Five PUP authors included in the Politico 50 2016 list

We are thrilled that five PUP authors have been included in the Politico 50 2016 list!

 Robert Gordon, author of The Rise and Fall of American Growth

Gordon

George Borjas, author of Heaven’s Door

Borjas

David Card and Alan Krueger, authors of Myth and Measurement

Myth

Angus Deaton, author of The Great Escape

Deaton

Kenneth Rogoff: Cash is an emotional topic

Read on for the first post in a blog series by Kenneth Rogoff, author of The Curse of Cash:
Rogoff

In The Curse of Cash, I make a serious case for phasing out the bulk of paper currency, particularly large denomination notes. Since pre-publication copies started floating around just a few weeks ago, a number of engaging, thoughtful reviews have published (for example, here, here, here, here and here). But mere rumors of the book’s impending publication have also evoked an extraordinary number of visceral comments (online and by email): “This idea is almost as bad as banning semi-automatic weapons,” is one theme. Another is, “Why should people feel guilty about doing business in cash to avoid paying taxes when we all know the government will just waste the money?” Having first explained two decades ago why governments that print big bills are penny-wise and pound-foolish, I am well familiar with how emotional this topic can be.

There have also been some comments having to do with individual liberty and wondering if criminals will use other currencies and transactions media. I address these and many other serious concerns in the book, and I have tried to do so in a clear and engaging way that anyone can understand. But here is a quick version to straighten out some key points:

The most fundamental point is to emphasize that the book argues for a less-cash society, not a cash-less one. There is a world of difference. If the U.S. first phased out one hundred-dollar bills and fifty-dollar bills, and then after perhaps two decades phased out twenty-dollar bills, there would still be ten-dollar bills and below. I strongly argue these should be left around indefinitely, and explain why it would be a mistake to withdraw cash entirely, as opposed to just larger bills. Even if we get down to ten-dollar bills, making an anonymous cash purchase of $1,000 would still be pretty easy—and even a $100,000 purchase would require only a briefcase. The aim of my proposal is to get at wholesale tax evasion by businesses and higher-income individuals, and by large-scale criminal enterprises, e.g., drug lords and crime bosses. With ten-dollar bills and below—which will be left in place indefinitely—there will always be ways for ordinary people to make private (anonymous) payments and for low-income individuals to buy groceries.

Any reader of the book will see that I am not proposing getting rid larger bills as segue to an outright abolition of cash—I explain why I’m against eliminating physical cash into the very distant future, perhaps another century. But for all the advantages of cash, we have to recognize that the current system is badly off kilter. A lot of central banks and finance ministries know it, as do justice departments and tax authorities.

What about the argument that in lieu of big bills, criminals and tax evaders are always going to find other ways to make anonymous payments? Obviously this is an important point, and one that comes up throughout in the book. But there is a reason why cash is king. No other anonymous transactions vehicle, however, is as remotely easy to use. Gold coins have to be weighed and assayed, and can hardly be spent at the tobacco shop. Uncut diamonds are even less liquid. Bitcoin is somewhat anonymous (albeit traceable in many instances), but governments have been putting up all sorts of tax rules and restrictions on financial institutions that make it a very poor substitute for cash. And by the way, governments will continue to do this with any new transaction media they view as facilitating tax evasion, money laundering, and crime. As I explain in the book, big bills facilitate big crime—taking them out of circulation will have a significant effect.

Finally, another very early comment on the book, of a vastly different type, is from someone I greatly respect but do not always agree with, Edward Chancellor. Unfortunately, he makes a couple of absolutely critical misrepresentations. Most importantly, he seems happy to blur the critical distinction between “less cash” and cashless. He slips easily into the “cashless” phraseology, for example, when wondering how to give money to beggars in my world. I am impressed if he can give out one hundred-dollar bills to beggars, but if so, I think he would find that a fistful of tens is also welcome.

I agree with Edward that to take advantage of today’s ultra-low real interest rates, it would be a good idea for governments right now to issue very long-term bonds (see my recent article); I have no objections to his preferred perpetuities. But there is an enormous difference between issuing registered perpetual bonds and issuing anonymous currency; that is my whole point. By the way, as the book notes, anonymous bearer bonds were effectively killed a long time ago.

Edward and I disagree on negative interest rates, but that it is whole different can of worms. I’ll just say that, in addition to explaining the issues, the section in the book on negative rates shows that effective negative-interest-rate policy is going to require laying many years of ground work—not a recommendation for something the ECB or the Bank of Japan can do tomorrow. But for reasons discussed, it is by a wide margin the best plan for the future. All the others are much worse.

In the meantime, anyone who has looked serious at the data will realize that even as currency use is declining in the legal economy, it is growing in the underground economy. Something is badly out of whack, and it is time to have a serious discussion about it.

Kenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton). He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. He lives in Cambridge, Massachusetts.

Offer and Söderberg on the real-world consequences of economics–and the Nobel Prize

Offer and SoderbergThe Nobel Prize in Economics arose during a changing time for the world’s markets. Was this a coincidence? Avner Offer and Gabriel Söderberg say no. In  The Nobel Factor: The Prize in Economics, Social Democracy and the Market Turn, Offer and Söderberg detail  how the prize, which was first awarded to economists Jan Tinbergen and Ragnar Frisch in 1969, was created by the Swedish central bank to enhance the central bank authority and the prestige of market-friendly economics. Offer and Söderberg have taken some time to answer questions about the origins of this esteemed prize and how it emerged from a conflict between central bank orthodoxy and social democracy.

What is the core argument of this book?

