Economics of the World Cup

By: Oleg Biletsky

While billions tune in to witness the drama and excitement of the world cup, many may not realize there are significant economic implications to the biggest sporting event on the globe.

Every four years, billions of people gather around their TV screens to watch the biggest sporting event on the planet: the World Cup. FIFA, the international governing body of football, reported that the 2014 World Cup in Brazil reached a global in-home television audience of 3.2 billion. With all the tournament drama surrounding the teams, players and FIFA’s corruption scandal, it is easy to forget that the World Cup has massive economic effects on the host nation and the various countries that qualify and do not qualify for the competition. With the next World Cup coming in less than 2 months, it is worthwhile to examine the many economic implications of this sporting mega-event.

Effects on the Host Country

This year’s World Cup will take in place in Russia. The country was selected to host the tournament in 2010 as Russia’s president, Vladimir Putin, sought this opportunity to showcase Russia as a global superpower. According to The Moscow Times, the country is expected to spend $13.2 billion on the tournament. Most of the budget is going to infrastructure, with St Petersburg’s stadium alone costing around $800 million to build. Previous hosts Brazil (2014) and South Africa (2010) also spent significant amounts on the tournament, with their budget totaling $15 billion and $3 billion respectfully. Although countries have historically faced substantial costs to host the World Cup, they were not able to greatly benefit from their investment. A study by Swantje Allmers and Wolfgang Maenning that looks at the economic impacts of the World Cup on host countries France (1998) and Germany (2006) finds little evidence that these tournaments had any short-run positive effects on tourism, employment and income. These results agree with other empirical findings that sporting mega-events such as the World Cup do little to benefit the host country’s economy. It seems as though Russia will therefore be no different. Russian economic expert Dmitry Kulikov was quoted by the Russian media group RBC saying that the expected effect of the tournament on economic growth of the country in 2018 “will be equivalent to that of a statistical error.” If host countries receive little economic benefits from the World Cup, what about the absentees and winners of the competition?

Impact on Winners and Absentees

World Cup winners tend to receive short-run economic benefits from the tournament. According to a 2014 Goldman Sachs report, the winner of the tournament outperforms the global market by 3.5% on average the first month after the competition. Sentiment and passion can only take the markets so far, as these gains tend to fade after three months. It also appears that World Cup winners have a high GDP growth rate for the few years prior to their victory. According to the same report, the GDP of a hypothetical ‘champion-to-be’ economy from years 1934-2010 would have had a 2.7% annual growth rate, making its 2010 GDP per capita 55% higher than in the US and 85% higher than a hypothetical ‘host-to-be’ economy.

While winners of the competition tend to experience a sizable GDP growth rate before their victory and a minor boom afterwards, countries that do not qualify for the tournament have many businesses suffer from their nation’s absence in the World Cup. According to the owner of SpeakEZ lounge in Grand Rapids, Eric Albertson, bars are set to lose around $400-$500 thousand in the West Michigan area alone due to US’s failure to qualify for the 2018 tournament. The US Soccer Federation, Fox News Network, the owner of broadcasting rights for the 2018 and 2022 World Cups, and Nike, the US’s team jersey sponsor, are set to suffer the most from USA’s World Cup absence. Economic losses are set to be even bigger in countries where the sport is more prominent.

Who Wins?

As we saw earlier, World Cup winners often experience a minor economic boom after the competition; yet the hosts receive little economic benefit for having spent enormous amounts to prepare their country for the tournament. The absentees also have many of their businesses suffer, whereas the participants aid companies in their country but experience little to no economic gains as a whole. If the majority of countries receive little to no economic benefits from the World Cup, who wins financially from the competition? Perhaps unsurprisingly, the overwhelming winners are the organization that made the tournament in the first place. According to Business Insider, FIFA generated a $2.6 billion profit from the 2014 World Cup, a $2.36 billion profit from the 2010 tournament and a $2.21 billion profit from the 2006 World Cup. It is important to note that these profits are not counting the unofficial payments from ‘host-to-be’ countries to various FIFA officials, which led to the FIFA corruption scandal where 14 individuals were indicted on corruption charges in May 2015. Although certain officials charged with corruption were removed from the organization, FIFA still stands to generate enormous revenues from the upcoming World Cup. This competition, like other sporting mega-events, will do little to uplift the economies of most countries. At least we as fans can still enjoy all the magical moments of this spectacular show.

Sources:

Bostwick, J. (2017, November 20). The Economic Effects of Missing Out on the World Cup. Retrieved April 19, 2018, from https://www.radiusworldwide.com/blog/2017/11/economic-effects-missing-out-world-cup

FIFA.com. (2015, December 16). 2014 FIFA World Cup™ reached 3.2 billion viewers, one billion watched final. Retrieved April 17, 2018, from http://www.fifa.com/worldcup/news/y=2015/m=12/news=2014-fifa-world-cuptm-reached-3-2-billion-viewers-one-billion-watched–2745519.html

Gaines, C. (2014, June 17). FIFA Is On Pace To Make A $2.61 Billion Profit On The World Cup. Retrieved April 19, 2018, from http://www.businessinsider.com/fifa-profit-world-cup-2014-6

The World Cup and Economics 2014 [PDF]. (n.d.). Goldman Sachs.

2018 World Cup Won’t Boost Russia’s Economy, Analysts Say. (n.d.). Retrieved April 17, 2018, from https://themoscowtimes.com/news/2018-world-cup-wont-boost-russias-economy-analysts-say-59768

Image source: Pixabay

Rising Inflation: Causes and Consequences

By: Oleg Biletsky

Inflation has been low the past decade but with the recent inflation scare at the start of 2018 and a possibility of more in the future, it is worth revisiting the topic of rising inflation.

