Monday, November 28, 2016

Responding to Trump: Mobilized Women, States’ Rights Advocacy, and Secession

Many liberals awoke the day after the election, assuming they slept at all, feeling that somehow they had been transported to an alien land that had somehow evaded the inevitability of civilization.  It will take some time to deal with this shock and come to grips with a new reality.  There were a few interesting notes on the subject of potential responses that appeared in The New Yorker by Ariel Levy and Jelani Cobb.

Ariel Levy’s piece is available online with the title Can Women Bring Down Trump?  Levy provides the advice and experience of Francesca Comincini who believes that she and other women activists were responsible for finally ending the political career of Silvio Berlusconi.  Berlusconi served several terms as Prime Minister of Italy and had a record of sexism and misogyny that even Trump couldn’t hope to match.

“Comencini pointed out that Trump and Berlusconi have a lot in common. They both amassed fortunes in real estate through questionable business practices. They share a taste for marble, extreme tans, and strongmen: Trump is impressed by Vladimir Putin and Saddam Hussein; Berlusconi was chummy with Muammar Qaddafi.”

“Both have a murky grasp on the concept of consent. (‘We don’t have enough soldiers to stop rape, because our women are so beautiful!’ Berlusconi said in 2009, commenting on new statistics concerning sexual violence. Trump defended himself against one of the many women who have accused him of sexual assault by sneering, ‘She would not be my first choice.’) Much as Trump complained that he ‘wasn’t impressed’ with the view of Hillary Clinton from behind, Berlusconi once dismissed Angela Merkel as ‘unfuckable’.”

Whereas Trump has only been accused of fraud and sexual predation, Berlusconi has actually been convicted on both counts (his conviction for having sex with an underage prostitute was later reversed).

Comencini’s advice for US women is to not despair at this loss, but to let it strengthen resolve.  Act, but act smartly.  She and her sister Cristina organized a series of demonstration in cities and towns across Italy.

“Berlusconi resigned nine months after her group, Se Non Ora, Quando (If Not Now, When), held its demonstrations, which attracted more than a million people.”

“’The rally was friendly, cool—like a rock concert,’ Cristina, a novelist and director, said. Like Trump, Berlusconi was a skilled manipulator of the media, with a keen sense of what messages resonate with his countrymen. The Comencinis strove to battle him with imagery as much as with ideology. They enlisted the Italian actress Angela Finocchiaro to make a video appeal to the nation’s men, asking them to ‘tell the world you don’t want to live in a bad fifties movie.’ They framed sexism and misogyny as not just wrong but lame.”

The Comencinis believes women in this country can also be successful and provide some advice.

“The sisters have a suggestion for their American counterparts as they prepare for the Million Women’s March on Washington, the day after Trump’s inauguration. ‘Do not make something against him, but communicate the idea that women are the nation,’ Cristina said. ‘This is strength—it’s there, it’s something that he has to face’.”

Jelani Cobb provided a note titled Post-Election, Liberals Invoke States’ Rights.  He opens with this lede.

“In response to Trump’s hostility toward immigrants, political leaders in New York and California vow to protect their most vulnerable.”

The fear that the rights of states will be trampled on by an overreaching federal government is usually expressed by conservative Republicans.  With the election of Trump, politicians in both California and New York have expressed the will to defy some of Trumps proclaimed intentions with respect to immigrants.

“On the day after the election, Kevin de León, the pro-tempore president of the California Senate, and Anthony Rendon, the speaker of the California Assembly, released a joint statement whose opening sentence—‘Today, we woke up feeling like strangers in a foreign land’—perfectly summarized the disorientation that millions of Americans were experiencing. More important, the statement pointed out that Trump’s bigotry and misogyny were at odds with California’s values of inclusiveness and tolerance, and, the authors vowed, ‘we will lead the resistance to any effort that would shred our social fabric or our Constitution’.”

“Charlie Beck, the chief of the L.A.P.D., added, ‘We are not going to work in conjunction with Homeland Security on deportation efforts. That is not our job, nor will I make it our job’.”

Andrew Cuomo, the governor of New York issued this statement.

“Whether you are gay or straight, Muslim or Christian, rich or poor, black or white or brown, we respect all people in the state of New York.”

“It’s the very core of what we believe and who we are. But it’s not just what we say, we passed laws that reflect it, and we will continue to do so, no matter what happens nationally. We won’t allow a federal government that attacks immigrants to do so in our state.”

Cobb suggests that these are positions that should be taken seriously.

“Thirty-nine million people live in California—twelve per cent of the population of the United States. The state is home to the economic and cultural axes of Silicon Valley and Hollywood. Last year, its economy became the sixth largest in the world, a spot formerly held by France. Clinton beat Trump by twenty-eight points in California, and by twenty-one points in New York. Now the two states have triggered an uncommon development in a year that has offered us a great number of them: liberals invoking states’ rights.”

Cobb reminds us that we have been here before as a nation.

“In 1798, the passage of the Alien and Sedition Acts increased the residency requirement from five years to fourteen before immigrants could vote, and authorized the executive branch to summarily deport immigrants who were deemed dangerous or who had come from hostile nations. In response, James Madison and Thomas Jefferson, whose Democratic-Republican Party was favored by immigrants, wrote the Virginia and Kentucky resolutions, which held that individual states had the right to nullify unconstitutional laws within their borders. They further stipulated that states had the right to ‘interpose’ themselves against the authority of the federal government.”