AO & GS: Since the 1970s, academic economics and social democracy have disputed how society should be managed. The challenge is those parts of the life cycle when people have little market power, the contingencies of motherhood, education, illness, disability, unemployment, and old age. Economics claims that it is best to buy protection in financial markets, by means of saving, borrowing and insurance. This is backed up by the supposed authority of science, symbolized by the Nobel Prize in Economics. It is also the objective of business and finance in their quest to capture profit from everybody’s income streams. Social democracy deals with dependency by means of transfers from producers to dependents, providing education, healthcare, pensions, physical infrastructure and culture, and pooling the individual risks by means of taxation and transfers. We question the claims of economics to impartiality and superior reason.

Why does the Prize in Economics matter?

AO & GS: Nobel prize-winners provide a high-quality sample of economics. The prize has a halo that makes economics credible to the wider public, for policies which are often inimical to the public interest. It arose out of the long conflict between the interests of the wealthy in stable prices, and of everyone else in social and material improvement. Between the wars, this conflict became focused in central banks, which became a brake on social democracy. After the Second World War, the Swedish Central Bank clashed repeatedly with the social democratic government over financing the welfare state, and extracted the prize as a concession. The prize was then captured by conservative Swedish economists, who used it to provide credibility for sustained resistance to social democracy. This story shows how ideas and arguments work through society and politics, and how the prestige of science has been mobilised for political ends.

Who is this book for?

AO & GS: It enlarges understanding of economic and social development with a wealth of new findings that will engage students and academics in economics, social science, and history. This includes the two-thirds of economists who hold onto social-democratic values, at odds with their professional indoctrination. Policy makers in government, business, finance, and voluntary organizations may find that the concepts on which they rely are not well founded. The argument is written to be attractive to read for anyone interested in current affairs, economic policy, and the future of society, all over the world.

After the financial crisis many new books have criticized mainstream economics. How is this book different?

AO & GS: One rebuttal by economists is that critics have no alternative to offer. But economics is not in fact hegemonic: public policy is dominated by a pervasive, pragmatic and effective system of social democracy which allocates about 30 percent of GDP in most advanced countries (lower in the USA due to a private health system). ‘It works in practice, but will it work in theory?’ is the challenge of economics. It imagines a world of self-interested, rational persons whose choices scale up to a benign equilibrium, as if by an invisible hand. But this vision is arbitrary, difficult to apply, and not even consistent. Economics has turned its back to social democracy, and has also missed the buildup to the recent financial crisis.

Many Americans regard social democracy as something exclusively European. Why should Americans be interested?

AO & GS: This is delusive, like the tea party member who asked the government to take its hands off his medicare. The United States deploys a broad range of social democratic arrangements: free public schools up to eighteen, a public higher education system; health services for the indigent, the old, and military veterans; unemployment benefits, some income and disability support, and a reasonable system of old-age pensions (social security). Much of its other spending (fiscal and other subsidies, especially the mortgage interest offset against tax) is regressive and misdirected. Americans are becoming aware of the cost of their dysfunctional and expensive medical system. Educational debt is a crisis in the making. Private retirement arrangements are failing. Bernie Sanders, a self-proclaimed democratic socialist, has mounted a formidable challenge in the Democratic primaries. The other candidates have joined him in advocating more social security and free higher education; like the tea party member, the supporters of Trump are also responding to the weakness of American social democracy.

Many commentators in Europe are discussing the crisis of social democracy in terms of lack of vision and declining support. What do you think is the future of social democracy and how must it adapt to survive and flourish in the future?

AO & GS: The problems of social democracy arise partly from its success. It developed as a one-size-fits-all solution for male manual wage-earners, and was difficult to adapt to a more diverse, educated, and affluent society, and to service economies that employ men and women in almost equal proportions. Social democracy is still the bedrock of personal security. Its objectives and methods are not fully understood by its practitioners and advocates, and hardly at all by those who benefit. Centre-left politicians, beguiled by market rhetoric, have not served it well. The values of reciprocity and solidarity underpin social democracy: they are more attractive ethically than unbridled greed, but also more effective and efficient. The ‘market turn’ held out the prospect of moving beyond social democracy to private ‘nest egg’ provision for economic security. Home ownership promised wealth for everybody. Driven by easy credit and mounting debt, this seemed to work for a while but has now built up inequality, social exclusion and financial crisis. The advocates of self-regulating markets did not anticipate such a precarious outcome.

Avner Offer is Chichele Professor Emeritus of Economic History at the University of Oxford in Oxford, England. He is a fellow of All Souls College, Oxford and the British Academy.  His books include The Challenge of AffluenceGabriel Söderberg is a researcher in the Department of Economic History at Uppsala University in Uppsala, Sweden. The two recently collaborated on the book The Nobel Factor: The Prize in Economics, Social Democracy and the Market Turn.

Join Ken Rogoff for the launch of The Curse of Cash at The Infoshop Bookstore

New York Times bestselling author of This Time Is Different Ken Rogoff will be at The InfoShop Bookstore for the launch of The Curse of Cash, “a fascinating and important book” (Ben Bernanke), on Tuesday, September 13 at 12:oopm in the IFC Auditorium at 2121 Pennsylvania Avenue NW Washington D.C..

RSVP by emailing infoshop@worldbank.org.

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Joel Brockner: Are We More or Less Likely to Continue Behaving Morally?

by Joel Brockner

This post appears concurrently on Psychology Today.