For the past decade, the U.S. economy and financial markets have been dealing with an unusually low level of inflation; yet, the start of 2018 saw a rise of 0.5% in the Consumer Price Index (CPI), nearly doubling the Federal Reserve’s estimate of 0.3% for the month. The Fed’s target rate for annual inflation is 2%, and the first month of 2018 already hit a quarter of the Federal Reserve’s target. Although inflation stabilized with a moderate 0.2% increase in February, the sharp rise in prices the first month of the year reignited the fear of high inflation that was hardly present over the last decade. Such an inflation scare was a significant factor in the stock market volatility that reemerged at the start of February. After the Bureau of Labor Statistics reported a job growth of around 200,000 in January and a 2.9% increase in average hourly earnings, the inflation scare that resulted from the report pushed the Fed to propose further rate hikes, causing the biggest market drop since 2011. The February 5th market drop was a prime example of how fear of inflation can affect investors and the financial markets. Because of the possibility of another sharp rise in prices in the future, it is valuable for us to look at the origins and effects of higher inflation.

What Causes Inflation?

Inflation can be defined as an increase in consumer prices and the equivalent decrease in the value of currency. Thus, inflation is higher when prices of goods increase at a higher rate, causing a larger decrease in the value of money. Economists divide inflation into two types: 1) demand-pull inflation and 2) cost-push inflation. Demand-pull inflation results from an increase in the aggregate demand for goods that exceeds the economy’s capacity to supply these goods at their present market price. This type of inflation arises when the central bank rapidly increases the supply of money or when consumers expect higher future inflation. Demand-pull inflation can be attributed to some of the most severe examples of inflation in history, such as the hyperinflation in post-World War I Germany and Venezuela today. Germany was badly damaged at the time, and to pay off their enormous post-war debts, the country started mass printing money. The rapid increase in money supply plummeted the value of the German Mark, leading to demand-pull inflation. Similarly, inflation in Venezuela increased greatly over the past few years as the government attempted to print more currency to pay off the country’s debts. Because the country is showing no signs of recovery, consumers spend all they earn and save none due to expectations of higher future inflation.

While demand-pull inflation deals with demand for goods and monetary growth, cost-push inflation occurs when prices of production inputs increase. Cost-push inflation is attributed to economic events such as sharp wage increases or rising raw material prices. This type of inflation was a significant factor in the recent inflation scare that alarmed the Fed and shook the financial markets, as the Bureau of Labor Statistics reported an unexpected 2.9% wage increase. However, in the complex real world economy, there are often multiple causes of inflation. Often times, elements of both demand-pull inflation and cost-push inflation are behind a sharp change in prices.

Effects of Rising Inflation

Inflation can be a frightening economic phenomenon that rapidly consumes a country’s currency value and leads to little savings as consumers spend all their income before an expected price increase. Although it can have these severe effects on countries, a low and stable inflation is actually a good sign for an economy. With low inflation, businesses feel more confident investing and increasing their productive capacity in the future, while consumers are prone to save some of their income by investing in capital markets in order to counter the steady decrease in currency value. Governments usually target an inflation rate of around 2% and use fiscal and monetary policy to keep the rate close to the target.

The current 12-month inflation rate in the U.S. is 2.2%, which is fairly close to the Fed’s target of 2%. Ever since the Great Recession, the Fed maintained low interest rates, and the inflation rate remained surprisingly low as the U.S. economy began recovering from the financial crisis. According to the World Economic Forum, while the U.S. monetary base grew at an annual rate of 17.8% from 2005 to 2015, the CPI only increased at an annual rate of 1.9%. This low rate of inflation has largely benefited investors and the financial markets, but the recent inflation scares have brought this economic phenomenon back to light. And although the inflation rate has stabilized after the January jump, it is important to understand that it could reemerge in the U.S. again as the country deals with uncertainty relating to a potential trade war or a possible overheating of the economy due to recent tax cuts.

Sources:

Colato, J. (2018, February 19). United States: Inflation holds steady in January 2018. Retrieved March 21, 2018, from https://www.focus-economics.com/countries/united-states/news/inflation/inflation-holds-steady-in-january-while-month-on-month-price

Federal Reserve Bank. (2002, October 01). What are some of the factors that contribute to a rise in inflation? Retrieved March 21, 2018, from https://www.frbsf.org/education/publications/doctor-econ/2002/october/inflation-factors-rise/

Feldstein, M., & Harvard University. (n.d.). What’s causing America’s low inflation? Retrieved March 21, 2018, from https://www.weforum.org/agenda/2015/05/whats-causing-americas-low-inflation/

Payne, D. (2018, March 14). Moderate Inflation Returns. Retrieved March 21, 2018, from https://www.kiplinger.com/article/business/T019-C000-S010-inflation-rate-forecast.html

The Employment Situation – January 2018 [PDF]. (2018, February 2). Bureau of Labor Statistics.

GOP’s Tax Bill: Early Implications and Likely Aftermaths

By: Oleg Biletsky

GOP’s recent tax plan has been heavily criticized for its favoritism toward the upper class, but what has it actually done and how will it affect things going forward?

On December 22nd, 2017, President Donald Trump signed the GOP tax bill to mark the biggest legislative accomplishment of his first year in office. In his 2018 State of the Union address, Trump claimed that the Tax Cuts and Jobs Act (TCJA) consists of “the biggest tax cuts and reforms in American history.” Although that statement has already been refuted by various sources, the tax cut nevertheless represents the eight largest in the U.S. since 1918 (Committee for a Responsible Budget Report). Although Republicans celebrated the bill as a major victory, it has been heavily criticized by those across the aisle for a number of reasons, mainly due to the inequality of benefits from the cut across income classes and the repeal of the individual mandate. To see if these and other criticisms are justified in light of the cut’s effects, we first need to examine the details of the bill itself.

