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In the 2019–20 school year – the most recent with federal data – 51.4 percent of public schools possessed an armed, sworn, law‐enforcement officer. School Resource Officers (SROs) are police officers with a community‐oriented approach intended to increase safety by mitigating crime, violence, and other anti‐social behavior in schools. Some Americans view added police presence as an appropriate response to safeguard students, while others fear an increase in police misconduct. There is also growing concern SROs accelerate the "school‐to‐prison pipeline": pushing students into the criminal justice system through excessive discipline and law enforcement contact. With important concerns both for and against SROs, policymakers must ask: Do they do more harm than good? SROs are relatively new, and there are yawning gaps in research. Studies are often limited to small samples and find contradictory outcomes on arrest rates and effects on school safety. Nevertheless, a common theme is the presence of SROs increase disciplinary actions, including punishments potentially carrying significant long‐term harms. Researchers Gottfredson, et al. compared schools with increased SRO presences to schools with no increase in SROs. They found that schools with increased SROs saw the number of drug and weapons‐related offenses rise, as well as higher instances of exclusionary discipline by school administrators. Exclusionary discipline refers to measures that remove students from school, such as out‐of‐school suspensions. The study also concluded the increase in SROs did not improve school safety. Researchers Sorensen, Shen, and Bushway found the presence of SROs in middle schools decreased serious violence, in contrast to Gottfredson, et al., making schools safer, but they also increased "out‐of‐school suspensions, transfers, expulsions, and police referrals." The increase in suspensions was especially acute for Hispanic and Black students. A third study, comparing schools near police departments that did and did not qualify for SRO grants, had similar results, finding schools near departments above the threshold increased the number of recorded firearm offenses and decreased the instances of violent fights, but increased expulsions, referrals for arrest, out‐of‐school and in‐school suspensions, and chronic absenteeism. Black students experienced the largest effect on out‐of‐school suspensions, over two times greater than white students, followed by students with disabilities and males. Through exclusionary discipline, students miss the point of school – to be in the classroom learning – which can create lasting educational and socialization gaps. Additionally, the stigma surrounding the label of "criminal" can ostracize students from their social groups and remove support provided at school. But positive relationships are vital, particularly given the uptick of mental health disorders such as anxiety and depression among young Americans. Another study, which compared schools with and without SROs in the same districts, found no effect on total arrests, but a 402.3 percent increase in the arrest rate for disorderly conduct. The null findings on total arrests suggest arresting students is not the most common form of correction by SROs, but the five‐fold increase in disorderly conduct bears consideration. Disorderly conduct is cited when someone "disrupts the peace" and it is among the most discretionary – and possibly minor – actions potentially resulting in charges. For example, a student abruptly shouting in class could be charged with a misdemeanor or civil infraction, or in severe circumstances, a felony. The charge could depend on several factors: the teacher's tolerance of the disruption, the student's prior relationship with the teacher or SRO, or occurrences of interruptions in prior classes. The circumstances surrounding filing charges against a student can be subjective, leaving criminal justice system involvement largely open to SRO choice. Criminalization of misbehavior can inhibit future education, employment, and housing opportunities, feeding the "school‐to‐prison pipeline." Additionally, narrowing of options may lead to a higher likelihood of recidivism, as students are deprived of opportunities that increase individual capital. Weisburst found that increased police presence in Texas schools led to a 2.5 percent decrease in high school graduation rates and about a 4 percent decrease in college enrollment rates. An alternative to SROs could be encouraging administrators or parent monitors. Both groups could benefit from gaining greater awareness of school issues by engaging with the larger student body. Monitor positions create positive connections for youth by bridging social gaps between staff, parents, and students. Administrations can highlight mediation practices when conflict arises between students, and hold interventions with families, emphasizing law enforcement as a last resort. Such negotiation and conflict resolution are essential life skills. States are rapidly expanding SRO programs, federal grants enable local agencies to create positions, and Congress continues to propose bills expanding such programs. Given the paucity of good research and the mixed findings of what does exist, expanding SROs is something all levels of government—especially Washington, which has no constitutional authority to intervene—should be hesitant to do.
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After more than three decades of conflict and several bloody wars, the Republic of Azerbaijan recaptured the Armenian-inhabited enclave of Nagorno-Karabakh on September 28. Azerbaijan's lightning victory followed a nine-month blockade of the Lachin Corridor, the only link between the Karabakh region to mainland Armenia, effectively depriving the roughly 120,000 Karabakh Armenians who lived there of food and other necessities.Following Azerbaijan's victory, there was a mass exodus of Armenians from Karabakh and the creation of a severe humanitarian crisis that reminded some of the Armenians' flight from the Ottoman Empire during 1915-16 when as many as a million people died or were killed — considered a genocide by Armenians and part of World War I's tragic collateral damage by the Turks.Many factors contributed to Azerbaijan's final victory in its long-simmering conflict with Armenia over Nagorno-Karabakh. Some factors are rooted in the South Caucasus' complex history as part of the Iranian state until 1813, followed by the Russian and Soviet empires, the USSR's nationalities policies and its practice of using various ethnic groups as levers of influence, and finally the messy breakup of the USSR beginning in 1988. Other factors relate to the disparity in Armenia's and Azerbaijan's size, population, and resources. Unlike Armenia, which has few natural resources, Azerbaijan is an energy-rich country and thus capable of spending large sums on arms.Additional factors include Armenia's persistent internal political differences on the country's foreign policy orientation, as well as rivalries and disagreements between Armenian and Karabakh political elites.Since gaining independence after the Soviet collapse, Armenia has mostly depended on Russian support. But largely due to the 20-month-old war in Ukraine, Moscow's priorities have changed. Both Turkey and Azerbaijan became more important for Moscow, and its failure to adequately support Armenia, particularly by deploying its peacekeeping force to dismantle the blockade, sealed last month's outcome.Unfortunately for Armenia, Azerbaijan also became more important for the West in light of the Ukraine war. This meant that neither Europe nor the United States was willing to take major risks to restrain Baku.Lastly, international and regional geopolitical rivalries and Armenia's vulnerable geopolitical position contributed to its ultimate defeat. Among these factors were the larger Russia-West rivalry for control of Eurasia and Washington's 30-year-old efforts to contain and isolate Iran by denying Tehran any role in the emerging post-Cold War economic and security structures of the Southern Caucasus, most importantly in the construction of pipelines to transport oil and gas from Azerbaijan, the Caspian Sea, and Central Asia to Western markets.To accomplish this aim, the U.S. and Europe effectively assigned a leading role to Turkey in the Caucasus and Central Asia both as a model to be emulated by the Central Asian states and as the West's major regional partner. Perhaps, at the time, Armenia should have seen the writing on the wall and aligned itself more closely with the West while seeking some form of accommodation with Turkey. But given Armenians' history with the Ottomans and Turkey, this was not easy to do, and Yerevan chose to align itself more closely to Russia instead.Armenia did, in fact, retain ties with the West and even joined NATO's Partnership for Peace program. Yet, despite religious and cultural bonds with the West and a politically active Diaspora community, particularly in France and the U.S., Yerevan's closer ties to Moscow resulted in a lingering Western distrust. And, as time went on, the lure of Azerbaijan's energy resources became too strong for the West to resist.Surrounded by Turkey and Azerbaijan, Armenia saw Iran with which it built a constructive relationship after independence, as a potential counterweight to Azerbaijan. But Iran, fearful of antagonizing its own Azeri population concentrated in the northwestern part of the country and concerned about antagonizing a fellow Muslim and mostly Shi'a country, was limited in its response. At the same time, Moscow worked to enhance Armenia's dependence on Russia, making it more difficult for Yerevan to develop closer economic and energy ties with Tehran. In short, U.S. containment of Iran and Russia's desire to control Armenia deprived Yerevan of alternative sources of support.The regional involvement of Israel, the Middle East's most important military power and a sworn enemy of the Islamic Republic, has further complicated matters. As a minority state in the Muslim world that was itself born in part as a result of the Nazi genocide against the Jews in Europe, Israel should theoretically have felt a natural affinity for Armenia. But a desire to expand its diplomatic relations with Muslim states (long before the 2020 Abraham Accords), the lure of energy resources and markets, and its hostility toward Iran have pulled Israel ever closer to Azerbaijan.Over time, Israel became a key supplier of weapons for Baku, providing it with as much as 69 percent of its total arms imports, including some of its most advanced weapons systems, between 2016 and 2020, a trend that intensified significantly as Azerbaijan prepared its offensive to take Karabakh. Moreover, Baku's principal patron and mentor, Turkey, which has its own regional ambitions, supplied additional weaponry and assistance, even to the extent of reportedly providing Syrian mercenaries for Baku to fight in Karabakh during the 2020 Armenia-Azerbaijan conflict.Since Ottoman times, Turkey has coveted what is now the Republic of Azerbaijan, as well as the Iranian province of Azerbaijan. Pan-Turkist and neo-Ottoman forces, with which President Recep Tayyip Erdoğan is identified, have long wanted to create a land bridge between, first, Turkey and Azerbaijan, and subsequently through northern Iran to Central Asia. In this way, Turkey hopes to realize a direct land route to link all Turkic peoples.Azerbaijan's conquest of Karabakh marks the first step towards this goal. Now, Turkey is insisting on the creation of a land corridor between Azerbaijan and Nakhicevan, an Azerbaijani exclave bounded by Armenia, Iran and Turkey. This would amount to the incorporation of what the Armenians call Syunik and the Azerbaijanis call Zangezur into Azerbaijan, thus bypassing Iran. In a demonstration of Turkey's aims, Erdoğan himself visited Nakhichevan for a meeting with Azerbaijani President Ilham Aliyev on September 25, two weeks before Baku's Karabakh offensive, and talked about the opening of the so-called Zangezur Corridor.Iran is understandably concerned by all of these developments. While relations between Baku and Tehran have oscillated between warm and cold since Azerbaijan's independence, they have grown more tense in recent years, particularly as Israel became increasingly critical to Baku's military buildup, possibly in exchange for oil and reportedly also for access to Iran for Israeli intelligence operations. Iran has long been concerned that Azerbaijan may serve as a launch pad for an Israeli, U.S., or joint attack on its territory.As for Turkey's ambitions, it should be noted that the Nakhicavan exclave lies only 90 miles from Tabriz, the capital of Iranian Azerbaijan, which Baku claims is occupied territory it refers to as Southern Azerbaijan. Erdogan appears to share that sentiment; in 2020, his recitation of a poem that claimed that Iran had usurped the region provoked protests in Tehran.Iran has said clearly that it opposes any other territorial changes in the region, especially the creation of a corridor that would eliminate its common border with Armenia. In early October, Iran's president, Ayatollah Ebrahim Raisi, expressed this view to Armenian and Azerbaijani officials who met with him. Earlier, members of parliament had warned that Iran would not tolerate any changes to its border with Armenia, while an article that appeared in Tehran's influential "Iran Diplomacy" even suggested that Iran unilaterally create a 20-mile buffer zone within Karabakh, Nakhichevan, and Syunik in order to prevent any incursions into Iranian territory. A year ago, Iran held large-scale military exercises along its Azerbaijani border, signaling its determination to resist further territorial changes to its detriment.Against this background, the steady rapprochement between Turkey and Israel since last year's exchange of ambassadors — Erdogan was reportedly preparing to host Israeli Prime Minister Binyamin Netanyahu later this month or in November before the latest Gaza war broke out last weekend – has done little to calm Tehran's concerns. Earlier this year, 30-plus members of Israel's Knesset also called for international support for "the national aspirations of the peoples of South Azerbaijan."Thus, the latest Caucasus conflict is not finished, and larger clashes may lie ahead, especially if Azerbaijan pursues its irredentist claims against Iran with the backing of Turkey and Israel. In the last few days, there have been reports that Baku and Tehran are now trying to normalize bilateral relations and even discuss opening a new transit route through Iran to Nakhicevan, which could alleviate some of Tehran's key concerns. However, the deep-rooted sources of tension between Iran and Azerbaijan are unlikely to be quickly resolved, and thus the risk of possible conflict remains high, especially if Iran's rivals pressure Baku.
