The Rule of Law: China and the U.S.

The rule of law has been an essential and critical foundation of successful free market economies. It provides the certainty of property rights and contracts needed for entrepreneurs to risk their capital in business undertakings. But as our business and other activities cross borders, whose laws apply?

“Among the earliest examples of legal codes concerning maritime affairs is the Byzantine Lex Rhodia, promulgated between 600 and 800 C.E. to govern trade and navigation in the Mediterranean.” https://en.wikipedia.org/wiki/Law_of_the_sea  Leaping forward, international air travel, satellite communications, spectrum allocation for radio, TV, internet, and other telephonic transmission would be impossible without firm agreements among countries–the international rule of law.

Laws facilitate commerce–buying and selling–by establishing rules for doing so (e.g. contract enforcement rules) that are stable and applicable to all. They lower the costs and reduce the risks of trading. The United States Constitution recognizes the importance of this in the commerce clause of Article I Section 8, which is used to prevent individual states from taxing or otherwise interfering with interstate commerce. Achieving the same law-based freedom to trade across national borders is more difficult, requiring the negotiation of agreements and treaties that establish common rules between sovereign nations.

The World Trade Organization (WTO) develops and enforces the rule of law in the area of cross border trade. The difficulty of achieving global agreement on the rules of various aspects of trade is reflected in the fact that no new agreements have been reached since the establishment of the WTO (taking over the General Agreement of Trade and Tariffs) on January 1, 1995. “The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countries’ commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes.” the WTO – what is it?

China was admitted to the WTO as a developing country on December 11, 2001. Chinese officials immediately expressed the desire to understand and conform to the international rules required by the WTO and requested technical assistant from the IMF for doing so. In July of 2002, the IMF sent me to Beijing to review their needs with them.  They were particularly keen to have an American banking supervisor to advise them. I had a perfect candidate who was just finishing a two-year posting to Hong Kong. Everyone I spoke to in Beijing, as well as my Chinese colleagues at the IMF, stated that virtually all Chinese officials agreed on where China wanted to go–full liberalization according to WTO rules. They only differed with regard to how fast they thought they should move to get there.

Our condition was that our resident banking supervision advisor had to have his office located with the other Chinese banking supervisors and that he would have an open door. This was enthusiastically accepted by the Deputy Governor who apparently had not informed the Governor of these details. Unfortunately, when the Governor was presented the contract of his signature, he killed the arrangement. I was, however, able to enjoy wonderful tours of the Great Wall, the Forbidden City, and dine on the best Peking Duck I have ever had.  

An economically rising China is lifting millions of people out of poverty. We rightly welcome its newly productive economy contributing to increasing world output and living standards. The challenge is to square China’s authoritarian political regime with an international free market trading system. The vehicle has been the WTO and other international rule setting bodies that exist to harmonize diverse economies in the direction of freer and more open trade. The rules were being set by the dominant, largely free market economies that China wanted to join.

Beyond an American led WTO itself, the multilateral trade agreement that established the highest standards yet for tariff reduction and the incorporation of more modern trade issues such as non-trade barriers, services, protection of intellectual property, minimum labor standards, and dispute resolution (the rule of law cannot meaningfully exist without credible dispute resolution procedures) was the Trans-Pacific Partnership (TPP) negotiated between 2006 and 2015. The TPP agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States was announced on October 5, 2015.

Three days later, on October 8, I spoke in New York City at a seminar hosted by the Chinese Chamber of Commerce of New York on the internationalization of China’s currency, the renminbi. All of the talk by the Chinese attending was about the TPP. Why was China excluded? Could they join? My reply was that China would be very welcomed to join when they were able to meet the treaty’s conditions. TPP was another powerful magnet pulling China into the liberal international trading order.  

A recent report from the Peterson Institute of International Economics (June 23, 2020) stated that: “The Trans-Pacific Partnership (TPP) was designed in 2016 to be almost China-proof, with stringent obligations requiring transparency and trade liberalization. As former US Trade Representative Michael Froman put it, Chinese participation would be welcomed only when China could meet TPP’s terms, which it was far from doing. The United States was not keeping China out; China was just not ready to come in.” “China and Trans Pacific Partnership-in or out”

