October 9th, 2021

Mecklinburg Autumn

CAPITAL FLIGHT

As the Fed moves towards tightening its post-pandemic monetary policy, developing countries around the world face growing risks of capital flight. The deep political constraints posed by this risk are not new, but their implications for contemporary policymaking are persistent.

In a 2014 book chapter, Léonce Ndikumana and James Boyce consider strategies to overcome the tension.

From the text:

"On the African side, capital flight is associated with the embezzlement of national resources, corruption and political instability. But external agents and institutions also contribute to capital flight from the continent, in particular through the opacity of the international banking system and inadequate enforcement of rules on financial transparency.

This implies that efforts to stem and prevent capital flight must be organized on both domestic and international fronts. At the national level, the effectiveness of official institutions in preventing capital flight is contingent on the existence of a dynamic network of civil society entities committed to financial transparency and accountability. Civil society needs to be given ample space to operate as a counterbalancing force to executive power. In turn, civil society must take advantage of this position to consolidate action plans in the fight against illicit financial flows. Internationally, the establishment of a body to adjudicate questions of debt legitimacy would add an important missing piece to the current financial architecture. The coordination and harmonization of regulatory frameworks and enforcement mechanisms are critical to increase effectiveness in preventing illicit financial flows and tax evasion, and in facilitating stolen asset recovery. A more transparent international financial system will benefit developing and developed countries alike."

Link to the piece.

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December 19th, 2020

Au Matin

GREEN CENTRAL BANKING

In the wake of recent financial convulsions, central banks have emerged yet again as the first responders to crisis. But to confront the crisis of anthropogenic climate change, there is growing acknowledgement that central banks should go further, beyond their limited remit of maintaining price stability.

Central banks should be more cognizant of their own role in creating credit-fueled growth; monetary policy already features distributing the benefits and burdens of decarbonization. Crucially, stepping up ambitions for active climate change mitigation would involve abandoning spurious notions of "market neutrality."

In a recent e-book, PATRICK BOLTON , MORGAN DESPRES, LUIZ AWAZU PEREIRA DA SILVA, FRÉDÉRIC SAMAMA, and ROMAIN SVARTZMAN argue that facilitating decarbonization is in fact consistent with concerns over financial and price stability:

"An additional ambitious and controversial proposal is to apply climate-related considerations to central banks’ collateral framework. The goal of this proposal is not that central banks should step out of their traditional role when implementing monetary policies, but rather to recognise that the current implementation of market neutrality, because of its implicit bias in favour of carbon-intensive industries [...] could end up affecting central banks’ very own mandates in the medium to long term. Honohan (2019) argues that central banks’ independence will be more threatened by staying away from greening their interventions than by carefully paying attention to their secondary mandates such as climate change. Thus, and subject to safeguarding the ability to implement monetary policy, a sustainable tilt in the collateral framework could actually contribute to reducing financial risk."

Link to the book.

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August 25th, 2020

Escaping the Bleak

DIGITAL CURRENCIES

Covid is accelerating the transition away from cash and encouraging the development of state-backed digital currencies. In the past two weeks, the People's Bank of China launched a trial run for digital renminbis in three major cities, and the Boston Fed announced a research initiative examining the technicalities of a Central Bank Digital Currency (CBDC) in the United States.

Despite its purported benefits, the shift threatens to fundamentally alter the priorities of central banks, the structure of payment markets, and the regulatory framework required to ensure financial stability. A 2018 paper by SHEILA DOW considers the limitations of CBDCs for this latter aim.

From the piece:

"The development of Central Bank Digital Currencies feeds into a more general debate on the state’s role in the financial sector. Markets price according to evidence of the past, but also according to conventional judgements about that evidence. Since these conventional bases for pricing are vulnerable to discrete changes which spread across markets, there is considerable scope for financial instability. Innovation in payments systems and digital currency assets is just part of an ongoing process of financial innovation outside the current boundaries of regulation.

Governments have placed the full onus for macroeconomic policy on monetary policy, with fiscal policy restricted to reductions in budgetary deficits and the size of the state. Ironically, since fiscal austerity policies held down aggregate demand and elevated expectations of risk attached to real projects, increases in the money supply were accompanied by low inflation. Consequently, monopoly control of the money supply in order to promote monetary stability seems to be beside the point. Rather the focus needs to be on how the financial sector might be regulated in such a way as to generate credit for useful projects and liquidity as a refuge from uncertainty. Central bank digital currencies may pose benefits, but to consider them the core of a generalised policy to avert future crises is to look in the wrong place."

