After 20-Plus Years of Dollarization, Ecuador Is Better Off

Last week, I returned from an unforgettable vacation in Ecuador. I truly had a wonderful time. I enjoyed multiple natural sites, including a volcano, a rain forest, and a crater lake. I also got to enjoy the wonders of Quito, which is one of the original UNESCO World Heritage Sites. Aside from learning the differences of the Spanish language across countries, one of the other things I got to learn about was the history of Ecuador's monetary policy. 

In 1884, Ecuador took on the currency known as the sucre, a currency that was then linked to the silver standard until 1898 when it switched to the gold standard. To jump forward, the International Monetary Fund established a purchasing power parity in 1946 of 13.5 sucres to the U.S. dollar. Things were relatively stable until 1983. To deal with the devaluation, Ecuador adopted a crawling peg. Things went from bad to worse, from 42 sucres to the U.S. dollar in 1983 to 3,000 sucres in 1995. Ecuador's financial crisis of 1998-99 led to hyperinflation of the sucre, which resulted in a 95 percent devaluation of the sucre. Then-President Jorge Jamil Mahuad Witt to announce in 2000 the adaptation of the U.S. dollar as Ecuador's currency to deal with the rising prices and devaluation. How has the Ecuadorian economy fared since dollarization? 

Pros of Ecuador's Dollarization

1. Macroeconomic stabilization. Considering what the Ecuadorian economy was experiencing up to the 1998-99 financial crisis and the path towards hyperinflation that Ecuador was on, this was a major plus. Ecuador has enjoyed price stability that it has not seen at least fifty years prior to dollarization. Since 2005, Ecuador's consumer price index converged to that of the United States, and has not gone beyond 5 percent. Even when Ecuador had fiscal expansion between 2008 and 2014, it was able to do so without inflationary consequences.

2. Improved macroeconomic credibility. Using the United States as a monetary anchor meant a more credible monetary policy. Because of dollarization, Ecuador needed to create a list of priorities within its balance sheet to "limit monetary financing of the central government (ADF)." This credibility also improves long-term investment and trade prospects in comparison to the sucre. 

3. Lower risk premia. Because of the improved credibility and stabilization, there is unlikely to be steep currency devaluation. This makes it easier to access international financial markets. It also makes it a lot less likely for capital flight. 

4. Elimination of transaction costs. Since Ecuador is dealing in dollars, it becomes easier to business in the international marketplace.

5. Development of financial sector. This is another outcome of the credibility and low risk premia. Since there is greater funding for investment, greater economic growth is an end-result. This economic boost translates into more money for the poor, which means less income inequality. 

6. By most metrics, the lives of Ecuadorians improved. Dollarization resulted in higher incomes for Ecuadorians, thereby increasing the GDP per capita (Macrotrends). Unemployment and poverty rates fell. Infant mortality rates did not increase. 

Cons of Ecuador's Dollarization

1. Ecuador cannot be a lender of last resort. When Ecuador underwent dollarization, it lost control of monetary policy, which means the Ecuadorian central bank cannot be a lender of last resort. This loss of control was clear during the global financial crisis of 2007-09 when Ecuador's central bank lost its independence. During this time, it had to lend to the government, which dwindled Ecuador's foreign reserve. Although the central bank cannot act as a conventional "lender of last resort," the central bank of Ecuador has used a Deposit Insurance Scheme and a Liquidity Fund that build liquidity buffers.  

2. Inability to handle foreign shocks. This is another issue with relinquishing control of monetary policy to the U.S. Federal Reserve. If there is a global recession or a major trading partner has an economic downturn, Ecuador's central bank would have little recourse to deal with it since it cannot use interest rates to maintain the currency. There would need to be a greater reliance on fiscal policy (e.g., higher deficits, higher taxes). Conversely, if a central bank's policy is ineffective or has lost credibility, then this lack of control is negligible. 

3. Loss of seigniorage. Seigniorage is profit made by the government making currency, which is the difference between the value of the currency and their production costs. The revenue losses experienced are both in terms of the initial replacement of the currency and the "flow" costs related to future earnings from the flow of new currency. 

