At least, we can credit Edgar L. Feige, Emeritus Professor of the University of Wisconsin, with asking the question and not giving in to the new "common wisdom" that Wall Street's financial innovations and new products are going to consign the dollar to the trash heap of history. Or, to quote him directly from one of his papers from 2011:
One of the most reliable economic statistics is the amount of U.S. currency in circulation held outside of depository intuitions by the public. By the end of 2010, U.S. currency in circulation with the public2 had risen to $920 billion dollars, amounting to $2950 for every man, woman and child in the country. Over the past decades we have witnessed a host of cash-saving financial innovations, leading to widespread predictions of the advent of a “cashless society”. But contrary to these expectations, the demand for U.S. dollars continues to rise and we remain awash in cash. Over the last twenty years, real per capita currency holdings increased by 79 percent and currency as a fraction of the M1 money supply rose from 30 percent to 49 percent.
In the
next iteration of his studies, that figure had dropped:
We conclude that by the end of 2011, the best direct estimates of U.S currency held abroad suggest that $230 billion is held overseas, that is 23 percent of the currency in circulation with the public. This estimate implies that per capita domestic cash holdings amount to roughly $2300.
I only cite those quotes to indicate that Feige's interest has persisted, even though he still hasn't figured out what to call the part of the economy that doesn't show up in the national accounts (shadow, underground, unreported, unobserved, non-observed), and remains convinced that domestic supply of the currency, minus what's held abroad, is the best tool for predicting what the economy is going to do.
While I definitely agree that the money is important and a good indicator of what's going on and can appreciate the effort to determine how much cash the people in the U.S. actually have, I don't share Feige's fixation on tax evasion.
Tax evasion effectively defrauds the government of legally due tax revenues, thereby reducing the government‟s ability to provide public services, while increasing the nation‟s debt burden. Noncompliance shifts real resources from honest taxpayers to dishonest evaders, and tax liabilities from present to future generations. Such inequities precipitate greater discontent with the government and further erode public revenues. In light of these consequences, economists strive to estimate the magnitude, composition, growth and determinants of tax evasion in the hope of implementing public polices likely to improve fiscal compliance.
Keep in mind this is an economist who is firmly convinced that the entity which issues the currency (what he studies) can't provide public services, presumably because it doesn't actually control what it makes. If politicians don't know any better, they should not be blamed. Also, here's an economist who's got not a scientific, but a normative agenda. He wants to "improve ... compliance."
So, what he wants to know is how much money can easily be tapped. So, he's got some lovely graphs.
U.S. dollars held abroad.
I picked this one to show you because it came as a result of the New York Federal Reserve Bank finally showing its data, which cause the prior estimates of how much of our money languishes overseas to fall quite significantly. In other words, despite people's admission to having only about 15% of the cash in which we are "awash," it has to be a lot more. And that confirms in my mind that looking at what money is doing, rather than just who has it, is worth while.
So, instead of pulling up that Federal Reserve graph of the velocity of M2 money, I'm going to show you what MZM is doing. (Money of Zero Maturity means no interest is being earned, presumably while it sits in your pocket, the laundromat or the coke machine). Because, what I think is that the reason the national government needs to collect taxes is simply to keep the money moving and counteract the propensity to hoard.
Why does that money not seem to be moving? Is it because it is in the shadow economy and simply not being tracked? Or is it because Wall Street churning doesn't show up? Or is it because Congressional rationing/sequestration has aggravated the propensity to hoard?
Feige's explanation is much more restrictive:
The most restrictive specification of the general currency ratio model [Cagan (1958), Gutmann (1977)] assumes that currency is the exclusive medium of exchange for unreported transactions, that the ratio of currency to checkable deposits remains constant except for changes induced by the growth of unreported income and that the amount of unreported income produced by a dollar of currency transacted in the unreported sector is the same as the amount of reported income produced by a dollar of currency transacted in the reported economy.
What I want to call to your attention is the word "assumes." All economic analysis is based on assumptions, which may or may not be relevant to what people do.
It should be noted that our estimate of both unreported income and the tax gap are based exclusively on the use of domestic currency in unreported activities. Recent attention has been focused on an additional tax gap resulting from income earned abroad in tax havens. Although we cannot trace the source of estimates of overseas tax haven evasion, figures as high as $100 billion have been mentioned in the press. Taking account of the tax gap resulting from overseas tax havens, overall tax evasion may cost the U.S. government as much $600 billion per year.
So, five hundred billion by the locals and a hundred billion overseas and the U.S. government which sends out three hundred billion in hundred dollar bills in one year is going to be hog-tied because of "unreported activities." Also, somebody might be doing something
illegal.
U.S. currency is a preferred medium of exchange for facilitating clandestine transactions, and for storing illicit and untaxed wealth. Knowledge of its location and usage is required to estimate the origins and volume of illicit transactions. These include the illegal trade in drugs, arms and sex as well as the amount of “unreported” income, that is, income not properly reported to the fiscal authorities due to noncompliance with the tax code. The fiscal revenue lost to the government creates a “tax gap” that measures the extent to which taxpayers do not file their tax returns and pay the correct tax in a timely manner.
Oh, now, because the good professor doesn't know where it is, currency is suddenly suspect. I'm glad Feige makes reference to timeliness, because time is definitely what one saves when one uses cash and that certainly facilitates exchange. Moreover, that keeping records and making reports is a waste of time and a nuisance to busy people doesn't seem to enter into his thinking. People who send money abroad to families (Hispanics), are assumed to do so because they don't have bank accounts. Never mind that in actual fact, most of their transfers are now by electronic means, as one of his graphs clearly shows. I suppose he assumes that the reason the citizens of other nations (
Japan, Hong Kong, Europe, Switzerland), hold on to cash in even larger amounts is because they are less sophisticated than people in the U.S.
So, Feige's affection for the dollar apparently has less to do with an appreciation for currency, something humans have been using for over five thousand years, than it does with a desire to track people's behavior and manipulate their economic relationships. Cash in people's pockets frustrates that desire. It almost resembles the priestly fixation on sex to make it stop.
My point? Money is good, especially when it gets spent. If I didn't hate hats, I'd be tempted to buy me an Easter bonnet.