Broadly speaking, the aim of the WTO is to increasingly move its member countries toward the freest trade possible with fair competition (a level playing field), thus promoting a more productive allocation of economic resources and lifting global incomes.  The organization is not without its problems. But rather than working to strengthen the WTO, President Trump turned to negotiating bilateral trade agreements and raising rather than lowering import tariffs. Clearly bilateral agreements are easier to conclude than are global or broad multilateral agreements. Trump focused on China and its large bilateral trade surplus with the U.S. out of the mistaken belief that its surplus (our deficit) was harmful to the U.S. and that reducing it would increase American jobs. “Who pays Uncle Sam’s deficits”

In one of his most short-sighted actions from a sadly long list, President Trump withdrew the U.S. from the TPP on January 23, 2017. In addition to tweaking a few existing trade agreements, such as the North American Free Trade Agreement (NAFTA) by incorporated many of the newer provisions of the TPP and the United States-Japan Trade Agreement and the United States-Japan Digital Trade Agreement, and imposing protective tariffs on solar panels, washing machines, steel and aluminum imports in the name of national security and “America First,” the Trump administration has focused its trade war bilaterally on China (with occasional pot shots at our friends in Europe and elsewhere).  “Trade Office fact-sheets and-annual-report”   A Brookings Institution study assessed the result of all of this for the American economy and workers as follows: “American firms and consumers paid the vast majority of the cost of Trump’s tariffs. While tariffs benefited some workers in import-competing industries, they hurt workers in sectors that rely on imported inputs and those in exporting industries facing retaliation from trade partners. Trump’s tariffs did not help the U.S. negotiate better trade agreements or significantly improve national security.”  “Did-Trump’s-tariffs-benefit-American-workers-and-national-security”

The remaining eleven countries that had signed the TPP agreed in January 2018 on a revised treaty they renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership” (CPTPP).  CPTPP is substantially the same as TPP, but omits 20 provisions that had been of particular interest to the U.S. These provisions can be relatively easily restored should the U.S. choose to rejoin. “Trade and Globalization”

With the increasing power of Xi Jinping, China’s President and the General Secretary/Chairman of the Central Committee of the Chinese Communist Party (now for life), China has played an increasingly active role in the IMF, WB, WTO and other international bodies. In addition, it has launched several regional organizations that it leads (the Asian Infrastructure Investment Bank, the New Development Bank–BRICS, and the Belt and Road Initiative) “The Asian Infrastructure Investment Bank and the SDR”  Xi Jinping claimed that the AIIB would adhere to the highest international standards. But as President Trump and others have noted, there are a number of important areas in which China does not abide by the WTO rules. The policy question is what should be done about it.

The Cato Institution began a recent review of China’s trade practices as follows: “There is a growing bipartisan sentiment in Washington that Chinese trade practices are a problem, since these practices are unfair to American companies in a number of ways. But there is disagreement about the appropriate response. Can multilateral institutions be of use here? Or is unilateralism the only way?” Their conclusion is that the WTO and other multilateral institutions would be the most effective way of continuing to pull China into compliance with the international rule-based system. “Disciplining China’s trade practices at the WTO-how -WTO complaints can help”

President Trump has unilaterally gone the other way. He has blocked Huawei, the world’s leading seller of 5G technology and smartphones, from U.S. 5G mobile phone systems and urged our European allies to do the same because of Huawei’s links with the Chinese government. He is attempting to block the sales of U.S. and other non-Chinese manufacturers of the semiconductor chips used in Huawei and other Chinese products to China.  “A-brewing-US-China-tech-cold-war-rattles-the-semiconductor-industry”  He is trying to ban TikTok, WeChat and other popular Chinese products from U.S. markets and raising tariffs on an increasing number of Chinese products imported into the U.S. Some of these measures might be justified on national security grounds but some seem more protectionist of U.S. companies that are not otherwise competitive.

We are basically forcing China to build its own alternative rules and approach to trade. It is even offering its own global tracking system in place of the GPS system the U.S. has given the world and they seem well along in dividing the World Wide Web and other Internet protocols into two worlds. https://www.voanews.com/east-asia-pacific/voa-news-china/chinas-rival-gps-navigation-carries-big-risks

A November 20, 2020 article by William Pesek highlights what Trump’s misguided trade war with China is producing: “On his presidential watch, Donald Trump did manage to make one thing great: economic cooperation within North Asia.

So chaotic and pernicious was the outgoing US president’s pivot away from Asia that China, Japan and South Korea are dropping the hatchet and joining hands. The unlikely union was formalized on November 15 with the signing of the 15-nation Regional Comprehensive Economic Partnership, or RCEP, free trade agreement.”  “US sidelined as China Korea and Japan unite”  The RCEP is a lighter more limited trade agreement than was the TPP (now the CPTPP) but it is led by China rather than the U.S.  Rather than converging to WTO standards it creates an alternative. 

