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National security is the justification President Trump will employ if he takes action against aluminum and steel imports. As the president said last week, “I want to keep prices down but I also want to make sure that we have a steel industry and an aluminium industry and we do need that for national defense. If we ever have a conflict we don’t want to be buying steel [from] a country we are fighting.”
Really? Just what sort of military scenarios is the Pentagon feeding the White House? The top two suppliers of steel imports to the US are Canada and Brazil. Russia and China, on the other hand, are fifth and eleventh with 9% and 2% of imports, respectively. Indeed, as trade expert Phil Levy points out, the US currently has defense treaties with five of the 12 countries picked for potentially higher tariffs. Levy adds that the report itself notes that Defense Department steel needs require a measly 3% of US steel production.
This supposed national security reason looks like a paper-thin excuse for trade action. Then again, cooking up an economic justification would be even harder, as Trump’s quote about prices suggests. Although the US metal manufacturing industry produces some $60 billion in value-added output, according to the Cato Institute, domestic manufacturers that use steel generate nearly $1 trillion.
When barriers are raised against steel imports, former George W. Bush economic adviser Keith Hennessey has explained, “You also raise input prices for American firms that use steel to build bridges and buildings and make cars, and trucks, trains and train tracks, appliances, ships, farm equipment, drilling rigs and power plants, and tools and packaging.” So what you give with corporate tax cuts, you take away with misguided trade policy.
The economic case for President Trump’s protectionist trade policy is, as Trump himself might put it, “like, the opposite of strong.” It really is basic economics. Adam Smith and David Ricardo. The IGM survey of economists found 96% agreed or strongly agreed, “Freer trade improves productive efficiency and offers consumers better choices” while just 5% agreed (and none strongly agreed) with Trumponomics’ core view: “A typical country can increase its citizens’ welfare by enacting policies that would increase its trade surplus (or decrease its trade deficit).”
So what is the real goal here? Pretty much just a sop to Trump’s unhelpful economic nostalgia. (“For Trumpists, steel is an emblem of their country’s descent from greatness” is The Economist’s correct take.) But what an expensive concession to make, especially if it leads to expanding and deepening trade conflict.
While America’s wonkactivists are thinking hard about how to dismantle or more heavily regulate the megaplatforms such as Facebook and Google (though perhaps not thinking hard enough on the practical aspects of such radical action), China is working hard to duplicate what American has already achieved. First, a reminder of that achievement:
Being a global tech hegemon has been lucrative for America. Tech firms support 7m jobs at home that pay twice the average wage. Other industries benefit by using technology more actively and becoming more productive: American non-tech firms are 50% more “digitised” than European ones, says McKinsey, a consulting firm. America sets many standards, for example on the design of USB ports, or rules for content online, that the world follows. And the $180bn of foreign profits that American tech firms mint annually is a boon several times greater than the benefit of having the world’s reserve currency.
China would love to replace us in that leading position. And they are working hard to make that happen, as The Economist’s “Schumpeter ” column notes. But how close is Team China getting? Here is what the magazine has come up with:
The overall conclusion is that China is still behind. Using the median of the yardsticks, its tech industry is 42% as powerful as America’s. But it is catching up fast. In 2012 the figure was just 15%. Start with Chinese tech’s weak spots. Its total market value is only 32% of the figure for America’s industry. While there are two huge companies and lots of small ones, there are relatively few firms worth between $50bn and $200bn. China is puny in semiconductors and business-facing software. Tech products do not yet permeate the industrial economy: Chinese non-tech firms are relatively primitive and only 26% as digitised as American ones.
As for investment, Chinese tech’s absolute budget is only 30% as big as that of American tech. And it is still small abroad, with foreign sales of 18% of the total that American firms make. Apple rakes in more abroad in three days than Tencent does in a year.
The gap gets much smaller, however, when you look at the most dynamic parts of the tech industry. In the area of e-commerce and the internet, Chinese firms are collectively 53% as big as America’s, measured by market value. China’s unicorns, a proxy for the next generation of giants, are in total worth 69% of America’s, and its level of VC activity is 85% as big as America’s based on money spent since 2016. There is now a rich ecosystem of VC firms buttressed by Alibaba and Tencent, who seed roughly a quarter of VC deals, and by government-backed funds-of-funds.