Breakdown of the Tax Cuts and Jobs Act

The first major element of TCJA is the permanent slash in the corporate tax rate from 35% to 21%. The GOP’s justification for this massive cut is that it will prompt American businesses to increase capital investment, leading to an overall growth in production and demand for workers, therefore creating higher wages and increased consumption. The increase in profits of firms and eventual rise in wages should then boost the amount in tax collected by the government, thus offsetting the deficit rise caused by the corporate tax cuts. This theory is known as “trickle-down economics,” and its validity has been debated heavily over the years. One of the main arguments against this economic idea is that business investment and economic growth doesn’t rise enough for the tax cut to offset the deficit increase. This argument is supported by various projections for the impact of the TCJA on the GDP growth rate over the next 10 years. Analysis of GOP’s tax plan by University of Pennsylvania’s Wharton School of Business predicts that after TCJA’s 10-year period, the GDP will only be between 0.4% and 0.9% higher than with no tax changes. This small growth in GDP will not be enough to cover the losses of government revenue from the tax cut, possibly leading to a $1.5 trillion and $1.7 trillion loss in revenue by 2027. Even going by the more conservative Tax Foundation’s model, the government is still set to lose $448 billion over the next decade after a 1.7% increase in long-run GDP.

Other parts of the bill consist of changes to deductions, exemptions, child credit and income tax rates. TCJA increases standard deduction to $12,000 for singles, $18,000 for heads of households and $24,000 for married filing jointly. While we see a rise in the standard deduction, many other deductions are either eliminated, limited or modified. Personal and depended exemptions, which before TCJA translated to reductions of over $4000 in taxable income for individuals, are also eliminated. Child credit, on the other hand, increases from $1,000 to $2,000 (H&R Block Report). GOP’s new tax plan also lowers the income tax rate for 5 out of the 7 income brackets as shown in the table below:

 

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Source: Tax Foundation

Many of these changes may seem exciting on paper, but what is hidden in the bill is the substantial inequality in the amount of benefits given to different income classes. This inequality in benefits along with the elimination of the individual mandate represent the biggest criticisms of the bill. We shall take a look at these criticisms in the next section.

Main Criticisms of TCJA

What is undoubtedly causing a stir regarding the changes to income tax rates is the hidden favoritism for the wealthy. Although in 2018 the average household will receive a tax cut of $1,610—corresponding to a rise in about 2.2% in household’s income—the number varies drastically across income classes. Households earning $733 million or more will get an average cut of $51,000 or a 3.4% bump income, while those making between $49,000-$86,000 will only get a cut of $870 or a 1.6% increase in income (Tax Foundation Center Report). And after the individual income tax provisions expire in 2025, the Tax Foundation Center predicts that in 2027, taxpayers in the top 1% of income distribution will receive 83% of the total tax benefit for that year.

Besides TCJA’s discrimination toward the lower and middle classes, the bill also repeals the individual mandate, a crucial part of the Affordable Care Act (ACA). Obamacare’s individual mandate is a requirement by law for every citizen to purchase health insurance, and in order to greatly weaken Obamacare and offset some of the deficit increase caused by the tax cut, the GOP ended this provision in the TCJA. According to the Congressional Budget Office (CBO), the repeal of the individual mandate should lower the deficit by $338 billion in the next decade. This reduction falls short of covering the projected increases in the deficit discussed earlier, and it comes at a large cost. The CBO estimates that health insurance premiums will increase by about 10% in most years of the decade in the individual market created by Obamacare. This eventually should lead to a 4 million decrease in the insured population by 2019 and a 13 million decrease by 2027.

 Likely Implications

Over the next decade the Tax Cuts and Jobs Act is set to leave 13 million people uninsured and increase the deficit by $450-$1.7 billion, depending on the GDP growth rate. Such repercussions are the cost for the majority of Americans’ taxes to go down; however, as we examined earlier, the tax cuts are not spread evenly across income groups. After TCJA’s individual income tax provisions end in 2025, the top 1% is estimated to receive 83% of all tax benefit for the year 2027. Then there is also a question of the bill’s timing. The economy is currently in full swing and unemployment rate is the lowest it has been for 17 years. Traditionally, tax cuts were often thought of as a boost to the economy, increasing consumer spending and profits of firms, thus leading to increase in demand for consumer goods and labor. It is thus logical to implement tax cuts when the economy is recovering from a recession, but when the economy has been in a boom for nearly 9 years, it becomes highly questionable whether tax cuts should be applied to extend a healthy period in the economy. In fact, applying tax cuts now might actually hurt the country, possibly causing the economy to overheat and fall into a recession sooner that expected. According to the Federal Reserve Bank of New York President William Dudley, the accelerated growth caused by TCJA could give sudden rise in inflation, which would propel the Fed to raise interest rates quicker, potentially triggering a recession. Although we won’t know the full extent of TCJA’s effects till they occur, it looks like the gains for the majority of Americans may not last long, as millions of people are set to be uninsured, the majority of tax benefits are set to be collected by the upper class and a recession in the near future is a real possibility.

Sources:

Distribution Analysis of the Conference Agreement for the Tax Cuts and Jobs Act [PDF]. (2017, December 18). Tax Policy Center.

Full Details and Analysis: Tax Cuts and Jobs Act. (2017, December 20). Retrieved February 07, 2018, from https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/

Is President Trump’s Tax Cut the Largest in History Yet? (2017, October 25). Retrieved February 04, 2018, from http://www.crfb.org/blogs/president-trumps-tax-cut-largest-history-yet

Kathy Pickering – Executive Director, The Tax Institute. (2018, January 09). Tax Cuts & Jobs Act (TCJA) | H&R Block. Retrieved February 07, 2018, from https://www.hrblock.com/tax-center/irs/tax-reform/tax-cuts-and-jobs-act/

Repealing the Individual Health Insurance Mandate: An Updated Estimate [PDF]. (2017, November). Congressional Budget Office.

Rovella, D. (2018, February 07). Your Evening Briefing. Retrieved February 07, 2018, from https://www.bloomberg.com/news/articles/2018-02-07/your-evening-briefing

The House Tax Cuts and Jobs Act, Amended (11/9/17): The Dynamic Effect on the Budget and the Economy. (n.d.). Retrieved February 07, 2018, from http://budgetmodel.wharton.upenn.edu/issues/2017/11/13/the-house-tax-cuts-and-jobs-act-amended-11917-the-dynamic-effect-on-the-budget-and-the-economy

Blockchain: The Biggest Invention Since the Internet?

