into recession the government should allow the deficit that naturally results from falling tax revenue and increasing safety net spending. These are referred to as automatic stabilizers. However, we are currently not now in that phase of the business cycle. We are now at its peak and if the government is to achieve fiscal balance over the cycle it must run budget surpluses at the peak to pay for the deficits during the slumps. The U.S. should now have a budget surplus and not the huge deficit presently experienced and projected. The White House’s announcement today (Monday) that it is giving up on the traditional Republican goal of a balanced budget in ten years is hardly a surprise when we are starting with a large deficit at the peak of the business cycle. https://www.washingtonpost.com/business/economy/white-house-budget-proposes-increase-to-defense-spending-and-cuts-to-safety-net-but-federal-deficit-would-remain/2018/02/12/f2eb00e6-100e-11e8-8ea1-c1d91fcec3fe_story.html?utm_term=.514757e9c8de&wpisrc=al_news__alert-politics–alert-national&wpmk=1

Senator Paul was rightly angry that not only was the need to face and correct this untenable future kicked down the road yet again, but the process of doing so was corrupt. Votes were bought by sticking in special tax and spending breaks for the constituents and friends of individual congressmen—the old earmarks by another name. “Budget-deal-retroactively-extend-several-expired-tax-provisions”. While it is true that the bipartisan budget deal wouldn’t have passed without these bribes, it shouldn’t have passed. Instead of draining the swamp the Republicans have joined with the Democrats to feed it. “In-big-reversal-new-trump-budget-will-give-up-on-longtime-republican-goal-of-eliminating-deficit”. And more repulsive is the fact that these are the same Republicans who rallied against spending during the Obama years. This is the hypocrisy Senator Paul lamented.

Congress has failed yet again to prioritize it’s spending to match the resources that taxpayers are willing to pay. The moral corruption of this way of doing business was reestablished and reinforced. As another example of blatant corruption, Presidents have rewarded (paid off) large contributors with Ambassadorships to nice places like London, Paris, and Rome (to name a few) for decades. This is pure corruption for which the country pays with lower quality representation and diplomacy than would be provided by Foreign Service professionals. Unfortunately we have grown used to it and barely notice it. This is dangerous.

All individual government expenditures and programs look worthwhile to at least some people, but at the expense of what? What do taxpayers or investors or other government programs give up to finance them. These are not easy choices and decisions but it is the job of our representatives to make these judgments in the best interests of the country as a whole. That is probably expecting more than they are capable of delivering, but it is their job. Those of you of Generation X, Y and Z will have to pay for this so you are the ones with an incentive to do something about it. We need more Rand Pauls. “The-5-biggest-losers-from-the-2018-budget-deal-are…”

General Michael Flynn

We all deserve to know whether Donald Trump colluded or cooperated with Putin and Russia in any way to illegally help his presidential campaign. I have full confidence that special counsel Robert Mueller’s investigation will provide us with the truth of that question one-way or the other.

I also strongly support former President Obama’s (Russian restart) and President Trump’s desires to build the closest and most cooperative relationship possible with Mr. Putin’s Russia that is consistent with American interests and values. This means that conversations—many conversations—between the Trump administration and Russian officials are not only proper, but also highly desirable.

The revelations that such conversations occurred tell us nothing about whether the Trump administration has been doing anything improper. Then enter General Michael Flynn.

Sunday’s Washington Post contains an article with the headline “Inside the day that set in motion Michael Flynn’s guilty plea”. The day in question was Dec 29, 2016, well after Trump’s election and four weeks before his inauguration. The day before President Obama had “imposed sanctions against Russia for its alleged interference in the election.” Flynn called Russian Ambassador Sergey Kislyak, “urging Moscow not to retaliate — and Russia later surprisingly agreed.”

On the face of it this is neither appropriate nor inappropriate. We would need additional information to come to such a conclusion. However, Flynn lied to the FBI about having such a conversation, which raises the suspicion that it was inappropriate. Unrelated to his work with the Trump administration, General Flynn failed to get clearance before doing work with foreign governments, nor did he register as their agent, as required by law. Generally Flynn seems to have a habit of lying. Later Flynn pleaded guilty to perjury as part of a deal to fully cooperate with Mueller’s investigation in exchange for not being charged with these other crimes.