China is improving at “breakthrough” innovations. Take AI. China’s population of AI experts is only 6% of the size of America’s (if you include anyone of Chinese ethnicity this rises to 16%) and the best minds still work in the United States, for example at Alphabet. But now the number of cited AI papers by Chinese scientists is already at 89% of the American level. China has piles of data and notable companies in AI specialisms, for example Face++ in facial recognition and iFlytek in speech. At the present pace China’s tech industry will be at parity with America’s in 10-15 years.
Note that bit in the final sentence: “at the present pace.” Of course sometimes past performance does not predict future results. It can be easier to play catchup than to lead at the frontier. We’ll see. But I think it matters that tech companies based in democratic capitalist America set the pace and create the standards, not authoritarian China. It seems like a bad time to make America less immigrant friendly or less open to trade or less interested in cutting-edge science.
The March issue of Esquire gives Scott Galloway, an NYU marketing professor, nearly 7,000 words to make his case for dismantling Apple, Amazon, Facebook, and Google. Galloway scare-quotes them as “the Four,” while the headline writer refers to them as “Silicon Valley’s Tax-Avoiding, Job-Killing, Soul-Sucking Machine.” (As a long-winded sobriquet, the latter really doesn’t have the oomph or stickiness as when Matt Taibbi famously referred to Goldman Sachs as “a great vampire squid wrapped around the face of humanity.” But a solid effort, I guess.)
So what is Galloway’s argument? Patient readers must plow through nearly half the essay — though many lovely charts will aid the journey — to find out. Before getting to his casus belli against the SVTAJKSSM, Galloway first runs through a series of “valid concerns” to whet the appetite for antitrust destruction: The Four are really, really big. The Four are addictive. “Google is our modern day god.” The Four don’t pay enough taxes. The Four are destroying massive numbers of jobs. Government has surrendered before the Four like the POTUS before Zod in “Superman.”
All worrisome factors, but Galloway concedes that “none of them alone, or together, is enough to justify breaking up big tech.” So what is his justification if not the Four being a SVTAJKSSM? Well, I think it goes something like this: Inequality is rising. The middle-class is failing. Market forces are creating a “winner take all” economy and a society that is “bifurcating into those who are part of the innovation economy (lords) and those who aren’t (serfs).” And the Four are both a cumulative result and an accelerant of these forces through their monopoly-like, competition-squashing powers. Galloway:
Why should we break up big tech? Not because the Four are evil and we’re good. It’s because we understand that the only way to ensure competition is to sometimes cut the tops off trees, just as we did with railroads and Ma Bell. This isn’t an indictment of the Four, or retribution, but recognition that a key part of a healthy economic cycle is pruning firms when they become invasive, cause premature death, and won’t let other firms emerge. The breakup of big tech should and will happen, because we’re capitalists. It’s time.
Well, I’m not going to write a 7,000 word blog post responding to Galloway’s essay. I have already addressed many of these issues in the past on the AEIdeas blog. But here are a few thoughts and observations:
— If you are going to make a job-killing case against the Four, then you have to contend with a macro environment where unemployment is headed below 4% and jobless claims are near a 45-year low. Or maybe tackle how ecommerce, supposedly killing retail, is actually generating gobs of jobs.
— And has government surrendered to the Big Four? If so, then why are the Four dramatically ramping up their lobbying efforts? They seem worried. One could also point to the competition for Amazon HQ2 as an example. But there is nothing new about states and cities offering tax breaks to lure company headquarters. Usually it’s a bad idea, but in this case there might be a rare opportunity to create a legit tech hub. So maybe not so dumb this time.
— Google is not my god. Also not Amazon, Facebook, or Apple. Not even Twitter!
— Are the Four a group of forever-dominant, big data controlling, “winner-take-all” companies that are killing America’s competitive dynamism? This is Galloway’s core complaint. But I don’t think the evidence is there. These companies are certainly acting like they are under severe competitive threat. I mean, they know the history of supposedly impregnable market positions. They don’t last. Anti-tech activists often presume history is over, to paraphrase tech analyst Ben Evans.
