Italy’s Macroeconomic Problems Cannot Be Remedied By Issuing a Domestic Quasi-Money

The Italian general elections of March 4, 2018 have produced an improbable coalition government between two upstart populist parties: left-Eurosceptic-nationalist Movimento 5 Stelle (Five Star Movement) and the right-Eurosceptic-nationalist Lega (League). The coalition partners agree on greater public spending and, at the same time, on tax cuts that would reduce revenue. How then to pay for the additional spending? Italy is already highly indebted. Its public debt stands at 133 percent of GDP, highest in the Eurozone apart from Greece, and well above the EU’s average of 87 percent. Its sovereign bonds carry a high default risk premium. Today, the yield on Italian 10-year bonds stands at 291 basis points above the yield on 10-year German bunds, up from a spread in the 130-40 range during the months before the election.

If tax revenue and debt cannot practically be increased, the remaining fiscal option—for a country with its own fiat currency—is printing base money. But Italy is part of the Eurozone, and only the ECB can create base-money euros. A group of four Italian economists (Biagio Bossone, Marco Cattaneo, Massimo Costa, and Stefano Sylos Labini), correctly noting that “budget constraints and a lack of monetary sovereignty have tied policymakers’ hands,” and regarding this as a bad thing, have proposed in a series of publications that Italy should introduce a new domestic quasi-money, a kind of parallel currency that they call “fiscal money.” Similar proposals have been made by Yanis Varoufakis, the former Greek finance minister, and by Joseph Stiglitz, the prominent American economist. Italy’s coalition government is reportedly considering these proposals seriously.

Under the Bossone et al. proposal, the Italian government would issue euro-denominated bearer “tax rebate certificates” (TRCs). The government would pledge to accept these at face value in “future payments to the state (taxes, duties, social contributions, and so forth).” The certificates in that sense would be “redeemable at a later date – say, two years after issuance.” If non-interest-bearing, they would trade at a discounted value. But if interest were paid to keep the certificates always at par, and the payment system accordingly accepted them as the equivalent of base-money euros, the certificates would be additional spendable money in the public’s hands. “As a result,” they argue, “Italy’s output gap — that is, the difference between potential and actual GDP — would close.” Thus they claim that “properly designed, such a system could substantially boost economic output and public revenues at little to no cost.”

Remarkable claims. Bossone et al. have recently argued that their “fiscal money” program would not violate ECB rules. But there is a more basic question: would it actually work to boost real GDP sustainably by shrinking unemployment and excess capacity? On critical examination, the answer is no. The proposal is based on wishful thinking.

To provide empirical context, note that estimated slack in the Italian economy is already shrinking. The OECD estimate of Italy’s output gap (the percentage by which real GDP falls short of estimated full-employment or “potential” GDP) was large—greater than 5 percent—for 2014, the year when Bossone et al. first floated their proposal. Among the major Eurozone economies, only Greece, Spain, and Portugal had larger gaps; France had a gap half as large, while Germany was above its estimated potential GDP. For 2018, however, Italy’s estimated output gap is under 0.5 percent. For 2019 the OECD projects that actual GDP will exceed full-employment GDP.

Theoretically (as famously argued by Leland Yeager and by Robert Clower and Axel Leijonhufvud), in a world of sticky prices and wages a depressed level of real output can be due to an unsatisfied excess demand for money, which logically corresponds to an aggregate excess supply (unsold inventories) of other goods including labor. People building up their real money balances will do so by buying fewer goods at current prices and offering more labor at current wages. But is that the cause depressed output in Italy today? Yeager’s “cash-balance interpretation of depression” assumes an economy with its own money, domestically fixed in quantity, so that an excess demand for money can be satisfied only by a drawn-out process of falling prices and wages that raises real balances.

But Italy today does not have its own money. It is a part of a much larger monetary area, the Eurozone. (For one indication of Italy’s share of the euro economy, Italian banks hold 14.7% of euro deposits.) The European Central Bank through tight monetary policy can create an excess demand for money in the entire Eurozone, in which case Italy suffers equally with other Eurozone countries, but it cannot create an excess demand for money specifically in Italy. A specifically Italian excess demand for money can arise if Italians increase their demand for money balances relative to other Eurozone residents, but in that case euros can and will flow in from the rest of the Eurozone (corresponding to Italians more eagerly selling goods or borrowing) to satisfy that demand.

Because Italy’s small output gap in 2018 therefore cannot be plausibly attributed to an unsatisfied excess demand for money, an expansion of the domestic money stock through the creation of “fiscal money” is not an appropriate remedy.

