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. 

Top 5 Blog Entries of the Libertarian Jew for 2020

2020 has been a crazy year. We had the worst pandemic since the Spanish Flu. We are experiencing the worst economic downturn since the Great Depression. Social unrest and political polarization have not been this tumultuous since "who knows when." The U.S. presidential elections were an absolute circus. In future years, 2020 is going to be the year we would like to forget, but we will end up remembering not-so-fondly. As I look back on the year, I look at the good, bad, and the ugly in my personal life. I also look back at my blogging for 2020. Here are five of my favorites: 

1. Cancel Culture and J.K. Rowling's Remarks About Transgenderism & Biological Sex. How do we deal with people whose viewpoints or opinions we find disagreeable? I explored this question after J.K. Rowling made comments that "sex is real," a comment that resulted in accusing Rowling of transphobia. After providing nuance in the world of transgenderism, I segue over to criticizing cancel culture and how cancel culture is toxic for society as a whole. 

2. Why We Need to Start Lifting Coronavirus Lockdowns Sooner Rather Than Later. About a month-and-a-half after the lockdowns commenced in March, I got fed up enough where I decided to write a list of thirteen reasons and considerations for why we needed to gradually lift restrictions. In early May when I wrote this, I called for a balanced approach and using standard risk management to figure out how the best way to navigate the pandemic. It's sad to see how much fear superseded logic in the proceeding months. 

3. A Sukkot Lesson on Schach and Being Comfortable with the Uncomfortable. While the pandemic has come with a lot of negative aspects, I did find myself growing spiritually. During the Jewish harvest festival of Sukkot, I looked at some of the architectural technicalities of the sukkah (temporary dwelling) and reflected on how to develop equanimity during tough times. 

4. The Smithsonian's Take on "White Culture" Begs the Question: When Does "Wokeness" Start to Resemble Racism? Martin Luther King, Jr. believed that we should judge people not by the color of their skin, but their content of their character. It's amazing how certain parts of society have devolved from that ideal. This past summer, the Smithsonian published an infographic outlining "whiteness" and "white culture" in an offensive form of stereotyping. I first delve into why over-generalizing an entire race is problematic, both factually and morally. Afterwards, I ponder where the line is between improving racial justice and becoming so obsessed with race that one's thoughts, words, and actions ressemble or parallel that of bona fide racists. 

5. Reflecting on My 1,000th Blog Entry and Why I'm Still a Libertarian, Pandemic or Not. Time flies when you are having fun, and my blogging has been no exception. It took over ten years, but I reached the milestone of writing 1,000 blog entries. I took the time to reflect on how I became libertarian. I then outlined the values-based (i.e., why I find it morally compelling) and outcomes-based reasons (i.e., why a look at empirical evidence led me to conclude that the private sector generally outperforms the public sector) as to why I adhere to libertarianism. I finally illustrate why a pandemic did not deter me from being libertarian, and if anything, why it strengthened my libertarianism. 

Shutting Down Gyms and Restaurants: Discussing Burden of Proof and COVID Risk Assessment with Limited Evidence

It has been a very trying year as we all get through this pandemic. After enduring a spring of lockdowns, establishments increasingly started to open. Navigating regulations and safety protocols has been difficult for many businesses as they struggle to comply while still generating enough necessary profits to remain in business. For those who have been in favor of lockdowns and a more restrictive approach generally, their mantra has been "Listen to the science!" We can get into whether the restrictionists are legitimately concerned about evidence-based practice or whether it is a guise to amass more power and control. I can say that I have expressed concerns about coronavirus-related restrictions not being empirically-based since I criticized the lockdowns last May. 

For those who thinks that being libertarian automatically means "have everything open during the pandemic," it really does not. For one, I called for a limited face mask mandate. I also was okay with a subsidy to pay for people to take the vaccine, provided that a) it is proven to be safe, and b) there is compelling case to be made to ensure that enough people will take it to create herd immunity. At the same time, I looked at the evidence for school closures in July and found it to be lacking. 