So if Flynn was not making improper deals with Russia, why did he lie about it? Hopefully we will know in the course of time, but it could be because he belatedly learned that his “conversations with Kislyak violated the Logan Act, a 1799 law that prohibits private citizens from conducting U.S. foreign affairs without the permission of the government.”

No one has every been convicted of violating the Logan Act and a strong argument could be made that such acts by a President elect and his team are not covered.

I want to know the truth. Trump lies so regularly that he has no trust from anyone who really cares about the truth. But to be fair, Flynn’s conversations with Kislyak is not evidence of anything inappropriate. Let’s not jump to conclusions until we have enough information to do so with some confidence that they are correct.

Our Free Press

A free press is an important pillar of a free society. In addition to reporting what is going on—who said and did what—the hard hitting investigative reporting of The Washington Post and other news outlet has exposed corruption and abuse of power from the Watergate scandal of Richard Nixon to the sexual misconduct of Donald Trump, Bill Clinton, Roy Moore, Harvey Weinstein, Bill O’Reilly, Roger Ailes, Kevin Spacey, Charlie Rose, Mark Halperin, Al Franken, and Representative John Conyers to name a few (more on this later). Such scrutiny of the behavior of those in positions of power is a critical service that is vital to the preservation of the integrity of our government.

One way to undermine the role of our free press is to challenge its integrity—to create doubts about the honesty of news reports—to label news as “fake news.” I am not suggesting for a second that news reports are never wrong or that we should not scrutinize them with some care and skepticism, but if the public comes to believe only those news sources that repeat what they already believe, one of the most important institutions protecting our freedoms (the fourth estate) would be seriously weakened.

We know that Mr. Putin’s Russia has been actively undermining faith in Western institutions by their citizens. In the U.S. and Europe Russia has used social media to plant fake news with both the right and the left in order to fan social divisions. One element of this campaign has been to undermine confidence in news reporting in general.

According to Hedrick Smith, former New York Times Moscow Bureau Chief and author of the global best-seller, The Russians: “Putin has turned to cyber warfare, using his intelligence services and computer hackers rather than military force to disrupt the West – and we can expect more of that in the 2018 elections and beyond…. It’s kind of Putin’s revenge for the fact that we pushed the Russian bear back in the cave by moving the frontiers of NATO into the Baltic states—Lithuania, Estonia and Latvia. And (Putin) sees us as being behind the overthrow of the pro-Russian president in the Ukraine. So he’s hitting back.” (Putin wants new cold war) Putin also needs external enemies—external distractions—to divert the attention of Russians from deficiencies at home.

As part of this attack on American institutions they have called the news media “the enemy of the American people,” and planted statements such as: “It’s frankly disgusting the way the press is able to write whatever they want to write, and people should look into it.” New York Times /2017/10/12/ And in a direct attack on the First Amendment, this: “Why Isn’t the Senate Intel Committee looking into the Fake News Networks in OUR country to see why so much of our news is just made up-FAKE!” Money CNN/2017/10/05/

If you didn’t catch it already, I played a little trick on you in the previous paragraph. Those of you who have been paying attention will have spotted that the above quotes attacking the American press and fake news were not Russian propaganda but from President Trump. He also said in a February White House press conference:

“I’m making this presentation directly to the American people with the media present … because many of our nation’s reporters and folks will not tell you the truth and will not treat the wonderful people of our country with the respect they deserve.

“Unfortunately, much of the media in Washington, D.C., along with New York, Los Angeles, in particular, speaks not for the people, but for the special interests and for those profiting off a very, very obviously broken system.

“The press has become so dishonest that if we don’t talk about it, we are doing a tremendous disservice to the American people, a tremendous disservice. We have to talk about it. We have to find out what’s going on because the press, honestly, is out of control. The level of dishonesty is out of control.”  (Trump: media out of control)

Why does Trump do this? Some think that Trump’s attempt to undermine confidence in the news media is part of a well thought out strategy to raise doubts about the veracity of news reports critical of him. It is all “fake news.” I am more inclined to think that he is simply unable to control his anger whenever his ever present and huge ego is bruised. He and his ego are more important than the health and well being of our country, as when he complained about a lack of gratitude for his helping get the release of three UCLA basketball players caught shoplifting in China. On November 15, Trump tweeted:

“Do you think the three UCLA Basketball Players will say thank you President Trump? They were headed for 10 years in jail!”