There is, as David Evans and Richard Schmalensee write in the must-read Winter issue of Regulation, a
collection of dead or withered platforms that dot this sector, including Blackberry and Windows in smartphone operating systems, AOL in messaging, Orkut in social networking, and Yahoo in mass online media. . . . The winner-take-all slogan can claim to be based on the simple theory of network effects. One can’t claim any theoretical foundation for the new slogans around ‘big data.’ . . .
Like the simple theory of network effects, the ‘big data is bad’ theory, which is often asserted in competition policy circles as well as the media, is falsified by not one, but many counterexamples. AOL, Friendster, MySpace, Orkut, Yahoo, and many other attention platforms had data on their many users. So did Blackberry and Microsoft in mobile. As did numerous search engines, including AltaVista, Infoseek, and Lycos. Microsoft did in browsers. Yet in these and other categories, data didn’t give the incumbents the power to prevent competition. Nor is there any evidence that their data increased the network effects for these firms in any way that gave them a substantial advantage over challengers.
The data-driven case — as opposed to the emotional, lizard-brain, “Google is our modern day god” case — for busting up Big Tech just isn’t there, at least not yet.
Welfare, entitlements, safety net — these terms are often used interchangeably, but they have different connotations and stigmas attached to them, and people often use them to describe different things. To help us navigate this complex web of federal programs, I’m joined by AEI fellow Angela Rachidi.
Before joining AEI, Dr. Rachidi served as a deputy commissioner in New York City’s Department of Social Services, and spent nearly a decade researching benefit programs for low-income individuals. In this episode we cover the state of the safety net today, lessons learned from her time in New York, why we don’t just copy the Scandinavian system, the arguments for and against a guaranteed income or jobs program, and much more.
PETHOKOUKIS: Let’s start with a definitional question. When people talk about welfare programs or the social safety net or entitlements, all these words start to get used interchangeably. How would you define them?
RACHIDI: It’s a really great question. There are actually some terms that are outdated now and we don’t even use them a lot but those are the terms that people recognize. Welfare is one of those terms. I think when we talk about welfare it generally refers to a government program that’s targeting people in poverty or people with very low incomes. And it’s very similar to when we hear the word entitlement program. Entitlement though is really an outdated term. It tends to give people the impression that it’s a government program that people are entitled to, hence the term, and it’s a little bit different when you are using the word entitlement for low-income programs than what we typically think of as an entitlement like Medicare or Social Security —
Those are the classic ones.
Yes, those are the classic ones. But in the same definitional aspect it’s thought of as a governmental program that people are entitled to, meaning the government can’t decide necessarily who gets it and who doesn’t, if they meet the eligibility criteria — that’s how it’s been used in the past. But like I said it’s a little bit outdated because some of our programs for low-income Americans have moved away from entitlements and more toward things like block grants where there’s more state flexibility in how people are served by them.
Since late December, Republicans in Washington have signed onto tax cuts and spending increases that could, over a decade, add several trillion dollars to the national debt and some 20 percentage points to the federal debt-GDP ratio. As such, this Bloomberg Businessweek headline seems warranted: “Doesn’t Anyone Care About Deficits Anymore?”
A classic case of Betteridge’s Law of Headlines if ever there was one. Bloomberg reporter Peter Coy offers this explanation for the apathy: “Voters don’t care about federal budget deficits. And that, in a nutshell, is why the deficit hawk is an endangered species in the environs of Washington.”
But the deeper cut here is more troubling. In the piece’s final paragraph Coy employs this quote from former Reagan adviser Bruce Bartlett to do the deed: “Deficit concern exists solely as a political weapon for Republicans to use against Democrats.”
A harsh opinion, but one shared by many Democrats. Now I have no doubt that many GOP politicians, like Democrats, will use whatever tools are available to score political points. Some of the GOP debt hysteria during the Obama years was partisan politics. (Of course this works both ways. There are those on the left who are finding their inner deficit hawks now that it is the Rs responsible for the red ink. In actuality, many only care that all this money is being borrowed to pay for corporate tax cuts rather than infrastructure or free college tuition or some such.) And to that point, President Trump talked during the campaign about all the debt accrued under Obama, yet now . . .