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Nurses in Sri Lanka attend to their work. Photo: Dominic Sansoni/World Bank
The COVID-19 pandemic is prompting a fresh look at options to ensure reliable power for health facilities , including the Vavuniya General Hospital in Sri Lanka's Northern Province. In line with an overall push to boost the share of renewables, the government of Sri Lanka is pursuing new power solutions for Vavuniya and about 20 other hospitals across the nation.
The World Bank is assisting as part of a multi-sectoral pandemic response in Sri Lanka. Similar initiatives are underway in other countries around the world, including Afghanistan, Madagascar, and Nigeria, to name a few.
Parts of a solution
Distributed photovoltaics (DPV), installed on rooftops or open spaces near buildings, are proliferating as a low-cost option for emergency power supplies. Many developing countries already use DPV as a long-term primary or secondary power source for health care facilities in rural and urban settings. While operating costs are minimal, average investment costs are dramatically lower today than even a few years ago, making DPV more economically attractive. When coupled with batteries, which are also becoming cheaper, DPV systems can contribute to reliable power around the clock.
With these solutions, diesel generators can become more of a last resort, instead of being the main or only source of essential back-up power when the grid is unavailable. Less use of diesel generators helps avoid the high cost of fuel, vulnerability to shortages, and toxic emissions.
Diverse technology options are available for distributed renewables. They range from individual components to pre-packaged "box" solutions which combine DPV, batteries and generators of varying sizes, including up to mini-grid level for larger sites. Under the auspices of the Energy Storage Partnership facilitated by the World Bank, a survey of suppliers has found that significant inventory is available despite logistics disruptions.
Electrical devices are also increasingly available in more energy efficient models, which can help avoid oversized power systems in new health care units. Correct system sizing is crucial where financial resources are limited, but many variables need to be considered.
For example, the electricity needs of intensive care units (ICU) differ greatly depending on how many beds are occupied: temporary ICU wards need significant power, but only for a limited time period. Another key factor to consider is that electricity demand from certain medical services may drop while stay-at-home measures are in force. For instance, some hospitals are deferring elective surgeries during the crisis. System sizing strategies need to examine such factors when addressing the health care sector's power needs in response to the pandemic.
Bringing the parts together
Given all the options, what tools are available to design power solutions for hospitals without full grid electricity? One resource is the HOMER Powering Health Tool, a free online model to help simplify the design process for distributed generation systems for health care facilities. Standing for Hybrid Optimization Model for Multiple Energy Resources, HOMER is a leading resource for mini-grid analyses.
Originally commissioned for USAID's Powering Health program, the HOMER Powering Health Tool has recently been updated to reflect typical COVID-19 response needs with support from the World Bank's Energy Sector Management Assistance Program (ESMAP). Users enter the electrical needs manually or select default values for pre-listed devices from one of four health facility tiers as a starting point. The tiers include, for example, a small rural dispensary that would typically screen and refer serious cases to larger facilities such as a district hospital. Based on user inputs, the tool calculates least-cost combinations of batteries, PV, and diesel generators sets – including as back-up to grid electricity if this is available for some hours each day.
The tool runs entirely online and can be used an unlimited number of times with no need to sign in or to download a software. It's kept simple for non-specialists to use without requiring special training. This comes with limitations, of course. For certain advanced needs, other products are available, such as the full, licensed software of HOMER Energy by UL or the free System Advisor Model (SAM) of the U.S. National Renewable Energy Laboratory (NREL). The latter is especially useful for systems that may feed DPV power to the grid when it is not needed on site. In Sri Lanka, the World Bank is applying these tools to optimize solutions to strengthen power for Vavuniya and other hospitals.
From one to many
With a standard lifetime of 20 years, DPV systems can supply clean energy to the national grid. They can also become the backbone of community mini-grids. The value of both options goes well beyond the pandemic. DPV can help not only the consumers who host the systems but also a power system that it feeds. DPV can reduce grid congestion and energy losses for utilities. It can also displace more costly generation from wholesale sources while promoting resilience.
Sri Lanka has already been promoting DPV such as through its Rooftop Solar Power Generation Project, in partnership with the Asian Development Bank. Nationwide, rooftop installations are on track to reach a total of 200 megawatts capacity by the end of 2020, equivalent to around 7 percent of system peak demand. Northern Province alone has added over 3 megawatts since 2017, including 17 projects in Vavuniya for businesses and households. Consumers with DPV can choose to feed some or all the power generated into the national grid through the utility providers. In all cases, the DPV significantly reduces consumers' bills while providing clean energy to the system at a lower cost than fuel-based generation for grid.
Sri Lanka's initiative shows that solutions to the current crisis can also address longer-term challenges. With a strategic approach, health care facilities can be well-positioned to combat COVID-19 while preparing for the "new normal."
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Topics
Energy Health
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South Asia
Series
COVID-19 (coronavirus)
Authors
https://www.linkedin.com/in/alandlee/
Alan David Lee Senior Energy and Climate Change Specialist More Blogs By Alan
https://www.linkedin.com/in/andrea-arricale/
Andrea Arricale Energy Access Consultant More Blogs By Andrea
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Poverty in the North EastThe North East, as everyone knows, was once a powerhouse of coal mining, shipbuilding, and manufacturing which fuelled the nation's growth and prosperity. However, the decline of traditional heavy industries, coupled with shifts in global trade patterns and technological advancements, decimated the region's economic foundation.The repercussions of this industrial decline have been felt far beyond the factory walls, affecting the social fabric of the North East. Unemployment soared, and the ripple effects of job losses exacerbated into poverty and deprivation. Now 54.6% of all homes in the North East are classed as deprived in one or more of the four dimensions used to measure deprivation in the UK. And the problem with deprivation is that it casts a long shadow. The poverty that the North East grapples with is intergenerational, and very difficult to combat.The problem with poverty:This is not complicated. Poverty is bad. Beyond the loss of potentially productive workers due to poor health and education, poverty had wide ranging social and psychological impacts. Not only does mental health suffer under poverty – which then circles back to reduced productivity, but social cohesion is harder to achieve. But the issue in the North East isn't in getting people to understand the problems with poverty – it's in understanding that poverty in the North East is repetitive. It is intergenerational.What is intergenerational poverty?Intergenerational poverty occurs when poverty persists from one generation to the next. Children born into deprived circumstances face barriers to accessing essential needs (such as stable housing) and opportunities (such as quality education) which constrains their prospects. In the North East Child Poverty Commission's most recent report, 35% of babies, children, and young people live in poverty, and 11% in very deep poverty. This helps perpetuate a cycle of poverty and marginalisation.Material poverty serves as a formidable barrier to upwards mobility. With factors such as a lack of stable housing, an inability to meet fundamental needs and one in ten households in the North East being classed as "food insecure", harming a child's growth and future wellbeing.Educational poverty, characterised by limited educational resources, feeds into lower academic achievement which limits future economic opportunities. Cultural poverty is a socially sensitive topic, as those referencing it could fall into the trap of blaming the poor for their conditions, but it is a crucial factor. When people face barriers to opportunities for a long time they might start to believe that they can't improve their lives. This feeling of hopelessness feeds into the younger generation by making their dreams feel unattainable and curbing their opportunities.These are just a few of the many limitations that are passed onto the next generation. The cascading effects of intergenerational poverty only serves to exacerbate inequality over time. A new approach to fighting poverty:If, as I think everyone should, you read the NECPC's report 'No Time to Wait', you begin to understand the scale of the problem facing those trying to fight poverty.The report itself makes for harrowing reading. Reading the words and experiences of those who deal with poverty every second of every day is eye-opening, and the plethora of statistics on the topic is heartbreaking.Now, if you were part of a charity or organisation actively working to combat poverty on a daily basis, witnessing the potential of bright children being limited by circumstances beyond their control would likely be disheartening. Additionally, observing the limited impact of government policies in addressing these challenges would likely lead to high levels of frustration and disappointment.Which makes the solution proposed by these organisations understandable.Devolution, from the point of view of those calling for it, will finally allow these charities and organisations the power to make a real difference and help save the futures of hundreds of thousands of children.The dangers of devolution:The hope of the organisations calling for devolution is that giving more power to councils and regional bodies will result in the regional policy they want. However, expanding devolution by granting councils increased powers and authority could lead to a proliferation of politicians. While many politicians undoubtedly work with commendable intentions, their actions may become influenced not solely by the pursuit of fostering growth. Additional objectives such as securing re-election and upholding a consistently favourable public image may become the main focus of their work.More bureaucracy and politicians will not lead to the dramatic fall in poverty that these charities and companies desire. Instead, it will gum up the system, hindering the fight against poverty and further constrain the North East.This is all without mentioning the elephant in the room that in 2004, 77.93% of the North East voted against devolution and a regional assembly.Alternative solutions:There are alternative solutions to fighting poverty, rather than devolution.Local authorities and mayoral offices have an opportunity to collaborate. If the combined authorities of the North East pooled their funding to help finance a cross-sector initiative they could help fight poverty. By engaging charities, schools and even businesses a comprehensive plan to take on poverty from multiple angles can be drawn up. Then, the pooled funding from various local authorities and mayoral offices can be used to properly finance a cross sector comprehensive poverty action plan.Schools play a crucial role in addressing poverty. By collaborating with local authorities to provide the necessary resources and engaging with the business community, schools can facilitate work-based learning opportunities and mentorship programs that prepare students for the demands of the local economy.The involvement of charities can significantly enhance the reach and impact of any efforts to fight poverty. Charities in the North East have spent decades fighting poverty, generating a deep understanding of the specific needs of vulnerable people and can provide targeted support and services. By collaborating with local authorities and businesses, charities can access additional resources and expertise to amplify their impact.The involvement of businesses is essential for sustainable poverty alleviation and economic growth. Businesses can contribute by creating job opportunities, providing training and skills development programs, and investing in local community initiatives.Ultimately, a cross-sector initiative to tackle poverty in the North East of England can lead to tangible benefits for the region's economy, bolstering the region's competitiveness and attractiveness for investment. Summary:Concerns over poverty, its ever-worsening condition and fears that more could become trapped in poverty are sound concerns that should be seeing wider attention and action. But the answer is not more devolution. The answer lies with a comprehensive plan, designed by experts in a cross-sector initiative to allow the North East to grow and flourish, without staying forever supported by the state, or becoming oversaturated with politicians.