“President Xi Jinping’s Friday [Nov 20, 2020] announcement of China’s intent to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a high-standard mega regional trade pact, has been seen as a bold move to reassure the world of the country’s continuing commitment to reform and opening-up.” “News analysis: an uphill task for China to negotiate CPTPP accession agreement”  While Xi Jinping’s strategy for China’s ascension is to take over the leadership in forging the rules for the international order more to the liking of his regime, China’s younger and upcoming managerial and entrepreneurial class, many of whom studied in the U.S. and Europe, have seen and liked the freer and more open capitalist societies. Their patriotism and commitment to a rising China is informed by the knowledge that freer and more open economies thrive more than centrally controlled ones.  We should not overlook their potential for returning China to a path of liberalization and integration with the liberal international order enjoyed by the rest of us.

Xi Jinping and his government’s goal is to retain power by delivering rapid economic growth, which allows and requires a vibrant private sector, while overseeing tight political control. One example is provided by its Social Credit System.  “China’s social credit system-mark of progress or threat to privacy?”  This requires a different set of rules for cross border trade than set out by the WTO. But many of China’s world traveling citizens see China’s successful rise in more closely embracing free market capitalism. We should incentivize the later view.

President Trump’s trade policies have damaged the world’s rule-based trading system and hurt the American economy while turning China in a different direction. President elect Biden has indicated his interest in rejoining the TPP. He should give it and the rebuilding of the WTO and other multilateral bodies high priority.

The Thanksgiving Revolt

Sadly, Thanksgiving and healthcare more generally has been politicized (or “weaponized” as I said in a report to the UNDP with regard to the monetary system in Yemen–my advice was that nothing as important as the monetary system should be weaponized). Why are normally sensible (I am being generous on this day of giving thanks) people behaving like rebellious teenagers? Among other reasons, I think, it is in part because they are being treated like children. We can demand that our children do this or that (at least when we don’t have the time or patience to explain why they should do this or that as part of preparing them to become adults).

Mature, independent minded adults (i.e., typical Americans) bristle when told that they must stay home, or cancel Thanksgiving dinner and other social activities, even when they suspect that it is the prudent thing to do. Our government should not be dictating our behavior in a free society. There are exceptions, of course, for the protection of the rest of us. We are (or should be) free to do what we like as long as we do not infringe on the right and ability of others to do the same. For example, we don’t permit people infected with communicable diseases to wander around in public endangering the rest of us–quarantining those with active cases of Covid-19 is properly required.

We each have our own assessment of the risks of infection and our own willingness to take risks.  We should be free to make our own decisions about what to do (as long as we are not endangering others–yes you should wear a face mask if you go out).

What should the government’s role be? The government should provide the best information available on what those risks are and how best to mitigate them. Not everyone agrees on what the data says.  Where that is the case, the government (CDC basically) should be honest about the disagreement and the basis of the government’s consensus judgement. This is a constructive, helpful role and a proper way of dealing with adults. Somehow too many political types have acquired the tone of voice with which one might speak to children. And if that weren’t bad enough the government provides conflicting information. Fortunately, our stable genius is no longer listened to and his quack remedies will fade from our memories.

We need an honest and less intrusive government that advises rather than dictates. We need fellow citizens who civilly share their views with us while respecting, even if not necessarily agreeing with, ours. We have a long way to go but let’s rally and raise above the muck we are in.  Oh yes, and happy Thanksgiving.

Thanksgiving Proclamation, 3 October 1789

Thanksgiving Proclamation

[New York, 3 October 1789]

By the President of the United States of America. a Proclamation.

Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”

Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.

and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.

Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.

Go: Washington

Judy Shelton’s monetary policy

I share Judy Shelton’s support for monetary policy with a hard anchor. Following currency board rules, the public should determine the money supply they want to hold at its fixed price. Historically, gold was the most common hard anchor. It worked well for centuries. However, it had two problems.

The first is that central banks actually bought and stored gold, which distorted its market supply and thus price. Widespread adoption of a gold anchor combined with central banks buying up much of it would be an even more serious problem today. But gold can anchor the price of a currency without the central bank actually hoarding gold. It would instead issue its currency against other safe assets, such as government debt securities, as fixed gold price. It would fully back its currency with such assets so that it could redeem it all if the public chose to return it. This would ensure that the gold price in the market in the central banks currency was always very close to its official (anchor) price.