On the one hand, I am glad that many jurisdictions are treating the "shut things down" more like a dial than a switch. On the other hand, if a certain government entity is going to shut a certain type of establishment down, the burden of proof is on them to provide a conceivable set of facts that such a provision would protect the public health before disrupting the livelihood of hundreds. As the second wave has kicked in, we have seen two such establishments targeted either with more severe limits or downright shutdowns: restaurants and gyms. 

I want to see if the evidence out there merits shutting down either one or both types of establishments, but before jumping into that, a word on risk assessment in general. There is never going to be a scenario in which we eliminate risk. Why this pandemic brought about the delusion in many thinking we could is beyond me. As I will bring up again shortly, costs need to be weighed against their benefits. We know that contamination through surfaces is unlikely, and COVID-19 is most commonly spread by respiratory droplets. 

This has a few implications when assessing risk. One is that being outdoors is safer than being indoors because of how bacteria and viruses dilute and decay much more rapidly outdoors. The second is that social distance less likely spreads COVID-19 than being right next to someone else. The third is that larger gatherings are more likely to spread COVID-19 than smaller gatherings (and certainly smaller than being by oneself). There are more factors, but these are the main ones that help us determine the likelihood in which COVID-19 is transmitted to others. If I had to make an educated guess based on these factors, I would guess that gyms and indoor restaurants would fall somewhere on the range of "Medium Risk."

This side-conversation about restaurants and gyms is important since gyms and restaurants are more commonly indoors, not to mention that there can be multiple people together in what arguably could be construed as adequately close enough for major spreading. This gets even more important as winter weather kicks in, which means that outdoor gym classes or dining become less viable of options. Even if we did not have studies explicitly covering the specific topics at hand, we could at least see other past epidemiological studies to make an educated guess. However, since there are at least a few studies out there, I would like to see whether gyms and restaurants are such super-spreaders that we should be shutting them down as we get through this second wave. 

Are Gyms Major Spreaders of COVID-19?

Gyms did not exactly have a reputation of being a haven of sanitation pre-pandemic. At the same time, we already pointed out that COVID-19 is not commonly transmitted by other surfaces. Intuitively, whether gyms are super-spreaders largely depends on such factors as ability to space out the machines and treadmills, ventilation and airflow, face mask compliance, whether group classes are halted (see South Korea study here), local infection rate, and protocols on checking members for symptoms. As an epidemiologist from Arizona University, Saskia Popescu, put it, "it is hard to put them [all gyms] into a single box."

There was one study from MXMetrics based on 49 million gym check-ins that showed a 0.0023 percent likelihood of contracting COVID-19 from the gym, but it was commissioned by a sports club association. Another study that is to be released by Oregon University in the near future looked at gym usage in the state of Colorado. While they did not find a statistically significant correlation between weekly gym usage and weekly incidence of COVID-19, they also did not conclude that gyms are safe. At the end of its press release, Oregon University discussed safety procedures that it could use to minimize spread of COVID-19. Additionally, a November study coming from Norway found that provided there are good hygiene and physical distancing measures, gyms and training facilities do not provide additional risk (Helsingen et al., 2020).

What About Restaurants?

This is a good question, especially given scant data. An oft-cited CDC study is a limited study in Guangzhou, China saying that substandard ventilation is more likely to spread COVID-19, but that study had no scientific controls (Lu et al., 2020). There have been other similarly limited studies with similar results, but because they are so limited, it tells us next to nothing. Not many jurisdictions release such granular data. Even so, we do know, for example, that in New York State, 1.4 percent of cases were caused by restaurants and bars (compared to the 73.8 percent from private social gatherings). Similarly, the state of Minnesota found that since June, only 1.7 percent of COVID-19 cases were associated with restaurants.

One study I found helpful is from Stanford University, in which it shows that targeted efforts (e.g., capacity limits) are more effective than blanket closures (Chang et al., 2020).