More Futility in the War on Drugs

Despite $8.6 billion spent on the eradication of opium in Afghanistan over the past seventeen years, the US military has failed to stem the flow of Taliban revenue from  the illicit drug trade. Afghanistan produces the majority of the world’s opium, and recent U.S. military escalations have failed to alter the situation. According to a recent piece in the Wall Street Journal:

“Nine months of targeted airstrikes on opium production sites across Afghanistan have failed to put a significant dent in the illegal drug trade that provides the Taliban with hundreds of millions of dollars, according to figures provided by the U.S. military.”

This foreign war on drugs has been no more successful than its domestic counterpart. If U.S. military might cannot suppress the underground market, local police forces have no hope.  Supply side repression does not seem to work, and its costs and unintended consequences are large.

 Research assistant Erin Partin contributed to this blog post.

Rethinking America’s Highways

In 1985, Reason Foundation co-founder and then-president Robert Poole heard about a variable road pricing experiment in Hong Kong. In 1986, he learned that France and other European countries were offering private concessions to build toll roads. In 1987, he interviewed officials of Amtech, which had just invented electronic transponders that could be used for road tolling. He put these three ideas together in a pioneering 1988 paper suggesting that Los Angeles, the city with the worst congestion in America, could solve its traffic problems by adding private, variable-priced toll lanes to existing freeways.

Although Poole’s proposal has since been carried out successfully on a few freeways in southern California and elsewhere, it is nowhere near as ubiquitous as it ought to be given that thirty years have passed and congestion is worse today in dozens of urban areas than it was in Los Angeles in 1988. So Poole has written Rethinking America’s Highways, a 320-page review of his research on the subject since that time. Poole will speak about his book at a livestreamed Cato event this Friday at noon, eastern time.

Because Poole has influenced my thinking in many ways (and, to a very small degree, the reverse is true), many of the concepts in the book will be familiar to readers of Gridlock or some of my Cato policy analyses. For example, Poole describes elevated highways such as the Lee Roy Selmon Expressway in Tampa as a way private concessionaires could add capacity to existing roads. He also looks at the state of autonomous vehicles and their potential contributions to congestion reduction.

France’s Millau Viaduct, by many measures the largest bridge in the world, was built entirely with private money at no risk to French taxpayers. The stunning beauty, size, and price of the bridge are an inspiration to supporters of public-private partnerships everywhere.

Beyond these details, Poole is primarily concerned with fixing congestion and rebuilding the nation’s aging Interstate Highway System. His “New Vision for U.S. Highways,” the subject of the book’s longest chapters, is that congested roads should be tolled and new construction and reconstruction should be done by private concessionaires, not  public agencies. The book’s cover shows France’s Millau Viaduct, which a private concessioner opened in 2004 at a cost of more than $400 million. Poole compares the differences between demand-risk and availability-payment partnerships – in the former, the private partner takes the risk and earns any profits; in the latter, the public takes the risk and the private partner is guaranteed a profit – coming down on the side of the former.

This chart showing throughput on a freeway lane is based on the same data as a chart on page 256 of Rethinking America’s Highways. It suggests that, by keeping speeds from falling below 50 mph, variable-priced tolling can greatly increase throughput during rush hours.

Why Bitcoin Is Not an Environmental Catastrophe

The environmental impact of cryptocurrencies looms large among the many concerns voiced by sceptics. Earlier this year, Agustín Carstens, who runs the influential Bank for International Settlements, called Bitcoin “a combination of a bubble, a Ponzi scheme and an environmental disaster.”

Carstens’ first two indictments have been challenged. Contrary to his assertion, while the true market potential of Bitcoin, Ethereum and other such decentralized networks remains uncertain, by now it is clear to most people that they are more than mere instruments for short-term speculation and the fleecing of unwitting buyers.

That Bitcoin damages the environment without countervailing benefits is, on the other hand, an allegation still widely believed even by many cryptocurrency fans. Sustaining it is the indisputable fact that the electricity now consumed by  the Bitcoin network, at 73 TWh per year at last count, rivals the amount consumed by countries like Austria and the Philippines.

Computing power is central to the success of Bitcoin

Bitcoin’s chief innovation is enabling payments without recourse to an intermediary. Before Bitcoin, any attempt to devise an electronic payments network without a middleman suffered from a double-spend problem: There was no easy way for peers to verify that funds promised to them had not also been committed in other transactions. Thus, a central authority was inescapable.