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U.S. officials view the war in Ukraine as a way of achieving geopolitical objectives in the Black Sea, an energy-rich region that connects Russia, Eastern Europe, and the Middle East.At two recent Senate hearings, State Department officials portrayed the war as a means of transforming the geopolitics of energy in the Black Sea. As long as Ukrainians keep fighting, they said, there remains a potential to transform the Black Sea into a new market for the European Union. The officials envisioned a new energy corridor that provides Europe with oil and natural gas from Central Asia."The United States has long recognized the geostrategic importance of the Black Sea region," State Department official James O'Brien told the Senate in a written statement. "Not only does the Black Sea border three NATO Allies and several NATO partners, but it is also a vital corridor for the movement of goods—including Ukrainian grain and other products bound for world markets—and hosts significant untapped energy resources."Weakening RussiaSince the Russian invasion of Ukraine in February 2022, officials in Washington have seen the war as an opportunity to weaken Russia. While they have mobilized military and economic support for Ukraine's defense, they have worked to impose major costs on Russia's military and economy. As U.S.-backed Ukrainian forces have imposed major losses on Russian forces, the United States and its allies have worked to isolate Russia economically and limit its revenues from the sale of oil and natural gas.So far, the United States has provided Ukraine with $43.9 billion in military assistance, and a U.S.-led coalition of some 50 nations has committed an additional $33 billion in military support.The support of the United States and its allies has proven critical to Ukraine's resistance to Russia, which "starts with the incredible courage of the Ukrainian people, the Ukrainian fighters," Secretary of State Antony Blinken acknowledged last year. "But what we've been able to provide them—the United States, Germany, and many other partners and allies—is what is making the difference."While U.S. officials have been open about their intentions of using Ukraine to weaken Russia, they have been careful about claiming that they are making hardheaded geopolitical calculations. Typically, U.S. officials have remained sensitive to the Ukrainian position that the war is a matter of resisting Russia's military occupation, especially given that so many Ukrainians have died fighting in the war."We brought together a coalition of more than 50 countries to help Ukraine defend itself, and it's critical," President Biden said in September, as he met with Ukrainian President Volodymyr Zelenskyy.When O'Brien spoke to a Senate committee on October 25, he provided a blunter explanation of U.S. goals. Not only did he portray the war as "a very good bargain" for the United States, citing the fact that "Ukrainians are paying the bulk of the cost" by doing nearly all the fighting, but he also described it as an opportunity for the United States to achieve major geopolitical objectives, ones he indicated were "incredibly exciting."One key objective, O'Brien explained, is to strengthen NATO's presence in the Black Sea. Given that NATO is present in the Black Sea through member states and partner countries, O'Brien saw an opportunity to use the war to increase NATO's military presence across the region's lands, airspace, and waters. In terms of the weapons involved, he said, "that will be something that NATO will dig in on."Pulling the Black Sea WestwardAnother key objective, O'Brien noted, is to pull Ukraine and other Black Sea countries away from Russia while integrating them into the European Union, where they will be required to follow its rules of trade and production. The entire region, he envisioned, "becomes a place where we're in very good position to control what happens as the rules get made," he said.In another major admission, O'Brien acknowledged that Washington aspires to create oil and gas pipelines that lead from Central Asia to Europe. Claiming that Central Asia relies too much on China and Russia to export its energy resources, O'Brien reviewed multiple possibilities for alternative pipelines to run through Armenia, Azerbaijan, Georgia, and Turkey."Whatever path we take leads us to the Black Sea," he said.The senators who convened the hearing supported O'Brien's vision, agreeing that the Black Sea remains an area of great geopolitical importance. Senator Jeanne Shaheen (D-NH), who has been pressuring the Biden administration to devise a formal strategy for the Black Sea, praised its efforts to create a "new east-west energy corridor that would go under the Black Sea and provide an alternative for energy coming out of Central Asia into Europe."For decades, in fact, the United States has been pursuing geopolitical opportunities in the Black Sea. Years of analysis by U.S. diplomats, as captured in leaked diplomatic cables published by WikiLeaks, show that U.S. officials have attributed a great deal of importance to the region, especially as it concerns energy. One of Washington's major goals has been to strengthen NATO's presence in the Black Sea region, regardless of warnings that such moves could provoke Russia.U.S. energy companies also depend on the region's pipelines. Chevron and ExxonMobil, both of which maintain operations in Kazakhstan, rely on a pipeline that leads to the Black Sea.Earlier this year, Defense Department official Mara Karlin spoke about the "critical geostrategic importance" of the Black Sea region, characterizing it as a major frontline for the transatlantic alliance, a major link between Europe and the Middle East, and "a key node for transit infrastructure and energy resources."The Senate has been active in considering the geopolitical factors at stake. Not long after holding the hearing on October 25, the Senate convened an additional hearing on November 8 to revisit the reasons for the war in Ukraine. O'Brien testified once again, this time joined by additional colleagues who helped him reinforce his message about the geopolitics of energy in Ukraine, the Black Sea, and the broader region.Redrawing the Energy MapState Department official Geoffrey Pyatt, a former U.S. ambassador to Ukraine who now leads U.S. energy diplomacy, explained that the United States is facing extraordinary opportunities in the Black Sea region, which he described as "one of the fulcrums of the energy map of Europe today."One of the most significant regional transformations, Pyatt explained, is "the redrawing of the energy map around the Black Sea that's taking place." It includes "new pipeline infrastructure," such as "the Southern Gas Corridor to bring gas from Central Asia to European consumers."While the war has created new opportunities to transport natural gas from Central Asia to Europe, it has also made it much more difficult for Russia to export natural gas to Europe. Whereas Russian natural gas made up 45 percent of the EU's natural gas imports in 2021, it is now down to 15 percent."As we look to the future, you're going to have a Europe which has decoupled from Russian energy supplies," Pyatt said.So far, the major winner in the geopolitical contest has been U.S. energy companies. As Russian exports to Europe have decreased, U.S. exports have increased, positioning the United States to become one of Europe's major suppliers. If Europe can acquire more natural gas from Central Asia, then Russia could potentially be excluded from the European market altogether.As O'Brien noted, the situation is putting Russian President Vladimir Putin in a tough position. "It's a long-term strategic loss for him, and it creates a great opportunity for us in a number of important sectors," he said.But a major question remains: how long will U.S. officials continue viewing the war as "a good deal for America," as O'Brien described it? Although Ukraine is paying the bulk of the cost in terms of fighting, the number of deaths keeps rising, and there is no end in sight."It's difficult to get a decisive battle, so what we need is what's in the supplemental," O'Brien said, referring to the Biden administration's request for more money to help Ukraine fight the war. It will provide "the ability to fight this fight over some time," he said.This piece has been republished with permission from Foreign Policy in Focus.
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Yesterday, I posted a reply to John Cochrane's Sept 4 post on the national debt. John alerted me to his Sept 6 update, which I somehow missed. Given this update (together with some personal correspondence), let me offer my own update. John begins with an equation describing the flow of government revenue and expenditure. With a debt/GDP ratio of one, the sustainable (primary) deficit/GDP ratio is given by g - r, where g = growth rate of NGDP and r = nominal interest rate on government debt (I include Federal Reserve liabilities and currency in this measure). John assumed g - r = 1% (so about $200B). In a post I published last year, I assumed g - r = 3% (so about $600B); see here: Is the U.S. Budget Deficit Sustainable? Two things to take away from these calculations. First, this arithmetic suggests that the U.S. federal government can easily run persistent primary budget deficits in the range of 1-3% of GDP. Not only does the debt not need to be paid off, but it can grow forever. Second, primary budget deficits are presently far in excess of this range. What does this imply?Let's step back and think about John's equation. The arithmetic of the government "budget constraint" basically says this:Deficit/GDP = [1 - (1+r)/(1+g)] x Debt/GDPNote that a sustainable primary deficit is only possible if r < g. If r > g, then a primary surplus is needed to service the interest expense of the debt. Students of monetary theory may recognize the expression above as a Laffer curve for inflation finance. That is, in the case of currency we have r = 0. Let g represent the growth rate of the supply of currency and assume a constant RGDP (so that g also measures the growth rate of NGDP). Finally, replace debt with currency, so that Seigniorage revenue = [1 - 1/(1+g)] x Money/GDP Again, this is just arithmetic. Economic theory comes in through the assumption that the demand for money is decreasing in the rate of inflation, g. If this is true, then an increase in g has two opposing effects: it increases seigniorage revenue by increasing the inflation tax rate, but it lowers seigniorage revenue because it decreases the inflation tax base. There is a maximum amount of seigniorage revenue the government can collect by printing money. That is, there are limits to inflation finance. (See also my post here.)Now, I know John is fond of saying that Federal Reserve liabilities and U.S. Treasury securities are essentially the same thing (especially if the former exist mainly as interest-bearing reserve accounts). I happen to agree with this view. But then we can use exactly the same logic to characterize the limits to bond finance, recognizing that U.S. Treasury securities are essentially money. To this end, assume that the Debt/GDP ratio is an increasing function of (r - g). To make things a little simpler, let me continue to assume zero RGDP growth, so that g represents both inflation and NGDP growth. Finally, let me assume that r is a monetary policy choice (just as setting r = 0 for currency is a policy choice). Next, we need a theory of inflation. In the models I work with, the rate of inflation in a steady state is determined by the growth rate of the nominal debt, g, which I also treat as a policy parameter. So, the magnitude r - g is policy-determined, at least, within some limits. By lowering r and increasing g, the government is making its securities less attractive for people to hold. But this just tells us that the demand for debt is lower than it otherwise might be--it does not tell us how large this demand is in the first place, or how it is likely to evolve over time owing to factors unrelated to r or g (e.g., regulatory demand, foreign demand, etc.).So, with this apparatus in place, my interpretation of what worries John is the question of what happens if [1] the federal government finds itself near the top of the bond-seigniorage Laffer curve; and [2] a shock occurs that requires a large fiscal stimulus. Barring alternative forms of securing resources (e.g., through direct command/conscription), the government will not have the fiscal capacity to lay claim against the resources it needs. Printing more money/bonds here is not going to help even with zero interest rates. The ensuing inflation would simply put us on the right-hand-side of the Laffer curve -- the government's ability to secure resources would only diminish. Assuming I have captured at least a part of John's concern accurately, let me go on to critique it. To begin, there's nothing wrong with the logic I spelled out (I don't think). But I want to make a couple of points nevertheless.First, the demand for U.S. government securities (D/Y) seems to be growing very rapidly and for a very long time now. We know, anecdotally, that the UST is used widely as collateral in credit derivatives markets and repo, that foreign countries view it as a safe asset, that investors value its safety, and that recent changes to Dodd-Frank and Basel III have contributed to the regulatory demand for USTs. The global demand for the U.S. dollar is, if anything, growing more rapidly than ever (re: the recent "dollar shortages" that resulted in the Fed opening its central bank swap lines). We don't know where this limit is, but judging by how low U.S. inflation is (together with low UST yields), it seems fair to day that there's still plenty of fiscal capacity. (And I want to stress that this has nothing to do with the ability of a country to pay back its debt -- I'm not sure why John keeps mentioning this while at the same time understanding that this debt is money). I suspect that John is likely to agree with what I just said. Sure, there may be more room now, but how much more? With bipartisan concern for debt absent in Congress, with no sign of inflation in sight, with interest rates so low, how can we not hit this limit at some point?My own view is that we are bound to hit this limit (though, economists like Simon Wren-Lewis have warned me not to discount the forces of austerity). The question is what happens once we hit that limit? I say we get USD depreciation and some inflation (not hyperinflation). John seems to be worried about hyperinflation after all, which he likens to a debt rollover crisis. I just don't see it. (Of course, if John is simply suggesting that the fiscal authority will continue to run persistently large deficits in the face of high inflation, then I agree with him. While I don't see this happening, who can say for sure?)Finally, what happens if we're near the debt limit and there's a shock. Well, what type of shock exactly? The type of shock that hit us in 2008 is likely to increase the demand for debt, expanding fiscal capacity. So, here too, I'm not sure what form the debt crisis is supposed to take. It would be great to appeal to a model (but please, not one of Greece).
