Category: News and politics

In Defense of Vultures

They clean up the mess beside the road that has been left there to rot. It is not a pleasant sight but who can really object to the service these birds perform. Actually, the vultures I want to defend are not the feathered ones but the even uglier, so called, bottom- feeders, who take advantage of asset fire sales.

I am trying to find words to explain the stupidity of the attack on people who swoop in to buy things when their prices are depressed, that will not be insulting to the intelligence of non economist. I think that every one understands that if the demand for something increases its price will go up (or not fall as far). A so-called fire sale is when someone, often a company facing bankruptcy, is forced to liquidate some or all of its assets in order to pay its bills. The forced sale often pushes the price of the asset below its true long run value (to the extent anyone knows what that is). Bottom feeders step in and buy when they think the price has fallen to or below that long run value. If they are right, they will make money in the long run when the price of the asset recovers. Are they doing a bad thing? If we some how could keep them out of the market, what would happen to the price of the asset being sold under duress? It would fall further, of course! If you think that these vultures are exploiting distressed sellers, you are free to offer a higher price.

The attack on Payday lenders, so called because borrowers use an upcoming paycheck as collateral, is a bit more subtle. Interest fees on these emergency loans are very high, as these risky borrowers don’t qualify for normal bank loans. According to the Washington Post “Each loan comes with steep fees. The CFPB found that payday borrowers pay a median $15 in fees for every $100 they borrow, amounting to an annual percentage rate of 391 percent on a median loan of $350.” The new Consumer Financial Protection Bureau (CFPB) has just proposed “sweeping new rules” that will limit their use. As with restrictions on vulture investors (which fortunately have not been proposed by the administration), restricting access to payday loans would force such borrowers to seek out loans with still worse terms or suffer the consequences of no loan. If you think that payday lenders are exploiting their customers, you are free to lend to them at better terms.

However, restrictions on payday loans have a big brother, paternalistic purpose. The argument is that these emergency borrowers can’t be trusted to use the money responsibly. “The agency found that about 80 percent of payday loans are rolled over into a repeat loan, causing fees to pile up for borrowers. Roughly 45 percent of payday customers take out at least four loans in a row.” http://wapo.st/1sPFODl   It is appropriate to take away the freedom of choice from people judged mentally or emotionally incapable of exorcising that judgment in their own best interest. The power to do this is potentially dangerous and should only be used sparingly and with careful judicial guidelines and oversight. Dangerously our government has pushed this boundary far beyond what can be justified in a free society. Big brother has grown fat.

A further step in the direction of ever more intrusive government are the new rules issued by the Obama administration that would require investment advisors to put the interests of their clients above their own. “Trade groups representing businesses, Wall Street firms and other financial professionals joined forces to file a legal challenge against a new rule from the Obama administration that would restrict the advice brokers and advisers can offer to retirement savers…. The groups are attempting to block a rule announced by the Labor Department in April that created a higher standard for the investment advice offered to retirement savers. The new regulations require brokers selling investments for retirement accounts to put their clients’ interest ahead of their own.” http://wapo.st/1TM6gVj

Putting the interests of investors above those of their advisors is a perfectly good standard. It is what I, and most people, expect from their financial advisors. The questionable self-interest of the trade groups opposing it is obvious. It doesn’t follow that every good practice should be made a legal requirement enforced by the government, which is the direction we have been going in recent decades resulting in thousands and thousands of pages of regulations in almost every area of economic activity. Markets tend to adopt good practice on their own.

Investment advisors who give the best advice from their clients point of view (rather than investments that might pay the advisors the highest commissions) are certainly more desirable to investors. The marketing issue is how to know and insure that that is the standard followed by a particular advisor. If such a standard is written into your contract with your investment advisor—something she would surely proudly advertise—you would have the legal basis to sue if that standard were violated.

Private markets don’t have the best solutions to all problems of product quality but they do have the best solutions in an ever-changing technical world for most of them when given the chance.

On being Adults

I have always opposed hate crime laws on the grounds that the law should generally deal with our actions rather than our more difficult to determine motives. I am also saddened by the growing tendency of college students to turn to their in loco parentis administrators to protect them from the verbal challenges that should be part of their growing up experience. These two are related.