By: Oleg Biletsky

Blockchain is already changing the financial industry, but soon, it could transform our whole world.

You have probably heard of Bitcoin and its meteoric rise over the years, but you might not have come across the technology without which Bitcoin would not exist: blockchain. At its core, blockchain is simply a decentralized database of various records. Bitcoin, a digital currency designed for peer-to-peer trading without the use of an intermediary, utilizes a Bitcoin blockchain to maintain records of all the transactions involving the cryptocurrency. And Bitcoin is just one of many digital currencies that use the technology. Blockchain has received plenty of attention from various financial corporations such as Goldman Sachs, J.P. Morgan and Bank of America, because as one Goldman Sachs 2015 equity research report puts it, “blockchain technology could disrupt everything.” According to Hadley Stern, Senior Vice President of Fidelity Labs, blockchain “will change the world.” Blockchain is being labeled a potentially revolutionary technology, but what exactly makes it so special? 

How Does Blockchain Work?

To perform a transaction through a blockchain system, one begins by writing a few lines of code, which are then shared with a network of private computers. Each private computer is called a “node,” and the nodes have to approve the transaction for it to be recorded in the decentralized ledger. Once a transaction is accepted, a record of the transaction, called a “block,” is immediately linked with all the other blocks in the system. With all the records being linked together, if someone might attempt to modify a particular record, they will have to tamper with all the other blocks in the database to do so. Much like it is impossible to alter the fact that Donald Trump won the 2016 US Presidential Election unless you somehow convince everyone that he did not win, it would be simply infeasible to modify the data in blockchain as it is shared everywhere in the system and becomes public knowledge. This keeps the records in the database secure and makes blockchain a trustworthy source of information.

Blockchain was first developed to serve as a supporting system for Bitcoin, but its applications range way beyond a single cryptocurrency. For instance, Ether, another blockchain-based, distributed currency, serves as the form of payment in the Ethereum blockchain, a different subclass of the blockchain system that allows developers to build and utilize decentralized applications. Bitcoin is just one decentralized application intended for peer-to-peer electronic cash transactions, while Ethereum can be used to decentralize any type of centralized service, such as the lending service. Using blockchain, an individual may lend or borrow money in seconds instead of funneling requests through a bank or another intermediary that simply take longer. This technology can also eliminate numerous fee generating services offered by banks of all sizes, and banks have been very responsive to blockchain’s potential of disrupting traditional banking.

Blockchain in the Financial Industry

In his 2015 letter to shareholders, Jamie Dimon, the CEO of JPMorgan Chase, claimed that “there are hundreds of startups with a lot of brain and money working on various alternatives to traditional banking.” He stated that they “can make loans in minutes, which might take banks weeks.” These fintech startups such as Abra and Ethereum, the company that designed the Ethereum blockchain, are using blockchain to develop faster and safer methods of buying, selling and lending. Dimon went on in his letter to say that “we are going to work hard to make our services as seamless and competitive as theirs. And we are also completely comfortable with partnering where it makes sense.” Financial institutions such as J.P. Morgan have already started working with startups, as a 2016 SEI report claims that 42 banks have joined fintech startups to develop blockchain technology for industry use, utilizing blockchain to record financial transactions with much greater security and cost efficiency. A 2017 report by Accenture claims that blockchain could save banks $8 billion to $12 billion annually and cut their operational costs by 30% per year on average. Various banks have also patented some of the most promising applications of blockchain. Goldman Sachs, for example, published a blockchain patent “Systems and Methods for Updating a Distributed Ledger Based on Partial Validations of Transactions” in September 2016 for foreign exchange trading. UBS and Santander had also partnered with a blockchain company, Ripple, whose cryptocurrency has a market cap of just under 10 billion. Banks are turning blockchain from a threat to their traditional services to a significant asset for the future.

Other Uses

The financial industry is not the only sector that is exploring the potential of this technology. Blockchain is also being used in other areas of the private sector and the public sector. The healthcare and retail industries are beginning to apply blockchain technology to maintain records of transactions involving pharmaceutical drugs and goods purchased from retail stores. Various countries around the world are also currently testing and using blockchain. Georgia has recently moved its land registry into a blockchain network and has already registered more than 100,000 land titles using the technology.  An increasing number of countries such as Luxemburg and China have also been exploring the use of blockchain to collect taxes. And this technology isn’t just being limited to single government operations. Dubai, for instance, plans to run its entire government on blockchain by 2020. It plans to use the technology to record all of its implementable transactions. According to Smart Dubai, a government entity charged with applying smart technologies to improve Dubai’s operations and the overall city experience, blockchain could save the city $1.5 billion a year. Although most of these projects are still in their development phase, their number is increasing every year as more and more countries are realizing blockchain’s immense potential.

What’s Next?

Although bitcoin has received much more attention, the cryptocurrency is only a fraction of the entire blockchain system that is set to revolutionize the world as we know it. Much like the internet disrupted centralized media and news services, blockchain could disrupt the centralized financial system. This technology is also set to alter business and government operations, as it provides a cost-effective, secure way of recording transactions and storing information. It is a technology with enormous potential, and as years go by, we will see if its true value lives up to its massive hype.