This system of indirect redeemability, as Leland Yeager called it, would ensure a more stable market price for gold relative to other goods and services and thus a more stable purchasing power of a currency fixed to it. However, choosing a single commodity as the anchor (its second problem) would result in a less stable value of the currency than would choosing a small basket of widely traded commodities. https://www.adamsmith.org/blog/returning-to-currencies-with-hard-anchors

Given the discretion to manage their currency supplies, central banks have historically tended to undermine its value as the result of over issuing it (inflation). Judy is right to want to limit that discretion. The Federal Reserve Act mandates that the Federal Reserve should aim for price stability (and full employment). This is an important constraint on the Fed’s behavior, but we can do better.

Unions vs the Gig Economy

Americans largely support and benefit from a political/legal environment conducive to individual freedom and active entrepreneurship.  However, within that broad consensus, views vary over how large and prescriptive the role of government and mandatory bodies should be.  Should only doctors, lawyers, plumbers and hairdressers licensed by the state be allowed to provide their services?  Few things capture this difference more clearly and dramatically than whether cab drivers must be employees of the cab company or can work as little or as much as they chose as independent contractors– company employees or gig workers (uber drivers).

Licensed professionals, like union members, can help promote and certify a minimum standard of training and confidence. But historically they have also sheltered their members from competition. Unions provide a number of services to their members, but their overriding purpose is to confront employers with a united front from workers on wages and working conditions. They understandably exist to serve the interests of their members.  While the commercial success of the companies’ union workers work for is also in the interest of these workers in the long run (if companies are not profitable they cannot provide jobs and/or good wages) it is more remote from workers’ immediate interests.

Gig workers are independent contractors who individually agree with an employer (such as Uber or Lyft) on wages, hours, and working conditions. In fact, Uber and Lyft drivers decide on their own, hour by hour whether and when to work. Their financial reward rests more directly on satisfying their customers.  The brand name Uber or Lyft must also insure a minimum standard of service to their riders (quality and cleanliness of the car and honesty and politeness of the driver, etc.). https://wcoats.blog/2014/12/18/free-markets-uber-alles/

The incentives confronting union workers and gig workers thus differ. Union works, in the first instance, by confronting their employers seeking better working conditions and pay (wages and benefits) while gig workers are competing with other drivers to please their customers. The results can be mixed but the difference between a ride with a yellow cab driver and a Lyft driver can be rather dramatic. I never had a yellow cab driver leap out of the spotlessly clean car to open my door saying: “I hope that you enjoyed your ride.” But while Uber and Lyft provide us with better and cheaper rides, they also provide drivers with more and better options of when and where they work.  Some want to work only a few extra hours after a regular job. Some choose to put in long hours when in need of extra money. Like most transactions in a free market both drivers and riders benefit–its win, win.

My experiences with unions have not been good. My father was a Shell Oil union member.  His union went on strike long ago when my mother was pregnant with my younger brother. After a few months on strike it was growing obvious (according to my father) that it would end soon in failure from the union perspective. The union bosses feared that my father and others would return to work before the union had formally given up. They came to our house and told my pregnant mother that it would be quite unhealthy for her if my father returned to work.

While a student at the U of C Berkeley I had taken jobs for three summers with Shell Oil, one of the perks they give their workers’ children. Two summers were roustabouting in the oil fields of Kern County, California with regular Shell employees who never spoke of labor relations with the company. Instead they talked about their families and non-work activities.  The middle of the three summers with Shell, I was assigned to the supply yard behind Shell’s Kern County headquarters. I assisted the one employee there who loaded pipes and other oil field equipment onto trucks that then delivered the equipment to the fields I had worked in the summer before. Much of the time the two of us just hung out there waiting for the next truck, very unlike digging ditches to repair leaking pipes as I had done the previous summer in 112-degree summer heat. We drove around in the small portable crane used for loading the trucks. The entire time my “companion,” an avid union member, complained about how Shell Oil was exploiting us. After a few weeks I dreaded having to be around him.

After my brother and sister and I were out of the house my mother went back to school, first to finish high school and then to college and a teaching degree. She became a highly successful grammar schoolteacher who specialized in taking on (and taming) problem students. She complained frequently at the attitude and self-protective behavior of the teachers’ union members that was far more interested in protecting mediocre teachers than in teaching students.  Michelle Rhee only turned around the education system in Washington DC when she was able to break the strangle hold of the teacher’s union.