Link to the article.

  • "Time and effort would be better spent on upgrading existing payment networks rather than pursuing options that, for all their innovation, could create more problems than they solve." This week's FT editorial urges caution in rolling out CBDCs mid-crisis. Link. And a Philadelphia Fed working paper from June preempts these concerns, warning that the introduction of digital currencies may turn central banks into "deposit monopolists." Link.
  • "If banks are no longer willing to act as financial intermediaries, central banks should consider using CBDCs to circumvent the banking system and inject liquidity directly to those who need it the most." Elham Saeidinezhad and Jack Krupinski present an alternative view on digital currency creation as crisis management (stay tuned for Saeidinezhad's forthcoming piece on Phenomenal World). Link.
  • In a series of collected essays published by the European Money and Finance Forum at Bocconi University, analyses of CBDC pilots in Uruguay and Sweden. Link.
  • From 2017, Ole Bjerg on the "Policy Trilemma of CBDCs." Link.
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August 10th, 2020

Ships in Port

UNEMPLOYMENT

It's been over a week since Congress allowed the Federal Pandemic Unemployment Compensation scheme to lapse, and negotiations over an extension have reached a gridlock. But even prior to its end, access to the enhanced benefit was far from equal across the country—a host of administrative and practical hurdles in states like Florida and Alabama prevented scores of applicants from receiving aid.

The absence of a functional and unified federal unemployment scheme is a characteristic feature of America's patchy safety net. In a 1987 paper, Edwin Amenta, Elisabeth S. Clemens, Jefren Olsen, Sunita Parikh, and Theda Skocpol trace the history of this decentralized structure through a comparative analysis of 1930s UI legislation in Wisconsin, New York, Massachusetts, Ohio, and Illinois.

"The states, not the federal government, were the units that debated health and unemployment insurance bills and passed workers' compensation and mothers' pension laws during the Progressive Era and after. The debates surrounding unemployment insurance provide considerable insight into the political dynamics of industrial society. More than any other component of welfare policy, the states' response to unemployment politicized antagonisms between capital and labor. Moreover, the emergence of unemployment as a legitimate target for state action entailed both the development of a politically viable interpretation of the cause of unemployment, and decisions concerning the appropriate extent of the government's intervention in the economy.

Neither organized labor nor political parties have been identified as important shapers of Social Security. But, as we have seen, a programmatic political alliance between organized labor and the Democratic party did shape generous unemployment insurance in New York, and the influence of labor, mediated by Democratic parties, also mattered in Massachusetts, Ohio, and even Illinois. Moreover, in Wisconsin, the 1932 unemployment benefits law grew out of patterns of administrative-led political bar- gaining established in the Progressive Era. This bargaining included organized labor and its political allies, the Milwaukee Socialists; it also occurred in a partisan context marked by the strong influence of Progressive Republicans. In short, if we examine politics at the state level, we discover that organized labor and political parties (as actors and as organizational structures) played a much more important role in the shaping of American unemployment insurance than nationally focused research reveals."

Link to the piece.

  • A report from the New York State Department of Labor provides a legislative history of UI following the passage of the Social Security Act in 1935, with an appended chronology of significant legislative changes on the federal and state level. Link. And two Congressional Research Service reports summarize the structure of the current federal system, including that of the Unemployment Trust Fund which supports states in the case of insolvency. Link and link.
  • In a 1990 paper, Steve Valocchi examines the internal dynamics of the unemployed workers movement in the 1930s US: "The movement's inability to change its organizational form in the face of early New Deal reforms led to the precipitous decline in protest activity in 1934." Link.
  • "Governments shape the meaning of unemployment through policies and public declarations. Some kinds of joblessness come to 'count' as unemployment while others do not." In a 2004 book, Philip Baxandall situates categories of unemployment in Hungary within the country's changing political context. Link.
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August 3rd, 2020

Nocturnal Pasture

OFFSHORING

Much research has documented the vast sums of "missing wealth" stored in tax havens, and detailed its implications for inequality, fiscal policy, and economic growth. Less present in the discussion is the institutional and political history of these offshore financial centers.