The ongoing discussion of transgenders’ use of bathrooms, locker rooms, and other public facilities has raised all kinds of issues. What if a “real” man pretends to be a woman and comes into the Lady’s room and molests some poor girl? Won’t laws allowing people to use the restroom that fits their sexual identity encourage such behavior, or at least open the door to it? No. Such behavior has been illegal forever without having to ask what reason or excuse was given for being in the Lady’s room. Comments from a reader of my “Public Bathrooms” blog earlier this week illustrates this sort of misguided thinking:

John Rohan: “The fear is not just transgender people attacking anyone…. The real fear is ordinary males taking advantage of the policy, which has happened on many occasions, so it’s not a “non issue”.

“This isn’t just about bathrooms with private individual stalls. It’s about locker rooms and showers, like in our schools. If the Obama administration had it’s way, biological males, with no surgery, hormone treatments, and without necessarily even informing their parents, should be allowed to use the girls locker rooms and showers.

“McCloskey goes on to ask: “How is it to be enforced? DNA testing by the TSA at every bathroom door?” Well, let’s flip that around. If you allow trans people to use their preferred facilities, how is that to be enforced? Asking for proof of hormone medication? A doctor’s note? Then what?”

It is the transgenders who have the difficult and sometimes wrenching decisions to make about what facilities to use at each stage of their transition. Common sense will and normally has prevailed on everyone’s part. When truly offensive behavior occurs (e.g., an assault) for what ever reason, the laws already exist to punish it.

There are times when we need the state to punish unacceptable behavior and to protect the weak, but the trend toward reliance on Big Brother to deal with more and more of the things we don’t like bods ill for our liberties and our society. Big Brother has a habit of having a mind of his own (or of his best placed buddies) the imposition of which we don’t always like. Of equal importance is the weakening of our personal strength to deal with the real world from turning too often to the state to deal with what we should be able to deal with ourselves.

This leads to my second concern, which is the subject of an excellent op-ed by Catherine Rampell in this morning’s Washington Post: “College Students run crying to Daddy Administrator” https://www.washingtonpost.com/opinions/college-students-run-crying-to-daddy-administrator/2016/05/19/61b53f54-1deb-11e6-9c81-4be1c14fb8c8_story.html

In her column Ms. Rampell says: “I applaud students who want to create a diverse, welcoming atmosphere on campus. I admire their drive to make the world around them a better, more inclusive place. What puzzles me, though, is this instinct to appeal to administrators to adjudicate any conflict.

“Rather than confronting, debating and trying to persuade those whose words or actions offend them, students demand that a paternalistic figure step in and punish offenders.

“Adult students, in other words, are demanding more of an in loco parentis role from their schools. And administrators appear ready and willing to parent.”

Political correctness, as opposed to good manners, reflects a worrying propensity to turn to and give over to authorities things we should develop the capacity to deal with ourselves. I have written about this several times before but the disease is still with us: https://wcoats.wordpress.com/2015/11/11/what-is-wrong-with-pc/

Remove the Barriers to Work

Most people, and I mean almost everyone, would rather work than receive welfare. Earning your own living is an essential element of happiness and self esteem. These are the well-documented conclusions of Phil Harvey and Lisa Conyers in their new book The Human Cost of Welfare. You can watch their discussion of their book at Cato last month here: http://www.cato.org/events/human-cost-welfare-how-system-hurts-people-its-supposed-help.

Dozens of welfare programs attempt to help the poor and disadvantaged with mixed results. We would do well to replace most of these programs with a guaranteed minimum income (from which the government should deduct funds dedicated to health insurance and old age pensions of the recipients choice) as I proposed several years ago as part of a major tax reform: http://www.compasscayman.com/cfr/2009/07/07/US-federal-tax-policy/

Some of these programs discourage work by imposing financial costs for working as the result of reduced income from lost benefits. These welfare design flaws should be fixed (as the proposed guaranteed minimum income would), but governments have also thrown up many other barriers to getting jobs in the form of regulatory requirements and restrictions. Unnecessary or overly burdensome licensing requirements for many jobs protect incumbents and discourage job seekers.

According to the Washington Post: “Last year, a White House report documented the startling fact that 1 in 4 U.S. workers need a license to do their jobs, a fivefold increase since the 1950s.”