Still, I am also confident that plenty of Republicans — though fewer than I thought at the time — were truly worried that those trillion-dollar deficits under Obama were financially dangerous. Not only were those shortfalls historically large, they were coming right after the American financial crisis and at the same time as the Euro crisis. All that red ink just smelled of instability, even if such concerns weren’t really warranted by America’s economic fundamentals (low-tax nation whose debt is in its own currency, which happens to be the world’s reserve).
But there was no second financial crisis. There was no hyperinflation. The dollar didn’t collapse. Interest rates didn’t spike. And disaster not striking — indeed, we’ve experienced a historically long expansion — has assuredly made politicians and voters far less worried about debt and deficits. What’s more, with interest rates so low, financing the debt is quite doable.
And here’s the thing: Neither voters nor their elected representatives will likely care enough to force action unless markets start telling them to care. Of course by that point dealing with debt will require measures far more draconian than if tackled earlier.
There’s a good reason why economists at the Fed and the CBO are predicting weak US economic growth — less than 2% — as far as the eye can see. And it’s not because these forecasters are a bunch of green-eyeshade types who don’t understand the greatness that is America.
No, it’s actually more straightforward than that. Blame demographics. As former Obama White House economist Jason Furman explains in the WSJ:
Assuming that current immigration rates continue and that employment rates by age are stable, the workforce will expand by 0.5 percentage point a year over the next decade. . . . Slower growth is less the fault of President Trump than of his generation. Mr. Trump, born in 1946, was in the first wave of boomers. Forty percent of the people born that year have left the workforce.
So given slower workforce growth (assuming immigration rates don’t rocket higher) it will take quite speedy productivity growth for the economy to grow as fast in the future as it has in the past, say 3%-ish, on a sustained basis. So what can we reasonably expect from productivity growth?
In 2017 economy-wide productivity increased 0.9%, slightly below its 1% annual pace over the past decade. If that average rate continues, overall economic growth in coming years will average only 1.5%. But maybe the productivity figure for 2007-17 is too pessimistic, reflecting a combination of fallout from the global financial crisis and bad luck. In that case, we might look to the average economywide productivity growth of the past 50 years, 1.6%. That would push the baseline for overall growth to 2.1%.
Now if the workforce was growing at 2% a year like it was in the 1960s and 1970s, then it would be much easier to see how the US economy could grow in the 3% to 4% range. It wouldn’t be a huge stretch. But it is a big stretch today, which is why the CBO, the Fed, and most private forecasters see a 2% economy going forward, at best.
Not so, argues the Trump White House. In its latest budget proposal, the forecast is for 3% growth through 2024 and then just shy of 3% through 2028. And, not surprisingly, Team Trump sees faster productivity growth on its way thanks to its “growth enhancing policies.”
I would note, of course, the Reagan administration also touted its growth-enhancing policies in the early 1980s, but there was no productivity surge until the mid-1990s. (And we can debate the extent to which those policies played a role in that productivity boom.)
Then again, perhaps we are on the cusp of a new productivity boom based on tech trends already in place. And better policy can play a role here, for sure. But if I were fashioning a budget after a period when the federal debt-GDP ratio has doubled, I wouldn’t count on it.
“Pro-growth” economic policy is about more than just tax reform. Smart deregulation also has the potential to boost growth. Indeed, the Trump administration is counting on deregulation as a key lever for turning a 2% economy into a 3% (or higher) economy. In a report last October, the White House’s Council of Economic Advisers declared that “deregulation will stimulate US GDP growth” and favorably cites research finding that “excessive regulation” suppressed US growth by an average of 0.8% per year since 1980.
Of course this doesn’t mean that Trump’s deregulatory efforts will boost growth by nearly a percentage point or anywhere close. But the study does suggest regulation might be sub-optimal in a number of areas. For instance, President Trump hopes cutting environmental and other regulations will help get more bang for the buck out of his new infrastructure plan.