A few hours later at a press conference the three did just that, but the father of one of them, LaVar Ball, downplayed Trump’s role in his son’s release precipitating the following Presidential tweet:

“Now that the three basketball players are out of China and saved from years in jail, LaVar Ball, the father of LiAngelo, is unaccepting of what I did for his son and that shoplifting is no big deal. I should have left them in jail!”

Are you shocked or have you acclimated to the new normal? I leave it to you to decide whether Trump is reflecting his concern for the well being of our country or his ego. (Trump-college-basketball-players-helped-free-china-left-jail)

Undermining our faith in our institutions and in particular our news media is a serious matter. It is dangerous whether promoted by Russia or Trump. (Trump’s dangerous attacks on the press.) The press and its supporters, to their credit, are fighting back. (US-press-freedom-tracker-documenting-press-freedom-violations)

As David Ignatius put it: “Amid the slithering mess of problems that emerged in 2017, the one that bothers me most is that people don’t seem to know what’s true anymore. “Facts” this year got put in quotation marks.

“All the other political difficulties of the Donald Trump era are subsumed in this one. If we aren’t sure what’s true, how can we act to make things better? If we don’t know where we are on the map, how do we know which way to move? Democracy assumes a well-informed citizenry that argues about solutions — not about facts.” He suggests the reestablishment of newspaper ombudsmen and would “like to see [Google, Facebook, etc.] using machine learning to interrogate supposed facts to establish where they’ve been — how they first surfaced, and how they were passed from user to user.” (“Getting-back-to-facts/2017/11/23/”)

At the same time, the American press deserves some of the criticism it has received. The following article by Chris Wallace puts the case very well: Trump-is-assaulting-our-free-press-but-he-also-has-a-point The distinction between news and opinion is sometimes blurred.

Here are two quick examples: The-FCC-has-unveiled-its-plan-to-rollback-its-net-neutrality-rules. The Post article linked here provides a reasonably balanced report on those favoring and those opposing the FCC’s proposed return to more or less the legal situation prior to 2015. The problem, as is often the case, is that the article’s headline is not written by the article’s authors and the headline gives a totally misleading impression of what is proposed: “FCC plan would give Internet providers power to choose the sites customers see and use” However, the headline writer probably reflects the better disguised biases of the reporters (to their credit). My own blog on the subject from last May is far more balanced if I may say so myself: https://wcoats.blog/2017/05/17/net-neutrality/

The discussion now underway on Republican tax reform legislation provides another example of press bias. Every morning I read the Wall Street Journal followed by the Washington Post, which should provide a bit of balance. But I have found press reporting (editorials and opinion pieces are free to say whatever they want) on this subject sufficiently biased to provoke me to blog twice on it: https://wcoats.blog/2017/11/12/tax-reform-and-the-press/    https://wcoats.blog/2017/11/18/salt-more-press-nonsense-on-tax-reform/

And finally from my highly selective short list was the recent Post headline: Trump boosts Moore in Ala. Senate race despite sexual misconduct allegations (Trump-boosts-Moore-in-ala-senate-race-despite-sexual-misconduct-allegations)  This is very interesting (and amazing) on several levels.

Trump does not indorse Moore in this article but speaks out against his opponent: “’We don’t need a liberal person in there, a Democrat,’ Trump said about Moore’s opponent, former federal prosecutor Doug Jones, who has led in some recent polls in the state.”

The WSJ version of the same story was titled: “Trump Signals Support for Roy Moore Over Democratic Opponent.” WSJ 11/22/2017 With regard to the multiple sexual misconduct claims against Mr. Moore, “Mr. Trump pointed to the can­di­date’s state­ments: ‘Look, he de­nies it… He to­tally de­nies it. He says it didn’t hap­pen. And, you know, you have to lis­ten to him also.’”

A few hours later this article was updated as follows: “Trump said, ‘He totally denies it.’ Previously, the White House said that Mr. Trump believed Mr. Moore should leave the race if the allegations proved to be true.”

From CNN news: “President Donald Trump on Tuesday defended embattled Alabama Republican Roy Moore, all but endorsing the Senate candidate who has been accused of sexual assault and child sex abuse. “He denies it. Look, he denies it,” Trump said of Moore. “If you look at all the things that have happened over the last 48 hours. He totally denies hit. He says it didn’t happen. And look, you have to look at him also.” But to repeat, Trump did not endorse Moore.