 

Sources:

Boroujerdi, R. D., & Wolf, C. (n.d.). What if I Told You… [PDF]. Goldman Sachs

Blockchain [Digital image]. (n.d.). Retrieved November 28, 2017, from https://www.businessprocessincubator.com/wp-content/uploads/thumbnails/thumbnail-59859.jpg

Blockchain Technology Could Reduce Investment Banks’ Infrastructure Costs by 30 Percent, According to Accenture Report | Accenture Newsroom. (n.d.). Retrieved November 22, 2017, from https://newsroom.accenture.com/news/blockchain-technology-could-reduce-investment-banks-infrastructure-costs-by-30-percent-according-to-accenture-report.htm

Goldman Sachs Files Blockchain Patent for Foreign Exchange Trading. (2016, September 16). Retrieved November 22, 2017, from https://www.cryptocoinsnews.com/goldman-sachs-files-blockchain-patent-for-foreign-exchange-trading

How Does Blockchain Technology Work? (2017, July 19). Retrieved November 22, 2017, from https://www.coindesk.com/information/how-does-blockchain-technology-work/

Radcliffe, D. (2017, October 05). Could blockchain run a city state? Inside Dubai’s blockchain-powered future. Retrieved December 06, 2017, from http://www.zdnet.com/article/could-blockchain-run-a-city-state-inside-dubais-blockchain-powered-future/

Steve Cheng, Matthias Daub, Axel Domeyer, and Martin Lundqvist. (n.d.). Using blockchain to improve data management in the public sector. Retrieved November 22, 2017, from https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/using-blockchain-to-improve-data-management-in-the-public-sector

Summerville, A. (2017, August 11). ‘Blockchain technology will change the world’: Fidelity Labs SVP. Retrieved November 22, 2017, from https://www.cnbc.com/2017/08/11/blockchain-technology-will-change-the-world-fidelity-labs-svp.html

The Upside of Disruption [PDF]. (2016). SEI.

Paper Checks: Do We Really Still Need Them?

Checks are being used less and less each year as people rely more on technology to make payments, but if we have easier ways to transfer money, should we even keep paper checks?”

By: Oleg Biletsky

With the rise of technology came the rise of the many different ways to make payments electronically. Instead of buying something with cash or a check, people can now pay with a credit card, e-check or mobile apps such as Paypal, Venmo or Google Wallet. Instead of receiving your monthly income from your job in a form of a paper check, you can now get paid through direct deposit. Not only is it easier to receive and transfer money electronically, but it is also more convenient and cost efficient, as you do not have to carry around a checkbook that banks charge you for. If it makes that much more sense to use technology for receiving, transferring and spending money, should we keep checks as a method of payment at all? Before answering this question, we first need to dig deeper into how personal checks work.

How Checks Work

A simple definition of a check is a document guaranteeing a certain amount of money from the payer’s bank to the payee. After receiving a signed check, the payee can get the money by clearing the check. This is a process where the recipient submits the slip of paper to their bank, and their bank collects the funds from the payer by either drawing money from his/her account if they have the same bank, sending the check for collection to the payer’s bank or going through an intermediary such as the Federal Reserve. There is a belief that checks were in existence as far back as the ancient times in the Roman civilization, but the first pre-printed checks were issued in 1717 by the Bank of England. Checks have been one of the primary modes of payment for centuries and possibly since the ancient times, but their usage has been in decline ever since the introduction of debit/credit cards, e-checks and financial technology (fintech) apps. So how exactly have these electronic methods of payment impacted the usage of checks and should we ditch paper checks for much more convenient payment methods altogether?

The Decline of Checks and the Rise of Electronic Payment Methods

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The following graph shows the overall trends in noncash payments from 2003 to 2012:
  Source: “The Federal Reserve Payments Study”

As you can see, the amount of checks collected steadily decreased from 2003 to 2012 while other methods of payment such as debit cards, credit cards, ACH, and prepaid cards have gone up. The rise of technology and electronic ways of payment have also led to the emergence of mobile payments. According to PNC, a financial services corporation, U.S. mobile-based payments are set to nearly triple from $50 billion in 2014 to $142 billion in 2018. Chances are, you have a Venmo account and/or have used services such as Apple Pay or PayPal in the past to transfer money; and it’s no coincidence seeing as mobile payments have made it much easier to use money than paying with cash or checks. If all of these various electronic methods of payment have made it much more convenient to use money, should we even have paper checks at all?

Pros of Checks

Even though the rate of check usage has been falling among consumers, checks are still heavily used by businesses. According to a September 2014 survey by Association for Financial Professionals, U.S. businesses still pay half of their bills by check. Even though that number is down from 74% in 2007, the rate of decline has slowed down. It seems as though many businesses are reluctant to change their methods of payment as the check system has been around for a long time, and they thus feel comfortable using it. Since checks also take longer to process than other paying methods, the time it takes for a check clearing process to complete gives businesses a couple extra days of liquidity. This extra time helps companies manage short-term cash needs and lets them earn interest on that money until it clears.

Cons of Checks

Not only are checks less convenient than other methods of payment, they are also a burden to the economy. According to an electronic-payments company MineralTree Inc, the issuing and depositing of checks cost U.S. businesses between $26 billion and $54 billion in 2010. The Bank of America estimates that one business check costs an aggregate of $4 to $20 when accounting for the price of the check, the shipping, and the time employees spend writing, mailing, collecting, and reconciling the check. E-payments not only save companies time, but they are much more cost-effective. Moving away from the methods of payment pertaining to businesses, e-payments make it much easier for consumers to spend, collect and transfer money.

Where Do We Go from Here

Even though you can find arguments for and against keeping checks, perhaps a complete shift from paper checks to e-payments may not be the best solution for now. Although electronic methods of payment are much easier, convenient, and cost-efficient, they are still relatively new, and many consumers and businesses may feel uncomfortable suddenly switching from paper checks to e-payments. There is no doubt that the use of e-payments will continue to increase as we become more accustomed to new technology, and as more people begin using newer ways of payment, the usage of checks will continue to decrease. In addition, another issue is that the U.S. is largely behind other highly developed countries in the shift to e-payments. In 2012, European Union’s 28 member countries wrote 4 times less checks than the U.S. while having a bigger GDP level than the US that year (US’s 2012 GDP – $16.155 trillion, EU’s 2012 GDP – $17.272 trillion). Other highly developed countries are taking a bigger advantage over much more convenient and cost efficient methods of payment, and we need to focus on making the transition from paper checks to e-payments much faster in order to benefit from a greater use of simpler payment methods.

References:

Sports Investing: Do you Have to be a Billionaire to Invest in Sports?

Investing in rather than simply watching sports seems unusual, but how does it payoff and is it possible without billions of dollars?”