Conclusion

Dollarization was an extreme policy response to an extreme situation of its financial crisis. Like with so much policy, there are advantages and drawbacks. For one, we need to compare the costs of external monetary shocks to the costs of domestic monetary shocks. More importantly, we cannot compare to what an idealized version of a central bank could look like in comparison to the current dollarization because that would fall under the Nirvana fallacy. Looking at Ecuador's monetary policy from 1983 to 1999 specifically, as well as the history of monetary policy in Latin America more generally, strongly suggests that there was no viable alternative to dollarization in Ecuador. Policy is not about choosing an idealized version, but is choosing the best, or in some cases, the least worst, option. The reason why Ecuador chose the dollar was because there was such institutional weakness in its monetary policy to begin with. 

I was in Ecuador watching the presidential primary elections. Given that there were 18 candidates and that there were a lot of populist tropes throughout the campaigning, I wouldn't trust that Ecuador could provide a viable alternative to dollarization at this time. If left to its own devices, it would be more likely that the debt-to-GDP ratio would skyrocket even more than that of the United States currently is. I don't think that dollarization is a silver bullet with the capacity to cure Ecuador's macroeconomic woes, much like it wouldn't be if Argentina were to dollarize (read Mercatus Center analysis here). Aside from the structural issue in which Ecuador's economy is highly dependent on oil exports, it could be argued that dollarization is needed before a country passes more deregulation, freer trade, or balancing the budget. Even if it was not, the aforementioned reforms would be necessary to help complete Ecuador's transition into a developed nation. In short, based on the data available, Ecuador's dollarization was the best option, certainly at the time and still remains their best option. 

Major Sources

• Álvarez Vásquez, Carmen et al. Revista Científica Dominio de Las Ciencias. Cost-Benefit Analysis of Dollarization, Ecuador Case. October 2018. 
• Banco Central de Ecuador. Información Estadística Mensual No. 2026 - Diciembre 2020. December 2020. 
• Banco Central de Ecuador. Índice del Boletín Anuario Número 42, 2020.
• Cachanosky, Nicolas and John Ramseur. American Institute for Economic Research [AIER]. 20 Years of Dollarization: A Synthetic Control Analysis, September 2020.
• Cueva, Simón and Julián P. Díaz. University of Chicago. The Case for Ecuador, January 2019.
• Özyurt and Cueva. L'Agence Française de Développement [AFD]. Twenty Years of Official Dollarization in Ecuador: A Blessing or a Curse?, August 2020.
• Wang, Sam. Council on Hemispheric Affairs. Examining the Effects of Dollarization on Ecuador, July 2016.

Biden's Barrage of Executive Orders: Assessing His First Week in Office

With Donald Trump out of the White House, President Joe Biden did not waste any time. He hit the ground running within his first two days in office with a series of executive orders (no less than fifteen). In many respects, President Biden was reversing what former President Trump had enacted via executive order. As you could imagine, I am not thrilled with the presidency, regardless of partisan affiliation, having such powers. At the same time, it is what it is. I'm not going to be able to cover every single executive order, but I would like to cover some of the main ones. 

The Good

1. Travel Ban. This is not a "Muslim Ban," but a ban of seven Muslim-majority countries that was passed at the beginning of Trump's presidency. Semantics set aside, I took issue with the travel ban when Trump passed it. It does next to nothing to promote national security. It's costly, not to mention it erodes the values upon which this country was founded. Biden is right to reverse Trump's ban. 

2. Border Wall. Trump's idea of a border wall was a bad idea to begin with. As I pointed out in January 2017, border walls are ineffective, they are costly to build, and are costly to maintain, not to mention it ignores the net benefits of immigration. More recently, the Cato Institute found that border walls do not have any effect on crime rates (Abman and Foad, 2020). Biden ceasing funding to this boondoggle was a good life choice. 

3. Fortifying Deferred Action for Childhood Arrivals (DACA). DACA allowed for those who entered the country illegally at a young age to stay in the country. As much as I would like to have seen such measures passed through Congress, I find there to be both an economic and moral case to be made for DACA.

The Bad

1. Rejoining the Paris Climate Agreement. This is one of the few redeeming qualities of the Trump administration. I was glad to see when Trump pulled out of the Agreement. It did very little to stop anthropogenic climate change while costing a ton, especially for the United States. Biden's rejoining of this Agreement was political theatre at best. 