Trump’s tolerance of “questionable” behavior by Republican’s is not extended to Democrats. When he returned from Asia he tweeted on Nov 16 about a picture in which Al Franken is holding his hands above Leeann Tweeden’s breasts, while they were on a 2006 USO tour to entertain U.S. troops.

“The Al Frankenstien picture is really bad, speaks a thousand words. Where do his hands go in pictures 2, 3, 4, 5 & 6 while she sleeps?”

He continued in a second tweet, “And to think that just last week he was lecturing anyone who would listen about sexual harassment and respect for women.”

Trump seems to suggest that we should believe the denials of Republicans and investigate the denials of Democrats. He had wisely kept silent to that point about Moore’s pedophile charges, presumably not to remind the public of his own admitted sexual misdeeds (plus the large number of claims he has denied). Here is the full list: President Trump-and-accusations-of-sexual-misconduct-the-complete-list . The mystery is why when he consulted his advisor on such things (himself, of course) he decided to break silence on the subject—condemning Sen. Franken while giving Moore a pass. I suggest that he change advisors.

We have sadly and dangerously grown used to the routine lying of Trump and others. We live in a world of fake news. There have always been limits on our generally wide-ranging freedom of speech, however. Famously, we may not shout fire in a theater when we know there is none. The balance between the First Amendment’s protection of free speech and protection against willful defamation, for example, can be tricky. The following article provides a useful discussion of this balance in the context of the defamation case against Trump by one of his claimed sexual abuse victims, Summer Zervos, a contestant on Trump’s reality television show, “The Apprentice.” “She accused then-presidential candidate Trump of sexual harassment that purportedly occurred in 2007. Trump denied the allegations, and, in his characteristically understated style, tweeted that those allegations, and similar allegations made by other women, were “nonsense,” lies,” “phony” and “100 percent fabricated.” Zervos then claimed that Trump’s comments amounted to defamation.” (Trump’s attack on Summer Zervos blows hole first amendment) This might prove more damaging to Trump than the Russia investigation.

Sound Money

Philadelphia Society Address on Oct 14, 2017

Introduction

Sound money is a necessary but not a sufficient condition for a healthy economy. How can we best achieve and maintain it?

For almost two hundred years the gold standard did a good job of producing sound money but its weaknesses ultimately led to its abandonment and exchange rates were allowed to float.

The movement in the 1980s to independent central banks with a stable price level mandate, such as an inflation target, delivered several decades of sound money—this was called the great moderation. But is came at the expense of increased exchange rate volatility and asset bubbles.

We need to return to a monetary regime with a hard anchor. But money fixed in price to a single commodity, such as gold, will not provide as stable a value as a price fixed to a larger basket of goods.

The discretion of the central bank to control the supply of money should be replaced with market determination of the money supply. To achieve this money should be issued under currency board rules. Specifically the public should be able to buy all of the currency they want at the currency’s official prices and redeem any of it they no longer want at the same price.

The Gold Standard

The essence of the gold standard was the obligation of the issuer of gold backed money to redeem it for gold at an officially fixed price. This limited the amount of money that could be issued.  The United States set the price of fine gold at $19.49 per ounce in 1791 and raised it to $20.69 in 1834. The Gold Standard Act of 1900 lowered it slightly to $20.67.  In 1934, Congress passed the Gold Reserve Act, which raised the price of gold to $35 an ounce and prohibited private ownership of gold in the United States.  Lyndon Johnson’s guns and butter deficit spending over heated the U.S. economy, which raised doubts about the U.S.’s ability to honor its gold commitments. By late 1971 the U.S. no longer had enough gold to honor its redemption commitment, and President Richard Nixon suspended the U.S. commitment to buy and sell gold at its official price. Yet, an official price remained, and was raised to $38.00 per ounce in 1971 and to $42.22 in 1972. In 1974, President Ford abolished controls on and freed the price of gold, which rose to a high of $1,895 in September 2011 before falling back to $1,304 this morning (October 14, 2017). More importantly, as gold has never been very representative of prices in general, prices of goods and services on average in the U.S. rose 500% over the 45 years since Nixon closed the gold window.