Now a new report from Goldman Sachs splashes some cold water on the deregulatory impulse, or at least tempers expectations. The report first notes that Team Trump’s talk about deregulation isn’t just talk. Washington issued fewer regulations last year — particularly those with an annual effect of $100 million or more — while “some existing regulations were delayed, weakened, or repealed,” according to the bank.
But what has been the economic impact? To arrive at some answers, Goldman tries three different approaches:
First, the bank asked its analysts what they are seeing on the ground. And so far not much: “Today, our equity analysts in non-financial sectors report that deregulation has largely taken a back seat to tax reform and has had only a modest impact on economic decisions so far.”
Second, the bank looked at whether job growth and capital spending have been stronger in sectors and companies that were more highly regulated before the election. Goldman: “We find no evidence that employment or capital spending accelerated more after the election in areas where regulatory burdens are higher.”
Third, to try and get a more forward-looking view of deregulation — hey, it’s only been a year — Goldman looked at stock market performance. But not much there, either: “We find a roughly 0 correlation between regulatory burdens and post-election returns among the full set of S&P 500 companies, consistent with our earlier results based on macroeconomic data.”
These findings don’t mean deregulation is unimportant. Going forward, the bank adds, financial deregulation might be especially meaningful. But as far as rules affecting the economic and business world outside Wall Street, not so much:
Overall, our results suggest that non-financial deregulation has had a limited impact on the economy to date. This is not that surprising for several reasons: the estimated costs of regulation are not that high; implementing regulatory change even by executive action can be slow and difficult; and some promising targets for change largely involve state and local rather than federal regulation.
Don’t zoom over that last part. Some of the most anti-growth regulation comes at the state and local levels, such as burdensome land-use rules and labor market rules such as occupational licensing and noncompete agreements.
So are we really going to do this? Is the United States, the world’s most important economy, really going to thoughtlessly stumble into a novel experiment in fiscal policy? Massive fiscal stimulus at this point in the business cycle?
Apparently so. Even before Trump’s tax cuts, America’s debt-GDP ratio was projected to rise to 91% of GDP over the next decade from around 77% currently and 35% before the Great Recession. Now factor in the tax cuts and this new budget deal and — assuming what’s temporary is made permanent — the debt burden would reach 109% of GDP in 2027, “higher than the previous record of 106% of GDP set just after World War II,” notes the Committee for a Responsible Federal Budget. And trillion-dollar deficits as far as the eye can see. Up, up, and away.
Far less visible is any political will to do anything about this fiscal situation, including middle-class entitlement spending. So a reminder (one that precedes the recent passing of tax cuts and spending increases) on the potential downside of debt from the CBO:
Large and growing federal debt over the coming decades would hurt the economy and constrain future budget policy. The amount of debt that is projected under the extended baseline would reduce national saving and income in the long term; increase the government’s interest costs, putting more pressure on the rest of the budget; limit lawmakers’ ability to respond to unforeseen events; and increase the likelihood of a fiscal crisis, an occurrence in which investors become unwilling to finance a government’s borrowing unless they are compensated with very high interest rates.
So that’s the downside long-term. Shorter-term negatives would be higher inflation and interest rates, the fear of which is perhaps driving the recent stock market swoon. But is there potential upside here, at least in the short term, for pressing on the accelerator more than 100 months into the expansion? Perhaps. Maybe running a “high pressure” economy is just what’s needed after a sluggish, post-financial crisis recovery where economic and income growth has been tepid. The new issue of The Economist walks right up to making that case and then stops short:
First, it is far from clear that the economy is at full employment. Policymakers tend to consider those who have dropped out of the jobs market as lost to the economy for good. Yet many have been returning to work, and plenty more may yet follow. Second, the risk of a sudden burst of inflation is limited. Wage growth has picked up only gradually in America. There is little evidence of it in Germany and Japan, which also have low unemployment. The wage-bargaining arrangements behind the explosive wage-price spiral of the early 1970s are long gone. Third, there are sizeable benefits from letting the labour market tighten further. Wages are growing fastest at the bottom of the earnings scale. That not only helps the blue-collar workers who have been hit disproportionately hard by technological change and globalisation. It also prompts firms to invest more in capital equipment, giving a boost to productivity growth.