In a 2017 paper, VANESSA OGLE recounts the making of what she terms the offshore "archipelago"—the various institutions that, outside of the core of powerful nation-states, became central to the international financial system. From the paper:

"Contemporary definitions of tax havens are often too static to capture the more fluid and multifaceted legal constellation among such sites as they appear to the historian. In the age of empire, the natural state of affairs entailed legal unevenness. This world was made up of centralized nation-states, multiethnic land empires, overseas empires with their colonies, protectorates, settlements, and dominions, as well as 'informal empire' with its regimes of extraterritoriality and legal pluralism. Local administrations in overseas territories had considerable leeway in drafting company and bank laws or tax codes and accounting standards for these respective entities and sub-entities. Legal and political unevenness greatly benefited tax avoidance on a global scale.

As empires came undone, an archipelago-like landscape of distinct legal spaces re-created some of the unevenness that had characterized the nineteenth century. Yet in the twentieth century, this offshore world and the unevenness it offered existed in and for a world order in which bounded, homogeneous national state spaces and generally sizable nation states had eventually become the norm. The New Deal, the European welfare state, decolonization, and the Bretton Woods system were state-based and government-driven projects. The offshore world emerged on a more significant scale precisely at the moment when these state-based projects began to assume their greatest importance. It consisted of tax havens, flags of convenience registries, offshore financial markets and banking institutions, and special economic zones. This landscape allowed free-market capitalism to flourish on the sidelines of a world increasingly dominated by larger and more interventionist nation-states."

Link to the piece.

  • Antonio Coppola, Matteo Maggiori, Brent Neiman, and Jesse Schreger recalculate global capital flows, accounting for cross-border financing and tax havens: "We find that portfolio investment from developed countries to firms in large emerging markets is dramatically larger than previously thought. The national accounts of the United States, for example, understate the U.S. position in Chinese firms by nearly $600 bn, while China’s official net creditor position to the rest of the world is overstated by about 50 percent." Link.
  • Drawing on interviews with key informants from banks, shell companies, foreign real estate, and investor citizenship programs, Alexander Cooley and J. C. Sharman argue that "professionals in major financial centers serve to lower the transaction costs of transnational corruption by senior foreign officials." Link.
  • Daniela Gabor and Cornel Ban's 2017 paper on the political economy of shadow banking. Link. And Jan Fichtner's 2016 "anatomy" of the Cayman Islands offshore financial center. Link.
  • The 2011 book The New Fiscal Sociology, edited by Isaac Martin, Ajay Mehrotra, and Monica Prasad, marks and collects interdisciplinary research in the comparative history and politics of taxation. Link.
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July 10th, 2020

The Crisis and the Free Market

On crisis, partisanship, and public policy

Will the current crisis transform America’s politics and economic institutions? With unemployment higher than at any point since the Great Depression, rising food insecurity, and an increasingly muscular role for government—are we witnessing the beginning of the end of the four-decade-long era of the free market ushered in by Ronald Reagan? It’s a question worth considering, whether you’re a Democrat who blames the rising inequality of the last four decades on the policies of smaller government, or a Republican who thinks those policies saved America.

It wouldn’t be the first time a crisis has altered the trajectory of the country. The Republican Party of today is defined by its commitment to tax cuts, deregulation, and cuts in social spending. But prior to the Reagan administration, the Republicans were actually the party seen as most likely to increase taxes, because their main commitment throughout the post-war period had been to avoid deficits. The party was, in Newt Gingrich’s famous dismissal, the tax collector for the welfare state.

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May 26th, 2020

Radio

STATE CAPACITY IN THE US

Analyses of variation in state-level responses to the coronavirus tend to focus on party determination: On the whole, states led by Democrats have been found to undertake more rapid and extensive responses to the crisis. The focus on immediate political factors, however, masks the broader history of America's uneven and disaggregated bureaucratic capacity.

A 1982 book by STEPHEN SKOWRONEK presents one of the most comprehensive accounts of the origins of the US administrative state. Focusing on reforms in civil administration, the army, and national railroad regulation from 1870-1920, the book demonstrates how regional differences contributed to the particular character of American state development.

