Wednesday, August 17, 2011

Reviving the gold standard is of dubious value


Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, August 8, 2011.  

Many who are unhappy with the decline in the value of the dollar against foreign currencies, and especially against Yuan (Chinese currency), and with the Federal Reserve Bank's monetary policy would like to bring back gold in the international monetary system. The brief history of the gold standard and its variant will show that bringing gold into international monetary arrangements is impractical and misguided. There are two types of arrangements that have prevailed in the past: the gold standard and the gold exchange standard.

Under the gold standard, all countries fixed the price of gold in terms of their currencies and made them convertible into gold at a fixed price. This system led to fixed exchange rates between currencies, as long as all countries kept the price of gold in terms of their currencies fixed. The need to finance World War I and reconstruction afterwards prompted countries involved, except the U.S., to abandon convertibility of their currencies into gold and dollars at fixed rates.

Professors Paul Krugman and Maurice Obstfeld argue that implementing the gold standard will put constraints on the use of monetary policy to fight unemployment and creates more volatility in prices of commodities. In addition, gold reserves will not meet demands of expanding economies and international trade unless more gold is discovered; gold standard also would give more economic power to gold rich countries like South Africa and Russia to influence macroeconomic policies of other countries.

Attempts were made to resuscitate the gold standard after WWI, but it collapsed again in the midst of the great depression of the 1930s. After World War II, the international monetary system was on life-support, and uncertainty about flexible exchange rates to regulate it led to the gold exchange standard with fixed exchange rates under the Bretton Woods Agreement.

The agreement also called for the establishment of the International Monetary Fund to monitor the system and provide short-term credit. All non-dollar currencies were convertible into dollars at fixed exchange rates (except under certain special conditions) and only dollar was convertible into gold for $35 per ounce.

Hence, the dollar became the key currency for international reserves. At that time, the U.S. had more gold reserves than its liabilities abroad. And other countries, especially European countries and Japan, with war-shattered economies, had large trade deficits and faced dollar shortages. Reconstruction of Europe and Japan required US economic aid. That led to the accumulation of dollar reserves in countries' central banks to conduct international transactions.

The gold exchange standard provided some flexibility in fiscal and monetary policies of countries, as long as the U.S. was willing to provide dollar reserves and convertibility of dollars into gold. But it did make other countries' monetary policy dependent upon the monetary policies of the U.S. Because all countries' central banks fixed prices of their currencies in terms of dollars, market forces with the assistance of central banks kept exchange rates between currencies fixed.

This system required that all central banks have sufficient dollar reserves to keep their currency prices fixed in terms of dollars. For example, if the British pound declined in terms of dollars due to the UK's large trade account deficit, then U.K. central bank had to intervene in the foreign exchange market to buy enough pounds and supply enough dollars to increase the dollar price of pounds at the predetermined fixed rate level. Just the reverse intervention was required if the pound appreciated against the dollar. The fixed price of gold and the quantity of US gold stocks constrained U.S. monetary policy to fight recessions.

The limited U.S. supply of gold was not keeping pace with dollar liabilities due to the growth of world trade and large capital movements. Around 1964, U.S. dollar liabilities were larger than its gold stock, and hence it could not meet all its commitments to convert dollars into gold. Therefore, the confidence in dollar started to decline. The option to increase the price of gold above $35 per ounce would have caused inflation and decreased the value of dollar reserves of other countries' central banks. Thus, the Bretton Woods System was showing strains.

In 1971, the U.S. announced that it would no longer convert dollars into gold at $35 dollars per ounce, and under the Smithsonian Agreement the price of gold increased at first to $38 and then to $42 per ounce. Finally the gold standard was replaced with a dollar standard with no convertibility of the dollar into gold. Fixed exchange rates were replaced with a managed float exchange rate system. Under this system all governments maintained their currencies' exchange rates within certain bounds.