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President Biden requested more than $24 billion for Ukraine and associated assistance, making use of the debt deal loophole that excluded the Pentagon from spending caps imposed on other agencies. Within a week of Biden's request, a new Pentagon reform panel published a report on its work to improve the department's adaptability.
It's an interim report, and lawmakers can't miss the opportunity to weigh in on the recommendations the commission has yet to finalize. Congress will soon have to consider the president's Ukraine aid request while heeding calls for greater oversight of that aid — a task complicated by the fact that the House and Senate disagree on the need for a special watchdog for Ukraine.
But the Pentagon reform panel's reporting directly impacts the U.S. ability to arm Ukraine going forward and should be a priority for lawmakers upon their imminent return to Capitol Hill.
Congress established the panel — formally named the Commission on Planning, Programming, Budgeting, and Execution (PPBE) Reform — to review and improve the Pentagon's acquisition and budgeting processes, which are notoriously cumbersome. In pursuit of that effort, the commission is requesting feedback on several proposals intended to promote innovation and adaptability at the Pentagon.
One proposal gives the department more time to obligate funds while another grants the department the redistribution power "to ingest new technology and innovation or pivot effectively to an unplanned requirement without disrupting already spoken for resources."
Some budget flexibility could help the department better adapt to potential national security threats, but lawmakers should be wary of proposals that further solidify military contractors' influence on defense policy. Too often, efforts to "advance innovation" turn into reforms primarily focused on hastening the defense acquisition process and scapegoating oversight measures as the root of all ills.
Time and again stakeholders assert that red tape and budget inflexibility inhibit the department from delivering new capabilities to warfighters. But, as RAND expert Jonathan Wong has pointed out, overly focusing on acquisition speed can also introduce unintended consequences, like costly sustainment issues (or profitable ones, depending on who you ask). Ensuring warfighters have the resources they need — when they need them — to do their jobs effectively requires contractor accountability, in addition to a streamlined PPBE process.
In fact, contractor accountability should be top of mind for lawmakers reviewing the commission's recommendations for PPBE reform. That means challenging assumptions about what hampers innovation in the first place. The defense industry — well represented in the PPBE commission — claims that it can't invest in innovative technologies for the warfighters of tomorrow.
The commission appears to agree with this, writing that one of the root causes of the department's issues with innovation and adaptability is a "bias toward existing and traditional programs and approaches." Commissioners explain that existing programs have a "leg up" in the PPBE process because they're "not properly incentivized to spend money on new, innovative solutions that are riskier and need more time to develop." They go even further by saying that "faced with a choice between buying down risk and improving performance on existing program content or taking on additional risk by spending money on new, untested program content, most Services seem likely to choose the conservative option."
Tell that to taxpayers, who are footing the bill on at least a $1.7 trillion aircraft program with far greater issues than benefits, despite being marketed as the "the most advanced fighter aircraft in the world."
The Littoral Combat Ship (LCS) is another great example of juice not worth the squeeze, with the Navy attempting to retire several before they reach maturity for at least 2 years running. And with good reason — the LCS doesn't do much for the Navy. But what's so egregious about the LCS is that it failed for the same reason the F-35 program did — the Pentagon started development before the design and thorough testing were completed.
In other words, the Pentagon's need for speed created lagging performance and unforeseen sustainment costs. In the F-35's case, sustainment costs are the main reason the program is now the most expensive in U.S. history. The Pentagon's alleged aversion to risk didn't stop it from prematurely fielding these weapons, which now deliver little capability to warfighters on the hard-working taxpayer's dime.
Lawmakers should question how risk-averse the department really is (especially when authorizing funding) and consider the external factors that hamper innovation and adaptability — namely, military contractors' unwillingness to invest internally. Bureaucracy is no doubt a problem, but so are military contractors that consistently enrich their shareholders at the expense of internal investments needed to innovate.
Case in point: The defense industry increased cash paid to shareholders by 73% in the 2010s as compared to the 2000s. By contrast, contractor spending on internal capital investments and independent research decreased — despite improved profit margins and cash generation industry-wide over the same period. So the issue isn't just bureaucracy — it's also corporate greed.
Indeed, the defense industry has claimed that profits are "insufficient to finance" investments, requiring private financing to advance the development of innovative technologies. Even assuming that's generally true (which it isn't, according to the Pentagon), the government ultimately reimburses most research and development costs, generating free revenue, profits, and cash flow for companies.
Nevertheless, the interim report partially validates industry's claim that it can't afford investments toward innovation. Commissioners wrote that the PPBE process isn't responsive enough to attract private capital to develop "emerging technologies or manufacturing capacity."
The commission neglects to mention the size and scale of this so-called capital deficit. Surely commissioners aren't exclusively referring to small businesses, which certainly lack the financial wherewithal to pursue innovation independently but are also generally limited in their ability to fundraise. So how do the commission's findings fit with data indicating that the industry is quite financially capable of innovation?
The commission's scope is limited to understanding and evaluating the challenges within the PPBE process to improve it, but lawmakers are tasked with putting the commission's input in context. Contentious debates on Ukraine aid and its oversight surely await them, but the PPBE reform process deserves their time and attention, as it will have lasting effects on U.S. ability to both provide aid and ensure it's spent effectively.
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I was shocked by the recent headline that the largest individual student debt is currently in excess of £200,000. This encouraged me to think about the junior hiring strategy for many City firms. Like many organisations, the City are focussed on hiring top flight graduates from the best Universities, often at the behest of Human Resources (HR) who have firm views on what makes an excellent candidate and who should be put forward to interview. Managing 1000s of applicants is challenging and includes electronic CV screening which looks for preferred qualifications, and will also take into account other factors such as gender, sexuality and race. Diversity is an important part of this process. The strategy to hire those with 1st and 2:1's from the best universities appears sensible and thoughtful and will rarely be challenged. The risk to this approach is you create a concentrated people pool, who in general all went to a Russell Group University, and have been educated in those critical formative years in largely the same way. This creates concentration risk and the danger of group-think. The mind-set is similar and this feeds into business practice including how risk is managed and challenged. There is a collective comfort in this shared top-down education and approach. Subsequently, these junior hires become senior, or have become senior, and these risks become embedded and circular. I am a believer in more diversity within this hiring process, but not in the traditional sense of the meaning. This would include hiring more students straight out of school with their open minds and enthusiasm. They can go straight into the business as juniors within teams, to learn on the job, or onto training courses to equip them for specific areas. In general, I would also look for different qualities or skills to enrich the human pool. This can be sportsmen or women, ex- military, entrepreneurs - anything that makes them good different to name a few. While at Credit Suisse, I liked to hire platoon commanders who served in Afghanistan into the sales team. I wanted them to bring all their experiences and insights to the trading floor; to enrich it, to bring a different way of thinking, to challenge and to shake it up. I also expected some good friction with the consensus and was happy to underwrite this. Organisations can be at their most vulnerable when everyone thinks and acts the same. This challenge takes time to develop and it is difficult for collective thinkers to flick the differentiation switch. New people and insights help to do this.This will require a change of approach and an understanding that top flight University degrees are not the sole pointer for whether someone is talented, smart or a good hire. I have noticed that in America the label 'non-college educated' appears to be derogatory. In the UK, a similar description is 'non- graduate'. Notice the word 'non' features. This is not about ripping up the whole graduate hiring model but enhancing it and changing the mind-set.Let us return to the £200,000 debt figure. I am not critical of certain degrees or University education in general. For many, it is a great period of learning, growth, getting away and a welcome change of scene to the intense secondary school education system and the obsession 'at all costs' with grades. But we should create new routes for interesting people to join the work-force that does not just require them to go to University and take on the resulting debts. Done well this is a win,win for the individual and company.CEOs and senior managers will need to encourage this enhanced approach and give guidance to hiring managers and HR who effectively front their hiring plans. I also believe that if 'people' are a vital part of your organisation then you need some of your best talent in HR. In many cases, the existing HR hiring model is entrenched with group think with a keen focus on sieving out these differentiated candidates. In my experience this is a shame and a loss for the company. Diversity comes in many forms.Charlie White-Thomson is a Senior Fellow at the ASI and a former CEO of Saxo UK and a
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There are a lot of moving parts to the MMT program. I want to focus on one of these parts today: the relation between monetary and fiscal policy. One thing I find appealing about MMT scholars is their attention to monetary history and institutional details. I've learned a lot from them in this regard. But as is often the case with details, one has to worry about whether they help shed light on a specific question of interest, or whether they sometimes let us not see the forest for the trees. And in terms of the broader picture, since I grew up in that branch of macroeconomics that tries to take money, banking, and debt seriously (i.e., not standard NK theory), I sometimes have a hard time understanding what all the fuss is about. Much of standard monetary theory (SMT) seems perfectly consistent with some of the ideas I seen discussed in MMT proponents; see, for example, The Failure to Inflate Japan.
This post is devoted to better understanding a contribution by Eric Tymoigne. Eric is one of the people I go to whenever I want to learn more about MMT (if you're interested in MMT, you should follow him on Twitter @tymoignee). In this post, I discuss his article "Modern Monetary Theory, and Interrelations Between the Treasury and Central Bank: The Case of the United States." (JEI 2014). Passages quoted from his paper are highlighted in blue. The working paper version of the paper can be found here. Eric has kindly agreed to respond to my comments and let me post our conversation. We had to some editing, hopefully this did not disrupt the flow too much. In any case, I hope you find it interesting. And, as always, feel free to join in on the conversation in the comments section below. -- DA
One of the main contributions of modern money theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space. Not only can they issue their own currency to spend and to service their public debt denominated in their own unit of account, but also any self-imposed constraint on budgetary operations can be easily bypassed.
I'm curious to know what the contribution is here relative to standard monetary theory (SMT). In SMT, the government can also issue its own currency to spend and to service the public debt denominated in its own unit of account. So this degree of "flexibility" is already accounted for. As for "self-imposed constraints on budgetary operations," SMT takes several approaches to this issue, depending on the purpose of the analysis. One approach is to take these constraints as given and then to study their implications. But it is also common to consolidate the central bank, treasury and government into a single authority, which implies no self-imposed constraints on budgetary operations.