Sometimes when we do something it causes us to continue in the same vein, or show a more extreme version of the behavior. The method of social influence known as “the foot-in-the-door” technique is based on this tendency. For instance, salespeople usually won’t ask you to make a big purchase, such as a yearlong subscription, right off the bat. Instead, they will first ask you to take a small step, such as to accept an introductory offer that will only last for a little while. Then, at a later date they will ask you to make the big purchase. Research shows that people are more likely to go along with a big request if they previously agreed to a small related request. A now-classic study suggested that people were willing to put a large, ugly sign in front of their homes saying, “Drive Carefully,” if, a few days before they simply signed their name to a petition supporting safe driving.

Other times, however, when people do something it makes them less likely to continue to behave that way. For example, if people made a charitable contribution to the United Way at work, they may feel less compelled to do so if the United Way came knocking on their door at home. In fact, if solicited at home they would probably say something to the effect of, “I gave at the office.” Research by Benoit Monin and Dale Miller on moral licensing shows a similar tendency. Once people do a good deed it makes them less likely to continue, at least for a while.

The notion of moral licensing assumes that most of us want to see ourselves as open-minded or generous. Engaging in behavior that is open-minded or generous allows us to see ourselves in these desirable ways, which ironically may free us up to behave close-mindedly or selfishly. Regarding open-mindedness, consider the evolution that has transpired in the management literature on the meaning of diversity. Originally, diversity referred to legally protected categories set forth in the Civil Rights Act of 1964, which was designed to prevent employment discrimination based on race, color, religion, sex, or national origin. Over time, the definition of diversity has broadened, such that employers increasingly use non-legal dimensions – e.g., personality traits, culture, and communication style – as indicators of diversity. An example of a broad definition of diversity may be found on the website of Dow AgroSciences: “Diversity … extends well beyond descriptors such as race, gender, age or ethnicity; we are intentional about including aspects of diversity that address our differences in culture, background, experiences, perspectives, personal and work style.” Modupe Akinola and her colleagues recently discovered that law firms that adopted broader definitions of diversity had fewer women and minorities in their employee base. Thus, behaving open-mindedly (adopting a broad definition of diversity) was associated with law firms acting close-mindedly towards women and minorities.

Regarding generosity, studies have shown that people’s willingness to donate to a charitable cause is reduced if, beforehand, they wrote a short story about themselves using morally positive words (e.g., fair, kind) than if they wrote a short story about themselves using morally negative words (selfish, mean). The same thing happened if people simply thought about an instance in which they behaved morally rather than immorally. When people’s self-image of being moral is top of mind, they feel licensed to behave in less than moral ways.

So, on the one hand, there is evidence that behaving in a certain way or even thinking about those behaviors causes people to do more of the same. On the other hand, there is evidence that prior acts (or reflecting on prior acts) of morality may make people less likely to behave consistently with their past actions. What makes it go one way rather than the other? One watershed factor is how people think about or construe their behavior. All behavior can be construed in abstract ways or in concrete ways. Abstract construals reflect the “forest,” which refers to the central or defining feature of a behavior. Concrete construals reflect the “trees,” which refers to the specific details of a behavior. Abstract construals focus on the why or deeper meaning of behavior whereas concrete construals focus on the details of how the behavior was enacted. For instance, “developing a procedure” may be construed abstractly as increasing work efficiency or concretely as writing down step-by-step instructions. “Contributing to charity” may be construed abstractly as doing the right thing or concretely as writing a check.

When people construe their behavior abstractly they see it as reflective of their values, their identity, in short, of themselves. When people engage in behavior perceived to reflect themselves it induces them to show more of the same. However, when the same behavior is construed concretely, it is seen as less relevant to who they are. A moral act viewed concretely provides evidence to people that they are moving in the direction of being a moral person, thereby freeing them up subsequently to succumb to more selfish desires. Supporting this reasoning, Paul Conway and Johanna Sheetz showed that when people viewed their acts of morality abstractly they continued to behave morally whereas when they viewed those same behaviors concretely they subsequently behaved more selfishly.

Not only is it intriguing that moral behavior can foster more of the same or less, but also it is practically important to consider when behaving morally will have one effect rather than the other. People in authority positions, such as parents, teachers, and managers, typically want those over whom they have authority to behave morally over the longer haul. This may happen when children, students, and employees construe their acts of morality abstractly rather than concretely. Moreover, authorities have at their disposal a variety of ways to bring about abstract construals, such as: (1) encouraging people to think about why they are engaging in a given behavior rather than how they are doing so, (2) getting people to think categorically (e.g., by asking questions such as, “Downsizing is an example of what?”) rather than in terms of examples (“What is an example of organizational change?”), and (3) thinking about their behavior from the vantage point of greater psychological distance; for instance, when people think about how their extra efforts to benefit the organization will pay off over the long-term, they may be more likely to engage in such activities consistently than if they merely thought about the more immediate benefits.

In The Process Matters, I emphasize that even small differences in how people are treated by authorities can have a big impact on what they think, feel, and do. Here, I am raising a related point: a subtle difference in how people think about their behavior dictates whether their expressions of morality will beget more or less.

Joel Brockner is the Phillip Hettleman Professor of Business at the Columbia Business School. He is the author of A Contemporary Look at Organizational Justice: Multiplying Insult Times Injury and Self-Esteem at Work, and the coauthor of Entrapment in Escalating Conflicts.

Brockner

The Curse of Cash: An interview with Kenneth Rogoff (Part II)

Rogoff

This is the second installment of a two-part interview with economist Kenneth Rogoff on his new book, The Curse of Cash. Read the first part here.

Your new book advocates a “less cash” society, phasing out all paper currency notes over (roughly) $10, and in due time even replacing those notes with large coins.(You observe that notes of $10 or less account for only 3% of the US currency supply). How will getting rid of the vast majority of all paper currency help central banks fight financial crises?

