Archives: August, 2013

Troubled Currencies Project Update: Syria, Iran, and Egypt

Syria Since August 26,  when U.S. Secretary of State John Kerry began laying the groundwork for military intervention in Syria, the Syrian pound (SYP) has taken a beating on the black market. Indeed, the SYP has lost 24.07 percent of its value against the U.S. dollar (USD) in the two days since Kerry’s announcement. Currently, the exchange rate sits at 270 SYP/USD, yielding an implied annual inflation rate of 291.88 percent. In countries with troubled currencies, there is no better measure of economic expectations than the black-market exchange rate. The recent deterioration in the SYP/USD exchange rate clearly indicates that Syrians are anticipating Western military intervention in the near term. 

IranThe initial weeks of the Rouhani presidency have seen renewed economic confidence, as reflected by the Iranian rial’s (IRR) black-market exchange rate. The new central bank governor, Valiollah Seif, has stated that his primary concerns are to rein in inflation and boost economic stability. Over the past few weeks, the rial has strengthened on the black-market, and inflation has moderated somewhat. That said, recent international saber-rattling over Syria clearly has spooked the Iranian public. In the two days since Secretary Kerry first made his case for intervention in Syria, the value of the Iranian rial has dropped 4.74 percent on the black market, to 32,700 IRR/USD. This yields an implied annual inflation rate of 52.10 percent, up from 44.89 percent, prior to Kerry’s announcement.

EgyptSince the fall of the Morsi government, public confidence and support for the military regime has boosted the value of the Egyptian pound (EGP). Prior to the military takeover, the black-market exchange rate sat at 7.6 EGP/USD. Since Morsi’s ouster, the pound has appreciated by 7.34 percent, to 7.08 EGP/USD. This yields a current implied annual inflation rate of 18.62 percent, down from 27.85 percent in the final days of the Morsi government. In recent weeks, the Central Bank has been auctioning off up to $40 million in foreign exchange, three times per week. This rather modest sum has adequately met the demand for foreign exchange at rates close to the official exchange rate of 6.99 EGP/USD.

 

For more information on troubled currencies in these countries and others, see The Troubled Currencies Project.

A Dream on Hold

Matt Yglesias today cites data to the effect that, while the gap between blacks and whites in completing high school has been steadily closing in recent decades, racial gaps in income and wealth have remained stubbornly large. This discrepancy suggests that blacks have made real progress in raising their relative skill levels but for some reason they aren’t reaping the rewards of that progress in the workplace.

Alas, the solution to this puzzle is that the purported racial progress in the classroom is in fact a statistical mirage. The big problem is that the official stats on high school completion rates count GED holders as high school completers, despite the fact that both economic and social outcomes for GED holders much more closely resemble those for high school dropouts than those for people who actually earn a high school diploma. And it turns out that the GED program is used disproportionately by blacks – to a significant extent because black inmates are earning them in prison. So a big increase in GED certifications for blacks is portrayed as educational progress when in fact it is a byproduct of socially catastrophic mass incarceration.

Nobel Prize-winning economist James Heckman from the University of Chicago and coauthor Paul LaFontaine have found that only about 65 percent of blacks finish high school with a diploma, far below the level indicated by the official stats on high school completion. Furthermore, they find no evidence of black-white convergence in high school graduation rates over the past 35 years. Along similar lines, a study by Derek Neal of the University of Chicago found that the black-white gap in educational attainment stopped shrinking around 1990. Neal also looked at test scores and reached similar conclusions: convergence in black-white test score gaps came to a halt in the late 1980s.

The sad fact is that, after great progress through much of the 20th century, racial disparities in human capital levels have remained stuck for decades. The problem isn’t that the marketplace is shortchanging blacks for their rising job skills; the problem is that blacks’ job skills are still so low. This, in turn, is part of a much larger slowdown in human capital accumulation that I talk about in my most recent book.

How Transparent Is Your State’s Department of Education?

When a business applies for a loan, the bank needs to know the business’s operating expenses and its overhead to make an informed decision about whether to grant the loan. A business that acquired a loan while understating or hiding some categories of its expenses would be in serious trouble. However, the government seems to operate by a different set of rules.

A new report from the Cato Institute, “Cracking the Books: How Well Do State Education Departments Report Public School Spending?“ finds that state departments of education routinely understate the cost of public schools and often fail to report key spending categories. Meanwhile, a Harvard survey finds that the public thinks that public schools cost half as much as they really do. Are state education departments contributing to the public’s vast underestimation of the true cost of public education?

Find out more at Education Next.

Should Ill-Fated Activists Expect Rescue from Washington?

Kenneth Bae is a 44-year-old Christian missionary who was arrested last November while leading a tour of North Korea’s Rason special economic zone. He wanted to spread the Gospel, but the Democratic People’s Republic of Korea views religion as a particularly serious threat.

Bae was sentenced to 15 years of hard labor. His letters home, said his sister, Terri Chung, “contained the same message—Kenneth’s health is failing, and he asked us to seek help from our government to bring him home.”  He urged Washington to send an envoy for him.

Bae’s mother was even more insistent:  “I don’t see any action.  I want to ask them, send an envoy or do something.  As a mother, I am really getting angry, really getting angry.  What do they do?”

It’s a tragic situation.  But it isn’t the U.S. government’s responsibility to win the release American citizens who knowingly violate the laws of other nations. I say that even though I have traveled multiple times with ethnic Karen guerrillas in eastern Burma. I didn’t expect a rescue from Washington if something went wrong. After all, I’d chosen to enter a war zone.