More recently we have seen yet again the destructive role of police unions in protecting bad cops in connection with the death of George Floyd in Minneapolis. “Police-unions-minneapolis-kroll” Much has been written about how deals with police unions has thwarted needed reforms in policing. There seemed to be broad nonpartisan support for such reforms before the “defund the police” nonsense killed it.

But there is a surprising bit of good news from the election earlier this month beyond replacing Trump.  In California, for example, the state was attempting to apply a law regulating employment (AB-5) to contract Uber and Lyft drivers, demanding that they be treated as employees rather than contractors. This would have destroyed Uber and Lyft’s business models and was strongly opposed by them and their drivers. “California’s Public Utilities Commission said in an order Tuesday [June 9, 2020] that Uber and Lyft drivers are “presumed to be employees” under AB-5, the state’s new gig work law.” “Uber-Lyft-drivers-declared-employees-by-California-regulators”  California voters rejected this union effort to kill the market for gig drivers.

As The Wall Street Journal put it: “Democrats and unions in California are shell-shocked. Voters last Tuesday rejected a referendum that would have allowed racial preferences in state hiring and college admissions, defeated a massive business property tax hike, and rescued tens of thousands of gig economy jobs.” https://www.wsj.com/articles/californias-progressive-thumping-11605136309?st=ra1kvgf2okxr35j&reflink=article_email_share

The following description of Proposition 22 appeared on California ballets:

PROP 22

EXEMPTS APP-BASED TRANSPORTATION AND DELIVERY COMPANIES FROM PROVIDING EMPLOYEE BENEFITS TO CERTAIN DRIVERS. INITIATIVE STATUTE.

SUMMARY

Put on the Ballot by Petition Signatures

Classifies app-based drivers as “independent contractors,” instead of “employees,” and provides independent-contractor drivers other compensation, unless certain criteria are met. Fiscal Impact: Minor increase in state income taxes paid by rideshare and delivery company drivers and investors.

WHAT YOUR VOTE MEANS

YES A YES vote on this measure means: App-based rideshare and delivery companies could hire drivers as independent contractors. Drivers could decide when, where, and how much to work but would not get standard benefits and protections that businesses must provide employees. 

NO A NO vote on this measure means: App-based rideshare and delivery companies would have to hire drivers as employees if the courts say that a recent state law makes drivers employees. Drivers would have less choice about when, where, and how much to work but would get standard benefits and protections that businesses must provide employees.

Proposition 22 passed with a 58.6% majority in a state that rejected Donald Trump by a wide margin (64% for Biden and 34% for Trump). This result is consistent with what I hope is true, namely that a majority of voters voted against Trump rather than embracing the more government dominated management of our lives promoted by the “socialist” wing of the Democratic party. With the more skillful and predictable management of a Biden administration and a Republican controlled Senate to block any excessive expansions of government, we might be lucky enough to keep the good measures taken over the past four years (tax reform, reduction of excessive regulations, strengthening the courts, and no new wars) and get rid of the anti-market, protectionist, executive overreach, and internationally disruptive measures of an ineffective and dishonest bully.

Saving our free society

The vast majority of every new generation want to make society a better place. They support policies that they believe will contribute to making society fairer and “nicer.” As they age their altruism may tilt toward self-enrichment and self-protection at the expense of fairness (cronyism), but initially their motives are pure. The key issue is what policies they believe will help make society a better place. “The-search-of-purpose-nature-and-nurture-genes-and-culture”

We can be thankful that American voters in throwing out a dishonest, divisive, egomaniac didn’t endorse the socialist wing of the Democratic Party.  We seem to have moved back to the broad center.  “Dan Mitchell–a victory for Biden-a defeat for the left”  It is hard to know where to look for and find the truth today, and our society will suffer because of that.  But as we review and debate the policy proposals of a Biden administration, we must remember that we are all looking for the truth about what will make our society better (fairer, freer, and more virtuous).  We must listen to each other’s concerns and carefully evaluate each other’s proposals. But we have a duty to ourselves and our neighbors to study history for what has worked and what hasn’t and to do our best to understand why limited government and maximum reliance on our own decisions and the decisions of our neighbors is the best framework in which to help make society better.

The growing number of today’s youth who look favorably at socialism (whatever they understand that to be) is worrying because it reflects an incorrect assessment of what socialism has always delivered. To today’s youth: If you really care about making society better, take the time to study the history of socialism and learn why it failed and is bound to fail and why societies that are freer and law abiding are both more virtuous and more prosperous. “Socialism-as-seen-by-millennials”

Saving the American Dream

The American Dream is under attack.