KR: It will allow central banks to engage in much more aggressive stimulus with unfettered and open-ended negative interest rate policies, without running up against the “zero lower bound” on interest rates, a bound that exists because cash pays a zero return that any bond has to match. There are other ways to stimulate the economy at the zero bound, some quite elegant, but phasing out cash is simplest and more robust solution. If only large bills are phased out, people could in principle hoard smaller ones, but the cost is far greater (allowing rates to be much more negative), and in extreme circumstances, the government can place other restrictions on redepositing cash into the banking system.

How do negative interest rates work?

KR: The idea behind negative interest rates is simple: they give money that has been hibernating in the banking system a kick in the pants to get it out into the economy to stimulate demand thereby pushing up inflation and output. If successful, negative interest policy could end up being very short-lived because as demand and inflation rise, so too will market interest rates. In other words, if there were no obstacles, central banks could use negative interest rate policy to push down very short term interest rates, but at the same time longer term interest rates would actually rise because people would start to again expect normal levels of inflation and inflation risk. If you are worried about your pension then, on balance, this would be a very good trade.

Are negative rates the main reason to phase out cash?

KR: There are other very clever ways to introduce negative rates without phasing out cash, and the book explains these at length, with one especially clever idea in having its roots in the practices of the Mongol empire of Marco Polo’s time. In any event, the case for drastically scaling back paper currency is very strong even if the central bank is proscribed from setting negative rates. That would be mistake, as negative rates are a valuable tool. In any event, because phasing out cash opens the door wide to negative rates, it makes sense to treat the two topics in any integrative fashion as we do in this book.

Haven’t the early returns on negative interest rates been mixed?

KR: Some central banks have tiptoed into negative interest policy already, but they can only move so far before investors start to hoard cash, hampering the effectiveness of negative interest rates. If negative interest rates were open-ended, central banks could decisively shift expectations without necessarily having to go to extreme lengths.

Aren’t negative rates bad for financial stability?

KR: Not necessarily, because open-ended negative rate policy would allow central banks to turbocharge out of deflation, so that the low interest rate period would be relatively short-lived. The existing regime, where rates have been stuck at zero for many years at a time, likely presents far more risk to financial stability.

Is expanding the scope for negative interest rates really worth the trouble if the next big financial crisis isn’t expected to occur for many decades?

KR: Well, first of all, the next major financial crisis might come a lot sooner than that. Besides, the option of negative interest rates might matter even for the next “normal” recession if the general level of world interest rates remains as low as it has been in recent years. Clearing the way for open ended negative interest rate policy would not only help make monetary policy more effective, it would clear that air of a lot of dubious policy suggestions that would be extremely damaging in the long run. Too often, the zero bound is used as an excuse to advance politically motivated policies that might or not be a good idea, but should be evaluated on their own merits.

Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund. He is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton).  He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. Rogoff resides in Cambridge, Massachusetts.

The Curse of Cash: An interview with Kenneth Rogoff

Rogoff

What if cash is making us poor?

Called a “fascinating and important book” by Ben Bernanke, The Curse of Cash by leading economist Kenneth Rogoff argues that cash is making us poorer while fueling a corrupt underground economy on a global scale. Even as advanced economies are using less paper money, the amount of cash in circulation is on the rise, a reality Rogoff says feeds terrorism, tax evasion, and human trafficking, among other nefarious activities. Rogoff’s case for eliminating most paper currency is sure to stir serious debate. Recently we asked him to comment on his book and the reasons for his position.

Why do you think paper currency can be a “curse?”

KR: The big problem with paper currency is that a large part of it is used to facilitate tax evasion and a huge spectrum of criminal activities, including drugs, corruption, human trafficking, etc. Most people don’t realize the sheer scale of currency outstanding, over $4200 for every man, woman and child in the United States, with 80% in 100 dollar bills. The vast bulk is unaccounted for; it is not in cash registers or bank vaults. The phenomenon is the same across virtually all advanced economies. The dollar is not special in this regard.

Won’t the government be losing out on huge profits from printing currency?

KR: Yes, governments delight in being able to pay for things by printing money, and the United States government earns tens of billions of dollars each year by doing so. But tax evasion, which is widely facilitated by the use of cash to hide transactions from authorities, costs government far more, in the hundreds of billions for the United States alone, and far more for Europe. If phasing out most paper currency reduces tax evasion and crime by say, 10%, the government should at least break even, and the overall gains to society will be far larger. This is not a quixotic attempt to end all crime and tax evasion, but simply the observation that earning profits by printing large denomination notes is penny wise and pound foolish, a point I first made in an academic paper almost two decades ago.

Are you arguing for phasing out all paper currency?

KR: No, for the foreseeable future, I am proposing a “less-cash” society, not a cashless society. My plan would leave smaller notes, say $10 and below, for an indefinite period. This will help mitigate concerns about privacy, power outages, and the continuing convenience of cash in some small scale transactions. Over the very long run (perhaps several decades), moderately heavy coins would be substituted for small bills to make it even more difficult to transport and conceal large quantities. This last piece is inspired by the experience of ancient China, where paper currency was introduced in part because lower-grade metals were used in coinage, and it proved burdensome to carry large amounts over long distances.

Are you advocating digital currencies such as Bitcoin instead of cash?

KR: Private digital currencies are, in fact, a complete non sequitur, though of course they need to be regulated. Drastically scaling back currency was already a good idea two decades ago when I first wrote on the topic. Credit cards, debit cards, checks and electronic transfers have long been far more important than cash in the legal economy for larger transactions. Today, the role of cash is dwindling even for smaller transactions.