“Trump’s hostility toward immigration has taken various iterations, but the common theme is to rid the country of foreign residents deemed dangerous and to prohibit the entry of people from hostile nations. It would appear that, two hundred and eighteen years later, the principles of the Alien and Sedition Acts have sprung, with surprising vigor, from their resting place in history.”

It is not clear where this is going, but California and New York, assuming they are serious, have upped the ante considerably on any moves Trump and the Republicans might choose to make.  Meanwhile, it also provides a thread of hope to those who now live in greater fear for their future.

“The political leaders in New York and California have not yet proposed nullifying federal authority on immigration—they are only resisting it, in the service of the higher principle of democracy and inclusion. That alone can’t forestall the damage that a Trump Administration might do on the issue of immigration. But, for the millions of Americans, immigrants and non-immigrants alike, who also woke up last week feeling like strangers in a foreign land, it is as good a starting place as any.”

The two articles carry a similar message: Don’t despair; fight back.

There is another interesting development that could be worth following.  Consider this recent article: California secession initiative filed with Attorney General.

“Backers are seeking to get what they have dubbed “Calexit: The California Independence Plebiscite of 2019” on the November 2018 ballot.”

“If the initiative is approved by voters, it would force a vote on March 13, 2019, the election date for local, odd-year elections, on whether California should become a ‘free, sovereign and independent country’.”

“Signature gathering cannot begin until the Attorney General’s Office prepares a title and summary for the initiative. Backers expect to begin signature gathering in the spring, according to Louis J. Marinelli, president of the Yes California Independence Campaign.”

“Backers would then have six months to gather valid signatures from 585,407 registered voters — 8 percent of the total votes cast for governor in the 2014 general election — to qualify the measure for the ballot.”

This initiative predates Trump’s election.  One assumed it was going nowhere, but after the election one can only wonder how many Californians will see this as a means to express their emotions, if not their will.

We may be living in interesting times.

Thursday, November 24, 2016

Microbes, Microbial Consortia, Antibiotics, and Our Future

The danger from antibiotic resistant strains of microbes has been well publicized as the occurrence of difficult-to-control infections has grown.  As this resistance is developed it appears to spread quickly to other species of microbes.  The response has been to seek new and more powerful chemicals, but the prospects appear dim.  What is less well publicized is the fact that most of our current antibiotics were obtained by extracting chemicals that are produced by microbes.  One difficulty in finding new antibiotics is that 99% of the world’s microbes seem to refuse to allow themselves to be grown in a laboratory where their products can be assessed and harvested if appropriate.  To obtain an understanding of why this is the case and why microbes can mutate so quickly, we will turn to Paul G. Falkowski and his book Life's Engines: How Microbes Made Earth Habitable

Single celled microbes have been around for billions of years.  Falkowski details the relatively small number of chemical “engines” that evolved to provide the basis of life for these creatures.  He then illustrates how these simple structures could have evolved into more complex multicellular forms and, in so doing, remade the earth into a platform that would support the huge array of large life forms that inhabit the planet today.  Of interest relative to the search for new antibiotics is the symbiotic existence developed by most forms of microbes.

Microbes learned early on that survival is easier if they form cooperative groups.

“Microbes do not live in isolation; most of them are symbionts, that is, they live together and depend on each other for resources.  More specifically, microbes use each other’s waste products for sustenance.  The use of waste products—also known as the recycling of elements—is one of the basic concepts in ecology, and it has strongly influenced the evolution of microbial nanomachines.”

Microbes also have a very flexible and efficient mechanism for evolution.  Rather than evolving via some random genetic variation that is passed on to offspring, microbial evolution is dominated by horizontal (or lateral) transfer of genetic information via mechanisms that are not well understood.  The most direct means is for a microbe to simply absorb genetic material from its environment.  A fraction of the time the material will be incorporated and passed on to subsequent generations.  Genetic material can also be incorporated via interaction with the numerous viruses which inhabit the environment.  Also, similar types of microbes can form a bond together and exchange DNA.

“Horizontal gene transfer is not a biological curiosity; it is a major mode of evolution in microbes.  Simply put, genes that were preadapted by selection in one organism can somehow be transferred to another, completely unrelated organism without sexual recombination.  In effect, this is quantum evolution—an organism that did not have the capability of fixing nitrogen can acquire genes for nitrogen fixation from the environment, and voilà, it instantly can fix nitrogen.”

This method of evolution is important because it can happen so quickly.

“Indeed, the process is frighteningly rapid.  One of the very first examples of horizontal gene transfer was discovered in Japan when it was realized that resistance to antibiotics was acquired by pathogenic bacteria much faster than could be explained by classical vertical inheritance.  When the era of gene sequencing came into its own, it was quickly shown that genes for resistance to many common antibiotics were spread all across the microbial world.”

The collections of interacting microbes that form stable communities are labeled by Falkowski as “consortia.”  Given a large number of members made up of a significant number of species, one arrives at a highly adaptable entity that can respond to dramatic changes in environment.  The microbes of a consortia share their products, and they are also capable of internal communication.