One of thousands of examples is the “license to blow” in Maryland. The state of Maryland has just bravely reduced the amount of training required for a license to wash and dry hair from 1,200 hours to 350 hours. “The new Maryland bill creates a “limited” cosmetology license for workers in blowout salons; it can be obtained after 350 hours of training. Previously, you had to be licensed as a stylist or cosmetologist, which require 1,200 and 1,500 hours of training, respectively” Washington Post May 18, 2016 https://www.washingtonpost.com/opinions/maryland-blows-away-a-hurdle-for-workers/2016/05/17/fc61cb36-1c50-11e6-9c81-4be1c14fb8c8_story.html

Most people want to work and we should make it easier for them to do so.

Public Bathrooms

A few years ago the public bathroom scandal concerned the ignorance of male architects in incorrectly designing toilet capacities for the different requirements of men versus women. Clear evidence could be witnessed during intermission at the Kennedy Center in the form of much longer lines outside the Ladies’ rooms than the Men’s rooms. This was a real problem and thus a real scandal.

Now we have a totally fictitious scandal of transgender men and women using public bathrooms appropriate to their sexual identity rather than their sex recorded in their birth certificate. All these years of transgender women using the Ladies’ Room went unnoticed, but you can believe there would be (will be?) a ruckus if they had used the Men’s Room. This is politics of the worst type pure and simple by religious fanatics and Trump-like exploiters of latent bigotry (though to Trumps credit he also labeled this problem a phony, non issue).

The highly respected economist, Dierdre McCloskey—born Don, shared some of her experiences with me in correspondence:

“Before I “passed” (surgery, working at it) I was frightened to go into a ladies’ room, but I could hardly go into a men’s room in a dress.  You can imagine how dangerous that would be!  I was allowed to put Female on my driver’s license in tolerant Iowa in 1995.  But you are right that it is unwise in such matters if nothing much is going wrong to stir things up.  I’ll bet now that Iowa has rules from the state.  Then it was left to Iowans’ ample common sense.  My passport F was tougher—I wept to the woman at the New Hampshire passport office, and she relented and sent my passport the day before I was boarding a flight to go to Holland to teach for a year, in January 1996.  So the State Department unofficially was cool.  A year later I tried to get Harvard to change my degree from Harvard College class of ’64 to the women’s college, Radcliffe.  The male dean I spoke to thought not.  I whined, “But the State Department had no problem giving me an F passport.”  With a smile in his voice he replies, “But Harvard is older than the State Department!”

“There’s more on all this in my memoir of my transition, Crossing: A Memoir (1999 University of Chicago Press).

“The bathroom “issue” is entirely phony.  It has never been a problem.  Anyway, if men wanted to sneak in (they don’t), they could always have done so, with or without North Carolina’s law.  How is it to be enforced?  DNA testing by the TSA at every bathroom door?  Anyway, your house has a unisex bathroom, I presume, and in Europe they are not entirely uncommon—after all, the stalls have doors.  Etc, etc.  On both sides it is just a club to beat up the other side in the silly Cultural Wars, and to make people hate and disdain each other.  Adam Smith would not have approved.”

In fact my friend’s Washington restaurant, Café Asia, has one large unisex bathroom—a long row of washbasins and mirrors opposite individual, locked toilet stalls. No one seemed upset. “Nobody in this entire debate has produced a single documented instance of a trans person initiating any kind of violence or sexual harassment in a bathroom.” Elishe Wittes, a Washington DC high school student https://www.washingtonpost.com/opinions/one-bathroom-for-all-install-gender-free-single-user-restrooms/2016/05/13/0d15664c-1907-11e6-924d-838753295f9a_story.html

So the whole issue is phony. But it does raise once again the question of how best to promote the broadening of the civil liberties of all Americans and our history reflects broad, if sometimes uneven, progress. From the abolition of slavery the achievement of full equal protection of the law for all (abolition of: Jim Crow laws, the ban on interracial marriage, separate but equal, ban on same sex marriage) has been a slow process of broadening and deepening public understanding and acceptance to the dignity and rights of all law abiding people. Crucial Supreme Court rulings that have confirmed such rights came only after they were broadly supported by most (but not all) of the public. So the real battlefield for enlightened, (classically) liberal values is one on one, and in the churches, synagogues, Mosques, classrooms, and clubs in which people talk to each other in search for better lives. Once those who wish to deprive such protections to some group (blacks, Jews, gays, transgender, etc.) fall into a discredited minority, they rather quickly fall (relatively) quiet once the Supreme Court has ruled. Man’s insular, self-protective nature, and attachment to the familiar, eventually gives way through education to the higher values and enrichment of modern civilization. This will surely happen again. Though the Trump backlash may slow the process.