2. Discontinuing the Keystone Pipeline Permit. I was all in favor of the Keystone pipeline in 2015. As the Institute for Energy Research points out, the pipeline is safer and cheaper than rail, not to mention such a move is going to piss off our neighbor to the North (i.e., Canada). This doesn't even get into the fact that such a move is to cut 11,000 jobs. 

3. Allowing male-to-female (MTF) transgender individuals to play in female sports. This is not the single most pressing matter facing the American people. Even so, I covered this topic last year. As much as I believe in the dignity of other human beings, the physical rootedness of athletics has bearing on whether one is biologically male or female. Since biological males have an advantage in most sports, it would be unfair to allow for MTF transgender individuals to play in female sports. 

4. Dismantling Trump's deregulation efforts. One of the other nice facets of the Trump administration was the idea that we did not need government bureaucrats to manage every aspect of our lives. Trump created a "one-in, two-out" rule in which for every new regulation created, the government had to eliminate two regulations. Trump also created Regulatory Reform Officers to remove outdated or unnecessary regulations that "inhibit job creation" or "impose costs that exceed benefits." Trump even signed in a law that protects citizens from being charged with violating opaque federal regulations. Biden repealed all of this, thereby bringing us closer to a leviathan in which government is the solution to everything. 

Not Sure 

There were also some executive orders for which I have not had a chance to take a look at or I do not have a strong opinion on it. 

1. World Health Organization (WHO). Take the Executive Order reinstating our admission to the WHO. On the one hand, I don't like how the WHO handled China with kid's gloves regarding China's involvement in causing and propagating COVID. On the other hand, we need to global coordination to have us get to the end of the tunnel with this farkakte pandemic. 

2. Mask Mandate for Federal Workers and on Federal Property. The reason I feel lukewarm on this one has been the following. I have found the evidence for masks to be mixed and not as strong as I would like for such an important topic. As such, I am mildly for mask usage, even if temporarily mandated (see here and here). Plus, Biden does not have the constitutional power to mandate masks on a national level, which means that the effects of this mandate on the overall pandemic would be limited. 

3. Restructuring for COVID response. President Biden reinstated the National Security Council's Directorate for Global Health Security and Defense, a position that Trump eliminated with a reorganization of NSC. While I recognize that we live in a federalist society, I also think Trump's response to the pandemic has been sub-par, to say the least. The reason I put this in "Not Sure" is because especially at this stage in the pandemic, I'm not sure how effective it will be.  

4. Moratorium on rent for federally owned properties. I have mixed feelings on this one. On the one hand, being evicted comes with its own hardships, not to mention that eviction could very well attribute to the spread of COVID. On the other hand, as I discussed in May, this has the potential to contribute to limited housing supply, increased rent, and hamper economic recovery in the longer-term. 

Summary

Biden's strength has been in reversing Trump's harmful, idiotic, and deleterious immigration policy. His take on environmental policy and regulations in general make me want to shake my head. As for his policies in response to COVID, time will tell. Contrary to my friends on the Left, I don't assume that a centralized response from the federal government is going to make things hunky-dory, especially since we have a federalist system and the fifty states have enough diversity to affect how to respond to COVID (i.e., a "one size fits all" approach isn't the best). I would say that it has been a mixed bag in the direction of "not overall impressed." It sure will be an interesting four years, that's for sure.

12 Reasons Why Franklin D. Roosevelt Was One of the Worst Presidents in U.S. History

As Donald Trump wraps up his presidential term, it is hard for us to not reflect on the impact Trump has had on the United States, for better or worse. There are those Americans who think that Trump is the greatest thing since sliced bread. Others opine that he was the worst president ever. I actually heard that some from of my liberal friends, and I had to think to myself: "Is Trump really the worst president ever?" Sure, I have taken issue with his policies on trade and immigration since before he got into office. His brash, infantile behavior has chipped away at the integrity of the presidency. His actions since November to undermine the legitimacy of the election process, a move used by would-be autocrats, is all the more distasteful. At the same time, I have to ask if any other president could top that. Andrew Jackson had the Trail of Tears. Warren Harding was the most corrupt president with the Teapot Dome Scandal. Richard Nixon had Watergate. There is one other president who was pretty bad, and I think it is worth highlighting because a lot of people think he is so great. That man is Franklin Delano Roosevelt, or FDR for short. 

