Beware Economists Bearing Multiple Reasons

"If you have more than one reason to do something (choose a doctor or veterinarian, hire a gardener or an employee, marry a person, go on a trip), just don't do it. It does not mean that one reason is better than two, just that by invoking more than one reason you are trying to convince yourself to do something. Obvious decisions (robust to error) require no more than a single reason."
Not only do people use multiple reasons for doing something to convince themselves, but also to convince others. Recently Bloomberg borrowed my work (without citing) to discuss the Crypto-E-dollar. My piece was a warning, but Bloomberg portrayed the E Dollar as a viable solution strictly for economic reasons. Today they ran a new story on banning high denomination cash to aid law enforcement. They cited a paper done by a Harvard economist, Peter Sands, entitled Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes. Here is an abstract of the paper.

Illegal money flows pose a massive challenge to all societies, rich and poor. Tax evasion undercuts the financing of public services and distorts the economy. Financial crime fuels and facilitates criminal activities from drug trafficking and human smuggling to theft and fraud. Corruption corrodes public institutions and warps decision-making. Terrorist finance sustains organisations that spread death and fear. The scale of such illicit money flows is staggering. Depending on the country, tax evasion robs the public sector of anywhere between 6% and 70% of what tax authorities estimate they should be collecting. Global financial crime flows are estimated to amount to over US$2tr per year. Corruption amounts to another US$1tr. Most of the effort to combat such illicit financial flows focuses on the perpetrators, the underlying criminal activities or on detecting illicit transactions through the banking system. Yet despite huge investments in transaction surveillance systems, intelligence and interdiction, less than 1% of illicit financial flows are seized. In this paper we suggest a different approach, one that would complement existing policies and make them more effective. Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note. Such notes are the preferred payment mechanism of those pursuing illicit activities, given the anonymity and lack of transaction record they offer, and the relative ease with which they can be transported and moved. By eliminating high denomination, high value notes we would make life harder for those pursuing tax evasion, financial crime, terrorist finance and corruption. Without being able to use high denomination notes, those engaged in illicit activities – the "bad guys" of our title – would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their "business models".

One should be immediately suspicious, why would an economist write a paper about law enforcement? Wouldn't this plea have been better suited to a criminal justice professor? My mind went back to Nassim's quote. This paper is not to present facts but to convince the reader of something. The range of bills he uses as an example have a current value ranging from $74 to $1010. Quite a range isn't it? The supposed goal of this paper is to make cash so cumbersome that it is not viable as a criminal medium of exchange. A stack of fifties, of the same value, would take up only twice the room as a stack of hundreds, hardly a deterrent. Google "tens and twenties unmarked bills" and you will find countless references to criminals using these denominations as well. For reference, a $10,000 stack of ten dollar bills would be 4.3 inches high. Now consider that criminals have little choice but to use cash, at what point would they decide to use a different medium of exchange? I'm guessing if the ten dollar bill were to be eliminated criminals would opt to use something else such as gold.

Maybe not so ironically, when economist Willem Buiter discusses banning cash he allows the caveat of leaving denominations five dollars and below for older people who don't feel comfortable with electronic payments.

Interestingly, Buiter is not discussing cash bans for law enforcement reasons, he is suggesting it to allow significantly negative interest rates. Now THIS is a reason an economist would want to ban cash. Just like a criminal being deterred from using small bills, an individual will be less likely to take ones and fives out of the bank due to negative rates, and actually more so. There are steps added if a criminal wanted use gold to do business rather than cash, each of these steps is a place where they leave a trail, a trail that can be followed, leading to their capture. Is an individual going to pull out his savings in ones and fives to save 2% a year, on money that, if the likes of Buiter get their way, is going to be spent within two months. This being the case, banning larger bills is much more useful for implementing negative rates than for law enforcement.

When I hear Peter Sands say he wants to ban large denomination bills to 'stop the bad guys', it sounds very similar to: "Dad can I stay out all night to go to a party? I just thought it would be good to give you and mom a quiet night at home." If you wouldn't accept your kid's 'quiet night at home' line, why would you accept an economist trying to convince you that banning cash is a good idea for law enforcement reasons. Both have ulterior motives, one is slightly more veiled than the other.

1 comment:

  1. All these crimes are happening right under our nose and we remain unaware of them. It is absolutely crucial that strict measures are taken to prevent such frauds. I hope your suggestions are considers by the authorities.