“Microbial communities, or consortia, are microscopic jungles in which tens or even hundreds of species of microbes live in a mutual habitat.  It should be noted that it is often difficult to strictly define what a microbial ‘species’ is.  The traditional definition of the word—that the offspring from sexual recombination is viable—which is testable in animals and plants does not readily apply to microbes….horizontal gene transfer makes defining ‘species’ somewhat specious.”

“On a microscopic scale, the organisms within a consortium are living within very close proximity.  Under such circumstances, the opportunity for successful horizontal gene transfer is greatly enhanced.  Hence, within consortia, gene transfers often allow a distribution of metabolic nanomachines across many groups of microbes, thereby allowing the flows of elements between organisms to be tightly controlled.”

“Controls are imbedded in the chemical signals that are sent from microbe to microbe within the community and that provide information about who is doing what and how many are where.  The system of intercellular signaling, called quorum sensing, resulted from the evolution of specific molecules that are made and used by microbes to assess their own population density, as well as to signal other microbes about who and where they are.  This mode of intercellular communication remains pretty remote to us, although we do know that there are specific molecules sent out be some cells that float around until they attach to specific receptor sites on another microbe’s membrane.”

“Once attached, the molecules work by altering the expression of genes in a cell.  Quorum sensing allows consortia to establish a spatial pattern of microbial metabolism that further increases the efficiency of recycling nutrients.  But it can also alter behavior.”

Given that most of our antibiotics are produced by microbes, Falkowski believes that these forms of molecules are used as a defense mechanism against dangerous microbes.  If true, that would be a rather sophisticated response to a threat by one of these consortia.

Falkowski also reminds us that we carry around our own private consortia of microbes.  We evolved within a microbial bath, and the microbes evolved with us.  We and they are one.  The most important consortia are those that exist within our digestive systems.  They are essential to life, yet we damage them every time we take an antibiotic.  After an individual course of an antibiotic it takes time for the consortia to recover.  Multiple courses taken over a lifetime can result in permanent changes in our individual consortia and produce effects on our health.  Species of microbes can be eliminated entirely if they are not available to be passed on to our offspring.  The medical community is currently struggling to understand how bodily function is dependent on the specifics of our digestive consortia.

It would seem that the reason most microbes refuse to grow in a laboratory is because they are not so much individual species as members of a consortium tuned to and requiring an environment that has not been, and, perhaps, cannot be reproduced in a laboratory.

Raffi Khatchadourian provides a view of the state of antibiotic research with a focus on attempts to gain access to the microbes in the mysterious 99%.  His article appeared in The New Yorker with the title The Unseen.  Khatchadourian uses the efforts of one researcher, Slava Epstein, to access these “unseen” microbes as the theme of his piece.

“Nearly all of microbiology, Epstein eventually learned, was built on the study of a tiny fraction of microbial life, perhaps less than one per cent, because most bacteria could not be grown in a laboratory culture, the primary means of analyzing them. By the time he matured as a scientist, many researchers had given up trying to cultivate new species, writing off the majority as “dark matter”—a term used in astronomy for an inscrutable substance that may make up most of the universe but cannot be seen.”

The available 1% has been tremendously useful to humanity, providing the motivation to access much more of the microbial population.

“The near-universal presence of bacteria in nature—from the deepest layer of the Earth’s crust to the upper atmosphere—is reflected in their protean applications. They can be used to make industrial foods, to engineer perfumes, to produce fuel or to clean it up. More than half the cells in the human body are microbial, and many of them exist as biological dark matter, too; learning how they function could offer countless insights into human longevity. For decades, microbes had been a source of essential pharmaceuticals: chemotherapies, blood thinners, and drugs crucial to organ transplants. From just the one per cent of bacterial life that scientists had been able to cultivate, researchers had derived virtually every antibiotic used in modern medicine.”

The popular notion that microbes produce antibiotics to kill other microbes is dubious, and, in fact, is rather frightening.  One does not wish to envisage a world where microbes are busy producing lethal compounds to kill an enemy.  Humans could one day become the enemy.

“If antibiotics are indeed weapons, then humans are latecomers to an aeons-old arms race, whose rules remain opaque to us. “It is absurd to believe that we could ever claim victory in a war against organisms that outnumber us by a factor of 1022, that outweigh us by a factor of 108, that have existed for a thousand times longer than our species, and that can undergo as many as five hundred thousand generations during one of our generations,” several scientists argued in a recent paper.”

Epstein prefers to assume that what we call antibiotics are used by microbes for cooperative purposes and only become lethal when used at unnaturally high concentrations.

“For one thing, no one has ever measured concentrations of antibiotics in nature which are lethal to bacteria. He is open to the notion that these chemicals might be for signalling, and that they seem like weapons because of how we use them.”

The danger of generating resistant bacteria was apparent as soon as antibiotics were discovered.

“During the Second World War, penicillin was used widely, and it did not take long for resistant bacteria to spread. But many new drugs were being discovered, particularly from easily cultivatable species of actinobacteria. In 1943, there was streptomycin, the first cure for tuberculosis, and on the heels of that came chloramphenicol, chlortetracycline, neomycin, erythromycin. The rush of discovery gave the impression that nature contained an infinitely deep trove of new medicines. In 1962, a Nobel-winning immunologist went so far as to declare “the virtual elimination of the infectious diseases as a significant factor in social life.” Antibiotics became omnipresent. In industrial farming, they were used to hasten animal growth and to shield plants from pests; in medicine they were often overprescribed or incorrectly prescribed. Microbes, meanwhile, kept evolving.”

