Economic Question of the Day

Should paper cash still exist?

A number of economists over at the Freakonomics podcast aren’t so sure.

ROGOFF: It just plays a huge role in crime. There are lots of ways to conduct crime. You can use uncut diamonds; you can use gold coins; you can use cryptocurrencies. But you just can’t scale them the same way simply because these other things are not that easy to go spend in the economy. And yeah, crime would go on, people would do stuff. You don’t have to cut crime by 50 percent to make this a good idea. If you think of what we spend on cutting crime , cutting crime five percent is a big deal. And this is not a very complicated way to do it. Cash plays a very, very big role in just a whole range of crime: drugs, bribes, extortion, human trafficking, money laundering.

DUBNER: Can you quantify the amount of global bribery every year?

ROGOFF: You know, there aren’t great estimates. The World Bank braved estimates in the early 2000s and came up with a trillion dollars a year in global bribery. Another thing which is more complex, but if you look at illegal immigration, that’s really driven by cash — that employers are able to pay cash. That provides the magnet that brings people over. I favor much greater legal immigration by the way. But if a nation wants to control immigration, certainly cash plays a big role.

Another problem exacerbated by cash: tax evasion. The U.S. tax gap – that’s the difference between what’s owed and what’s paid in – was, as of 2006, around $400 billion, or 2.7 percent of GDP. Every time someone gets paid in cash, whether they’re a drug dealer or a plumber or a restaurateur, that makes it a lot easier to avoid paying tax.

The major counterargument is that of privacy. That is a tradeoff, of course, but one that seems hardly worth the immense benefits gained. I don’t engage in illegal activities and deterrents of this kind seem okay with me. Chalk it up as just one more personal cost that comes from living in society and the net benefits that entails.