If we get rid of most paper currency, won’t criminals and tax evaders find other ways around the system?

KR: Of course, but there are good reasons why cash is king in the global underground economy. There are other ways to launder money and hide income, but they do not offer the same safety or universal acceptance as cash.

Aren’t most dollars held abroad anyway?

KR: Overwhelmingly, the evidence is no, at least half of all dollars are held inside the United States, still more than $8000 per four-person family.

Do other countries have the same issue with huge amounts of currency outstanding or is the dollar unique?

KR: The US is no way unique, virtually every advanced country has a massive currency supply, some even larger than the United States. And in virtually all cases, the vast bulk is in very large denomination notes. Japan, for example, has issued over 50% more cash per capita than the US, with over 90% of it in 10,000 yen notes (roughly equivalent to the US $100 bill). T

What will happen to the poor in your “less-cash” society?

KR: The poor are not the ones accounting all the 100 dollar bills, but they are the ones suffering the most from crime and who stand to benefit the most if the government were more effective at collecting tax revenues. To facilitate financial inclusion, my plan calls for providing free basic debit card accounts; several other countries have already done this.

What about privacy from the government?

The continuing circulation of small bills will ameliorate privacy concerns to some extent.  The basically philosophy of this approach is that it should remain convenient for individuals to keep modest-size transactions completely private from the government, but for large transaction, the government’s right to tax, regulate and enforce laws trumps individual privacy considerations. I am making this argument on pragmatic, not moralistic grounds.  The current system just makes it too easy to do repeated large-scale illicit trades in cash with big bills.  Even after big bills are gone, there will still be many ways for ordinary citizens to conduct one-off high-value transactions with a significant degree of privacy.  These alternatives, however, are typically inferior to cash for repeated large-scale transactions, as risk of detection rises proportionately.

What about power outages, hurricanes, etc.?

KR: Again, the continuing circulation of small bills mitigates the issue. Other payment mechanisms, including via cell phones, are rapidly becoming more important in the aftermath of storms anyway, and there are a variety of backup technologies such as checks. In a sufficient profound power outage, ATM machines and cash registers will not work either, and the government will have to airlift cash and script regardless.

How will reducing the role of cash help deal with illegal immigration?

KR: Without paper currency, it would be vastly more difficult for employers to pay workers off the books, and sub-market wages. It would be more difficult for employers to avoid making social security tax contributions and to skirt labor laws. Phasing out paper currency is a far more humane way of channeling immigration through legal channels that some of the draconian methods being proposed, such as building giant walls and barbed wire fences. Remarkably, no one in the heated political debate on immigration seems to have quite realized this. Of course, any substantial phase-out of paper currency would take place of a very long period, perhaps 10-15 years, giving a long runway for policy to help existing immigrants.

If the US gets rid of large denomination, won’t other countries just fill in the void and supply their large notes to the world underground economy?

KR: The gains from reducing domestic tax evasion and crime still should make it a big win, even though the US would forgo profits earned from supply the global underground economy, including for example, Colombian rebels, Russian oligarchs and Mexican drug lords. Europe might profit if the euro becomes more popular, but frankly Eurozone countries have much larger underground economies than the United States, and thus even more incentive to phase out paper currency. By the way, foreign notes will hardly fill the void in the United States underground economy. There are already strict reporting requirements on banks and financial firms, and there already exits limits on taking cash in and out of the country. Any alternative currency that cannot easily be spent and recycled in the legal economy will be costly to use and sell at steep discount.

Is it realistic to think cash will ever get phased out?

KR: In fact, the Scandinavian countries are already far along the path, and have successfully negotiated many of the practical concerns that have been raised, for example now to give money to indigent individuals on the street. Sweden is particularly far along. Several countries, including Canada, Sweden, the European Central Bank and Singapore have already taken action to phase out their largest denomination notes, very much in response to concerns about their role in tax evasion and crime.

Part 2 of this interview with Kenneth Rogoff will appear tomorrow.

Kenneth S. Rogoff is the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund. He is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton).  He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. Rogoff resides in Cambridge, Massachusetts.

Time Magazine calls Robert Gordon the new Thomas Piketty

GordonHave you discovered “the Thomas Piketty-esque economic must-read of the year”?  Writing for Time Magazine, Rana Foroohar takes to heart economist Robert Gordon’s claim that the big payoff from the digital revolution has already come and gone. Foroohar suggests that if Gordon’s New York Times bestselling book, The Rise and Fall of American Growth and other cautionary titles like Revenge of the Analog are any indication, the hubris of Silicon Valley may be far less warranted than we’ve come to believe. Foroohar writes:

Beyond a mere surge of Silicon schaedenfreude, there is a significant debate going on about the effects of technology, about whether the digital revolution has made us better off (socially) and by how much (economically). Academic Robert Gordon, author of The Rise and Fall of American Growth, which is the Thomas Piketty-esque economic must read of the year, is gaining traction in policy circles with a persuasive argument that the inventions that drove growth and productivity over the last 100 years or so weren’t the personal computer or the Internet, but the internal combustion engine, indoor plumbing and electricity.

Gordon’s research shows that the Industrial Revolution had a much bigger effect on economic growth than the PC, the iPhone, or any other gadget. Indeed, his book points out that productivity growth actually began shrinking after the 1970s, which is when digital technology really began to take off. His conclusion: unless the techno-optimists come up with some really seismic invention quickly, our children are likely to be worse off economically.

Read the full piece in Time Magazine here.