Postscript

The limited evidence base that currently exists has not proven that gyms or restaurants are super-spreaders. How do we move forward? Do we err on the side of caution by shutting things down or do we allow restaurants and gyms stay open with such protocols as capacity limits, social distancing, and checking for symptoms before entering? I could ask how well lockdowns generally have worked (another discussion for another time), but I can say that restaurants and gyms across the country have been implementing protocols to make it safer, even if those vary from state to state or city to city. No activity is 100 percent free from risk, and that includes staying at home all the time.

Let's remember that when people solely focus on the risk for contracting COVID-19, they are only asking about one important part of the equation. I'm not here to diminish contracting COVID-19. I myself have already had it. At the same time, it does not paint the full picture. Extolling and playing up the benefits while ignoring or downplaying everything else is incomplete at the least, if not downright deceptive. It does not get into the benefits of keeping the establishments open (e.g., gyms keep people healthier) or the costs of keeping the businesses closed (e.g., how unemployment adversely affects finances or increases depression and suicidal ideation). Especially since we are almost a year into this pandemic, the government should show with evidence how keeping gyms and restaurants are harming public health before they needlessly go harming the livelihoods, and by extension, the quality of life, of thousands upon thousands of Americans.

Aside from each establishment having different levels of protocol, we each have our own level of risk. An 85-year-old with asthma is going to have a different risk tolerance than a healthy twenty-something. In the case of gyms, it is safe to assume that healthier people are going to the gym (especially now) than those who have conditions that could make them likelier candidates for contracting COVID-19. Even in a pandemic, we should not have one-size-fits-all solutions, but have the ability to voluntarily make our own decisions based on evidence and our own risks. 

7 Reasons Why the National Debt Still Matters (Even in a Pandemic)

For many, the year 2020 has been the worst year either in recent memory or in one's entire life. If the pandemic or recession were not enough, the United States government decided to accrue a ton of debt. Between March and October, the Treasury borrowed $3.5 trillion. Yes, that is trillion with a "t"! By the end of the calendar year, the debt-to-GDP ratio is expected to increase to 98 percent (Congressional Budget Office [CBO]). 

Tangentially, a school of thought that has gained more traction over time is Modern Monetary Theory (MMT), which essentially says that because the government has a de facto monopolistic power to create currency and bond investors have been lending at lower rates, the debt does not matter. Aside from being a departure from mainstream macroeconomics (as is exhibited by a survey of economists conducted by the University of Chicago showing that MMT is bollocks), MMT would have serious policy implications, mainly that one could continue to print currency until the end of time. A less extreme, more convincing argument than MMT is that in spite of the rising debt-to-GDP ratio, it is less costly [as a percentage of GDP] to service debt. 

Even if the debt servicing burden projects play out, there are still a number of reasons that we should still be worried about U.S. government debt:

1. Interest payments to go up from here. Part of what makes MMT so tenuous is that it assumes that interest rates (and by extension, the cost of burdening debt) stays low. According to the CBO's long-term projections, that is not expected to be the case. In the next decade, interest payments will increase from $376B in 2019 to $807B in 2029. In terms of percent of GDP, it is projected to be 2.2% in 2030 and 8.1% in 2050. There has been substantial academic literature to illustrate that there is a high correlation between rising debt and rising interest rates (Huntley, 2014).

2. Lower non-interest spending. If the government is spending more money servicing debt, that means less money on other public services (e.g., healthcare, education). Debt is the thing that holds back the ability to make better investments in the future. It also makes it more difficult to manage such future crises as wars, natural disasters, and recession (Romer and Romer, 2019).

3. Growing elderly population. As Baby Boomers retire, it will have an adverse effect on the debt, particularly when it comes to the worker-to-retiree ratio. This ratio is expected to decrease from 2.8 in 2020 to 2.2 in 2040. What happens when the elderly become a higher percentage of the population? For one, there will be fewer workers [as a percentage] contributing tax revenue dollars. This also means that there will be further strain on Medicare, Medicaid, and Social Security, which, by the way, are the largest drivers of the federal budget.