“The American Dream is the belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society where upward mobility is possible for everyone. The American Dream is achieved through sacrifice, risk-taking, and hard work….” “The American Dream is to succeed by work, rather than by birth”. The Dream has attracted the world’s best and brightest to our shores making America the world’s leading economic powerhouse and enabling us to live freely as we each determine what we are willing to work for, for ourselves and our families.

Historically, individuals have been limited in what they could achieve by where they were born in society, by their parent’s position in life, and by who they knew. Companies of individuals were limited by the restrictions placed on them by their governments, often by the protections from competition government granted their friends (crony capitalism). Such traditional societies limited the freedom and ambitions of its citizens and limited the productivity of its human and physical resources. In short, traditional societies were keep poorer than they would have been if their citizens had been freer to innovate and compete.

The American Dream is now under attack by Donald Trump’s trade protectionism, crony capitalist government favoritism, immigration walls, and weakening of the international rule of law that has extended the benefits of specialization and trade globally. It is also being attacked by Alexandria Ocasio-Cortez’s (LOC’s) vision of state leadership and control of production and a new generation of idealistic, but uninformed, voters who mean well but have missed the lessons of socialism’s failures. If we are to save the conditions in the United States in which the American Dream still lives, we must better understand what has led so many Americans to vote against it.

I am sure that the answers to that question are many and complex, but broadly speaking two stand out in my mind, both of which point to the measures needed to restore support for the dream.

The first is to better educate the public, especially its younger members, about the conditions that allow and encourage a productive, innovative economy. This includes understanding the proper role of government in protecting private property, enforcing contracts, maintaining public safety (the rule of law) and in providing the public infrastructure that facilitates private activities and commerce (the commons of public goods). It includes the lessons of why all socialist economies have failed as a result of the corrupting incentives of state direction of economic activity rather than the competitive search by profit seeking private enterprises for better ways to serve the public.

The second answer concerns the adequacy and efficiency of our social safety net. The American Dream concerns individuals who take responsibility for their own well-being. While on average this has opened the way for most to prosper to the extent of their talents and energy, some will, often through no fault of their own, fail and fall off the tightrope. Society has an interest (even beyond the obvious humanitarian one) in softening the fall. It has an interest in an effective social safety net. 

Some–those who have not understood the lessons of socialism’s failures–have looked to trade and immigration restriction to prevent them from losing their jobs. They object to the economic benefits of free trade when it means that they must look for a new job (however, most manufacturing job losses in the U.S. have resulted from technical progress and the resulting increase in productivity rather than from cross border trade). “Econ-101-trade-in-very-simple-terms”  “Trade-protection-and-corruption” Those with such views have supported Trump’s anti free market policies. They have been attracted by Trump’s “I win you lose, us vs them” rhetoric.

AOC and her friends point to the widening income inequality–the dramatic increase in the incomes of the wealthiest and the stagnation of the incomes of the middle class in recent years–and demand income redistribution. But she fails to understand that it has been the growth of government’s role in the economy and the incentives in big government toward corruption and crony capitalism (protectionism for the wealthy) that have reduced competition and protected the position and markets of the biggest companies with friends in government. Socialism would make those incentives even stronger.

America’s dynamism and success reflects the creative destruction of risk-taking entrepreneurs and their hard-working employees.  https://economics.mit.edu/files/1785  However, the workers whose jobs are displaced by new products and new technologies may need help in finding and retraining for new jobs. They may need financial assistance in between (unemployment insurance). If nothing else, this may be the cost of their support for such a dynamic system.  Our social safety net sometimes provides poor incentives and sometimes has holes. It is time to seriously consider replacing it with a less intrusive and more comprehensive Universal Basic Income.  “Our-social-safety-net”  “Replacing-Social-Security-with-a-Universal-Basic-Income”

The American Dream–the foundation of our freedom and affluence–is under attack from the left and the right. We should fight to preserve (or restore) it.

My Travels to Baghdad

Iraq: An American Tragedy, My Travels to Baghdad

Warren Coats (2020)

Kindle and paperback versions available at: Iraq-American-Tragedy-My-Travels-Baghdad

From the corkscrew landing at Saddam International Airport (now the Baghdad International Airport) to adventures in the Green Zone and beyond, this recounting of my experiences helping the Central Bank of Iraq develop modern market tools of monetary policy exposes the disfunction of the U.S. lead Coalition Provisional Authority (CPA) in its attempt to govern and rebuild post Saddam Iraq, following one of America’s more foolish and damaging military adventures. The existence of weapons of mass destruction was a lie. American skill at imperial rule–from disbanding the Iraqi Army to De-Ba’athification of the Iraqi bureaucracy– was a myth. 