Floating Exchange Rates and Inflation Targets

When Nixon closed the gold window he also imposed wage and price controls, which lasted for three years. The dollar no longer had a “hard” anchor. It was no longer redeemable for anything and new policies were needed to regulate its supply. Over this period the Fed implemented monetary policy via adjustments in the overnight interbank lending rate (the Fed funds rate) in light of, among other things, its objectives for the growth of monetary aggregates. When wage and price controls were finally lifted the CPI increased a staggering 12% in 1974.

In the face of the Fed’s persistent over shooting of its narrow and broad money target ranges and the entrenching of higher and higher inflation expectations in wage and price increases, Federal Reserve Board Chairman Paul Volcker led the Board and the Federal Open Market Committee (FOMC) on October 6, 1979 in a dramatic change in the Fed’s approach to implementing monetary policy by shifting to an intermediate, narrow money target, operationally implemented via a target for non-borrowed reserves. The new approach required the Fed to relax its Fed funds rate targets and it increased the band set by the FOMC for the Fed funds rate from 0.5% to 4%. However, the fed funds rate rose temporarily to over 22% and GDP fell by over 2% in 1982—actual and expected inflation were reversed and fell below 2.5% by 1983. The new approach had defeated inflation but it was not easy to implement and by the end of 1989 the Fed abandoned it for the more traditional fed funds rate targeting.

At about the same time radical innovations in the development of monetary policy rules were launched by the Reserve Bank of New Zealand, which came to be known as explicit inflation targeting. An inflation target provides a clear and explicit rule that permits flexible operational approaches to its achievement. Given Friedman’s long and variable lags in the effect of monetary policy on prices, setting monetary operational targets (almost always the equivalent of a fed funds rate) must be based on the best model assisted forecast of its consistency with the inflation target one to two years in the future. A longer target horizon provided more scope for smoothing any output gap (employment). Full transparency of the policy and the data and reasoning underlying policy settings is required to gain the benefits of the alignment of market inflation expectations with the policy target.

The RBNZ’s development and adoption of inflation targeting was an important development in the pursuit of rule based monetary policy with floating exchange rates that accommodated flexible implementation. It swept the world of central banking. While the Fed did not adopt explicit inflation targets until 2012, it clearly pursued an implicit inflation target long before that.

Monetary stability, defined as price level stability, improved significantly, but exchange rate volatility increased. The Great Moderation of the 1990s and early 2000s that resulted from more stable domestic prices was followed by the Great Recession. The Great Recession of December 2007 to June 2009 highlighted the failure of inflation targeting to take account of asset price bubbles and “inappropriate responses to supply shocks and terms-of trade shocks”.[1]

What followed can only be described as a nightmare (largely because of the over leverage and other weaknesses in the U.S. financial system). After properly and successfully performing its function of a lender of last resort and thus preventing a liquidity-induced collapse of the banking system, the Fed went on to undertake ever more desperate measures to reflate the economy. These Quantitative Easings (QEs)—quasi-fiscal activities—have been widely discussed and have contributed little to economic recovery.[2]

The conclusion from the above history is that monetary policy is being asked to deliver more than it is capable of delivering. Central banks are generally staffed by very capable people, but they can never know all that they need to know to keep the economy at full employment as employers and jobs keep changing. The quality of forecasting models has greatly improved in recent years, but they remain unreliable. The policy strategy and intentions of the Fed and other inflation targeting central banks have become admirably transparent, but given the uncertainty of its next policy actions, markets remain spooked by every new data release and speech by Fed officials. Yet inflation in the U.S. and Europe remain below the 2% targets of the Fed and of the ECB.

Despite the huge increase in the Fed’s balance sheet, which banks are largely holding as excess reserves at the Fed, monetary growth in the U.S. averaged only about 5.5 to 6% over the past four years or about the same as its long run average (for M2). My assessment of the slow pace and modest size of the economic recovery in the U.S. is that regulatory burdens have discouraged investment while many internet related investments continue to drive down costs of many economic activity (a sort of unrecorded productivity increase).  Easy money is once again inflating asset prices (stocks and to a lesser extend again real estate).  But who knows for sure?

The idea that central banks can micro-manage monetary conditions to smooth business cycles is a conceit. In my opinion, central banks have given their price stability mandates their best shot and failed. The successful, countercyclical management of the money supply with floating exchange rates is simply beyond the capacity of mortals.