"Unravelling the state-building problem in modern American political development places the apparent statelessness of early America in a new light. The governmental forms and procedures necessary for securing order in industrial America emerged through a labored exercise in creative destruction. Modernization of national administrative controls did not entail making the established state more efficient; it entailed building a qualitatively different kind of state.

The Civil War brought national military conscription, a national welfare agency for former slaves, a national income tax, national monetary controls, and citizenship. Yet, this was a state grounded in only half the nation. As the South returned, national electoral politics changed, and these institutional achievements began to be undone. Here, then, was a state only in the sense of the word imputed to it by the interests and strategies of the mass electoral organizations controlling its offices. No institution stood beyond the reach of party concerns. The fate of the wartime governmental apparatus suggests that if new institutional forms are to constitute a new state, they must alter the procedural bonds that tie governmental institutions together and define their relationship to society."

Link to the publisher's page.

  • Theda Skocpol and Kenneth Finegold expand Skowronek's research into the New Deal era. Link.
  • "In societies where social status is a cleavage, elites can use the threat of desegregation to unite wealthy and poor members of high-status groups against taxation and the bureaucratic capacity required to collect taxes." Pavithra Suryanarayan and Steven White on "Slavery, Reconstruction, and Bureaucratic Capacity in the American South." Link. In another article, Roberto Stefan Foa and Anna Nemirovskaya analyze the development of state capacity on the frontier. Link.
  • Daniel Berliner, Anne Greenleaf, Milli Lake, and Jennifer Noveck present "systematic study of relationship between state capacity and labor rights." Link.
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May 4th, 2020

Security for the People

ADVANCE CAUSE

Ethics in mitigation

Following the comparative success of South Korea and Singapore to flatten the Covid-19 curve, governments around the world have been discussing the merits and feasibility of tech-aided contact tracing systems. (Whether these comparative public health successes are actually attributable to such systems remains a point of debate.) In the US context, app-based tracing proposals have been floated by various think tanks, and Apple and Google have released protocols for their design.

Privacy concerns are paramount, as are questions of efficacy and the opportunity costs of new mitigation tools. In a white paper last month, Danielle Allen, Lucas Stanczyk, Glenn Cohen, Carmel Shachar, Rajiv Sethi, Glen Weyl, and Rosa Brooks examined the ethical and legal bases of pandemic mitigation.

From the paper:

"We are currently in the initial stage of facing the spread of an epidemic, with clear emergency needs to secure our health system while seeking to minimize lives lost and ensure that all patients, including the dying, are treated with dignity. We have to fend off a near-term catastrophe, and in that regard we are in our 'triage' moment. We are currently making triage decisions across all sectors of society.

Securing our health infrastructure and minimizing loss of life requires changing the trajectory of transmission through screening, testing, contact tracing, mobility restrictions, and social distancing. Whereas contact tracing and individualized quarantine and isolation suffice in non-pandemic circumstances, community quarantine and isolation become necessary under pandemic conditions in order to address the emergency. Here the challenging questions are to create the right package of temporarily adjusted norms, regulations, and laws around rights of mobility and association, and to determine whether the relevant packages of norms, regulations, and laws are best."

The authors propose guidelines for decision procedures that promote mitigation without violating civil liberties, justice, democratic institutions, or the "material supports of society." Link to the paper. h/t David Grant

  • An evolving list of projects using personal data for Covid-19 response. Link.
  • From a 2019 paper on the efficacy of contact tracing and epi models: "A major concern identified in future epidemics is whether public health administrators can collect all the required data for building epidemiological models in a short period of time during the early phase of an outbreak." Link. A 2018 paper on contact tracing's role in the 2014-2015 Ebola outbreak in Liberia. Link.
  • Previously shared in this newsletter, a technical paper for the Decentralized Privacy-Preserving Proximity Tracing (DP-3T) protocol. The tweet-length summary from researcher Michael Veale: "Health authorities learn nothing about users. Users learn nothing about other users. Users learn if they were too close to others who tested positive. Governments learn nothing about users. No-one is coerced: everything based on genuine, voluntary consent." Link to the paper. (And link to a comic strip explanation of how it works.)
  • An excellent blog post from Ross Anderson at Cambridge's Department of Computer Science and Technology on contact tracing in the real world. Link. See also "Apps Gone Rogue: Maintaining Personal Privacy in an Epidemic." Link.
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