The U.S. government has called for Bae’s humanitarian release. The DPRK almost certainly wants to use him to win one concession or another. In the past, that has meant a high-level visit to Pyongyang:  Bill Clinton and Jimmy Carter both have played that role.  But the administration is sending an envoy and Pyongyang might want more this time. 

Curbing Class Action Settlement Abuses

In 2007, Facebook launched the controversial “Beacon” program, which automatically broadcast purchases made by Facebook users. The disclosures revealed embarrassing movie choices, indulgent spending habits, and even ruined the purchase of a young couple’s engagement ring.

In the subsequent class action lawsuit, a $9.5 million settlement was reached in which Facebook would pay $3 million to cover attorneys’ fees and a remaining $6.5 million would be used to set up a new charitable organization—controlled by Facebook—whose mission would be to educate the public about Internet privacy. The millions of class members, however, would get nothing.

This redistribution of settlement money from the victims to other uses is referred to as cy pres. “Cy pres” means “as near as possible,” and courts have typically used the cy pres doctrine to reform the terms of a charitable trust when the stated objective of the trust is impractical or unworkable. The use of cy pres in class action settlements—particularly those that enable the defendant to control the funds—is an emerging trend that violates the due process and free speech rights of class members.

Accordingly, class members objected to the Facebook settlement, arguing that the district court abused its discretion in approving the agreement and failed to engage in the required rigorous analysis to determine whether the settlement was “fair, reasonable, and adequate.” The San Francisco-based U.S. Court of Appeals for the Ninth Circuit affirmed the settlement, however, and expressed its unwillingness to inquire into the nature of the award because to do so would be “an intrusion into the parties’ negotiations.”

Now that the objecting class members have asked the Supreme Court to review the case, Cato filed an amicus brief arguing that the use of cy pres awards in class actions violates the Fifth Amendment’s Due Process Clause and the First Amendment’s Free Speech Clause. Specifically, due process requires—at a minimum—an opportunity for an absent plaintiff to remove himself, or “opt out,” from the class. Class members have little incentive or opportunity to learn of the existence of a class action in which they may have a legal interest, while class counsel is able to make settlement agreements that are unencumbered by an informed and participating class.

In addition, when a court approves a cy pres award as part of a class action settlement, it forces class members to endorse certain ideas, compelling speech in violation of the First Amendment. When Facebook receives money—essentially from itself—to create a privacy-oriented charity, the victim class members surrender the value of their legal claims in support of a charity controlled by the defendant. Class members are left uncompensated, while Facebook is shielded from any future claims of liability.

The Supreme Court will decide this fall whether to take the case of Marek v. Lane.

More Evidence that Foreign Aid Throws Dollars Away for Nothing

The Obama administration celebrated its “leverage” from foreign aid to Egypt, and then demonstrated Washington’s complete political impotence. Now the United Nations’ Millennium Development Goals have been found to have no effect on economic development.

Nations are poor because of bad policies, not inadequate cash balances. This makes economic reform, not foreign aid, the key to growth. Unfortunately, politicians continue to take money from poor people in rich countries and give it to rich people in poor countries in the name of development.

In 2000, the usual assemblage of global leaders adopted the United Nations Millennium Declaration. The Millennium Development Goals were supposed to reduce extreme poverty by 2015.

Alas, the record of more than six decades of government-to-government transfers is failure. Foreign “aid” turned into foreign hindrance, creating long-term dependency while reinforcing self-defeating collectivist economic strategies and subsidizing authoritarian political systems.  

Aid agencies eventually claimed to have developed new, smarter approaches to uplift the poor. Since 2000, total assistance from industrialized states alone has more than doubled, going from $53.9 to $125.6 billion last year. The results, explained the UN, indicated “unprecedented progress” and “remarkable achievements.”

Nevertheless, the UN does not believe its work will finish in 2015.  Last year, the UN established a 27-member “High-Level Panel of Eminent Persons on the Post-2015 Development Agenda.”  

And Next Year There Will Be an Eighth Budget “Showdown”

The Washington Post’s David Fahrenthold counts six budget “showdowns” in Washington over the past two and half year. The looming battle this fall over funding the government and raising the debt ceiling will be number seven. That led Fahrenthold to examine what the six showdowns have accomplished with regard to the size of government. 

In sum: we had big government two and half years ago and today we have…big government.  

Some left-leaning pundits are in a tizzy that the Washington Post would dare run an article that doesn’t speak of “draconian” spending cuts to “popular programs.” Instead, Fahrenthold looked at four measures and concluded that little has changed: federal spending is slightly down, the number of federal employees is slightly down, the number of regulations is up, and the federal government still has a lot of real estate. 

Fahrenthold’s sin (one of them) is that in pointing out that spending has gone flat after the bipartisan spending explosion of the 2000s he didn’t recognize the alleged virtues of increasing government spending to “stimulate” the economy. I’m guessing Fahrenthold didn’t get the memo that a journalist writing for a mainstream news outlet is supposed to supply a quote from some macroeconomic forecasting Nostradamus like Mark Zandi.    

I do wish, however, that Fahrenthold would have explicitly differentiated between the size and scope of government. When it comes to the scope of government activitybasically, what all Uncle Sam doesI don’t know how anyone could argue that it has receded in the past two and a half years. Or the past ten years. Or, well, you get the point.