Regime changes usually don’t involve changes in the monetary system. However, the toppling of Saddam Hussein’s government and the occupation of Iraq and the takeover of its government by the United States and a few allies in the name of the Coalition Provisional Authority (CPA) was accompanied by the replacement of the so-called Saddam dinar and modernization of Iraq’s monetary and financial system. The Iraq war was launched with “shock and awe” on March 20, 2003 and President George W Bush declared “mission accomplished” on May 1 a month and a half later. But when I retired from the International Monetary Fund and took up residence in Baghdad to advise the Central Bank of Iraq on developing Iraq’s financial markets and managing its new currency, the fighting was not over on many fronts. I lived in Baghdad the last two months of the CPA (May-June 2004) and made four two-week visits between then and December 2005

In this book, much of it written in diary form at the time, I share the challenges of advising the staff and management of the Central Bank of Iraq from my office in the central bank and of navigating the U.S. interagency rivalry from my office in Saddam’s Republican Palace in Baghdad’s Green Zone.  Security was always a challenge, producing many adventures. But the wisest advice I received was from a colleague in the CPA, who told me to “be careful who you talk to here (CPA headquarters in the Republican Palace), your worst enemies are in this building.” Over my 26 years in the International Monetary Fund and the technical assistance missions I lead to some 20 countries, many of them post conflict countries, I have never encountered the disfunction and resulting ineptitude of the U.S. led Coalition Provisional Authority in Iraq.

Previous Books

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina

by Warren Coats (2007)    Hard cover: One Currency for Bosnia

FSU: Building Market Economy Monetary Systems–My Travels in the Former Soviet Union

By Warren L Coats (2020)  Kindle and paperback versions available at: FSU-Building-Economy-Monetary-Systems

Afghanistan: Rebuilding the Central Bank after 9/11 — My Travels to Kabul

By Warren Coats (2020)  Kindle Edition:  “Afghanistan-Rebuilding the Central Bank after 9/11”

Zimbabwe: Challenges and Policy Options after Hyperinflation

by Warren L. Coats (Author), Geneviève Verdier (Author)  Format: Kindle Edition

Zimbabwe-Challenges and Policy Options after Hyperinflation-ebook

Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence

by Warren L. Coats (Author, Editor), Deena R. Khatkhate (Author, Editor)  Format: Kindle Edition

Money and Monetary Policy in LDCs-ebook

My Travels in the Former Soviet Union

FSU: Building Market Economy Monetary Systems–My Travels in the Former Soviet Union

By Warren L Coats (2020)  Kindle and paperback versions available at: https://www.amazon.com/FSU-Building-Economy-Monetary-Systems-ebook/dp/B08K3WNQK2/ref=sr_1_2?dchild=1&keywords=warren+Coats&qid=1601491694&s=books&sr=1-2

By the end of 1991 the pressures for the Union of Soviet Socialist Republics (USSR) to break up into 15 separate countries climaxed. On December 25, Mikhail Gorbachev resigned as the President of the USSR and the next day the Supreme Soviet voted to end its existence. The demise of the Soviet Union was precipitated by the failure of its system of central planning to deliver an acceptable standard of living for its unfortunate citizens. Thus, Russian and the other now Formerly Soviet Republics wanted to transition into market economies as quickly as possible. They wanted to become what they called “normal” countries and to join the rest of the world.

Of direct relevance to me, my employer, the International Monetary Fund (IMF), suddenly faced the prospect of fifteen new members, each of which wished to convert its branch of Gosbank, the central bank for the USSR, into its own independent central bank overseeing the monetary and financial systems of market economies.

Four months after the USSR was formally dissolved, I was on a charter flight from Geneva, Switzerland, to Alma Ata, Kazakhstan, with eleven other economists to provide technical assistance to the National Bank of Kazakhstan. We knew almost nothing about the people we were to meet, the living conditions we would find, the social customs that we might be expected to understand, and the condition of the former branch of the Gosbank of the USSR that we were to help become a normal central bank. It was a challenging but very exciting undertaking.

In this book, I attempt to share some of the more interesting social, primarily non-economic, encounters of my work in Kazakhstan, Kyrgyzstan and Moldova from 1992 to 1995.