The Market vs. the State

It is in our natures to serve our personal interests first and those of others second. The interests of others include not only those around us in need but also our children and future generations in general, which are served by far sighted policies that might entail short-run and immediate sacrifices. Communities and societies that have instilled in each generation the values that promote and serve such longer-run interests will flourish relative to those with more narrowly “selfish” values.

Adam Smith famously explained in The Wealth of Nations how an individual’s pursuit of his personal gain benefits society at large. In the marketplace the fruits of our labors enjoy the greatest profit the better they meet the desires and needs of our customers at the lowest possible cost. While we might like to cut corners and raise our prices if we could get away with it, competition in the market prevents us from doing so.

Free trade and the international agreements that promote it is an example of the trade off between personal and community or national interests that I am raising. The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) will further extend the freedom to trade among the countries signing up to them while raising the standards for working conditions, intellectual property protection, and conflict resolution.

I began an article on free trade written a year and a half ago with: “World per capita income didn’t change much from the time of Christ to the founding of the United States ($444 to $650 in 1990 dollars), a period of 1,790 years. But in the following 320 years it jumped to $8,080. And about half of that jump came over the last 50 years. What explains this fairly recent explosion of well being? Many things, of course, but central to this explosion of wealth was trade.” free-markets-uber-alles As the most disheartening and distressing U.S. presidential campaign in my lifetime has made clear, the huge gains from freer trade as with the huge gains from technical advances have not been evenly shared thus highlighting the trade off between personal and community interests I am exploring.

We have long accepted that economic progress should not be stopped because it would make a particular set of skills or tools less valuable. When someone developed cheaper and better ways of providing us with music than the old 78 inch vinyl record—itself an amazing technological feat in its time—those producing the old records were forced to learn new skills. We should debate whether society (family, church, community governments, etc.) should help those adversely affected by technological progress and how best to do it, but few would want to prevent such progress from which almost everyone in the world has eventually benefited enormously.

Government, which represents an exercise of our collective will, is meant in part to give primacy to our concerns for the interests of others and/or the long run over our individual, immediate personal well being. The American constitution was all about trying to do that without the government becoming captive of the self-interest of those running it. Our natures, whether we operate as private individuals constrained by the market place or as public officials constrained by the law and a broadly agreed public purpose, remain a mix of self-interest and public interest. The fundamental difference between our behavior as private citizens or public servants is in the external constraints that impact our behavior. Our natures otherwise remain the same.

The power of government can be exploited to thwart the discipline of competitive markets on the dominance of self-interest over the common interest. Preventing government from being captured by the self-interest of those running it or those who seek special privileges from it is no easy task. To that end our constitution strictly limited what government could do (the enumerated powers) and encumbered it with checks and balances. The dangers of such capture posed by the military industrial complex of which President Eisenhower warned, is well known and real (e.g. $400 billion F-35 Joint Strike Fighter that few believe we need), but the same is true of most other intrusions of government into private affairs, such as all of our many wars (on drugs, terror, poverty, etc.) as well.

Sadly our government has expanded well beyond its necessary functions into every nook and cranny of our personal lives with increasingly pernicious and alarming results. The abuses of its ever-expanding powers for personal and partisan benefits are exemplified by the scandal of asset forfeiture,the-abuse-of-civil-forfeiture/, which alarmingly continues, the long and bipartisan history of political abuse of the IRS, irs-tea-party-political, and most recently the legal attack on companies questioning the climate change forecasts of the Intergovernmental Panel on Climate Change (IPCC) by the AGs United for Clean Power using the Racketeer Influenced and Corrupt Organizations (RICO) Act in an effort to silence criticisms of UN climate studies. prosecuting-climate-chaos-skeptics-with-rico. Such a blatant government attack on free speech is truly shocking. These are but a few examples of growing government tyranny and corruption.

The most effective defenses against such corruption are to limit the scope of government as much as possible (i.e. subject individual actions to the discipline of the market as much as possible) and to strengthen public insistence on adherence to the rule of generally applicable law. As trade has moved beyond the village and nation, so must the rule of law.