Robert J. Gordon is the Stanley G. Harris Professor in the Social Sciences at Northwestern University. His books include Productivity Growth, Inflation, and Unemployment and Macroeconomics. Gordon was included in the 2013 Bloomberg list of the nation’s most influential thinkers.

 

Three PUP books longlisted for the FT & McKinsey Business Book of the Year award

The FT & McKinsey Business Book of the Year Award is an annual award given to the best business book of the year as determined by the Financial Times and McKinsey & Company. This year, we are delighted and honored to have three of our titles included in the longlist! The shortlist of up to six finalists will be published on September 7, and the winner will be announced on November 22 in London.

Gordon The Rise and Fall of American Growth
Robert J. Gordon
Frank

Success and Luck
Robert H. Frank

Rogoff The Curse of Cash
Kenneth S. Rogoff

Peter Lindert & Jeffrey Williamson: Will the rise in inequality ever stop?

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By Peter H. Lindert and Jeffrey G. Williamson

Could the steep rise in the share of income gains falling into the hands of the top one percent of Americans since the 1970s have been stopped, and will the rise stop in the near future? A newly revealed history of American growth and inequality suggests the answer is yes to both questions.* What is exceptional about recent American experience is that inequality has risen faster than in other rich countries. Furthermore, it has happened twice in our history – before the Civil War, and again since the 1970s. Without some exogenous crisis like revolution, war, and great depressions, does America have the political will to stop the widening of income gaps between the very rich and the rest?

How hard would it be to stop, or even reverse, the trend? The economics is easy. The politics may be harder. However, to make the policies politically acceptable, just follow a simple equality-growth rule: Make life chances more equal in a pro-growth manner. Prioritize those economic policies that have been shown to equalize people’s opportunities without doing any damage to the growth of our average incomes.

$100 bills lying on the sidewalk

Finding such win-win policies is easy. To see why it’s so easy, just remind yourself: Has our political system seized all the chances to make us richer and more equal at the same time? Of course not. Throughout American history politicians have failed to cash in on equitable growth opportunities, even though they are all around us like so many $100 bills left lying on the sidewalk.

Four easy win-win choices stand out when we compare our experience with that of other countries – and yes, the United States can learn positive lessons from other countries.

Early and basic education for all. The United States has slipped down the rankings in its delivery of early education since the 1960s. At the primary and secondary levels, other countries have caught up with us in years of school completed, and we rank about 27th among all tested countries in the quality of the math, science, and reading skills that students actually learn by age 15.

We are also below the OECD average in the enrollment of three- and four-year olds in early education-plus-care institutions, mainly because we are also below average in our commitment to both public and private funds in pre-primary education. A growing body of evidence shows high returns to early education. Providing it to all serves both equality and growth.

Investing in the careers of young parents with newborns. Our country lags behind all other developed countries in public support for parental work leave. We are failing to invest in both child development and mothers’ career continuity. All of society gains from the better nurturing of our children and the extra career continuity of their mothers, and all of society should help pay for parental leave, not shoving the whole burden onto the young parents or their employers. Other countries figured this out long ago.

Equal opportunity and the inheritance tax. We should return to the higher federal tax rates on top inheritances that we had in the past. This would force rich children receiving bequests to work harder, make Americans more equal, and, by leveling the playing field for new generations a bit, even promote economic growth. A return to a policy which dominated the twentieth century would deliver on the American claim that “in our country, individuals make their own way, with their own hard work and abilities.” To honor that claim, we should make sure that the top economic slots are not reserved for those born very rich. We have done it before. Our top rate of inheritance taxation was 77 percent from 1942 to 1977, years when American incomes grew at the fastest rate this country has ever attained. We haven’t achieved that growth performance since the policy was changed in the 1970s.

Taxing high inheritances is not anti-growth. Instead, it promotes productive work by those who would have inherited the top fortunes. Statistical studies have demonstrated the strength of the “Carnegie effect”. Carnegie was right: passing on huge inheritances undermines the heirs’ work incentives. We also need to stress that bigger inheritance taxes do not take income away from any living rich citizen who has earned it.

Riding herd on the financial sector. Since our Independence, the United States has been above average in its history of financial meltdowns. One could even say that America has been “exceptional” in that regard. Frequent bubbles, booms, and crashes have done great damage to our growth and our equality. The danger of future meltdowns remains, because the Dodd-Frank reforms of 2010 are weaker than the tougher regulatory reforms of the 1930s, which served us so well until the ill-advised de-regulation of the 1980s. More regulatory vigilance, government liquidation authority, and capital requirements are needed to prevent financial breakdowns that tax the non-rich to bail out the rich, and make the poor also pay by losing their jobs.

History is also clear on the inequality connection. When the financial sector was closely regulated in response to the Great Depression disaster, the incomes of the rich in the financial sector fell to more moderate levels. After de-regulation in the 1980s, incomes of the rich in the financial sector soared.

Picking up the easy money takes time – and votes

Implementing just these four win-win policies may or may not be enough to stop any trend toward more inequality, or to raise growth rates from their now-modest levels. We will have to push against a strong headwind coming from competition with poorer countries. Lower-skill jobs in this country will continue to suffer from the competition produced by the long-overdue catching up rise in Asian economies since the 1970s, and from Africa in the future. This new global competition is to be welcomed. There is no reason to wish that poor countries remain hobbled by the bad institutions that have impoverished them for so long. Yet the rising competition challenges the United States to continue to upgrade its own skills to keep ahead. All the more reason to upgrade our human capital.

It will take some time to do these things. Politicians and voters hate to wait for good results that are more than two years away. And such policies may face opposition from those who would not directly gain from such win-win policies.