Doctors as Data Entry Clerks for the Government Health Surveillance System

As a practicing physician I have long been frustrated with the Electronic Health Record (EHR) system the federal government required health care practitioners to adopt by 2014 or face economic sanctions. This manifestation of central planning compelled many doctors to scrap electronic record systems already in place because the planners determined they were not used “meaningfully.” They were forced to buy a government-approved electronic health system and conform their decision-making and practice techniques to algorithms the central planners deem “meaningful.”  Other professions and businesses make use of technology to enhance productivity and quality. This happens organically. Electronic programs are designed to fit around the unique needs and goals of the particular enterprise. But in this instance, it works the other way around: health care practitioners need to conform to the needs and goals of the EHR. This disrupts the thinking process, slows productivity, interrupts the patient-doctor relationship, and increases the risk of error. As Twila Brase, RN, PHN ably details in “Big Brother in the Exam Room,” things go downhill from there.

With painstaking, almost overwhelming detail that makes the reader feel the enormous complexity of the administrative state, Ms. Brase, who is president and co-founder of Citizens’ Council for Health Freedom (CCHF), traces the origins and motives that led to Congress passing the Health Information Technology for Economic and Clinical Health (HITECH) Act in 2009. The goal from the outset was for the health care regulatory bureaucracy to collect the private health data of the entire population and use it to create a one-size-fits-all standardization of the way medicine is practiced. This standardization is based upon population models, not individual patients. It uses the EHR design to nudge practitioners into surrendering their judgment to the algorithms and guidelines adopted by the regulators. Along the way, the meaningfully used EHR makes practitioners spend the bulk of their time entering data into forms and clicking boxes, providing the regulators with the data needed to generate further standardization.

Brase provides wide-ranging documentation of the way this “meaningful use” of the EHR has led to medical errors and the replication of false information in patients’ health records. She shows how the planners intend to morph the Electronic Health Record into a Comprehensive Health Record (CHR), through the continual addition of new data categories, delving into the details of lifestyle choices that may arguably relate indirectly to health: from sexual proclivities, to recreational behaviors, to gun ownership, to dietary choices. In effect, a meaningfully used Electronic Health Record is nothing more than a government health surveillance system.  As the old saying goes, “He who pays the piper calls the tune.” If the third party—especially a third party with the monopoly police power of the state—is paying for health care it may demand adherence to lifestyle choices that keep costs down.

All of this data collection and use is made possible by the Orwellian-named Health Insurance Portability and Accountability Act (HIPAA) of 1996.  Most patients think of HIPAA as a guarantee that their health records will remain private and confidential. They think all those “HIPAA Privacy” forms they are signing at their doctor’s office is to insure confidentiality. But, as Brase points out very clearly, HIPAA gives numerous exemptions to confidentiality requirements for the purposes of collecting data and enforcing laws. As Brase puts it, 

 It contains the word privacy, leaving most to believe it is what it says, rather than reading it to see what it really is. A more honest title would be “Notice of Federally Authorized Disclosures for Which Patient Consent Is Not Required.”

A NAFTA Deal Inches Closer

It has been a whirlwind week of negotiations on the North American Free Trade Agreement (NAFTA), ending on Friday in apparent deadlock. Canada was not able to reach a deal with the United States on some of the remaining contentious issues, but that did not stop President Trump from submitting a notice of intent to Congress to sign a deal with Mexico that was agreed to earlier this week. This action allows the new trade agreement to be signed by the end of November, before Mexican President Enrique Pena Nieto leaves office. While a high degree of uncertainty remains, it is premature to ring the alarm for the end of NAFTA as we know it.

Why? First, there is still some negotiating latitude built into the Trade Promotion Authority (TPA) legislation, which outlines the process for how the negotiations unfold. The full text of the agreement has to be made public thirty days after the notice of intent to sign is submitted to Congress. This means that the parties have until the end of September to finalize the contents of the agreement. What we have now is just an agreement in principle, which can be thought of as a draft of the agreement, with a lot of little details still needing to be filled in. Therefore, it is not surprising that the notice submitted to Congress today left open the possibility of Canada joining the agreement “if it is willing” at a later date. Canadian Foreign Minister Chrystia Freeland will resume talks with U.S. Trade Representative Robert Lighthizer next Wednesday, and this should be seen as a sign that the negotiations are far from over.