The 1% could not provide an unending supply of new molecules and progress ground to a near halt.

“As costs rose and results diminished, most of the largest pharmaceutical companies shuttered their antibiotic-discovery programs. The fear now is that the aging war chest will be rendered totally ineffective. Already there are strains of tuberculosis and gonorrhea, among other pathogens, that are resistant to virtually every drug in the medical arsenal. By conservative estimates, there are now seven hundred thousand fatalities from antibiotic-resistant bacteria in the world each year.”

Expressions of unbridled optimism are being replaced with those of despair and of an impending apocalypse.

“In desperation, hospitals have begun to revive old antibiotics that were discarded because they were too toxic. One such drug, colistin, was set aside for decades because its side effects included kidney damage and neurotoxicity. Today, it is a last line of defense against the hardiest of pathogens—though probably not for long. In 2012, the World Health Organization recommended that it be administered under strict regulation, but farmers around the world continued to use the drug liberally, particularly in China, where it was given to livestock by the ton. In 2013, researchers in China discovered colistin-resistant E. coli in the intestine of a pig, and a few weeks ago a similar strain was found in a patient in Pennsylvania—prompting the head of the Centers for Disease Control to declare that ‘the end of the road isn’t very far away for antibiotics’.”

A view of a future with ever-diminishing antibiotic effectiveness is not something one would choose to linger on.

“….a study commissioned by the British government predicts that, if trends continue, annual fatalities from drug-resistant microbes could exceed ten million by 2050, eclipsing those from cancer. Many key advancements in modern medicine could be reversed. As one researcher noted recently, ‘A lot of major surgery would be seriously threatened. I used to show students pictures of people being treated for tuberculosis in London. It was just a row of beds outside a hospital—you lived or you died’.”

Even if people like Epstein are successful at extracting new chemicals from the dark 99%, is that really a solution?  Or does it buy us perhaps another few decades before the ever-adapting microbial armies overwhelm them as well?  Humans like to believe that they rule the earth, but it could be the microbes that are really in charge.

The interested reader might find the following articles informative:

Saturday, November 19, 2016

When Collaboration Kills Creativity

Susan Cain produced a best-selling book on introverts and their place in society: Quiet: The Power of Introverts in a World That Can’t Stop Talking.  She tells us that introversion and extroversion seem to be genetically determined because researchers have been able to correlate responses to stimuli by infants with tendencies toward introversion or extroversion in later life.  Roughly a third to a half of the population falls on the introvert side of the ledger.  There is, of course, a spectrum of tendencies between polar extremes.  Some introverts can perform as extroverts for short periods when necessary.  Some extroverts are also quite capable of quiet introspection when necessary.

These personality differences have also been observed in other animals, suggesting that a blend of the two characteristics within a population is favored by natural selection.  That being the case, Cain is disturbed by trends in education and in workplaces that promote environments suited to the extrovert as the ideals for learning and innovation.  She was moved to produce a chapter titled When Collaboration Kills Creativity.

To understand the issues faced by introverts in an extrovert-oriented world, Cain provides some general characteristics of the two personality types.

“….introverts and extroverts differ in the level of outside stimulation that they need to function well.  Introverts feel ‘just right’ with less stimulation, as when they sip wine with a close friend, solve a crossword puzzle, or read a book.  Extroverts enjoy the extra bang that comes from activities like meeting new people, skiing slippery slopes, and cranking up the stereo.”

In terms of how the two might comport themselves in a work environment:

“Introverts often work more slowly and deliberately.  They like to focus on one task at a time and can have mighty powers of concentration.”

“Extroverts tend to tackle assignments quickly.  They make fast (sometimes rash) decisions, and are comfortable multitasking and risk-taking.”

“[Introverts] listen more than they talk, think before they speak, and often feel as if they express themselves better in writing than in conversation.  They tend to dislike conflict.  Many have a horror of small talk, but enjoy deep discussions.”

“[Extroverts] tend to be assertive, dominant, and in great need of company.  Extroverts think out loud and on their feet; they prefer talking to listening, rarely find themselves at a loss for words, and occasionally blurt out things they never meant to say.  They’re comfortable with conflict, but not with solitude.”

When researchers study the characteristics of people that would be defined as “creative” by society, they arrive at a prototype.

“One of the most interesting findings….was that the more creative people tended to be socially poised introverts.  They were interpersonally skilled but ‘not of an especially sociable or participative temperament.’  They described themselves as independent and individualistic.  As teens, many had been shy and solitary.”

Cain provides a few interesting quotes from creative introverts that describe the mode in which they feel they need to operate in order to be productive.  The first is from Albert Einstein.

“I am a horse for a single harness, not cut out for tandem or team work….Full well do I know that to attain any definite goal, it is imperative that one person should do the thinking and commanding.”

The following quote is by Stephen Wozniak of Apple computer fame.

“Most inventors and engineers I’ve met are like me—they’re shy and they live in their heads.  They’re almost like artists.  In fact, the very best of them are artists.  And artists work best alone where they can control an invention’s design without a lot of other people designing it for marketing or some other committee.  I don’t think anything really revolutionary has been invented by committee.  If you’re that rare engineer who’s an inventor and also an artist, I’m going to give you some advice that might be hard to take.  That advice is: Work aloneYou’re going to be best able to design revolutionary products and features if you’re working on your own.  Not on a committee.  Not on a team.