Still, our democracy can achieve reforms that promote both growth and equality. We’ve done it before. We can do it again. That’s what elections are for.

* The findings reported here are substantiated in Peter H. Lindert and Jeffrey G. Williamson, Unequal Gains: American Growth and Inequality since 1700 (Princeton University Press, 2016).

unequal gains lindert jacketPeter H. Lindert is Distinguished Professor of Economics at the University of California, Davis. His books include Growing Public: Social Spending and Economic Growth since the Eighteenth Century. He lives in Davis, California.

Jeffrey G. Williamson is the Laird Bell Professor of Economics, emeritus, at Harvard University. His books include Trade and Poverty: When the Third World Fell Behind. He lives in Madison, Wisconsin. Both are research associates at the National Bureau of Economic Research.

Together they have written Unequal Gains: American Growth and Inequality Since 1700.

Lee Alston: Is Dilma Rousseff’s impeachment a coup or Brazil’s window of opportunity?

Brazil in Transition book jacket(This article was originally published on The Conversation. Lee Alston is co-author of Brazil in Transition)

“Brazil’s young democracy is being subjected to a coup,” said Dilma Rousseff after the Senate on May 12 voted 55 to 22 to remove her as president and move forward with impeachment.

Is this really a coup, as Rousseff and her supporters believe? Coups usually entail the violent overthrow of a government or a trampling of constitutional rules and procedures. In Brazil, there has been no involvement by the military other than to keep the peace.

And the major players in this real-life Brazilian telenovela – Congress, the judiciary, the federal police and the Federal Accounting Office (TCU) – are all playing by the constitutional rules. This is testimony to strong institutions in Brazil and a victory for checks and balances.

Far from being a coup, the current tumult, I believe, offers a chance for Brazil, with the right leadership, to return to the policies initiated in the mid-1990s that put the country on a virtuous trajectory of rising growth and falling inequality. The middle class expanded dramatically and the political system became more transparent.

Such policies first and foremost conform to monetary and fiscal orthodoxy but also promote social inclusion through programs such as the one that pays mothers to keep their children in school.

I call this economic model “fiscally sound social inclusion,” and it’s a topic my coauthors and I explore in our forthcoming book, “Brazil in Transition: Beliefs, Leadership and Institutional Change.” Such policies helped make Brazil one of the world’s largest and fastest-growing economies.

Can Brazil’s new leader, Vice President Michel Temer, use this window of opportunity to restore economic growth and also reduce inequality under the mantle of fiscally sound social inclusion?

How we got here

Prior to the reelection of President Rousseff in October 2014, two decades of economic and political development were beginning to founder on the shoals of a decline in commodity prices and a corruption scandal involving Petrobras, the state-owned oil company.

With the country’s economy in decline and the election drawing nearer, the president submitted rather rosy-looking public accounts to the TCU – basically a federal budget watchdog similar to the U.S. General Accounting Office but with the power to approve or reject them. Rousseff’s accounts suggested the government’s finances, although deteriorating, were not far off track.

But in a historic ruling following her narrow election victory, the TCU unanimously rejected the accounts, asserting that Rousseff understated the public deficit in the year prior to the election.

It is plausible, as her critics have argued, that Rousseff would not have won reelection had the voters known the true fiscal state of Brazil.

Although the impeachment trial technically entails prosecution for violating the fiscal responsibility law, in the eyes of the public, more is at stake, including the mismanagement of the economy and the corruption scandal at Petrobras, where Rousseff was board chair prior to her election.

Markets remain optimistic

Where does Brazil go from here?

Again, playing by the rules, former Vice President Temer, who belongs to a different party than Rousseff, is now the interim president while the impeachment prosecution proceeds. If Rousseff is impeached or resigns (never, she claims), Temer’s position will become permanent, and he will serve out her term, which expires in 2018.

Impeachments (and certainly coups) generally send economies into a tailspin. Yet, this hasn’t happened in Brazil. As the impeachment gained steam this year, the Brazilian real (the national currency) actually appreciated, as did the stock market.

Since the beginning of the year, the real is up by 10 percent and the stock market by 23 percent. And even when the real was tanking in late 2015, foreign direct investment surged, a sign of confidence by outside investors in the underlying fundamentals of the economy despite the political turmoil.

It may also signal confidence that Temer will institute market-friendly reforms. It’s important to note that in Brazil presidents have much stronger agenda-setting powers than in the U.S.

Temer is not popular in Brazil, but he is known as a “dealmaker,” one who is capable of managing a coalition in a multiparty Congress.

This all sounds promising, but before looking forward it is important to understand the past.

From military rule to fiscally sound social inclusion

From 1964 until 1985, Brazil was ruled by a military regime.

The military imposed order in its early years and embarked on an ambitious top-down development plan that turned Brazil into a “miracle economy” in the 1970s. However, growth began to sputter by the end of the decade, and inflation soared.

As growth weakened and the opposition became more vocal, the military’s oppressive reaction failed to suppress a growing populism, forcing it to pave the way for a return to democracy.

This helped usher in a new belief: social inclusion, which meant everything for everyone. The constitution of 1988 is one of the most detailed in the world, especially in terms of human rights. The decision-making process codified these beliefs around social inclusion as every interest group got to hang its ornament on the “Christmas tree” constitution.

Unfortunately, this didn’t work so well for the economy. From 1986 through 1993, governments spent generously on wasteful pork barrel projects, financed by printing money, leading to hyperinflation in the thousands of percent. Social inclusion was great in principle but bad in practice.