Return to a Hard Anchor

The Fed should give up its management of the money supply and return to a system of money redeemable for something of fixed value – a so-called hard anchor for monetary policy. This means linking the value of money to something real and managing its supply consistent with that value (exchange rate). Such regimes do not magically overcome an economy’s many and continuous resource allocation and coordination challenges, but by providing a stable unit in which to value goods and services and to evaluate investment options, and sufficient liquidity with which to transact, such regimes facilitate the continuous adjustments private actors need to make for an economy to remain fully employed and to grow.

But fixed exchange rate regimes, including the gold standard in one of its forms or another, have historically had their problems as well. These problems generally reflected one or the other of two factors. The first was the failure of the monetary authorities to play by the rules of a hard anchor, which is to keep the supply of money at the level demanded by the public at money’s fixed value. The pressure to depart from the rules of fixed exchange rates generally came from fiscal imbalances or mistaken Keynesian notions of aggregate demand management. However, even when central banks aimed actively to match the supply of its currency to the market’s demand with stable prices it proved beyond their capacity to do so.

The second source of failure came from fixing the value of money to an inappropriate anchor. When the exchange rate of a currency is fixed to another currency or to a commodity whose value changes in ways that are inappropriate for the economy, domestic price adjustments can become difficult and disruptive. Fixing the exchange rate to a single commodity, as with the gold standard, transmitted changes in the relative price of gold to prices in general, which imposed costly adjustments on the public.

These historical weaknesses of monetary regimes with hard anchors can be overcome by choosing better anchors and by replacing central bank management of the money supply with market control via currency board rules.

Currency board rules give control of the money supply to the market—to the public. As an example, a strict gold standard operated under currency board rules would increase the money supply whenever the public wanted more and was willing to buy it with gold at the fixed gold price of a dollar. If the public found it held more money than it wanted it would redeem the excess for gold at the same price.

I led the IMF teams that established the Central Bank of Bosnia and Herzegovina with currency board rules, and it functions in exactly this way. It has no monetary policy other than issuing or redeeming its currency for Euro at a fixed exchange rate in passive response to market demand. It has worked very well. I was also involved in establishing currency board rules for the Central Bank of Bulgaria, which has also enjoyed stable money ever since.

The hard anchor should not be just one thing. The relative price of any individual good or commodity will vary relative to prices in general. Thus a small representative basket of goods should be chosen for the anchor. Earlier proposals for broader baskets suffered from the assumption that buying and redeeming the currency should be against all of the items in the basket. That would be cumbersome and storage and security would be costly. Currency board rules should provide for indirect redeemability, by which the currency would be purchased with or redeemed for designated AAA securities (e.g., U.S. Treasury bills) at their current market value.

Exchange Rate Volatility or a Global Currency

A major cost of the current system of floating exchange rates with inflation or other targets is the uncertainly and wide swings of exchange rates. Over the last decade the USD/Euro exchange rate varied over 40 percent. The classical gold standard was associated with a flourishing of foreign trade in part because the gold standard was a world currency, which there for eliminated exchange rate risk. There would be considerable benefit to world trade, economic efficiency, and growth if all or most countries adopted the same hard anchor for their currencies. The International Monetary Fund’s SDR already exists for this purpose but would need to be modified in several important ways in order to operate under currency board rules and to change its valuation basket from a basket of currencies to a basket of goods.

Conclusion

Experience with monetary regimes with floating exchange rates has been mixed. Almost all major currencies have become more stable in the last three decades but at the expense of increased exchange rate and asset price volatility. The United State, as well as most other countries, would benefit from a return to a monetary system with a hard anchor, but fixed to the value of a small basket of goods rather than to just one, and whose supply is determined by the public’s demand via issuing and redeeming it indirectly for a liquid asset of comparable value according to currency board rules. The benefits of such a system would be increased the more widely it was adopted. One of the virtues of the gold standard was that it was global.

Reference

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

________________, “What’s Wrong with the International Monetary System and How to Fix it?” April 20, 2017. https://works.bepress.com/warren_coats/38/

Jeffrey Frankel. “The Death of Inflation Targeting”. Project Syndicate, May 16, 2012.

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[1] Jeffrey Frankel. “The Death of Inflation Targeting”. Project Syndicate, May 16, 2012.

[2] See for example, Warren Coats, “US Monetary Policy–QE3” Cayman Financial Review January 2013.