By Oleg Biletsky

Sports. Lots of us love them for the passion and entertainment they generate, but what we don’t often recognize in sports is the investment opportunities that come with them. Many billionaires purchase teams from the NFL, NBA, EPL, MLB, etc. for bragging rights and entertainment, but they also acquire shares of major league teams because of the sizable return on investment that the franchises provide. Sports franchises have proven to be stable sources of revenue over the years, but how profitable is it exactly to invest in sports teams from the major leagues?

 

Investment Profits from Major League teams

The profitability of sports teams in major leagues is impressive considering how much revenue those major leagues generate and how much some of these teams have grown in value since their last purchase. From the 2015/16 season, the National Football League brought in $13 billion in revenue, more than any other sports league in the world. The closest sports league to the NFL in terms of revenue was Major League Baseball, which took in $9.5 billion. The English Premier League and the NBA followed with revenues worth $5.3 billion and $4.8 billion respectively. The Dallas Cowboys, the #1 ranked team on the 2016 Forbes’s list of most valuable sports teams in the world, is currently valued at $4 billion, while the next two teams on the list, Real Madrid and FC Barcelona, are valued at $3.65 billion and $3.55 billion respectively. And that’s just a few of the major league teams. The profitability of sports teams seems even more astonishing when considering how much some of the owners paid for their teams. The McCaskey family bought the Chicago Bears for just $100 in 1920 ($1,218.02 adjusted for inflation), and the NFL team is now valued at $2.45 billion. In 1973, George Steinbrenner purchased the New York Yankees for $8.7 million (about $48 million adjusted for inflation) and they are now worth $3.4 billion. Owning or investing in a sports team from the world’s major leagues is likely going to give you a stable return for the future, but how possible is it to enter the market of major league sports teams?

Investment Possibilities in the Major Leagues

As far as the franchises from the major sports leagues go, it is difficult at this point to invest your money directly into a team. For NFL teams, the only franchise that offers its shares to the public is the Green Bay Packers, and their last stock offering took place in 2011. The Green Bay Packers stock does not provide dividends or capital appreciation so the best you can hope for is to recover your original investment amount. Thus, to make money from investing in an NFL franchise, you must be willing to invest over a billion dollars or at the very least hundreds of millions of dollars to purchase a majority stake of a team. The case is similar for teams in other major sports leagues. The only NBA team that offers its shares to the public is the New York Knicks, and there are only a few soccer teams from the major leagues in Europe like Manchester United and Juventus FC whose stocks are publicly traded. Thus, most teams from the major sports divisions are privately owned, and investing in those teams takes an incredible amount of money and/or good relationships with owners. So if the teams from the major leagues are so difficult to invest in, how can you put your money into a sports team and get a sizable payoff?

Is Investment in Minor League Teams the Answer?

There are numerous sports teams in lower divisions that don’t offer as expensive shares compared to the main publicly traded sports companies and also have a lot of room to grow and become much bigger and more profitable in the future. For instance, AFC Bournemouth is a soccer club that is currently in the English Premier League, the highest division in England and the most profitable soccer league in the world. Only 7 years ago, the team was in the EFL League 2, the 4th highest division in England and the lowest professional soccer league in the country. In 2011, Russian millionaire Maxim Demin acquired a 50% stake of the club for £850,000, and in just 4 years, the total value of the club rose from £1,700,000 to £104 million, as the club was able to progress through the lower divisions to reach the English Premier League. Thus, by acquiring a team from the lower leagues, Demin was able to profit from his purchase as the club reached promotion to the highest division in England.

The minor soccer leagues, along with the minor leagues in various other sports, allow for opportunities to invest in a team for less money and profit on the investment based on the performances of the team. Thus, one does not need to be worth billions of dollars or a special status to invest in a sports team and get a satisfactory return of that investment. And if £850,000 from our AFC Bournemouth example still seems like a lot of money, there are various teams in even lower divisions or in other minor sports leagues that have a lot of room to grow and are worth less. In England for instance, there exists a division below the EFL League Two called the National League where semi-professional teams have the opportunity to move up to the professional division League Two and build from there to hopefully one day reach the EPL. These semi-professional teams are worth less than the League Two teams such as AFC Bournemouth in 2011, but they have even more room to grow into a major league club. Thus, the opportunities are there for those without a lot of money to invest in sports too; they just have to direct their attention to the minor leagues to see the investment possibilities that hide behind the overlooked part of sports.

 

Sources:

The Fed Rate Hike: What it Means for You and the Economy

“The rise in interest rates is a sign that the economy is doing well, but what does this increase entail for you and the U.S. economy as a whole?”

By Oleg Biletsky

Why the Hike?

     On Wednesday March 15th, 2017, the Federal Reserve raised its key interest rate by 0.25%, and it was only the 3rd time since the financial crisis of 2008 that the Fed increased interest rates. The increase was widely anticipated after the Federal Reserve Chairwoman Janet Yellen signaled weeks before that the move was coming in March. So what does the Fed rate hike mean? Generally, an increase in interest rates is a signal that the Fed feels confident about the pace of the US economy’s growth. As the Chairwoman Yellen said herself in a press conference, “the simple message is the economy is doing well…we have confidence in the robustness of the economy and its resilience to shocks.” The rate hike is a sign that the economy no longer needs as much assistance from the Fed to operate at a satisfactory level and that businesses and consumers can now afford to pay more to borrow money. The Fed increased its targeted rate from 0.75% to 1.00%, compared to 0% in December 2008 after the collapse of the housing market. What’s more is that the Fed expects to increase its key interest rate twice more in 2017, which signals that the Fed is even more confident about the continuation of the economy’s growth. By raising rates, the Fed aims to prevent the economy from overheating, a process that occurs when the economy’s productive capacity can’t keep up with the growing demand. As we are about to see, higher rates decrease consumer spending and business investment, thus cooling the economy back to safe levels.