Corporate executives and educators have marched in the opposite direction by creating environments in which students and workers are never allowed to be alone.  Teamwork and constant communication are supposedly the keys to success.

It was encouraging to note that there are indications that corporations are beginning to take note of the need to accommodate different personality types as part of their mode of operation.  The writer of the Schumpeter page in The Economist produced an article titled Shhhh! which included the following lede.

“Companies would benefit from helping introverts to thrive”

The article references Susan Cain’s book and agrees with her conclusions.

“Most companies worry about discriminating against their employees on the basis of race, gender or sexual preference. But they give little thought to their shabby treatment of introverts.”

“The biggest culprit is the fashion for open-plan offices and so-called “group work”. Companies rightly think that the elixir of growth in a world where computers can do much of the grunt work is innovation. But they wrongly conclude that the best way to encourage creativity is to knock down office walls and to hold incessant meetings. This is ill-judged for a number of reasons. It rests on a trite analogy between intellectual and physical barriers between people. It ignores the fact that noise and interruptions make it harder to concentrate. And companies too often forget that whereas extroverts gain energy from other people, introverts need time on their own to recharge.”

Cain provides us information from studies by psychologists and others of worker and company productivity when open-plan offices are utilized.

“A mountain of recent data on open-plan offices from many different industries corroborates the results….Open-plan offices have been found to reduce productivity and impair memory.  They’re associated with high staff turnover.  They make people sick, hostile, unmotivated, and insecure.  Open-plan workers are more likely to suffer from high blood pressure and elevated stress levels and to get the flu; they argue more with their colleagues; they worry about coworkers eavesdropping on their phone calls and spying on their computer screens.  They have fewer personal and confidential conversations with colleagues.  They are often subject to loud and uncontrollable noise, which raises heart rates; releases cortisol, the body’s flight-or-fight ‘stress’ hormone; and makes people socially distant, quick to anger, aggressive, and slow to help others.”

The Schumpeter article also points out that leadership is not a simple attribute. 

“Many companies unconsciously identify leadership skills with extroversion—that is, a willingness to project the ego, press the flesh and prattle on in public.”

Effective leadership depends on the personalities of the people involved.  Extroverts, with the energy and tendency to dominate that they bring, are effective at managing workers who have well-defined responsibilities, but less so when dealing with those whose task is to think creatively.  In the latter case, introvert managers are more adept at encouraging productivity from that class of employee.

“Many of the most successful founders and chief executives in the technology industry, such as Bill Gates of Microsoft, and Mark Zuckerberg of Facebook, are introverts who might have floundered in the extroverted culture of IBM, with its company songs and strong emphasis on team-bonding. In penalising other people like them, firms are passing over or sidelining potential leaders. At all levels of company hierarchies, that means failing to take full advantage of employees’ abilities.”

Besides backing off on open-plan work areas, companies are encouraged to take into account personality differences in evaluating prospective employees, and to manage time better so that only necessary meetings occur and they are conducted in an efficient manner where all participants are likely to contribute—not just the loudest few.

“Some of the cleverest companies are beginning to look at these problems. Amazon has radically overhauled its meetings to make them more focused. Every meeting begins in silence. Those attending must read a six-page memo on the subject of the meeting before they open their mouths. This shifts the emphasis from people’s behaviour in the meeting to focused discussion of the memo’s contents. Google has downplayed the importance of interviews in recruiting and put more emphasis on candidates’ ability to carry out tasks like the ones that they will have to do at the firm, such as writing code or solving technical problems.”

A few examples of enlightened management are encouraging, but it will take much more to overcome decades of propaganda about the “extrovert ideal.” 

The interested reader might find these articles informative:

Sunday, November 13, 2016

Living Without Paper Money

Kenneth Rogoff recently produced a book, The Curse of Cash, in which he argued that the world would be a better place if we gradually eliminated paper money (cash) starting with the largest-value notes first.  He concluded that eliminating cash would make tax evasion and numerous other crimes much more difficult, and would facilitate national monetary policies by making significant negative interest rates possible.  The latter topic is best left to economists to argue.  Here the interest is in the benefits and inconveniences that arise when a plan such as Rogoff’s is implemented.  There are countries that have already decided that they are going to purposely favor digital financial transaction and purposely inhibit cash transactions.  The experiences of those countries will also be discussed.

There are two major issues associated with a plan to phase out paper money.  The first involves the logistics of taking the notes out of circulation, the second involves dealing with the fact that many people do not currently have access to modern banking and are required to have cash available for financial transactions.  The solution to the latter issue is to provide what Rogoff refers to as “universal financial inclusion.”

Rogoff provides a short summary of his phase-out plan.

“All paper currency is gradually phased out, beginning with notes of $50 and above (or foreign equivalent), then next the $20 bill, leaving only $1, $5, and (perhaps) $10 bills.  These small bills would be left in circulation for an indefinite period.  In the final phase, small bills would be replaced by equivalent denomination coins of substantial weight.”

The point of eliminating cash is to eliminate financial transactions that cannot be monitored.  It turns out that 80% of the paper money in distribution in the US is in the form of $100 bills, a denomination that is rarely used in everyday transactions.  Rogoff argues that a significant fraction of those bills are involved in illegal activities. 