There are certain people who have nostalgia for FDR because people remember him as the man who pulled the nation out of the Great Depression. The image many have of FDR is him helping Americans get through the Great Depression with fireside chats and provided employment with public works projects. FDR was also the man who led the American people during World War II. He was seen as a man of the people, a uniter, especially by those on the Left. The fact that he was elected four times, more than any other president, was arguably a reflection of his popularity. The truth of the matter is that FDR was a wanker. I'm not going to be able to cover everything here, but if you need a list as to why he is a contemptible president, here you go:

1. FDR's economic policy turned what should have been a recession into a double-dip depression. FDR implemented a series of regulations (e.g., National Industrial Recovery Act, Anti-Chain Store Act) and increased taxes to high amounts (more on that below). If you listened to my fiscally liberal friends, more taxes and regulations should have ended beautifully. How did it go? For one, employment did not prosper under FDR's administration. Quite the opposite! According to the Bureau of Labor Statistics, unemployment did not fall below 14 percent between 1931 and 1939 (see below). An econometric study from two economists from UCLA found that "real gross domestic product per adult, which was 39 percent below trend at the trough of the depression in 1933, remained 27 percent below trend in 1939." These same economists concluded that FDR's New Deal policies "reduced consumption and investment about 14 percent relative to their competitive balanced growth path levels (Cole and Ohanian, 2003)." To further the argument, a combination of federal debt reduction and the paring of New Deal programs contributed to the 1948 economic recovery (Higgs, 1997). In other words, FDR's policies slowed down the recovery. 

2. FDR's banking policy adversely impacted the finance sector. This is in reference to the Glass-Steagall Act, a bill FDR signed into law that prohibited commercial bankers from engaging in investment banking. For starters, Glass-Steagall did nothing to decrease the likelihood of banks failing during the Great Depression. The other issue, as is illustrated in a robust report from the Cato Institute on the myths behind Glass-Steagall, is that it ended up making banking more fragmented and expensive (also see Ramirez, 1999).

3. FDR's agricultural policy worsened the Great Depression. In 1933, FDR passed the Agricultural Adjustment Act [AAA]. The purpose of the AAA was to subsidize farmers to limit agricultural production in order to increase the prices of agricultural goods. Destroying tons of food is reprehensible, especially in a depression in which millions are starving. What were the economic effects of the AAA? Economists from Cambridge University (Fishback and Kachanovskaya, 2015) looked at the multiplier effects to find that they were, on average, between 0.40 and 0.96, which is economic speak for "it caused more economic harm than good." Another paper shows that the AAA had little or a somewhat negative effect on agricultural spending (Fishback et al., 2005). There is also econometric evidence showing that the AAA was responsible for the displacement of black and white sharecroppers, as well as black managing tenants (Depew et al., 2013).

4. FDR is responsible for Social Security. Social Security was created as a temporary relief system to make sure the elderly weren't dying in the streets during the Great Depression. It has since evolved into a source of supplementary retirement income. Aside from being a major driver of the federal budget, Social Security's return on investment (ROI) is mediocre in comparison to investing in stocks, bonds (either corporate or U.S. treasury), and/or real estate. The Tax Foundation compared tax-favored retirement plans to Social Security, and it's not even close (Entin, 2016). The Heritage Foundation makes a similar case (Dayaratna et al., 2018). Social Security does not allow for people to save for retirement as they see fit, even though there is evidence that private retirement investment is superior. Since the primary metric of Social Security is ROI, FDR inadvertently failed the American people, even well beyond his death.  

5. FDR's income tax reform is sadly still with us. As the American Institute for Economic Research points out, only 10 percent of earners paid the income tax in 1939. By 1946, that increased to 96 percent. This is one way of saying that "FDR forced the working class to pay the income tax to this very day." The personal exemption also dropped by half between 1939 and 1942 to contend with revenue strains. The aforementioned modifications, even if intended to be temporary, became more permanent fixtures in the U.S. tax code. FDR had also raised the top marginal tax rate to an astounding 94 percent in 1944. This sort of precedent has led certain Democratic politicians to think that a high marginal tax rate is a good idea, although there is enough evidence showing that high marginal tax rates would be a poor life choice. 