To be clear, this newspaper would not advise a fiscal stimulus of the scale that America is undertaking. It is poorly designed and recklessly large. It will add to financial-market volatility. But now that this experiment is under way, it is even more important that the Fed does not lose its head.
So time for stimulus? Maybe? One centered around tax cuts and defense spending rather than, say, infrastructure spending? No. I think that’s the magazine’s point. Then again, at least in the US, it seems the labor market was already at a turning point. So maybe history repeats itself in that this stimulus, like so many others, fails the test of being timely, targeted, and temporary. It is none of these things.
On CNBC this morning I discussed the recently-passed budget deal, set to explode deficits by more than $300 billion. The Grand Old Party is transforming before our eyes from one that claimed to harbor huge concerns about debt and deficits into that doesn’t seem to mind them all that much.
We also discussed what’s likely to be next on the Republican agenda. Infrastructure and tax reform phase 2 have both been rumored, and while there’s something to the idea of making Democrats take a tough vote on making the temporary individual tax cuts in tax reform phase 1 permanent, I think there’s only one safe forecast: Nothing will be done to reduce spending and deficits over the coming years.
You can watch the full clip above.
2017 saw a meteroic rise in the value of cryptocurrencies — followed by a disappointing start to 2018. But who among us can explain why? Here to discuss the mechanisms and purpose behind these commonly-used but little-understood words like Bitcoin and blockchain is Jerry Brito.
Jerry Brito is the executive director of Coin Center, a research and advocacy organization that focuses on the public policy implications of cryptocurrencies. He was also a senior research fellow at the Mercatus Center and an adjunct professor of law at George Mason University, and he is the co-author of the book Bitcoin: A Primer for Policymakers.
PETHOKOUKIS: I was not planning on beginning our chat by asking you to define terms, but the Twitter-verse was demanding it. People sometimes use the terms “Bitcoin” and “blockchain” interchangeably. What are their differences?
BRITO: Right. So let’s start with Bitcoin, which I think is kind of the main way to get into it. Bitcoin is the world’s first completely decentralized digital currency. We have had digital currencies for decades, so whether you think of Facebook credits or Microsoft points or World of Warcraft gold or even the dollars in your PayPal account, these are all digital currencies.
So what is it about Bitcoin that makes it unique, that makes it worth having a podcast about? It is that it’s the world’s first completely decentralized digital currency. It is the decentralized piece that makes it unique.
Before the invention of Bitcoin, for two parties to transact electronically always required a third-party intermediary to be between them. And why is this? Well, you can think about what a transaction is like without a third-party intermediary, and that’s cash.
So if I have $100 bill and I hand it to you, now you have it and now I don’t. And we can verify this transaction by looking at our hands, so there’s physical scarcity. I don’t have it anymore and now you do. And we don’t need anybody else between us, just peer to peer, person to person.
If we try to replicate that electronically, online, before the invention of Bitcoin, what would that look like? Well, I would have to have some kind of digital representation of that $100 bill. So, you know, call it $100 file, some kind of digital file. And I would send this to you, the same way that I might send a photo or a Word document to you.
But think about a photo or a Word document. If I send you a photo, you now have it, but what about me? Do I no longer have it? No. I retain a perfect digital copy of that thing I just sent you. And if that was money, it doesn’t work. And this is what computer scientists very imaginatively refer to as the double spending problem. And the way we solved the double-spending problem before the invention of Bitcoin is that we employ a third party, something like a Bank of America or a Visa or a PayPal.
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And what I do in order to send you money electronically is I wouldn’t send you a message. I would send a message to PayPal, of which we are both customers, and it doesn’t work if we’re not both customers of PayPal. And I would say, hey, PayPal, please deduct $100 from my account and add it to James’ account. And PayPal would dutifully do this, minus $100 from Jerry, plus $100 to James, that reconciles to zero, and across all transactions, across all — you know, everybody — that comes out to zero. And that’s essentially what PayPal is, a ledger keeper. They do two things. They basically verify that you have authority to make a transaction and they keep a ledger.