“A million dollars in $100 bills weighs approximately 22 pounds (10 kilos), and, if stacked, rises to 43 inches, (or 109 centimeters).  Obviously, with $20 bills, all measures would be five times as much; with $10 notes, $1 million is suddenly 220 pounds (100 kilos), and 430 inches (1,090 centimeters).  It is also proportionately costlier to count, verify, handle, and store….Properly designed, the weight of coins, though quite modest for ordinary day-to-day transactions, would make them awkward for transporting large amounts or conducting large anonymous transactions.”

The elimination of large notes begins with the decision to not print any more.  The ones in circulation can be withdrawn slowly or quickly depending on the degree of the crime problem.  India suddenly decided to render all 500 and 1000 Rupee notes invalid essentially instantaneously just a few days ago.  The stated motive was to fight corruption.  Rogoff anticipates a transition that could take decades.  The period must be timed with the transition to universal financial inclusion if it is to work.  The government could merely set a date by which all bills must be exchanged or else they will expire.  There are a number of ways to facilitate the exchange so it goes smoothly and without great inconvenience.

Most people, particularly the young, are already decreasing their use of cash and would not find the transition particularly troublesome.  However, the large number of people without bank accounts would make the goal of universal financial inclusion more complicated.

“In the United States, more than 8% of households were unbanked in 2013, according to an FDIC survey.  Another 20% were underbanked, meaning they also used alternative financial services outside the banking system, including prepaid cards, payday loans, pawn shops, and check-cashing services.”

Being unbanked can be a very expensive way to execute transactions.

“Unfortunately, the cost of not having bank access is high.  Check-cashing services charge exorbitant fees; for immigrants and others who need to wire funds abroad and transfer money to relatives, the transaction costs can amount to 10-15% or more.  Storing cash at home and carrying cash greatly increases the chance of theft.  The risks of being subject to fraud are much higher outside the regulated financial sector.  The poor may benefit from being able to use paper currency, but overall, financial exclusion implies large costs for basic services.  In sum, the status quo is extremely regressive.”

The solution is to have a federal program that subsidizes accounts for the poor so they have access to the electronic equivalent of currency. A rather simple way to implement such a system would be to create debit accounts (or an equivalent) at existing banks and have the government deposit the costs of maintaining the accounts directly into them.  The cost of such a program might seem large, but is really rather small compared to the amount of taxes being evaded, and the amount that potentially could be recovered or saved by the move to a cashless society.

“The long-run solution is to provide government-subsidized access to financial services for the poor, giving them equal access to electronic currency and, at the same time, helping to reduce some of the costs associated with financial exclusion….The cost of providing subsidized electronic currency accounts for low income individuals should be relatively modest, say, on the order of $32 billion per year (for example, 80 million free basic accounts at $400 per year).”

“If providing such basic services sounds spendthrift, remember, programs will be built in the context of a transition to electronic payment vehicles that would likely bring net revenue to the government overall, given higher tax receipts.  Shifting away from cash will also help reduce crime-related expenditures.”

A brief article in The Economist took note of Rogoff’s book and produced a summary of how the trend away from paper money was progressing in Europe.  It supplied this chart indicating the degree to which consumers in various countries had embraced electronic transactions over cash.

The Scandinavian countries are eager adapters and generally prefer using cards and smartphones over cash.  Germany and Italy seem determined to hang on to their cash.  France and Britain are somewhere in between. 

Clearly culture plays a role—and trust in government and banks as well.  Moving to electronic transactions eliminates the privacy associated with cash transactions.  This lack of privacy is what is needed in order to address criminal activities, but it also means that numerous small transactions that are, in principle, subject to government intervention like hiring a baby sitter or purchasing a bit of marijuana can now be observed by financial institutions and the government if they are so inclined

“Swedes rarely handle cash; the volume of card payments has increased tenfold since 2000 and only one in five payments—5-7% if measured by value—are made in cash today. In much of northern Europe the situation is similar, with “no cash” signs increasingly popping up in shop windows.”

“Most surprising is Germany’s reluctance to dispense with “real money”. Over three-quarters of German payments are still made in cash and “cash only” signs are not that uncommon.”

“….a deep-rooted aversion to being tracked—a scar left by the Stasi—lies behind German distrust. A recent survey by PWC revealed that two in five Germans don’t use mobile payments because of concerns about data security (and nearly nine in ten worry about it).”

Banks are generally in favor of the transition.  Cash is expensive for them to deal with, and more profit can be made from transaction fees.  Part of encouraging the transition involves banks and government collaborating in providing the tools for efficient transactions while minimizing the costs.

“In the Benelux and Scandinavian countries, banks were early promoters of electronic payments and made it easier (and cheaper) for customers to use cards. In thinly populated Sweden and Norway, maintaining a large branch and ATM network is costly; Swedbank, Sweden’s largest retail bank, has only eight branches that handle cash. Banks also helped to develop mobile-payment technologies, such as MobilePay in Denmark, an app now used on nine out of ten Danish smartphones.”

Electronic registering of transactions as they take place can eliminate the option retailers have of cheating on cash transactions.  Removing that opportunity clearly places cash in the nuisance category for both consumers and vendors.  Smartphone apps and chip and pin cards are much quicker than counting out change and handling coins and bills that many believe are a means of transmitting disease.