This brief checkered history does not inspire confidence in the gold standard or the gold exchange standard. There is not enough gold to keep up with the growth of world trade and capital movements. Nostalgia with the shiny metal that is good for filling teeth, making jewelry and in other industrial uses, will not solve our or other countries' economic problems. The U.S. trade deficit will not disappear and the dollar will not recover its former value unless we become more competitive in the world market. That requires building up our manufacturing base, complemented by investment in human capital, renewable energy and new technologies.

Mathur is former chair of the economics department and professor of economics, Cleveland State University, Cleveland, Ohio. His articles also appear at www.standard.net. He also writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.

Monday, August 8, 2011

Remedying organ transplant shortage requires financial incentives


Vijay K. Mathur
Published in Standard-Examiner, Ogden Utah, July 2, 2011

Organ transplants for organs like kidney, liver, heart have grown substantially since 1970 with the development of drugs to prevent rejection. However, the shortage of organs also continues to increase over time. In an academic paper in Contemporary Economic Policy, January 2011, Alison J. Wellington and Edward A. Sayre reported that in the winter of 2009, close to 100,000 people were on the waiting list for organ transplants, and most of those were waiting for kidney transplants.

In the private market for other commodities, where price mechanism is allowed to function, the shortage of anything will cause the price to rise until total quantity demanded is equal to quantity supplied. However, in the human organs' market the government does not allow the price mechanism to function, perhaps due to fear or moral guidance that it may lead to financial exploitation, especially of poor people. The National Organ Transplant Act of 1984 does not allow financial incentives for organ transplants. But faced with increasing shortages, even AMA is favorably inclined to consider financial incentives for families of cadaveric donors. Research on the estimated price from cadaveric donors, which tends to equate demand and supply, is spotty and finds very large differences in prices of organs. This could change once markets with appropriate regulations are allowed to function.

In a study in the Journal of Economic Perspectives, Summer 2007, Garry Becker and Julio Jorge Elias estimate that a large supply of live kidney donors would be available relative to the demand at the cost of $15,200 per donor; cost per liver donor is estimated to be $37,600. Perhaps Congress should allow pilot projects in different regions of the country where financial incentives are used to procure organs from cadavers. In fact we have a voluntary system now where we can indicate on our driver licenses, our willingness to donate organs at the time of death in a motor vehicle accident. Financial incentives could be given to those who would like to donate their organs at the time of death in an accident. Wellington and Sayre find that approximately "a quarter of the donated kidneys and one-third of donated hearts came from people who died in motor vehicle accidents..."

Another regulatory mechanism can be found for non-drivers and others who die in other fatal mishaps. The market price prevailing at the time of death will determine the compensation. Perhaps simple procedures and regulations could be implemented for people for drawing up the power of attorney on health matters, and denoting the party receiving the compensation. The compensation can only be paid after verification that organs are healthy and suitable for transplants.

Becker and Elias reason that organs from cadavers will not be enough to meet the demand for transplants. They favor financial incentives for live kidney donors, because they argue that lack of information on the health status of cadavers increases the chance of getting unhealthy organs and thus the failure rates in transplants.  But the failure rate can be minimized if compensation is paid after verification that organs are healthy enough for transplants. In addition, in pilot projects one can at least examine the successes and failures of financial incentives in procuring organs before extending it to kidney procurement from live persons, thus minimizing unwanted consequences.

Altruism has not solved the severe shortage problem, and until new technology is capable of producing kidneys in the lab, financial incentives will go a long way to remedy the shortage. Besides the morality of financial incentives, one has to consider the morality of saving some one's life and at the same time improving the economic well-being of donor's family after his/her death.

Wellington and Sayre report that currently many states, including Utah, have limited financial incentives for live donors of organs in the form of paid leave for government employees or tax deductions to live donors. But they did not find any significant effect of these limited incentives on kidney donations. The authors are of the view that limited financial incentives in states and lack of information to people about the existence of financial incentives for organ donations may be responsible for their weak results.

It seems that a well thought-out program, which compensates for organs from cadavers at full market price, is worth pursuing. It will draw people who are not altruistic and those who are altruistic at the margin.

Mathur is former chairmen of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio.  This article also appears at http://www.standard.net/topics/opinion/2011/07/01. He also writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/