Perhaps what is meant is that MMT shows how existing self-imposed constraints on budgetary operations can be (or are) bypassed in reality. This leads us to question, however, concerning what those self-imposed constraints are doing there in the first place. Are they there by design and, if so, why? Or are they there by accident (and, if so, how in the world did this happen)?
ET: Yes consolidation is not unique to MMT as we have said repeatedly. Not only is it used quite commonly in the economic literature, but also it is a common rhetorical tool in economic talks, discourse, etc.
DA: Right, so everyone understands this (at least, they should)--it's perfectly consistent with standard monetary theory. So far, so good.
ET: Most economists, politicians and the public don't understand this or its implications. They will interpret the above as saying that it is obvious that the government can create money but it is not a normal way to proceed and it is inflationary. MMT just pushes consolidation to its logical conclusions and shows that institutional details do back those conclusions. In a consolidated framework, the federal government can only implement spending by creating money, this is not abnormal and it is not inflationary by itself. There is no other way to find the necessary dollars to spend. Here is what consolidation means in terms of balance sheets:
For the federal government, taxes destroy currency (L1 falls) and claims on non-fed sectors falls (A1 falls) (an alternative offsetting operation is net worth of government rises). When US spends, it credits accounts (L1 rises). Similarly, bond issuance does not lead to a gain of any asset for the government; all it does is replace a non-interest earning government liability (monetary base) with an interest-earning government liability (Treasury securities).
DA: I am not going to argue against your accounting. As for bond-issuance, in SMT, an open-market operation is modeled as a swap of zero-interest reserves for interest-bearing treasuries. The interest on treasuries is explained by their relative illiquidity (another self-imposed constraint). The economic consequences of such a swap depends on a host of factors, which I'm sure you're familiar with.
ET: Sure, in addition, self-imposed financial constraints (e.g. debt ceiling, no direct financing by the Fed, no monetary power for treasury) have been put in place at various times with the argument that they impose discipline in public finances. MMT argues, these financial constraints are not necessary and are bypassed routinely through Treasury-Central Bank coordination.
DA: Sure, the standard view is that these self-imposed constraints are designed to impose discipline in public finance. The proposition that these financial constraints are or are not necessary, however, must be based on a set of assumptions that may or may not be satisfied in reality. (The fact that these constraints may be bypassed through Treasury-Central Bank coordination does not seem relevant to me -- the conflict emphasized by SMT is between an "independent" central bank and the legislative authority (e.g., the Fed and Congress, not the Fed and Treasury). I'm not sure why a new theory is needed here. We know, for example, that if the legislative branch of government fully trusts itself (and future elected representatives) to behave in a fiscally responsible manner, the notion of an "independent" central bank (and other self-imposed constraints) makes little sense.
ET: Remember that MMT emphasizes the irrelevance of financial/nominal constraints for monetarily sovereign governments (bond vigilantes, risk of insolvency of social security, etc.). One can do that by using the consolidated government (taxes don't finance, bonds don't finance, government spends by crediting accounts, etc.) or by using the unconsolidated government (the central bank helps the Treasury, the Treasury helps the central bank). The second method conforms to actual federal government operations but it is much less easy to use rhetorically and it waters down the core point: government finances are never a financial issue as long as monetary sovereignty applies.
Given that point, as you note, financial constraints are not only irrelevant, but also disruptive and used for political games. MMT wants to make government financial operations as smooth and flexible as possible. Once society has decided how, and to what degree, government should be involved in solving socioeconomic problems, finding the money should not be an issue when monetary sovereignty prevails. That means demystifying and eliminating financial barriers to government operations so the political debate can focus on solving real issues (environment issues, socio-economic issues, etc.). Fearmongering about the public debt and fiscal deficits makes for poor political debates and policy prescriptions.
There is a view, expressed by Paul Samuelson, that if we tell policymakers and the public that there are no financial limits to government spending, policymakers will spend like mad; therefore, economists need to lie to policymakers and the public (and themselves). This is nonsense. We ought to discuss policy choices not on the basis of Noble Lies but rather on the basis of sound and informed premises. Economists needs to make sure that policymakers focus on resource constraints.
In addition, political constraints on government should be geared toward improving the transparency and participatory aspects of government (e.g. limit role of big money in elections, limit wastes, etc.). We already have a government that passes a budget (it needs to do so for transparency and accountability purposes), we already have an auditing process, and we already have some (limited) democratic process, so aim at improving these aspects. MMT proponents are not naive, we know that some politicians are self-interested, we know that policy implementation may lead to mistakes, we know people may try to game the system ("free riders"); however we trust that a transparent and democratic government can (and does) get through these issues. MMT does not see financial constraints as helping in any ways, rather they inhibit the democratic process.
Of course, MMT proponents also have a policy agenda (Job guarantee, financial regulation based on Minsky, etc.) because we do not see market mechanisms as self-promoting full employment, price stability and financial stability. As such, as you said, MMT proponents favor alternative means to achieve these goals through direct government intervention. We don't see the central bank as an effective means to promote price stability. The central bank should focus on financial stability through interest-rate stabilization and financial regulation (an area where the Fed has not performed well).
Finally, yes independence of the central bank is seen as a big deal but MMT disagrees for two reasons. First, MMT emphasizes the lack of effectiveness of monetary policy in managing the business cycle and, second, and probably more importantly, MMT notes that central-bank independence in terms of interest-rate setting and goal settings does not mean independence from the financial needs of the Treasury.
DA: I think it's fair to say most people want to see government operations run smoothly, and would welcome a sober debate over the issues at hand without the fear-mongering that some like to promote. The broad objective seems the same--the debate is more over implementation--how monetary and fiscal policy is to be coordinated--given human frailties.
Having said this, I think you go too far by asserting that "government finances are never an issue as long as monetary sovereignty applies." Of course, technical default on nominal debt is not an issue (we all understand this). But SMT also recognizes the importance of economic default on nominal debt. True, a government can always print money to satisfy its nominal debt obligation, but if money printing dilutes the purchasing power of money, this is a de facto default.
On a related issue, SMT asks "what are the limits to seigniorage?" The fact that a government can print money does not give it the power to command resources without constraint. People can (and do) find substitutes for government money (they may also substitute out of taxed activities into non-taxed activities). SMT treats the limits to seigniorage as a financial constraint. Maybe MMT has a different label for this constraint? Perhaps it is related to what I hear MMT proponents call an "inflation constraint." Maybe one way to reconcile MMT with SMT on this score is by recognizing that SMT usually assumes (sometimes incorrectly) that the inflation constraint is always binding. If this is the case, a monetarily-sovereign government does have a financial constraint, even according to MMT.
ET: Yes, ability to create a currency does not mean ability to command resources because there may not be a demand for the currency. That is where tax liabilities and other dues owed to the government become important (cf. the chartalist theory of money, a component of MMT). That's also why taxes, monetary creation and bond issuance are not conceptualized by MMT as alternative financing means but rather as complementary. The government imposes a tax liability, spends by issuing the currency necessary to pay the tax liability, then taxes and issues bonds. Spending may be inflationary indeed and so there is an inflation constraint; but it is not a financial constraint, it is a resource constraint.
About the "printing" of money by government, inflation and economic default. Regarding the first two, there is no evidence of an automatic relation between money and inflation. In a consolidated view, government always spends by monetary creation but controls the impact on inflation via taxes and the impact on interest rates via bond issuance. In an unconsolidated view, the central bank routinely finances and refinances the Treasury by helping some of the auction bidders and by participating in the auction.
Finally, regarding economic default, governments routinely "default" in that sense with no problems. I don't see that as a relevant concept unless someone can show that economic default raises interest rates or generates rising inflation (it does not); here again, there is no automatic link between inflation and interest rates. That link depends on how the central bank reacts; if it does not then market participants don't either.
DA: Let me return to the manner in which the Fed/Treasury/Congress are consolidated (or not) in SMT and why this matters, in your view. In some SMT treatments, Congress decides spending and taxes, which implies a primary deficit. It's up to the Treasury to finance that deficit, with the Fed playing a supporting role (by determining interest rate and issuing reserves for treasury debt). What's wrong with this approach?
ET: That goes in the right direction with an understanding that the government really has no control over its fiscal position. All this, which relates to the implementation of monetary sovereignty, helps understand why the financial crowding out is not operative, why monetary financing is not by definition inflationary, why i > g is normal. It helps explain why the hysterical rhetoric surrounding the public debt and deficits in nonsense. I recently wrote a piece for Challenge Magazine on that topic. Surpluses are celebrated, governments implement austerity during a recession to "live within our means", Social Security needs to be fixed to avoid bankrupting it, governments need to save more, etc. All of this is incorrect.
DA: I'm not sure why you claim SMT leads to the idea of i > g. The case i < g is perfectly consistent with SMT (see Blanchard's 2019 AEA Presidential address, and also my posts here and here). The correct criticism (I think) is that mainstream economists have assumed i > g as being the empirically relevant case (it is not).
ET: That is what I meant. MMT links that to monetary sovereignty.
DA: I think that's correct. I should like to add that mainstream economists (apart from a small set of monetary theorists) have not appreciated the role of high-grade sovereign debt as an exchange medium in wholesale financial markets and as a global store of value, which in my view likely explains a lot of the "missing inflation." But as for "surpluses being celebrated," you are now talking about individual viewpoints and not SMT per se. There were plenty of calls out there for countercyclical fiscal policy based on standard macroeconomic principles. But I do agree virtually all mainstream economists are (perhaps overly) concerned about "long-run fiscal sustainability." The view is that at the end of the day, stuff has to be paid for -- and that having the ability to print money, while granting an extra degree of flexibility, does not get around this basic fact.
DA: I'd like to ask you about this statement you make:
In (the unconsolidated) case, the Treasury collects taxes and issues securities before it can spend. However, federal taxes and bond offerings also serve another highly important function that is overlooked in standard monetary economics. Specifically, federal taxes and bond offerings result in a drainage of funds from the banking system, and MMT carefully analyzes the implication of this fact. From that analysis, MMT argues that federal taxes and bond offerings are best conceptualized as devices that maintain price and interest-rate stability, respectively (of course, the tax structure also has some important role to play in terms of influencing incentives and income distribution; something not disputed by MMT).
DA: Well, yes, taxes serve both as a revenue device (permitting the government to gain control over resources that would otherwise be in control of the private sector) and as a way to control inflation. I'm not sure about the idea of the Treasury offering bonds for the purpose of achieving interest-rate stability (though this may happen to some extent when the treasury determines which maturity to offer). I don't think this is the way things work in the U.S. today.
ET: Taxes and issuance of treasuries drain reserves and so raise the overnight rate. Hence, on a daily basis, a fiscal surplus raises the overnight rate and a fiscal deficit lowers it. There has been significant Treasury-Fed coordination to smooth the impact of taxes (and treasury spending) on the money market.
DA: Fine, but so what? We all understand "coordination" between Fed and Treasury exists at the operational level.
ET: I think you are too kind to other economists and policymakers. On taxes as price-stabilizing factors, there is indeed some similarities here. On the role of treasuries for interest-rate stability, it does work like this today. It may not be obvious because of the current emphasis on treasuries as Treasury's budgetary tools, but Treasury has issued securities for other purposes than its budgetary needs. In the US, this occurred most recently during the 2008 crisis (SFP bills). In Australia, in the early 2000s, the Treasury issued securities while running surpluses in order to promote financial stability.