“Scandinavian authorities have helped facilitate card use. In Sweden the installation in cash registers of “blackboxes” that directly send sales data to the tax agency to fight VAT evasion, has helped make cash less attractive. In Denmark paying benefits onto debit cards aided the transition.”

“Dimitri Roes, the owner of ‘t Vlaams Broodhuys, a Dutch chain of bakeries, says the decision to become cashless was motivated by security and hygiene. ‘Bakeries are soft targets for robberies. For a few hundred euros you get a knife in you.’ Customers also didn’t like staff touching their croissants after handling coins. Some clients angrily threw their coins across the counter when bakers stopped accepting them, but over 90% didn’t care.”

It looks like this is going to happen.  Some groups will fight back against the phasing-out of paper money, but time and technology are not on their side.  Certainly the author of the article in The Economist agrees.

“Of course there are downsides to moving away from cash. Installing card machines can be costly. The poor, many of whom lack bank accounts, would need to be included. Concerns about losing anonymity are legitimate. And cash has always been the obvious contingency in case systems break down.”

“But the advantages of cashless commerce grow ever more apparent. Back in Stockholm, at the Radisson Waterfront hotel, two American seniors bicker over who will fetch ‘local money’ so they can get a taxi. If only they knew that cabbies here prefer cards and only 7% of Taxi Stockholm’s payments are made in cash.”

The interested reader might find the following article informative.

Wednesday, November 9, 2016

The Curse of Cash: Crime

Kenneth Rogoff is a well-known economist who has long had issues with paper money.  He has presented his case against the troublesome stuff in his recent book The Curse of Cash

Rogoff believes that paper money (cash) can and should be eliminated except for a few small denomination notes that would eventually be converted to coins.  He presents two arguments for why this step should be taken.  The first is related to the manner in which cash transactions facilitate a number of illegal activities.  Since cash transactions generally leave no record, tax evasion, unrecorded payments of wages to illegal aliens, large-scale criminal activities, and corruption of public officials are facilitated.

“….making it more difficult to engage in recurrent, large, and anonymous payments would likely have a significant impact on discouraging tax evasion and crime; even a relatively modest impact could potentially justify getting rid of most paper currency.”

His second argument is related to the low-interest-rate environment that developed countries have found themselves in after the Great Recession.  As interest rates have dropped to near zero, central banks have lost much of their ability to reinflate the economy with monetary policy.  A few have attempted to try small negative rates to address this.  Rogoff believes that setting negative rates will become more important as a tool for national banks, but in order to make it effective the alternative of moving investment into cash (a zero-rate instrument) must be eliminated.

“….as I have argued for some time, phasing out paper currency is arguably the simplest and most elegant approach to clearing the path for central banks to invoke unfettered negative interest rate policies should they bump up against the ‘zero lower bound’ on interest rates.  Treasury bills cannot fall much below zero, precisely because people always have the option of holding paper currency, which at least pays zero interest.”

Of interest here is the first issue and the details Rogoff provides about cash and how it is used in the United States and other developed countries.

The first thing to learn about cash is the amount that is in circulation in the economy.  One might think that all of the modern means for digital monetary transactions would have limited the demand for paper money.  Rogoff tells us that is far from being the case.

“Anyone who thinks that debit cards, cell phone payments, and virtual currencies are already burying cash could not be more wrong.  Demand for most advanced-country paper currency notes has been rising steadily for more than two decades.  Believe it or not, as of the end of 2015, $1.34 trillion worth of US currency was being held outside banks, or $4,200 floating around for every man, woman, and child in the United States.  The orders of magnitude for most advanced-country currencies is broadly similar.”

Not only is this an enormous amount of cash, it exists mostly in a form that would make it difficult to be used in most daily transactions.

“Incredibly, the vast bulk of this mass stash of cash is in high denomination notes, the kind most of us don’t carry in our purses and wallets, including the US $100 bill, the 500-euro note (about $570 at present), and the 1000-Swiss franc note (a little over $1000).  Almost 80% of the US currency supply is in $100 bills.  How many people have 34 of them in their purses, cookie jars, or cars, as each individual would need to account for his or her share?”

Those figures should arouse some suspicion that there is something not quite proper about how these bills are being used.  Apparently, little is known about where this money ends up after it is printed and how it used.  Rogoff had to expend considerable effort to arrive at some estimates—and estimates they were. 

Let us begin with the use of cash in what is referred to as the “underground economy.”

“The underground economy includes a huge range of blatantly illegal activities, for example, the drug trade, extortion, bribes, human trafficking, and money laundering, just to name a few.  But it also includes ordinary people—a great many of them—who use cash on occasion, say, when hiring babysitters or painters, to get a lower rate and to sidestep onerous reporting requirements.  And it definitely includes small cash-intensive businesses that prefer to get paid in cash so they can underreport revenues to tax authorities.  In some countries, like the United States, the underground economy very importantly includes firms that save on costs by hiring illegal immigrants at low wages, enabling them to undercut firms that hire workers legally.”

The data indicating the extent of tax evasion is startling.  One realizes that the tax authorities will target suspicious tax returns for an audit.  However, they can also target tax returns for an audit randomly in order to poll the economy to estimate the extent to which tax avoidance activities affect revenue.