Previous Books

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina by Warren Coats (2007)   Hard cover: One Currency for Bosnia

Afghanistan: Rebuilding the Central Bank after 9/11 — My Travels to Kabul By Warren Coats (2020)  Kindle and paperback versions available at:  “Afghanistan-Rebuilding the Central Bank after 9/11”

Zimbabwe: Challenges and Policy Options after Hyperinflation by Warren L. Coats (Author), Geneviève Verdier (Author)  Format: Kindle Edition Zimbabwe-Challenges and Policy Options after Hyperinflation-ebook

Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence by Warren L. Coats (Author, Editor), Deena R. Khatkhate (Author, Editor)  Format: Kindle Edition Money and Monetary Policy in LDCs-ebook

My travels to Afghanistan

Afghanistan: Rebuilding the Central Bank after 9/11 — My Travels to Kabul

By Warren Coats

Kindle and paperback versions available at:  “Afghanistan-Rebuilding the Central Bank after 9/11”

Watching the collapse of the twin Trade Towers in New York on September 11, 2001 on the TV in my hotel room in Bratislava, I never imagined that I would be in Kabul several months later and spend 212 days there spread over 19 trips from January 2002 to December 2013 to help modernize Afghanistan’s central bank–Da Afghanistan Bank (DAB). I learned more than I taught and share the highlights in this book. I became friends with many wonderful Afghan people, and bonded with my IMF team members. DAB was almost completely rebuilt. Watching its eager young staff mature into effective managers was a joy. Whether it will last in Afghanistan’s uncertain political and cultural environment is an open question.

I learned as much as I could about Islam and its internal struggle to denounce Islamism (radical Islamic fundamentalism). I share details of the collapse of Kabulbank, Afghanistan’s largest bank, and the corruption surrounding it and its resolution. The IMF’s presence and work in Afghanistan was not without tragedy. The IMF’s resident representative, in whose guest facilities we stayed, was killed in a terrorist attack. And I learned much about walls.

Previous Books

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina

by Warren Coats (2007)   Hard cover: One Currency for Bosnia

Zimbabwe: Challenges and Policy Options after Hyperinflation

by Warren L. Coats (Author), Geneviève Verdier (Author)  Format: Kindle Edition

Zimbabwe-Challenges and Policy Options after Hyperinflation-ebook

Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence

by Warren L. Coats (Author, Editor), Deena R. Khatkhate (Author, Editor)  Format: Kindle Edition

Money and Monetary Policy in LDCs-ebook

Buy American

Buy American is un-American. Much if not most of what we already buy is American, meaning made in America. Though it would be rather challenging to identify products (leaving aside services) that are 100 percent made in American, i.e. that do not have at least some components produced abroad, 85% of U.S. GDP is domestically produced. So why is the slogan “buy American” un-American?

Buy American has several understandings. There are laws, such as the Buy American Act of 1933, that require the U.S. government to give preference to American goods and services over others in its purchases. To the extent such laws have any effect, they require the purchase of goods and services that would not otherwise be chosen–that would not otherwise meet the test of the best value for the taxpayers’ dollars. This law aims to protect American jobs. This, of course, is a misunderstanding of the reality. Buy American, when it changes behavior at all, protects some undeserving jobs at the expense of other jobs that are worth keeping.  It protects jobs producing goods and services that would not otherwise be profitable. In short, it keeps American workers employed in activities that are less productive than would otherwise be the case. In the long run, it does not increase employment but rather reallocates workers to less productive tasks. In short, buy American lowers our standard of living. Thus, we can be thankful that it only requires 51% domestic content to qualify as “American.”

So why does our current government adopt such policies? For the same reason we have slapped a tariff on Canadian steel. It is not to make the American economy more productive or to keep it fully employed (which it already was when President Trump imposed such a tariff for “national security” reasons (I kid you not).  Rather, like other “protectionist” measures, it is to protect the jobs of particular, favored industries or workers, or what you might call political corruption.  Such favored industries are not competitive without such protection or why bother.

Beyond the legal requirement for government to Buy American, the plea to the general public is voluntary.  But why should we purchase products that we otherwise would not have (because they were more expensive or inferior)?  As with government buying American, the effect is to draw workers into activities at which they are less productive than they would have been otherwise. So “Buy American” is un-American because, if taken seriously, it would lower our standard of living and is contrary to the free market and entrepreneurial spirit that has made America the prosperous society that it is.