DA: But even if this is not the way things actually work (in my view, it's the Fed that stabilizes interest rates, possibly through OMOs involving U.S. Treasuries), I'm not sure what point is being made. I think we can all agree that monetary and fiscal policy can be thought of as being consolidated in some manner. What would be good to know is how a specific MMT consolidation matters (relative to other specifications) for a specific set of questions being addressed. There is nothing in the abstract or introduction of this paper that suggests an answer to this question.
ET: The point being made is that in a consolidated government, tax and bond issuance lose the financial purpose they have for the Treasury but keep their price and interest-stability purposes.
DA: In standard monetary theory, tax and bond issuance keeps its funding purposes for the government and at the same time can be used to influence the price-level (inflation) and interest rates. Is this wrong? I don't think so. At some level, taxes (a vacuum cleaner sucking up money from the private sector) must have some implications for the ability of government to exert command over real resources in the economy. What we label this ability (whether "funding" or ''finance" or whatever, seems inconsequential).
ET: Ok here comes the crucial difference between financial and real sides of the economy. In financial terms, taxes do not increase the capacity of the government to spend, i.e. the government does not earn any money from taxing; taxes destroy the currency. In financial terms, there is no reason to fear a fiscal deficit; deficits are the norm, are sustainable and help other sectors grow their financial net wealth. As such, it is not because a government wants to spend more that it must tax more or lower spending somewhere else. That is the PAYGO mentality. This mentality makes policymakers think of spending and taxing in terms of how they impact the fiscal balance instead of their impact on employment, inflation, incentives, etc. While deficits may have negative consequences, they are not automatic. If one takes a look at the evidence, deficits have no automatic negative impacts on interest rates, tax rates, public-debt sustainability, or inflation.
In real terms, the necessity to increase tax rates to prevent inflation, and so move more resources to the government, depends on the state of the economy and the permanency of the increase in government spending relative to the size of the economy. In an underemployed economy, the government can spend more without raising tax rates. In a fully employed economy, shifting resources to the government without generating inflation does require raising tax rate and/or putting in place other measures such as rationing, price controls, and delayed private-income payment. Here Keynes's "How to Pay for the War" provides the roadmap. Standard economics is full-employment economics so opportunity costs are always present. MMT follows Kalecki, Keynes and the work of their followers (have a look at Lavoie's "Foundations of Post Keynesian Economic Analysis") and note that capitalist economies are usually underemployment and economic growth is demand driven. Put in a picture, the economy is usually at point a.
Put succinctly, the real constraint is conditionally relevant, the financial constraint is irrelevant if monetary sovereignty prevails. That is the proper way to frame the policy debates and to advise policymakers; don't worry about the money, worry about how spending impacts the economy.
ET: Moving to another topic, consolidation of the government brings to the forefront forces that are operating in the current system but that are buried under institutional complications. Namely that a fiscal deficit lowers interest rates and treasuries issuance brings them back up, that spending must come before taxing and treasuries issuance, that monetary financing of the government is not intrinsically unsound and does not mean that tax and treasuries issuance don't have to be implemented.
DA: The statement that "deficit lower interest rates" needs considerable qualification. Among other things, it depends on the monetary policy reaction function. As for the claim that spending *must* come before taxes, this is not a universally valid statement (even if it may be true in some circumstances. But even more importantly, who cares? Mainstream theory does not suggest that monetary financing is intrinsically unsound (seigniorage is fine, if it respects inflation ceiling). As for money, taxes and bonds not being alternative "funding" sources, I worry that this semantics. You can call X a "funding" source or not -- it's just a label. The real question is: what are the macroeconomic implications of X?
ET: Let me emphasize where I agree. Yes, evidence shows the central role of monetary policy for the direction of interest rates, fiscal policy is at best a very small driver. And yes, one ought to focus on the real implications of government spending and we ought to forget about the financial implications. A fiscal deficit is not unsustainable nor abnormal; deficits are the stylized fact of government finances and are financially sustainable if monetary sovereignty is present. So don't try to frame the policy debate and set policy in terms of household finances, bankruptcy, fixing the deficit, etc.
To conclude I see three reasons why the "taxes/bonds don't finance the government" rhetoric is helpful:
1- It is strictly true for the federal government (i.e. consolidation).
2- it brings to the forefront some lesser-known aspects of taxes and treasuries issuance: impacts on money market, role of central bank in fiscal policy, role of treasury in monetary policy.
3- It changes the narrative in terms of policy and political economy: government does not rely on the rich to finance itself, taxes should be set to remove the "bads" not to finance the government (e.g. one should not set tax rates on pollution with the goal of balancing the budget but with the goal of curbing pollution to whatever is considered appropriate, that may lead to much higher tax rates than what is needed to balance the budget), PAYGO is insane, one should focus on the real outcomes of government policies not the budgetary outcomes.
DA:
1. I think this is semantics.
2. Not sure how it helps in this regard.
3. I think all of these positions are defensible without the statement "taxes/bonds don't finance the government", so if this is the ultimate goal (and I think it should be), perhaps we should set aside semantic debates and focus on the real issues at hand.
ET: 1 is not semantic. I know you have in mind taxes as a means to leave resources to the government. MMT makes a clear difference between financial (ability to find the money) and resources constraint (ability to get the goods and services) as explained above. The financial constraint is highly relevant for non-monetarily sovereign governments so it should be noted and clearly separated from the real constraint. Too many policy discussions and decisions by policymakers operating under monetary sovereignty are based on an inexistent inability to find money and the imagined dear financial consequences of budgeting fiscal deficits. 2 helps to understand how monetary sovereignty is implemented in practice. On 3, yes focus on the real issues.
DA: We agree on 3! Thank you for an interesting discussion, Eric. There's so much more to talk about, but let's leave that for another day.
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The stock of national debt is now larger than our annual national income in the United States. Is this something to worry about? Does it matter how big the debt-to-GDP ratio gets? Is there any limit to how large it can grow and, if so, what is it this limit and what factors determine it? A lot of people have been asking these questions lately. John Cochrane is the latest to opine on these questions here: Debt Matters. I'm not even sure where to begin. I suppose we can start with the famous debt clock pictured on the right. Whenever I look at the debt clock, I'm reminded of James Tobin who, in 1949 remarked: The peace of mind of a conscientious American must be disturbed every time he is reminded that his government is 250 billion dollars in debt. He must be shocked by the frequent announcement that every newborn baby is burdened, not with a silver spoon, but with a debt of $1700. The national debt is now 100 times larger than it was in 1949. Society has somehow managed to hold itself together since then. At the very least, this suggests we need not pay attention to the debt clock. It does not, however, not mean we shouldn't pay attention to managing the debt. Ironically, worrying about the debt is, in a way, what permits us not to worry about it. The time to start worrying is when we and our elected representatives stop worrying about it. According to John, "The notion that debt matters, that spending must be financed sooner or later by taxes on someone, and that those taxes will be economically destructive, has vanished from Washington discourse on both sides of the aisle." That is, it may be time to start worrying. I think there's an element of truth to this. For example, while it's true that the Reagan deficits were large, it's also true that there was strong bipartisan support for "doing something about the growing debt." And it wasn't just words. As Justin Fox reminds us, Congress increased taxes seven times between 1982-93. Well, what about Japan? As I explain here, Japan is a poster child for "worrying about the debt." To make a long story short, the debt-to-GDP ratio in Japan has stabilized (pre-Covid, at least), inflation is below target, and the fiscal authority keeps raising the sales tax. Rightly or wrongly, the Japanese "care" about the national debt--the effect of which is to keep fiscal policy "anchored." But what exactly is there to fear if fiscal policy becomes "unanchored?" For a country like the United States, it seems clear that outright default will never happen. U.S. Treasury securities (USTs) are too important for global financial markets. A default may very well trigger a global financial meltdown. The only practical option is to continue rolling over the debt, principal and interest (the latter of which is very low these days). Is there a danger of "bond vigilantes" sending the yields on USTs skyward? Not if the Fed stands ready to keep yields low (related post here on yield curve control). And, in any case, even if the Fed raises (or is expected to raise) its policy rate, the U.S. Treasury can just continue to issue the bills necessary to make the scheduled payments. Treasury securities and Federal Reserve reserves are just different forms of interest-bearing money. To put things another way, the national debt need never be paid back--like money, it can be held in private wealth portfolios forever. The only question is on what terms it will be willingly held.This last point gets to the question of what can be expected to happen if the debt gets too large (say, because the fiscal authority plans to run large primary budget deficits off into the indefinite future). Much will depend on the evolution of the global demand for USTs. If that demand stops growing while fiscal deficits run unabated, surely we can expect the U.S. dollar to weakened and the domestic price-level to rise. The former is likely to contribute to an export boom, which should serve to close the trade deficit (mitigating the adverse consequences of global imbalances). The latter is likely to promote the growth of nominal GDP. Needless to say, an export boom and higher NGDP growth don't sound like disaster scenarios, especially in the current economic environment. John seems to worry that whatever happens, it's likely to happen suddenly and without warning. We know Naples is going down (in the manner of Pompeii c. 79AD), we just don't know when. But how does the lava flow correspond to the economic consequences of a debt crisis? (Keep in mind, we're not talking about a country that issues foreign-denominated debt.)Should we be worried about hyperinflation? Evidently not, as John does not mention it (see also this nice piece by Francis Coppola). But he does mention something about fiscal capacity (the ability of the fiscal authority to exert command over resources). As I explain here, there are limits to how much seigniorage can be extracted in this manner. To put things another way, there are economic limits to how large the debt-to-GDP ratio can get. But reaching this limit simply means that the required tax (whether direct or indirect via inflation) is high--it does not mean disaster. John concludes with the following warning: "The closer we are to that limit, the closer we are to a real crisis when we need that fiscal capacity and its no longer there." This is one of those sentences that starts your head off nodding in agreement. But then you think about it for a minute and wonder what type of "real crisis" he has in mind? If it's a financial crisis, the implied positive money-demand shock (flight-to-safety) is likely to increase fiscal capacity, not diminish it. A war perhaps? In these types of emergencies, the nation bands together and governments use other means to gather the resources necessary (e.g., conscription). So, to conclude, I'm not saying that John is wrong. It's just not very clear in my mind how he imagines a U.S. debt crisis to unfold exactly. What is missing here is a model. This is odd because one of John's great strengths is model building. And so my conclusion is that it would be very interesting to follow the logic of his argument through the lens of one of his models. Let's see the model, John!
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Republican Gov. Jeff Landry scored a final success going out the door as Louisiana's attorney general, but an even greater challenge from climate craziness has reared its ugly head.
Landry proved a reliable champion against climate alarmism in his two terms as attorney general, which mainly featured battles against the overreach of Democrat Pres. Joe Biden. Usually, these incidents affected the state as part of the broad collective of states and not directly targeted at Louisiana. Democrat former Gov. John Bel Edwards also is a climate alarmist, but he couldn't do much to spread the infection into state government with little support from the Legislature and Public Service Commission, and what little he could do Landry already has started to reverse.