4. Increased U.S. public debt stymies economic growth. Based on 2019 projections, reducing debt would increase GNP per person by $5,500 in 30 years (CBO). Similarly, the International Monetary Fund [IMF] found that high debt hampers economic growth by "increasing uncertainty over future taxation, crowding out private investment, and weakening a country's resilience to shocks" (Gupta et al., 2015, p. 7).

5. Look at those trust funds! As a result of the pandemic, major trust funds are to go broke earlier than anticipated: Social Security in 2031, Medicare [Part A] in 2024, and the Social Security Disability Fund in 2026. This only serves to accelerate and exacerbate debt projections. 

6. Increased debt means lower savings and investment. A 2014 CBO paper found that an increase of $1 in the budget deficit translates into a reduction of national savings by 57 cents, as well as domestic investment by 33 cents. 

7. The U.S. debt trajectory. Shortly before the pandemic, the CBO predicted that debt-to-GDP ratio will be 180 percent by 2050. The United States was one of the few developed nations facing rising debt levels pre-pandemic. Thanks to pandemic fiscal spending, that ratio went up to 195 percent (CBO). There is no sign of it slowing down because unfunded liabilities, in this case, Medicare, Medicaid, and Social Security obligations that are not backed by assets. More to the point, economists at the Brookings Institution calculated that even if interest rates remain the same, the debt-to-GDP ratio would still increase to 156 percent (Auerbach et al., 2019). 

Postscript: Is the federal debt something so urgent that if we don't deal with it right this second, we're all going to die? Nope. At the same time, the increasing national debt is like a foundation of house slowly rotting. With an aging population and no sign of federal deficits slowing, it is only getting worse and collapse without reform. To quote the Government Accountability Office (GAO) in its March 2020 report, "the longer action is delayed, the more drastic the changes will be needed to address the issue."

For more information, see analysis from the bipartisan Committee for a Responsible Fiscal Budget here and here.

Do We Need Another Round of Stimulus Checks? I Think Not.

As we approach the expiration of various provisions in the CARES Act intended to help keep millions of Americans afloat during the recession, Congress proceeds with its bipartisan back-and-forth as to what should be in the next stimulus bill. One thing I noticed missing in this round of negotiations was the one-time $1,200 stimulus checks for individuals ($2,400 for married couples). This was unusual considering how much President Trump was clamoring for it earlier this year. Rather than delve into the politics, I prefer to examine the policy aspect.    

The premise behind a stimulus check is based in Keynesian economic theory. Essentially, the government sends its populace money. That money burns a hole in their pockets, so to speak. The increase in disposable income is sent to incentivize consumption, which in turn drives revenue increases at retailers, manufacturers, and other establishments. Ultimately, the stimulus checks are to translate into an economic boost. There was a secondary reason of keeping people isolated with the hopes that the pandemic would have short-term effects, but that clearly did not pan out. 

I could say there were some advantages to sending stimulus checks to people directly. One is that the process was relatively simple. If you as an individual made $75,000 or less in adjusted gross income in 2018, you received a check in the full amount. There were not income brackets or tax exemptions, which made the IRS' processing straightforward (even if imperfect). Second, because of its simple processing system, many people were able to receive the checks relatively quickly. Third, as the Peter G. Peterson Foundation mentions, the payments did go to those most financially hurt by the pandemic (see below). 

This brings me to the complaints I have about the stimulus check program. Some of those complaints are specific to the particular implementation of the last round of stimulus checks. I could complain that it was not well targeted, given the eligibility ceiling of $75,000. However, that could be rectified by changing the eligibility requirements to make sure that the funds reach those who need the money the most. 

Another complaint is with regards to improper payments. According to the Government Accountability Office (GAO), nearly $1.4 billion of those stimulus check payments (or 0.5 percent of the $292 billion spent) went to deceased individuals. The GAO discusses in its report how the IRS can improve the hypothetical next round of stimulus payments. 