Several stabilization plans aimed at reining in inflation dramatically failed, and Brazil’s first democratically elected president since military rule, Fernando Collor, resigned during an impeachment trial in 1992.

This marked a turning point for Brazil and its economy after Fernando Henrique Cardoso, a self-exiled socialist during the military regime, was appointed finance minister by Collor’s replacement.

Cardoso and his team swiftly tamed inflation and instilled confidence, especially among businesses. This helped him win reelection, following which he passed the cornerstone of fiscally sound social inclusion: the fiscal responsibility law, aimed at ensuring that state governments could no longer spend more than their budgets allowed.

At the same time, Cardoso never abandoned the concept of social inclusion. Rather he merged it with his orthodox fiscal and monetary policies, such as keeping inflation in check, reforming pensions and controlling the budget. This led to modest economic growth and a growing middle class.

Yet his party lost the 2002 election to the charismatic Lula da Silva, who campaigned on a platform of largesse for the lower class and workers in general. Fortunately, high commodity prices helped da Silva run successive fiscal surpluses during his two terms, even as he expanded programs for the poor started by Cardoso. In other words, he continued and solidified a policy of fiscally sound social inclusion.

It was on da Silva’s crest of popularity and economic growth that Rousseff took the helm in 2010. But she abandoned many of his “fiscally sound” policies by increasing government expenditures and subsidies as well as expanding the role of state-run companies like Petrobras and the Brazilian Development Bank. And as commodity prices plunged, the economy fell with them, eventually exposing the holes in the government’s finances.

The traits of a leader

So the question now is will (and can) Temer restore those socially inclusive yet fiscally sound policies that put Brazil on course to becoming a truly developed country?

So far, foreign and domestic investors have reacted favorably. But Temer faces a difficult task in resurrecting trust amongst the population and investors. Meanwhile he also faces his own allegations of corruption.

To me, whether he can successfully navigate the ongoing bumps in the road and stay the course of reform or not depends on whether he has the necessary attributes of a leader to rise to the occasion.

In “Brazil in Transition,” my coauthors and I pose three questions to help us assess whether a leader such as Temer has what it takes: does he know what policies are needed to recover from the shock? Can he coordinate a coalition that includes economic and political actors as well as citizens to embrace those policies? And is he trusted and does he possess moral authority?

To this, I add two more: can he adapt to unforeseen bumps to stay the course? Does Temer (including his policy team) possess imagination to see solutions that were not on the table?

Temer has recognized the heart of Brazil’s dilemma: policies need to be fiscally sound. This means accepting some austerity, as Argentina recently did. On this score he wins points for naming Henrique Meirelles, a well-respected former head of the central bank and a Wall Street veteran, as finance minister.

Can Temer coordinate among Congress and other powerful players in Brazil, such as industry and unions, and convince them to play ball? Being known as “the dealmaker” means he should be able to “coordinate and adapt” as opportunities arise. Temer was also trained as a constitutional lawyer, which means he knows well both the law and rules of the game in Congress.

However, he lacks the moral authority of both Cardoso, who was a vocal critic of the military regime, and da Silva, who with a fourth-grade education rose to the presidency as a strident union leader. But leaders can build moral authority; they need not come to the job with it in hand. (Not everyone can be a Nelson Mandela.)

Finally, does Temer have the “imagination” to come up with extraordinary ideas capable of breaking through the gridlock and bringing about reform? In his first hours in office, he demonstrated imagination by cutting his cabinet by a third, to 22 from 31, and, controversially, he picked only white men. This move could backfire, but it at least shows he’s willing to take risks and is not afraid of some controversy.

So does this suggest he has the “right stuff” to seize the window of opportunity of a new government and return Brazil to its virtuous trajectory?

His early moves may please markets, but to satisfy Brazil’s diverse citizenry, he will need to demonstrate that he is not abandoning social inclusion. On this as well as his own fate in the ongoing corruption scandals: the jury is still out.The Conversation

Lee Alston, Professor of Economics, Indiana University

Taxing the Rich

Taxing the RichIf you didn’t file your taxes on April 15th, you can breathe a sigh of relief. Thanks to the Emancipation Day holiday in the District of Columbia, the tax deadline was switched to April 18 this year. Already ahead of the game? While the final hours tick down, we have just the history of fiscal fairness for you.

In Taxing the Rich, Kenneth Scheve and David Stasavage analyze the history of taxes and take a look at when and why countries tax their wealthiest citizens. The authors argue that governments don’t tax the rich simply because of striking inequality—they do it when its citizens believe that such taxes compensate for the state unfairly privileging the wealthy. What matters most is society’s views on how the inequality is being generated in the first place.

The Atlantic recently wrote about the book, including quotes from Scheve and Stasavage:

Relative to the past 200 years of U.S. history, how heavily are the rich being taxed today? Kenneth Scheve and David Stasavage, professors of political science at Stanford University and New York University respectively, looked into when countries have taxed their wealthiest citizens most heavily, and what societal conditions might have produced those tax rates. In a project that took five years, the two constructed databases of tax rates and policies in 20 countries over the last two centuries in order to answer those questions. They recently published this research in a book, Taxing the Rich: A History of Fiscal Fairness in the United States and Europe.

One of their motivations for starting the project was a disconnect they noticed between rising inequality and static tax rates. “With inequality rising over the last three or four decades, why have there not been public policies that seem to address that in an important and substantive way?” says Scheve. But while it would seem intuitive that taxes would increase at the times when inequality is highest, Scheve and Stasavage found that this relationship hasn’t held true over the course of history.

You can read the full piece in The Atlantic here, and an exclusive interview with Scheve and Stasavage here.