However, a recent Biden Administration action that ultimately could threaten national security delivered direct punch at Louisiana. Last week, the Department of Energy said it wouldn't approve indefinitely permits for liquified natural gas exportation to countries not part of free trade agreements with the U.S., pending a review of factors that go into that decision-making. The guidance is five years old and, according to Biden, doesn't take into account the alleged "climate crisis" built upon weak-to-nonexistent confirmatory data.
In effect, Biden pulled out another example of shadow banning in the area of fossil fuel collection and consumption. This is a behavioral pattern where the political left trots out a supposed explanation of government regulatory action – in this case, asserted obsolescent decision procedures and rules – to mask a more sinister agenda, in this case to achieve the twin goals of stifling fossil fuel production and achieving greater government control over economic production.
Landry and Louisiana, with other states, just beat back another such attempt. Earlier this month, the U.S. Fifth Circuit Court of Appeals invalidated the Biden Administration's try at repealing DOE rules that circumscribed unnecessary standards for dishwasher energy and water use. Requiring more efficient energy use for these appliances would spike the price of such units and likely use more resources, since the more efficient units too often do incomplete jobs that consumers would have to compensate for such as running loads again.
But the recent DOE decision contains a direct attack on Louisiana, because it came in the context of refusing to issue a permit to support the building, whether new or expansion, of capacity at sites in the state. One Louisiana site, Commonwealth LNG, had been waiting 14 months for approval, and another waits at the same stage. This is the culmination of a deliberate slowdown of permitting both by DOE and the Federal Energy Regulatory Commission in response to climate alarmist pressure levied at the COP 28 conference last year as well by hipster social media influencers.
Worse, the 20 countries that have unfettered access to U.S. LNG exports don't include any of those most under pressure now for access to reasonably-priced and available energy, Europe and around it who buy the majority of U.S. exported LNG. They face geopolitical stress from the war in Ukraine featuring their former largest LNG exporter, Russia, whose exports they have eschewed to pressure it to give up its military invasion of Ukraine.
In a reckless display of disregard for the truth and national security, climate alarmists allege the blockade will have little impact on shipments to Europe. In fact, the expansions were in response largely to sate forecasted European demand; for example, the Venture Global CP2 proposed plant, caught up waiting on slow-walking FERC review which whenever it happens now will be stymied from selling to Europe by the DOE suspension, already has committed a third of this unbuilt capacity to Germany over the next 20 years. As challenges to America's democratic allies multiply from Russia as well as from some Middle Eastern states and Red China over the coming years, their national security and America's will come under increasing threat by delaying energy independence gained from increased export capacity.
Closer to home, this could turn out to be devastating to Louisiana's economic recovery from the Edwards years that saw population sag over 100,000 people and more recently had recorded contractions in jobs for the past six months. Louisiana produces 63 percent of the countries LNG exports, has three of the eight largest export terminals (CP2 is set to become the world's largest), and produce billions of dollars in economic activity (and that was old data which by now is probably twice or more in size) that translates into hundreds of millions of tax dollars placed into the coffers of state and local governments.
To fight this, once again Landry, partnering with new attorney general Republican Liz Murrill, may have to go to court. The Natural Gas Act of 1938 requires the assumption that any non-FTA application is the public interest, subject to a review of that. That gives no direct authority for DOE to stop the process, as it may reevaluate the standards it uses simultaneously with making decisions, and the fact the reviews have ballooned out in length not only to slow approvals but also to dig up some way of torpedoing projects by finding a contrary public interest is something a court may find violates the law.
Let's just hope Landry's record of action against climate craziness, with a high proportion of victories, comes to fruition on this occasion.
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Russia offered a peace deal in exchange for Ukrainian neutrality in talks last April, an offer that Ukraine rejected on the grounds that Moscow could not be trusted to uphold the deal, according to Davyd Arakhamiia, a Ukrainian politician who led Kyiv's delegation to the negotiations. "They really hoped almost to the last moment that they would force us to sign such an agreement so that we would take neutrality," Arakhamiia said in a recent interview. "It was the most important thing for them. They were prepared to end the war if we agreed to — as Finland once did — neutrality and committed that we would not join NATO." The wide-ranging interview belies the Biden administration's claim that talks were "not about NATO" and that Ukraine's relationship to the bloc was a "non-issue." It also adds nuance to the debate around former British Prime Minister Boris Johnson's alleged role in scuttling the negotiations. According to Arakhamiia, Johnson met with officials in Kyiv and "said that we would not sign anything with [the Russians] at all, and let's just fight." However, the Ukrainian official denied that his team was on the verge of signing a deal — a decision he says could only have come from a direct meeting between the presidents of Ukraine and Russia — and insisted that Johnson's comments were meant as advice, not a command. Another reason for rejecting Russia's proposal, per Arakhamiia, was that such a move would require an amendment to Ukraine's constitution, which stipulates that the country intends to join NATO. Ukrainian officials have also previously cited Russian atrocities in Bucha as a key motive for pulling out of talks. Arakhamiia's comments suggest that Ukraine's relationship with NATO will be a major factor in any future peace negotiations but highlight the political difficulties that Kyiv would face if it decides to offer neutrality in exchange for an end to the war. "We can't go to the negotiating table right now. We're in a very weak negotiating position," Arakhamiia added. "Why would we sit down for talks right now? What, let's just stay where we are? Do you think Ukrainian society would accept that?" Meanwhile, the war has largely ground to a stalemate in its second year, which has seen an uptick in casualty rates on both sides. Fighting will likely slow on the frontlines as Ukraine's brutal winter sets in. (Just this week, a snowstorm in southern Ukraine killed at least 5 people.) These factors, combined with Russia's manpower advantage and wavering Western support, have created the conditions for a renewed negotiating effort, according to Anatol Lieven of the Quincy Institute. "The full engagement of the United States in the peace process from the outset will be necessary if negotiations are to have any chance of success," Lieven wrote in RS this week. "Only a U.S. administration can bring sufficient pressure to bear on the Ukrainian government, while also offering reasonably credible security guarantees for the future." "And only a U.S. administration," he continued, "can threaten Moscow that, for some time to come, massive U.S. military and economic aid to Ukraine will continue, while at the same time offering the Kremlin compromises on wider issues of vital importance to Russia." In other diplomatic news related to the war in Ukraine: — On Wednesday, U.S. Secretary of State Antony Blinken played down accusations that the West has a "sense of fatigue" in its support for Ukraine, arguing that "we must and we will continue to support Ukraine," according to Reuters. The comments followed a NATO-Ukraine meeting in Belgium and were likely aimed at assuaging Ukrainian concerns that the war in Gaza will pull attention and resources from Kyiv's fight with Moscow. Despite Blinken's rosy take, it remains unclear whether the U.S. Congress will be able to pass a new Ukraine aid package over the opposition of many House Republicans. — The U.S. believes that Russian President Vladimir Putin "won't make a peace or a meaningful peace before he sees the result of our election" in 2024, according to an anonymous senior official who spoke with reporters after the Brussels meeting. — Polish truckers expanded their blockade of Ukrainian border crossings on Monday amid allegations that Ukrainian companies are undercutting their business and hauling goods within the European Union, according to Euronews. The protests, which have forced thousands of trucks into days-long waits at the border, are in part a result of the EU's 2022 decision to cancel a permitting system that limited the number of Ukrainian trucks that could cross the border. While Polish truckers want to reinstate that system, Ukraine argues that Russia's Black Sea blockade has made it impossible to adhere to the pre-war caps. — Turkey will likely ratify Sweden's bid to join NATO "within weeks," according to the Swedish foreign minister. Turkish President Recep Tayyip Erdogan has long held up Sweden's accession to NATO due to Stockholm's relationship with Kurdish groups that Turkey considers to be terrorists as well as a series of protests in which far-right Swedish activists burned copies of the Quran, Islam's holy book. — Russian Foreign Minister Sergei Lavrov attended this week's summit of the Organization for Security and Cooperation in Europe, leading some states to boycott the meeting, which is being hosted by NATO-member North Macedonia, according to AP News. Lavrov's visit marks the first time that he has set foot in a NATO country since Russia's invasion of Ukraine. Russian officials claimed that they have received "a lot of requests for bilateral meetings" on the sidelines of the summit, which brings together a wide swathe of European and Central Asian leaders. U.S. State Department news:The State Department did not hold a press briefing this week prior to publication.
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For the first time since 1991, Argentina suffers from annual inflation rates above 100 percent. As voters prepare to head to the polls on August 13, the date of the presidential primaries for all parties, a majority thinks—regardless of ideology— that inflation is the country's most pressing problem. Meanwhile, a significant minority—29 percent according to one poll— now considers that the best way to tackle inflation is to get rid of the Argentine peso altogether and adopt the U.S. dollar as the official currency. They are absolutely right. As we explain in a new briefing paper out today, dollarization works because it deprives the local ruling class of all control over the national currency. This protects ordinary people's purchasing power from the excesses of chronically profligate politicians and often subservient—or simply incompetent—central bankers. Along with Peru, a semi‐dollarized economy, Latin America's three fully dollarized countries—Panama, Ecuador, and El Salvador—have had the region's lowest inflation levels during the past 20 years (and much longer in the case of Panama). Unlike many countries in the region, the dollarized trio did not see double‐digit inflation in the aftermath of the Covid‐19 pandemic. Steve Hanke, a Johns Hopkins University economist, puts it well: dollarization is equivalent to instituting the rule of law in the monetary sphere. Dollarization is often compared to the convertibility system that Argentina implemented in the 1990s, a monetary regime consisting of the Central Bank maintaining unlimited convertibility between its currency and that which it is pegged to at a fixed exchange rate. That system ultimately fell apart because it deviated from following orthodox rules. But because dollarization simply replaces a local currency with a foreign one, it does not depend on a promise from the political class to abide by a certain set of rules and it has proven much harder to undo. As we explain in our policy brief, this does not imply a country's surrender of its monetary policy to the United States: "As economist Juan Luis Moreno‐Villalaz argued in the Cato Journal in 1999, Panama's banks, which have been integrated to the global financial system after a series of liberalization measures in the 1970s, allocate their resources inside or outside the country without major restrictions, adjusting their liquidity according to the local demand for credit or money. Hence, changes in the money supply—which arise from the interplay between local factors and the specific conditions of global credit markets— and not the Federal Reserve, determine Panama's monetary policy. Fed policy affects Panama only to the same extent that it does the rest of the world".