“The IRS has used these extensive audits, combined with an array of other information (e.g., investigations into high-income-earner tax shelters) to arrive at an overall estimate of unpaid taxes.  For 2006, the most recent year reported, the IRS found that the “tax gap”—the difference between taxes voluntarily paid and taxes due—was $450 billion.  This comprises tax evasion in many different sectors, including underreporting of business income, wage income, and rental income.”

“Of the $450 billion, the IRS expected to recover $65 billion, leaving a net tax gap of $385 billion.  Put differently, roughly 14% of estimated 2006 federal taxes, or 2.7% of 2006 GDP, will never be paid.”

One might suspect that this activity goes on at levels where cash is not the logical means of transaction, but that would be wrong.  It seems a staggering number of small businesses use cash transactions as a means of hiding income.

“By far the most important area of tax noncompliance comes from underreporting of business income by individuals who conduct a significant share of their transactions in cash.  The problem extends to individuals operating as partnerships or small corporations.  Overall, small business owners report less than half their income and account for 52% of the tax gap.”

And the problem is even worse when state and local taxes are included.  Rogoff states that state and local taxes provide revenue at a level of about two thirds of federal revenue.

“Most states have income taxes (where noncompliance is presumably similar to that for the federal income tax), as well as sales taxes, where the scale for noncompliance in cash transactions is enormous.”

Rogoff uses the research of Gabriel Zucman to provide an estimate of the revenue lost to tax evasion utilizing offshore tax havens.

“In his 2015 book, The Hidden Wealth of Nations, University of California professor Gabriel Zucman has estimated that total financial wealth held in tax havens (including stocks, bonds, and bank accounts) amounts to about $7.6 trillion, or 8% of the world’s financial wealth of $95 trillion.”

The estimated loss of revenue to the United States from these tax havens is about $35 billion per year, and for Europe about $78 billion.  Surprisingly these numbers are much smaller than the sums involved in domestic tax avoidance activities.  However, Rogoff reminds us that cash and large-value bills are part of the scheme.

“These are large figures, but in comparison to overall tax evasion in the United States and Europe, they are only a modest fraction of the total.  In any event, even in the case of offshore tax havens, a considerable quantity of wealth still goes in and out in the form of paper currency packed in bags.”

The drug trade is probably the highest profile illegal activity that depends on cash for its transactions.  Rogoff provides an estimate of the size of the markets for cocaine, heroin, marijuana, and methamphetamine at a bit over $100 billion as of 2010.  He doesn’t claim that eliminating cash would eliminate the drug trade, but he does suggest that it would severely disrupt its business model.

“Given the violence and crime that the drug business spins off, the potential benefits to even a small reduction in drug trade crime arguably can have an extremely beneficial effect.”

A major problem for countries like the United States is the effort and expense involved in controlling their borders.  Rogoff points out that illegal immigration is a cash intensive business.  It takes cash to purchase a path across the border, and unreported cash wages paid to illegal immigrants often provide the economic motivation for making the crossing.  Limitations on the availability of significant amounts of cash would disrupt this business model and may be the most efficient way to limit illegal immigration.

“Yet there seems to be precious little awareness of how much more difficult and risky it would be for employers to routinely hire illegal workers if they could not pay in cash, and how phasing out paper currency might prove a far more effective remedy than the alternatives being considered.”

If one is to propose eliminating cash or making it scarce, it is necessary to produce numbers indicating how cash is being used in the legal economy.  Rogoff indicates that US dollars are of use to other countries and that as much as half the cash in circulation is held by foreign countries.  In terms of domestic use, the breakdown is as follows.

“A couple studies back in the 1990s that seed cash in retail establishments (e.g., in cash registers) is less than 2% of all outstanding cash, with perhaps another few percent in transit to banks at any one time.  Given the huge trend of decline in cash used for medium and large retail transactions over the past 20 years, this share can have only declined.”

“As of mid-February 2016, US currency in bank vaults and ATMs combined was $75 billion, which equals about 5% of reported currency in circulation.  However, out of this $75 billion, $61 billion is treated as required reserves, and doesn’t even count in the currency-in-circulation figures….”

“….the order of magnitude for consumer cash holdings is roughly 6-7% of total currency in circulation….”

Summing all these holdings for legal purposes suggests that 30-40% of outstanding US cash could be facilitating illegal activities.  

Rogoff has made his point that the currency supply could be restricted considerably without doing damage to our economy.  The obvious connection between illegal activities and high denomination bills has been long recognized and countries are beginning to do something about it.  The European Central Bank recently announced that it would no longer produce the 500-euro note.  Rogoff would start by phasing out $50 and $100 bills.  As this post was being written, this article was encountered: In Surprise Move, India Voids 500 And 1,000 Rupee Bills To Fight Corruption

A number of countries seem quite happy to begin phasing out cash transactions as a way to increase efficiency.  The chip and PIN cards common in Europe (and, hopefully, soon to become available in the United States) make all but the smallest cash transactions inefficient for both the consumer and the vendor.  Some bank branches in Sweden don’t handle paper currency at all.  Try finding an ATM in Stockholm.  Many businesses have begun to put up signs indicating that cash transactions are not allowed.

Younger people seem quite happy moving towards a low-cash future.  The older people who might already be suffering from a form of future shock better take note.  There is much more to come.

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