Relatedly, TPA legislation does not provide a clear answer as to whether the President can split NAFTA into two bilateral deals. The original letter of intent to re-open NAFTA, which was submitted by Amb. Lighthizer in May 2017, notified Congress that the President intended to “initiate negotiations with Canada and Mexico regarding modernization of the North American Free Trade Agreement (NAFTA).” This can be read as signaling that not only were the negotiations supposed to be with both Canada and Mexico, but also that Congress only agreed to this specific arrangement.  In addition, it could be argued that TPA would require President Trump to “restart the clock” on negotiations with a new notice of intent to negotiate with Mexico alone. The bottom line, however, is that it is entirely up to Congress to decide whether or not it will allow for a vote on a bilateral deal with Mexico only, and so far, it appears that Congress is opposed to this. 

In fact, Congress has been fairly vocal about the fact that a NAFTA without Canada simply does not make sense. Canada and Mexico are the top destination for U.S. exports and combined serve as the top source of imports to the United States, with total trade reaching over $1 trillion annually. Furthermore, we don’t just trade things with each other in North America, we make things together. Taking Canada out of NAFTA is analogous to putting a wall in the middle of a factory floor. Economists estimate that every dollar of imports from Mexico includes forty cents of U.S. value added, and for Canada that figure is twenty-five cents for every dollar of imports—these are U.S. inputs in products that come back to the United States.

While President Trump may claim that he’s playing hardball with Canada by presenting an offer they cannot reasonably accept, we should approach such negotiating bluster with caution. In fact, the reality is that there is still plenty of time to negotiate, and Canada seems willing to come back to the table next week. At a press conference at the Canadian Embassy in Washington D.C. after negotiations wrapped up for the week, Minister Freeland remarked that Canada wants a good deal, and not just any deal, adding that a win-win-win was still possible. Negotiations are sure to continue amidst the uncertainty, and it will be a challenging effort to parse the signal from the noise. However, we should remain optimistic that a trilateral deal is within reach and take Friday’s news as just another step in that direction.

Topics:

The Most Common Firearm in America is Not a ‘Weapon of War’

A Massachusetts statute prohibits ownership of “assault weapons,” the statutory definition of which includes the most popular semi-automatic rifles in the country, as well as “copies or duplicates” of any such weapons. As for what that means, your guess is as good as ours. A group of plaintiffs, including two firearm dealers and the Gun Owners’ Action League challenged the law as a violation of the Second Amendment. Unfortunately, federal district court judge William Young upheld the ban.

Judge Young followed the lead of the Fourth Circuit case of Kolbe v. Hogan (in which Cato filed a brief supporting a petition to the Supreme Court) which misconstrued from a shred of the landmark 2008 District of Columbia v. Heller case that the test for whether a class of weapons could be banned was whether it was “like an M-16,” contravening the core of Heller—that all weapons in common civilian use are constitutionally protected. What’s worse is that Judge Young seemed to go a step further, rejecting the argument that an “M-16” is a machine gun, unlike the weapons banned by Massachusetts, and deciding that semi-automatics are “almost identical to the M16, except for the mode of firing.” (The mode of firing is, of course, the principle distinction between automatic and semi-automatic firearms.)

The plaintiffs are appealing to the U.S. Court of Appeals for the First Circuit. Cato, joined by several organizations interested in the protection of our civil liberties and a group of professors who teach the Second Amendment, has filed a brief supporting the plaintiffs. We point out that the Massachusetts law classifies the common semi-automatic firearms used by police officers as “dangerous and unusual” weapons of war, alienating officers from their communities and undermining policing by consent.

Where for generations Americans needed look no further than the belt of their local deputies for guidance in selecting a defensive firearm, Massachusetts’ restrictions prohibit these very same arms from civilians. Those firearms selected by experts for reliability and overall utility as defensive weapons, would be unavailable for the lawful purpose of self-defense. According to Massachusetts, these law enforcement tools aren’t defensive, but instead implements of war designed to inflict mass carnage.

Where tensions between police and policed are a sensitive issue, Massachusetts sets up a framework where the people can be fired upon by police with what the state fancies as an instrument of war, a suggestion that only serves to drive a wedge between police and citizenry.

Further, the district court incorrectly framed the question as whether the banned weapons were actually used in defensive shootings, instead of following Supreme Court precedent and asking whether the arms were possessed for lawful purposes (as they unquestionably were). This skewing of legal frameworks is especially troublesome where the Supreme Court has remained silent on the scope of the right to keep and bear arms for the last decade, leading to a fractured and unpredictable state of the law.

Today, the majority of firearms sold in the United States for self-defense are illegal in Massachusetts. The district court erred in upholding this abridgment of Bay State residents’ rights. The Massachusetts law is unconstitutional on its face and the reasoning upholding it lacks legal or historical foundation.