Initial Results of a Fed Rate Hike

     The traditional effects of an increase in the Fed’s benchmark interest rate are a rise in the prime rate, credit card rates and national debt and a decrease in business profits, home sales and consumer spending. The increase in the prime rate represents a hike in the credit rate that banks extend to their credit-worthy customers. Banks have already increased their prime rates after the Wednesday hike as M&T Bank, BB&T, Citibank and others raised their lending rates from 3.75% to 4%. Along with prime rates, the Fed’s rate hike increases credit card rates, which represents a negative effect on borrowers that apply for credit after the rate hike. Besides prime rates and credit card rates, the rise in the Fed’s benchmark interest rate adds onto the national debt. The rise in interest rates increases the borrowing costs for the U.S. government and thus increases the national debt. According to a 2015 report by the Congressional Budget Office and Dean Baker, a director at the Center for Economic and Policy Research in Washington, the increases in interest rates may lead to a $2.9 trillion rise in US government costs.

     The Fed’s Rate Hike also causes a decrease in business profits, home sales and consumer spending. The increase in interest rates traditionally decreases business profits, as the cost of capital businesses must pay to expand spikes from higher rates. The only part of the global business sector that typically benefits from a rate hike is the financial sector, as banks can lend money for higher rates than before. Home sales also typically decrease after a rise in the Fed’s benchmark rate, as higher interest rates and higher inflation decrease the demand for housing. The rate hike also lowers consumer spending, as the rise of borrowing costs means less money on consumption of goods and services. With higher interest rates, consumers have to put aside more money to pay off higher credit card rates and take advantage of higher savings rates in banks. Given all of these traditional effects from a Fed rate hike, what does this rate increase mean for you and the U.S. economy as a whole?

Individual and Macroeconomic Effects

     As we discussed above, a Fed rate hike typically increases savings and credit card rates. Therefore, you can take advantage of the higher rates by setting aside more money for savings, but you will also have to spend more money on personal loans. This thus leaves you with less money to spend while shopping for various products. For college students in particular, higher interest rates are likely to raise rates on student loans but only for those with variable rates. Chances are, your loan rate is fixed as 92.5% of federal student loans carry a fixed rate. If your loans have a variable rate, you are likely going to see an increase in your loan rate, but as Jason Delisle, a resident fellow at the American Enterprise Institute, states, this increase won’t dramatically affect your monthly payments.

     As far as the effect of the Fed rate hike on the US economy as a whole, the increase will raise the national debt and decrease business profits, consumer spending and home sales. As we mentioned in the last section, the rate hike raises the costs of borrowing for the government, which thus increases the national debt. The increase in interest rates also decreases the prices of bonds, as the demand for present bonds with a lower rate decreases and the price of those bonds goes down to compensate for the loss of demand. Even though this is good for people that are about to enter the bonds market, the rise in interest rates typically reduces confidence among consumers and businesses. Higher rates discourage risky investments and purchases as more money is typically shifted to savings.

Final Thoughts

     Although higher interest rates typically decrease consumer and business spending, the interest rates are still at a relatively low rate to have major effects on you personally and on the economy as a whole. The fact that interest rates are going up is actually a good sign, because the Fed sees the country moving in the right direction and can now loosen its grip on the economy. The Fed’s prediction of increasing the interest rates twice more this year also shows their confidence about the continuation of the economy’s growth. Interest rates are a vital tool of monetary policy and are necessary to regulate the fluctuations of the economy. The Fed rate hike is a sign that the US economy is recovering well from the recent recession, and the likely additional rate increases this year should give us more confidence about where the economy is heading.  

References

Image from: “Interest rates just rose, and they could rise more next year”

Anderson, T. (2016, December 15). Fed rate hike will boost costs of variable-rate student loans. Retrieved March 19, 2017, from http://www.cnbc.com/2016/12/15/fed-rate-hike-will-boost-costs-of-variable-rate-student-loans.html

Baldwin, J. G. (2017, March 13). The Impact of a Fed Interest Rate Hike. Retrieved March 19, 2017, from http://www.investopedia.com/articles/investing/010616/impact-fed-interest-rate-hike.asp

Gillespie, P. (2017, March 15). Fed rate hike: Central bank signals faster pace in 2017. Retrieved March 18, 2017, from http://money.cnn.com/2017/03/15/news/economy/fed-march-meeting/

Nykiel, T. (2017, March 15). Fed Rate Hike: What It Means for Student Loans. Retrieved March 19, 2017, from https://www.nerdwallet.com/blog/loans/student-loans/fed-rate-hike-student-loans/

Wells, C. (2016, February 24). Interest rates just rose, and they could rise more next year. Retrieved March 18, 2017, from http://www.baltimoresun.com/business/bs-bz-fed-rate-hike-20151218-story.html

Wojcik, N. (2017, March 15). Banks increase prime rates after Fed announcement. Retrieved March 19, 2017, from http://www.cnbc.com/2017/03/15/mt-bank-increases-prime-rate-after-fed-announcement.html

Tuition-Free College: Fantasy or Possibility?

“Tuition rates keep rising and student loan debt is becoming an increasing issue in our country. Is tuition-free higher education a possible solution?”

By Oleg Biletsky

     Throughout his 2016 presidential campaign, Bernie Sanders spoke numerous times about the need to make all public colleges tuition-free, and it is easy to see why this was a central theme of his campaign. Americans owe approximately $1.3 billion in student loan debt with around 44 million people in total owing some amount of money for taking out student loans. On average, a class of 2016 graduate has $37,172 in student loan debt, which is a 6% increase from last year. The increase in student loan debt is mirrored by the increase in tuition rates. According to the National Center for Education Statistics, from 2011-12 to 2016-17, the prices for tuition and fees rose by 11% for public two-year colleges, by 9% for public four-year schools and by 13% at private four-year schools after adjusting for inflation. The reason behind this sharp increase in tuition rates can be attributed to a number of factors, but the biggest causes of this rise include the sharp spike in demand for college graduates in employment markets, increase in administrative positions, and an increase in student aid. In order to understand how tuition rates can be lowered, we must first dig deeper into the biggest factors in the rise of tuition costs.  