My issues with the stimulus checks go beyond the implementation. As University of Chicago professor Constantine Yannelis points out, the stimulus checks do not distinguish between households and recipients, which means that it ends up being poorly targeted in terms of who needs it the most (unless you severely limited the eligibility requirements). The same thing happens with minimum wage. Because minimum wage is based on individual income (as opposed to household income), it helps out a disproportionately small percent of lower-income households. This phenomenon would explain why Yannelis calls the stimulus checks a blunt instrument. 

An even bigger point is this: if one of the main goals of stimulus checks is to spur consumption, what we should see is that most, if not all, of the stimulus payments went towards consumption. So how were the stimulus checks used? The Federal Reserve Bank of New York found that 25.9 percent of households used stimulus checks for consumer spending.

The biggest use of those stimulus checks were savings (36.4%), followed by paying off debts (34.5%). This means that the majority of the stimulus checks did not go towards consumption. A study from economists at the University of Texas, University of California-Berkley, and the University of Chicago had similar results (Coibion et al., 2020). Not only did these economists find that only 15 percent of households spend, those who did spend only used 40 percent of the check on average to spend. Those who were more likely to spend were those without work, lived in larger households, faced liquidity issues, and/or were less educated. 

This leads to the question of whether the consumption that did take place result in a boost in the economy. According to the Congressional Budget Office's September 2020 report on pandemic legislation, there was an annual percent change in GDP of 0.6 percent. At the same time, this was almost half of the effect that enhanced unemployment compensation had (see below). 

The fact that the stimulus checks fail at one of its most basic goals does not surprise me. I take a look at the Great Recession, the only other time in U.S. history where we really had this magnitude of stimulus checks, and see what happened. An economist at Stanford University not only found that the 2008 stimulus checks did little to boost aggregate demand, but also that consumption proceeded to decline in proceeding months (Taylor, 2018). Cash for Clunkers, which was a similar indirect transfer program during the Great Recession, shows similar failures in boosting long-term consumption (Hoekstra et al., 2014; Gayer and Parker, 2013).

And then there's the research on stimulus more generally. An economist at the University of California-San Diego investigated the effectiveness of government spending in response to recessions (Ramey, 2018). She concluded that the multiplier effect typically ranges between 0.6 and 1.0 (see graph below), or in layman's terms: government stimulus spending in response to recessions typically remains ineffective.  

Source: Heritage Foundation

To make the matter worse, a high debt-to-GDP ratio erodes the multiplier effect even further. This is important considering that the United States' debt-to-GDP ratio is expected to reach 98 by the end of the year (Congressional Budget Office). Some other countries have had a zero multiplier effect (e.g., Huidrom et al., 2019; Auerbach and Gordonichenko, 2012) where as some countries have been found to have had a negative multiplier effect (e.g., Ilzetzki et al., 2012). Why is this the case? Because when a country faces a high level of debt and spend a lot, a fiscal contraction is pending to compensate for managing the debts. Since such adjustments are anticipated, there have been times where the short-term consumption gets largely offset. Macroeconomically speaking, what we see is that government stimulus does not produce desired multiplier effects and that more specifically, stimulus checks do not produce the desired boom in consumption. 

Postscript

Thankfully, there is light at the end of the tunnel. The findings with the Pfizer and Moderna vaccines are quite encouraging. The United Kingdom already approved an emergency use authorization for the Pfizer vaccine. If all goes accordingly, it looks like we can start head back to normalcy around mid-2021. In the meantime, we have another six to seven months to go. We need something to hold us over in the meantime, and direct stimulus checks do not seem to do the trick. It is not simply for the multiple, aforementioned reasons. 

While there is a demand shock component to this recession, there is also a major supply shock element, which is contrary to past recessions that have primarily been due to demand-side shocks. Even assuming the shocks to supply and demand are equal, there is nothing that stimulus checks can do to mitigate the supply shock. To help with the supply shock, businesses need the equipment to operate safely. What else would help is widespread testing, which is something I have said since early April. Making sure that businesses have personal protective equipment and have the support to implement proper safety measures is what we need. I won't say that another round of stimulus checks is like flushing money down the toilet, but it is safe to say that there are better ways we could spend and target money to get through the rest of this ordeal.