Hummel on the Curse of Cash
By David Henderson
In “Anti-Paper Prophet: Comments on The Curse of Cash.” Jeff Hummel has written an excellent response to Ken Rogoff’s response to Hummel’s review of his book The Curse of Cash. The whole thing is well worth reading. Here are the parts I found most striking.
When Rogoff gets to bona fide predatory acts within the underground economy, such as extortion, human trafficking, and violence associated with the drug trade, he descends primarily into lurid anecdotes. He fails to give even crude quantitative estimates to buttress his claim that eliminating cash would curtail these activities. As for corruption and bribery, Rogoff admits that they are really serious only in poorer countries–precisely where he also concedes that a premature elimination of cash would have dire economic consequences. In his discussion of terrorism, he admits that eliminating cash would have at best trivial impacts.
Nor can Rogoff demonstrate any increased revenue for the U.S. government from phasing out large denomination notes. Relying on IRS estimates of the legally earned but unreported taxes in 2006 and extrapolating forward to 2015, he puts the potential gains to the national government at $50 billion annually (or less than 0.3 percent of GDP), along with approximately another $20 billion gain for state and local taxation. Yet his most comprehensive estimate of the seigniorage the government would lose from phasing out cash is $98 billion, or over 0.5 percent of GDP. Add to that the $32 billion annual cost of free electronic accounts for the poor, and Rogoff has failed to make a credible case that his proposal would create a net gain for the U.S. government, much less a net benefit for society overall.
Here’s Jeff’s accomplishment in affecting Rogoff’s own views:
Rogoff’s response to my review is quite respectful. He clearly wishes to encourage a civil dialogue on this question. Indeed, much of his response consists of amplifying details of his proposal. He does accuse me of “polemic exaggeration” because I titled my review “The War on Cash,” but that hardly seems unwarranted given that the title of his book is The Curse of Cash. More important, Rogoff’s response exhibits a shift in emphases [sic] in order to make his proposal appear still more tentative than in his book. Thus, he includes “many years of discussion and analysis” before any “advanced democracy is likely to start down the less cash-road.” And he pushes the “ultimate move to coins only (which I throw out as a very long-run idea …)” to “a time frame on the order of half a century or more.”
Although I have only skimmed Rogoff’s book, I have read a number of reviews and the distinct view I got was that Rogoff wanted substantial moves to coins in a decade or two rather than in 5 decades. That’s a huge change.
Another insight from Hummel:
However these shifts introduce some additional tensions into Rogoff’s case. By admitting that phasing out cash is less of a priority for the U.S. than for other countries, especially those with high levels of tax evasion, he in essence is saying that his scheme is least needed where it is least onerous to implement and most needed where it is premature or dangerous to impose.
And yet another great point:
By adding emphasis to how slowly he is willing to implement his proposal, Rogoff also undercuts the urgency he has attached to overcoming the zero lower bound, which in his book he characterized as having “essentially crippled monetary policy across the advanced world for much of the past 8 years” (p. 4). Indeed, if he is really willing to wait “at least a couple decades” for the phasing out of large denomination notes, why not just rely on market processes and technological innovations already in play to achieve a less coerced transition? Rogoff even predicts in his response that “the use of cash in the U.S. in legal tax-compliant transactions will be well under 5 percent ten years from now and probably only 1-2 percent twenty years from now, and that is assuming no change in government policy on cash [emphasis mine].”