Following World War II the United States led the establishment of international arrangements and laws governing trade (WTO) and financial (IMF and WB) and diplomatic (UN, NATO) relations among nations. The U.S. was the natural leader of this globalized world not only because it had the largest economy and the largest military, but because it was generally respected for its commitment to the rule of law. More than any other country the U.S. was seen as committed to the longer run prosperity of the world above short run tactical benefits for itself.

In an April 12, 2016 interview by Steve Clemons in The Atlantic, U.S. Treasury Secretary Jacob Lew observed that “In the 21st century, the world needs the United States to be a North Star. The world wants us to be the North Star. I really do believe that. I am amazed at how other countries want to hear our advice and what we think makes sense. Sometimes we may have the habit of lecturing too much. We have to be careful not to do that.”

In recent years American leadership has been slipping. Rather than draw China more tightly into the global rule based trading system, we have pushed them away. After the United States convinced the IMF’s European members to accept a reduction in their share of votes in the IMF in order to bring the voting shares of China, India, and some other emerging economies more in line with their economic size, it took the U.S. Congress more than five years before it approved the amendments to the IMF Articles of Agreement needed to implement this agreement. In the mean time China set up its own international lending organization. US-leadership-and-the-Asian-Infrastructure-Investment-Bank

Rather than strengthen cooperative, diplomacy based relationships the U.S. has launched a series of generally failed wars to promote “democracy,” (Gulf War 1990-91, Somalia 1992-5, Haiti 1994-5, Bosnia 1994-5, Kosovo 1998-99, Afghanistan 2001 – to date, Iraq 2003-11, Libya 2011). These have weakened respect for American leadership.

On the economic front the United States has imposed hugely costly anti-money laundering (AML) and global tax reporting (FACTA) requirements on the rest of the world without regard for their cost and despite the lack of any evidence of benefits.  Operation Choke Point   These are serious abuses of American leadership that will produce a growing backlash. But it is not just misguided arrogance that is undermining our role in the world, it is the growing perception that our leadership is increasingly motivated by the selfish personal interests of crony capitalists rather than the high principles that have serviced us and world so well in the past.

Consider the example of the FATCA (Foreign Account Tax Compliance Act). Badly designed corporate and income tax laws in the United States have pushed an increasing number of companies and wealthy people out of the U.S. Rather than clean up its tax laws, the U.S. attempts to tax the income of Americans where ever they earn it and where ever they might live. The only escape is to renounce U.S. citizenship. The Obama administration is now proposing an exit wealth tax for American’s giving up their citizenship. It reminds me of the measures the Soviet Union took to prevent its citizens from leaving. Have we really fallen so low?

The use of off shore, tax minimizing structures by American companies and individuals (i.e. legal tax planning measures) as well as illegal efforts to hide income have been met by increasingly intrusive efforts by the U.S. to find and tax such income. Quoting from the introduction of the Wikipedia article on FATCA: “The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law to enforce the requirement for United States persons including those living outside the U.S. to file yearly reports on their non-U.S. financial accounts to the Financial Crimes Enforcement Network (FINCEN). It requires all non-U.S. (foreign) financial institutions (FFI’s) to search their records for indicia indicating U.S. person-status and to report the assets and identities of such persons to the U.S. Department of the Treasury.”

As the world attempts to comply with American extra territorial demands, the United States itself is not. Such reporting requires knowledge of the beneficial owners of companies. Most companies established in the United States, such as those incorporated in Delaware, are not required to provide the identities of beneficial owners. The U.S. seems to have no intention of requiring its companies to comply with what it demands from other countries.

The decline and fall of the “American Empire” seems to be underway. It doesn’t need to be.

Fighting Terrorists, Part II

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

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

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

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

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

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

Fairness or Envy?

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

Mean income

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

Income table

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

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

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

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

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

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

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

The Asian Infrastructure Investment Bank and the SDR

By Warren Coats and Dongsheng Di

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

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

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

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

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

References

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

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

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

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

2014, “Implementing a Real SDR Currency Board”

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

Footnotes

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

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

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

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

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

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

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

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

Fighting Terrorists

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[3] Ibid.

[4] Washington Post Op. Cit.

[5] Hamid, Op. cit. page 98

[6] Ibid. page 87

[7] Ibid. page 102

What to do about Syrian refugees?

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

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

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

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

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

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

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