6. FDR was a power-mongering politician that eroded the balance of powers. In response to the fact that the Supreme Court ruled a number of his initiatives to be unconstitutional, FDR attempted to pack the courts to get his way. The silver lining here is that FDR failed in his attempt. As I pointed out in my September 2020 analysis, court-packing is a way that would-be or future autocrats use to concentrate power. Additionally, FDR moved the Bureau of the Budget (now the Office of Budget and Management [OBM]) under the executive branch (Executive Order 8248). A move to have greater power over the budget is significant since the Constitution grants budgetary powers to Congress. Speaking of Congress, FDR vetoed a large number of bills and set the precedent of using the executive order as a way to circumvent Congress when he didn't get his way. This illustrates further irony since the Democrats controlled Congress at the time, which shows how much FDR wanted to consolidate his own power. And let's not forget that the 22nd Amendment, the amendment creating term limits, was in response to FDR winning four elections. 

7. FDR had disdain for the freedom of press and limited it. For those who have criticized Trump's attitude towards "fake news," this should set off some alarm bells. FDR constantly complained about "poisonous propaganda." In his 1936 election, FDR bemoaned that 85 percent of the media were "out to get him." Going back to the previous point, FDR created the Federal Communications Commission [FCC] in 1934 to have better control of the media. As Reason Magazine illustrates, this gave FDR the ability to regulate content and intimidate broadcasters and newspaper publishers to not cover anything critical of the Roosevelt administration. 

8. FDR's collusion with Hugo Black almost led to a mass surveillance state. This brings me to the Black Commission, which was FDR's attempt at mass surveillance in the United States (read research from Cambridge here, as well as research from the Georgia State University here). Led by Senator Hugo Black (a move that FDR approved), who was a New Deal loyalist, this Committee initially was created to probe into opposition to the "death sentence" in the Public Utility Holding Company Bill, a bill that would have allowed for dissolution of public utility entities. This initial probe gave the administration the carte blanche to surveil thousands of telegrams to find those who were anti-New Deal and journalists who voiced their dissent. Thankfully, William Randolph Hearst fought back. This was not only good for freedom of press at the time, but it helped limit the McCarthy hearing in the 1950s. For those who think that Trump has been bad for freedom of press or freedom of speech, FDR was undoubtedly worse since his goal was to use the state to create an Orwellian society in which dissent was not tolerated. 

9. FDR's racist policy is exemplified by Japanese internment camps. In response to the Pearl Harbor attack, FDR detained 120,000 Japanese-American citizens and Japanese expatriates at internment camps, effectively stripping them of their civil liberties and deleteriously disrupting the economic way of life (Executive Order 9066).  

10. FDR failing the Jewish people highlights his inept refugee policy. Being Jewish, this one hits home for me. The MS St. Louis was an ocean liner carrying over 900 Jewish refugees fleeing Nazi Germany. Instead of allowing them asylum, FDR denied them entry to the United States. They were sent back to face the horrors of the concentration camps. FDR did not increase the refugee limits, even though there was clearly a refugee crisis looming in Europe. FDR actually added requirements that made it more difficult for Jewish refugees to enter the country. Even more appalling is that FDR held prejudices against Jews (L.A. Times). His anti-Semitism resulted in the torpedoing of Jewish rescue efforts throughout the war (Medoff et al., 2006). For those who have taken issue with Trump's so-called "Muslim ban" and want a friendlier refugee policy, you shouldn't be happy with FDR if you are to remain consistent. 

11. FDR's indifference towards violence against African-Americans. While FDR expressed opposition to violence towards African-Americans, he ended up turning away a Republican-sponsored bill to make lynching a crime on the federal level. There is no significant evidence that FDR cared about lynching specifically or violence against African-Americans generally. This is significant considering that a) FDR is venerated on the Left, and b) one of the biggest activist issues on the Left is fighting violence against African-Americans. 

12. FDR deported thousands of Mexicans. From 1929 to 1936, the U.S. government repatriated thousands of Mexicans. Although this policy was a continuation of the Hoover administration, it should say a lot that FDR, a president venerated by a number of modern-day, pro-immigration liberals, continued said policy. The University of Arizona estimates that over 92 thousand Mexicans were deported during FDR's time in office (see below). Other estimates have the figures even higher. If you think past presidents such as Trump and Obama deporting people as morally problematic, so were FDR's actions.