Saturday, May 11, 2019

Interview: Kenneth Rogoff predicts "that wages of ordinary Americans will rise the next few years"

Editor's note: This interview was originally published in March 2017.

This is the third part of my discussion with Dr. Kenneth Rogoff. The first and second articles are available on-line. 
Story by Joseph Ford Cotto
Tired of carrying cash around? Does one fellow have a plan for you.
"I am not advocating a cashless society, which will be neither feasible nor desirable anytime soon," Dr. Kenneth Rogoff wrote in a recent article for Project Syndicate. "But a less-cash society would be a fairer and safer place."
His main beef is with large-denomination notes; specifically the $100 bill. In the same piece, he said it "accounts for almost 80% of the US’s stunning $4,200 per capita cash supply" while, overall, physical currency "facilitates crime because it is anonymous, and big bills are especially problematic because they are so easy to carry and conceal." 
Rogoff, who holds the Thomas D. Cabot professorship of public policy -- in addition to an economic teaching post -- at Harvard University, has much more to say about the campaign for a cash-free country. Last year, his book, The Curse of Cash, was published by Princeton University Press and found no shortage of attention. One might say it became something of a lightning rod.

Clancy Yeates of The Sydney Morning Herald declared Rogoff's work "a fascinating contribution to the debate about what might be done to help get many wealthy countries out of an economic funk." Yeates noted that Rogoff's argument "says boring old paper (or plastic, in our case) bank notes are a major barrier to monetary policy--changing interest rates--fulfilling its potential."
On the other hand, The Wall Street Journal's James Grant unleashed the following: "If there is a curse between the covers of this thin, self-satisfied volume, it doesn’t have to do with cash, the title to the contrary notwithstanding. Freedom is rather the subject of the author’s malediction. He’s not against it in principle, only in practice."
Aside from his currency activism, Rogoff is a chess grandmaster and the co-author of This Time is Different: Eight Centuries of Financial Folly, which soared to bestseller status in 2009. He recently spoke with me about many issues pertaining to the United States's economy. Some of our conversation is included below. 


Joseph Ford Cotto: The Donald Trump Administration promises many changes to federal politics. Do you believe that his economic proposals, generally speaking, will bring typical Americans higher wages?  

Dr. Kenneth Rogoff: I believe that wages of ordinary Americans will rise the next few years, but most of the action comes from factors outside the President’s control: rising productivity and continuing healing from the financial crisis.  They probably would have risen under Hillary Clinton, or if (hypothetically) Barak Obama could have had third term.  There are some areas were Trump’s policies might help somewhat.  A rise in infrastructure spending will both help boost short-term demand and, potentially, long-term productivity.  The rollback of Obama era regulations may have deleterious long-run effects (for example on the environment), but will probably boost growth in the short run. Indeed, we may see a genuine pickup in business investment over the next year or two, after a long period of stagnation.  Trump’s trade policies, however, could prove very costly to most Americans if he proceeds along the lines detailed in his campaign.  Wages for a few workers may go up, but for many others, all they will see is a rise in the prices.

Cotto: You have written that if the federal government were to end the circulation of large-denomination currency notes, it might help to fight crime and tax evasion.  Why?

Rogoff: Over the past few decades, paper currency has become less and less important in legal, tax-compliant transactions, except for very small payments where it is still dominant. Cash already accounts for under 10% of the value of all consumer payments, and the share is likely to fall to well under 5% over the next decade.  Yet the demand for cash remains enormous.  There is over $4200 floating around for every many, woman and child in the United States, the vast bulk in the form $100 bills. Some of it is in places like Russia or China, but most estimates suggest that at least half is insider our borders.  A broad array of evidence including survey data, evidence from crime and tax busts,  and data from other countries suggests that a great deal of this cash is used in tax evasion and crime.  

I refer the reader to my recent book The Curse of Cash for history and context of the problem, and a survey of the cross-country evidence.  Of course, cash is also used by ordinary people both for convenience and sometimes for privacy (albeit in much smaller quantities.)  The question for society is how to retain the convenience of cash for ordinary people while making life more difficult for those engaged in crime (e.g. drug trafficking, human trafficking, racketeering, etc.) and wholesale tax evasion.  There are many ideas; several countries in Europe have capped the size of cash transactions, while others have wired cash registers to make it more difficult for stores to under-report the sales taxes they owe (the so-called value added tax in Europe is over 20% in most countries so it is a very big deal.)   I believe that a more effective and more light-handed approach would simply be to eliminate large bills (say $100s and $50s in the US), making it more difficult to port, store, and hide large volumes of cash.  

It may seem crude but in fact processing cash is major expense in most criminal operations, and increasing the required weights and volumes would be a significant inconvenience.  As for the idea that criminals would simply use gold coins, uncut diamonds or Bitcoin, that is quite na├»ve (as my book discusses.) Simply put there is nothing that has the instant liquidty and universal acceptance of cash.  I don’t pretend that getting rid of big bills would eliminate tax evasion and crime, but if it can cut each by five to ten percent – as seems likely – it is huge benefit to a change most people wont notice.