So what Bitcoin does is that for the first time it allows for true peer-to-peer, person-to-person transactions online without the need of a third-party intermediary, with nobody between us.
That is the breakthrough. And I would put it this way. This is getting a little technical, but I think it’s worth noting. What Bitcoin created was digital scarcity. Before scarcity, where I hand you a $100 bill and now you have it and now I don’t only existed in the physical world. Scarcity only existed physically.
What Bitcoin invented was digital scarcity. So for the first time, I could hand you something or a representation of something and now you have it and now I don’t and the whole world can verify this by looking at this ledger of transactions called the blockchain.
So we talk about it as a currency. But what is it good for other than speculation right now?
So I think in the developed world, at least in my lifetime I don’t think we’re going to see Bitcoin used for day-to-day payments. And part of the reason for that is we don’t need it. In the developed world, we have a very good financial system where if you want to go to Starbucks, you can pay for your $1.50 cup of coffee with a credit card and it’s frictionless already. It’s very difficult to improve on that.
In the developing world, it might be a different story because in the developing world, you have many places where there are no electronic transactions. If you are a handy-craft maker in Afghanistan or Pakistan and you want to sell online, you can’t take credit cards because you don’t have a bank account. And even if you had a bank account, Visa does not serve your country. And so this technology allows folks in the developing world to sort of skip — it’s kind of like how cell phones skipped landlines.
What is the regulatory risk in the US, and what should government be doing to promote beneficial applications?
There’s this myth that Bitcoin and cryptocurrencies are this unregulated space. And the fact is that this space is one of the most regulated in technology. At least since 2013 we’ve had the government issuing all kinds of different pronouncements of guidance or any regulation that affect this technology. And so the areas are basically consumer protection, tax, anti-money laundering, securities and then commodities of regulations. And in each of these, there is a regulatory regime that applies to this technology.
We probably don’t have time, but if you’re in a Bitcoin exchange, you are subject to the same anti-money laundering requirements that banks are. And, indeed, all of the US exchanges comply with these. If you are an exchange or wallet service, you need a license in every state in which you do business. And so what the government can do to help along adoption here is get rid of that arcane 50-state licensing regime and have either a more unified federal regime. If we have a Commerce Clause for a reason, it’s to get rid of barriers to interstate commerce.
What are the tax implications?
The tax implications are pretty straightforward. So in 2014, the IRS issued guidance basically saying that they interpret something like cryptocurrencies to be property, that they’re not currencies under the law. Currencies are the coins and paper notes of a state. This is not that so this is property. So it’s more like a car or a house or gold. And so, in that respect, it’s pretty simple. If you bought Bitcoin at $100 and then you sold it for $1,000, and you held it for over a year, you owe capital gains on that $900 gain. That’s pretty straightforward.
I think where there are still questions is, well, what’s your basis? Let’s say you bought a Bitcoin every month for five years and then you sold some. Did you sell the first ones you bought or did you sell the last ones you bought? So I think today you can kind of choose which ones you sold, but we could use some more guidance there.
What is the attitude on Capitol Hill toward Bitcoin?
It runs the gamut, and I think it depends where these legislators sit. In the vast number of cases where we’ve talked to folks, we explain what is the technology and how it works, and the reaction is very positive. It’s, what can we do? How do we encourage this? How do we make sure its use is responsible in a vast number of cases?
In other cases, you have perfectly reasonable responses, so, for example, there is the Terrorism and Illicit Finance Subcommittee of the House Commerce Committee. So they’re interested in it for very particular things, and we’ve helped them with an investigation. They have held a hearing on this topic and they’ve been satisfied that law enforcement has tools to deal with it.
And then you have some folks who are just allergic to it. And I think those folks often times come around. But, typically, I think once you show folks, look, the law enforcement is on the case. All of these service providers are subject to anti-money laundering rules. Rogue exchanges are routinely taken down. And look at all this innovation that’s happening not just in Silicon Valley with startups, but at Microsoft.
And, finally, your 12-month end-of-year Bitcoin forecast.
If you found this interesting, RSVP to attend the upcoming AEI event: Cryptocurrencies and blockchain: Techno-gold or fool’s gold?