In Argentina, opposition to dollarization comes from critics on both the left and the right. The former usually claim that adopting the dollar is a costly affront to national sovereignty (the cost pertaining to the loss of seigniorage). The latter tend to argue that local technocrats will be left without monetary tools with which to steer the national economy. Neither side has come to terms with the reasons why an overwhelming majority of Panamanians, Ecuadoreans, or Salvadoreans wouldn't dream of ditching the dollar in favor of weak national currencies. In fact, minimal inflation rates are but one benefit of dollarization. The others include far lower interest rates, longer loan periods, and an intrinsic hard budget constraint on governments and parliaments alike. Despite such advantages, dollarization is certainly no guarantee of fiscal discipline or sustained economic growth, as the recent experience of both Ecuador and El Salvador can attest. Nonetheless, dollarization is worth it simply because it leaves politicians and bureaucrats unable to devalue a local currency or monetize the debt, thereby limiting the magnitude of the potential harm. During the 2010s, radical left‐wing governments in both El Salvador and Ecuador were unable to get rid of the dollar despite their anti‐dollarization rhetoric. The pros of dollarization may be difficult to grasp ex‐ante; once it is instituted, however, dollarization's benefits in daily life are so palpable to a large majority that the greenback has become demagogue‐proof in a region ripe with demagoguery. The loss of seigniorage, it turns out, is an infinitesimal price to pay for the advantages of dollarization. Manuel Hinds, a former finance minister in El Salvador, likens giving up seigniorage to paying a small insurance premium for protection against the very high risks of maintaining a local currency. Nor is a lack of large dollar reserves an excuse not to dollarize. In Ecuador, the mere announcement of dollarization in January of 2000 led to a massive increase in deposits in dollars previously held abroad or under mattresses. This was the case even though the beleaguered banks were offering negative interest rates. As we discuss in our briefing paper, adopting the dollar can also help solve Argentina's serious problem with short‐term liquidity notes, the debt of which is more than twice as large as the monetary base. This is yet another reason why Argentina's next government should dollarize, albeit taking seriously the technical challenges that dollarization presents. The Argentinean peso no longer provides the basic functions of money. Argentineans already use the dollar as a unit of account and—if they can overcome multiple legal obstacles and afford significant transaction costs—as a store of value and a medium of exchange for important transactions. Dollarization would democratize the latter two essential functions of a sound currency.
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After the arrival of ChatGPT and its competitors, panic ensued. Some people predict mass unemployment, the bankruptcy of education, the dominance of fake news, the collapse of democracy, and the end of human history. I think these augurs have seen too many movies. If calls for a moratorium are heeded, it would be the first time in history that a new technological invention has been suspended or canceled.
Fear is always of the unknown and is cured with more information. When one climbs to the top of a mountain and approaches the edge of the cliff, one's legs shake. But if one takes one more step forward and sees a landing just below where one can step over, the shaking stops. The more information, the less fear.
It must be taken into account that the power of Artificial Intelligence is enormous but limited. Chatbots access large amounts of data accumulated on the Internet by Wikipedia, some newspapers, patent sites and other online publications, and select the most likely results. It is like a search engine like Google or Bing but multiplied. The basic operation is the same as that of mobile phones when we are texting and it suggests the next word of the message. But what's the most probable, that is, the most common, is usually also trivial, superficial, and doubtful. In the language of the chatbot, clichés and bureaucratic verbiage abound.
My modest experience includes posing to ChatGPT the questions and exercises from my The Science of Politics textbook. The answers tend to be correct when it comes to, for example, applying data to a mathematical formula. But when the student is asked to research an election or analyze a document, the chat response is something like: "I'm sorry, I don't have access to current events or real-time data", "I'm sorry, it is possible that may this term refer to a specific field or context that is not within my knowledge or outside my training."
Chatbots know what is on the Internet, that is, they know a lot of what is known, but they do not know what is not known nor can they guess. They give probable answers, but they don't understand, they don't think, and they can't discover anything that hasn't already been discovered. They reproduce descriptions of how things are, but they do not give causal explanations of why they are so. They are the denial of creativity. Also, they have been restricted from contributing to anything new that might be controversial. A typical answer may be: "... depends on a range of contextual factors, including historical legacies, political institutions, economic structures, and cultural norms."
The AI is also incapable of reasoning from moral principles. A chatbot lacks emotions or feelings, is unconscious, incapable of forming opinions or beliefs. It is, therefore, useless for making decisions that imply value options or for establishing norms of behavior. When faced with intriguing questions, it is ambidextrous: "on the one hand, this; on the other hand, the other", "some say this, but others say something else"…
The biggest question that has caused so much panic is whether artificial intelligence can learn on its own and successfully compete with natural human intelligence. But AI learns statistical patterns from the available data, including errors and misrepresentations. For now, "hallucinations" abound, as absurd and crazy responses are called. It will only be able to improve if it receives feedback through evaluations of its results, corrections, and suggestions. In such a case, humans will maintain direction.
Handled well by humans, AI can generate immense benefits. Allow me a little anecdote. Two weeks ago, I participated in an international Colloquium at the National Autonomous University of Mexico. During my presentation, there were 400 people in the room and, I was told, 2,600 connected online from ten other universities in the country. Through a small black and white square called a QR code, 56 questions arrived that, in half a minute, an AI device collapsed into four thematic blocks, making them viable to answer.
As soon as this type of practices becomes widespread, assistants, secretaries, accountants, translators, a lot of mechanical, repetitive and servile work will gradually disappear. They will follow the path of phone operators, bus and subway ticket clerks, gas station employees, typists with carbon paper, travel agencies, road maps, or queues at bank windows to get a few bills. Welcome the time and energy gained for complexity, inventiveness, discovery, and creativity.
The increase in well-being that AI can enable is enormous. Some estimate that labor productivity in certain sectors is already multiplying. There are already tremendous advances in medicine, both for diagnosis and for new drugs; there will be soon others to deal with the climate crisis, the scarcity of natural resources, and food. We will learn how to discriminate against fake news, just as we learned to distrust advertising and electoral campaigns. And while some traditional exams may become obsolete, nothing will be able to replace the personal exchange with students in the classroom.
John Keynes predicted that his grandchildren would work only 15 hours a week; it was a correct calculation to live like in his time, but we have continued working many hours to live much better. When the computers came out, some asked: "do you work less now?" The answer was: no, I work the same hours, but the result is superior. The same will happen with Artificial Intelligence.In Spanish and Catalan in La Vanguardia: CLICK
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As the war in Ukraine moves into its third year, Russo-Japanese relations continue to deteriorate from the level that existed prior to the Russian invasion in 2022. Relations between the two countries have never been smooth. Relations have been hampered since World War II by the inability to conclude a treaty formally ending hostilities between the two countries and a disagreement resulting from an old territorial dispute involving a chain of Pacific islands known in Japan as the Northern Territories and in Russia as the Southern Kuriles. Even before the Ukraine conflict, Tokyo had complained about increased Russian military deployments on the islands. Despite these lingering post-World War II hostilities, Shinzo Abe, who served as prime minister from 2012 to 2020, helped foster warmer relations with Moscow as he attempted to court Russia as a buffer against China, Japan's greatest security threat. According to TASS, Putin and Abe met in person over 25 times and held about ten phone calls. Their last meeting took place in the fall of 2019 and their last telephone conversation was held on August 31, 2020, when Putin called Abe.The cornerstone of the Putin-Abe relationship was based on strong personal respect as well as mutual interests in increased trade, particularly to feed Japan's need for commodities. Abe also saw Russia as a potential buffer against an increasingly hostile China. In 2013, Russo-Japan trade approached a record $34.8 billion and remained strong throughout the decade despite fluctuating oil prices. As recently as 2021, total trade turnover was still above $20 billion, with 45% percent consisting of fuel exports to Japan. After the Ukraine invasion in February 2022, Tokyo revoked Russia's most-favored-nation status as part of a series of economic sanctions, including asset freezes targeting Russian President Vladimir Putin and the Russian central bank. According to The Japan Times: "without the most-favored-nation status under the World Trade Organization rules…tariffs imposed on salmon imported from Russia have been raised to 5% from 3.5% and those on crab to 6% from 4%." As a result of these and fuel-related sanctions, total trade amounted to barely $10 billion in 2023.A decrease in imports of Russian coal by 67.1%, as well as a 44.9% drop in supplies of cars to Russia and Japanese spare parts and components by 32.5% amid sanctions against Moscow were the main factors behind the contraction of trade turnover. Energy resources and transport vehicles still account for over 69% of total trade turnover. Despite the decrease in total trade, a February report from JETRO, the Japanese External Trade Organization, claims that 156 companies and economic organizations were active in Russia before 2022 and 35% reported they continue business without any changes.Until the fall of 2023, Japan's $12.1 billion contribution to Ukraine over the past two years consisted mostly of financial and humanitarian aid as its military equipment provisions have primarily been limited to non-lethal weapons. However, in December, Moscow reacted angrily when Japan stated it would be prepared to ship Patriot air defense missiles to the United States after revising its arms export guidelines. This represents Tokyo's first major overhaul of such export curbs in nine years. Although Japan's new export controls still prevent it from shipping weapons to countries that are at war, it may "indirectly benefit Ukraine in its war with Russia as it gives the United States extra capacity to provide military aid to Kiev."The diplomatic situation has taken on a more contentious character recently as well.The Moscow Times reports that Russian President Dmitry Medvedev on February 20 "slammed Japan's prime minister after he said his government remains committed to signing a peace treaty with Moscow to resolve the territorial dispute over an island chain claimed by Tokyo." Japanese Prime Minister Fumio Kishida said in a policy speech to parliament earlier that day that Tokyo "remains fully committed" to negotiations over what Japan refers to as the Northern Territories and signing an agreement formally ending World War II. Kishida also said that his government's support of Ukraine and sanctions against Russia "would not waver." Mevedev responded on X: "We don't give a damn about the 'feelings of the Japanese' concerning the so-called 'Northern territories." He added, "They're not 'disputed territories,' but Russia." This is indicative of the stance the Russian government has taken to Japan as an "unfriendly" country.Japan has also taken economic initiatives towards reconstruction in Ukraine that are not pleasing to Moscow. In mid-February, the government of Japan hosted the Japan-Ukraine Conference for Promotion of Economic Growth and Reconstruction. The conference, organized by the Japanese and Ukrainian governments as well as business organizations and JETRO, can only be viewed as an indicator of Japanese geopolitical priorities in support of the status quo in Europe. Moreover, Japanese efforts to spearhead reconstruction efforts send a clear indication that its priorities are allied with the United States and Europe Union. According to the Japanese Foreign Ministry, Japanese and Ukrainian government agencies and companies signed more than 50 deals, Japan pledged 15.8 billion yen ($105 million) in new aid for Ukraine to fund demining and other urgently needed reconstruction projects in the energy and transportation sectors, and President Kishida also announced the opening of a new government trade office Kyiv. After Russia's invasion of Ukraine its military cooperation with China has gotten stronger. Japan views their growing military cooperation as an unprecedented threat as it could become isolated in the region. As a result, it continues to try and demonstrate its commitment to the status quo in terms of supporting international sovereignty and law and order. While Japan's elites would like to continue the stability offered by its Cold War military alliance with the United States and South Korea, they understand the U.S. may no longer share the same interests in the region. Moreover, relations with South Korea are fractured and can make the alliance with the United States dysfunctional at times. This requires Japan to continue to seek openings with Russia that are in its own national interests. Although the Abe administration may have represented the peak for Russo-Japanese relations and such a level of relations is not replicable in the short term (particularly while Russia is still at war with Ukraine) it is in both Russia and Japan's interests to foster cordial relations, if not entirely friendly ones, via business, cultural and other non-government exchanges. Japanese companies still share a desire to resume business operations and invest in Russia once the war concludes in Ukraine. In April 2022, negotiations were concluded between the two countries regarding salmon and trout fishing and other potential fishing agreements could be concluded in the future.In addition, January 2024 saw double the number of Russian visitors to Japan as in January 2023. These are just two areas for positive interaction. However, a considerable measure of restraint will be required as a long war with Ukraine may erode possibilities even in these areas.