Main Causes of the Rise in Tuition Rates

     Over the last several decades, there has been a sharp increase in employers who demand workers with college degrees. According to a 2015 report from Georgetown University’s Center on Education and the Workforce, the percentage of college-educated employees in the workforce rose from 13% to 32% between 1967 and 2007. The rise in demand for college-educated workers increased the need for college degrees. Since 1995, the enrollment in undergraduate, graduate and professional programs has increased by 50%. This surge in demand is one of causes of the massive rise in tuition rates, but they also keep ascending due to the increase in administrative positions. According to the Department of Education data, administrative positions at colleges and universities grew by 60% between 1993 and 2009. A study conducted at the California State Polytechnic University, Pomona discovered that in the California State University System alone, the number of administrators grew from 3,800 to 12,183 between 1975 and 2008, while the number of full-time faculty rose from 11,614 to only 12,019. This expansion of university administration drives up costs for universities who, in turn, have to increase tuition rates for their students. The other cause of the sharp rise in tuition rates could surprisingly be the biggest reason for this increase, and it is the expansion of student aid. According to a study from the National Bureau of Economic Research, student aid is responsible for most of tuition increases from 1987 to 2010. The idea is that if students can borrow increasingly more money every year, colleges can then charge more every year. Thus, there is a vicious ongoing cycle within the American higher education system: a rise in tuition rates causes an increase in student aid, and a rise in student aid then increases tuition rates. All these factors contribute to the rise in tuition rates, so now the question becomes how do we cut these rates to $0?

Sanders’s Proposal for Tuition-Free Public College

     On May 19th, 2015, Bernie Sanders unveiled the “College for All Act,” which proposed a plan to make all four-year public universities tuition-free. Under the act, the federal government would cover 67% of the $70 billion annual tuition cost for all public colleges and universities in the U.S., with states paying for the other 33% of the cost. The bill was introduced in the 114th Congress but was not enacted. Nevertheless, Bernie Sanders still advertised his plan during his presidential campaign and has continued to support this legislation after he dropped out of the presidential race. On the surface, the College for All Act seems to be the optimal solution for cutting tuition rates and decreasing student debt, but how would this act work?

     The act proposed to pay off $70 billion in annual tuition costs for all public colleges and universities by implementing a “Robin Hood Tax” on Wall Street. Also known as as the Financial Transaction Tax or the Tobin Tax, it would impose a 0.5% fee on stock trades, 0.1% fee on bonds and a 0.005% fee on derivatives. According to the Robin Hood Tax Campaign, around 1000 economists support the FTT, and they estimate that the tax could raise as much as $350 billion a year in the US alone. The FTT seems to be a great idea on the surface, but it has many critics that argue the tax would not only not live up to $350 billion estimate, but it would lose money for the country altogether. Critics bring up the example of Sweden and France, who experimented with the FTT in 1984 and 2002 respectively and had to abolish the tax due to the damage it imposed on their economies. Sweden, for instance, imposed a 0.5% tax on the purchase or sale of an equity security. The tax was abolished in 1991 because it ended up driving between 90%-99% of traders in bonds, equities and derivatives out of Stockholm. The tax brought in very little revenue while forcing most businesses to move out of Sweden.

     It appears that the Robin Hood Tax proposed by Senator Bernie Sanders to pay off $70 billion in annual public college tuition costs may not work as well in practice as it does in theory. If the FTT would not be used to pay for public colleges, the federal government would have to substantially cut some of its other programs. Given that the Republicans currently control Congress and the White House, it is unlikely that they will consider Sanders’s plan or any budget cuts to other programs in order to raise money to pay off tuition rates for public universities. If tuition-free public higher education is unlikely to be implemented in the near future, are there any alternative steps we could take to drive down tuition rates and student debt?

Alternative Solutions?

     Many critics of Sanders’s plan stated that the federal government should be aiming to decrease the costs of universities instead of trying to pay off their costs by making public colleges tuition-free. Driving down university costs would not only help deal with the issue of student loan debt, but it would save the government money that it could put into other beneficial programs. Cutting university costs would mean dealing with some of the factors that drive up tuition rates that we discussed earlier. One way to drive down university costs is to reorganize the administrative structures of various universities around the country. UC Berkeley, for instance, eliminated around 300 administrative positions a few years ago in an effort that saved the college $20 million. Another way to drive down university costs is to rethink our student aid programs. As we have learned earlier, an increase in student aid has a major impact on the increase in tuition rates. Reorganizing our student aid system may be the optimal solution to lowering tuition costs and student loans. In any case, we must find a way or ways to deal with the rise of student loan debt, as a continued increase in student loans would be devastating for our younger population.

     The student loan debt and college costs are only getting worse, and if tuition-free higher education can’t be implemented at this time to assist our students, we need an alternative solution to start fixing this major issue.

 

Sources

Image Source: Credit: hxdbzxy via Shutterstock/Salon

Campos, P. F. (2015, April 04). The Real Reason College Tuition Costs So Much. Retrieved March 05, 2017, from https://www.nytimes.com/2015/04/05/opinion/sunday/the-real-reason-college-tuition-costs-so-much.html

Grant, K. B. (2015, April 13). Rising demand for college-educated workers. Retrieved March 05, 2017, from http://www.cnbc.com/2015/04/13/the-downside-of-high-demand-for-college-educated-workers.html

Huelsman, M. (2015, December 06). Student loans don’t have to be this miserable: The simple fix that could save our college grads. Retrieved March 05, 2017, from http://www.salon.com/2015/12/06/student_loans_dont_have_to_be_this_miserable_the_simple_fix_that_could_save_our_college_grads_partner/

Kiley, K. (2011, September 16). Where Universities Can Be Cut. Retrieved March 05, 2017, from https://www.insidehighered.com/news/2011/09/16/unc_berkeley_cornell_experience_show_where_administrative_cuts_can_be_made

Path, D. B. (2013, August 08). College Graduate Supply and Demand. Retrieved March 05, 2017, from http://www.huffingtonpost.com/dr-bill-r-path/college-graduate-supply_b_3727375.html

Robin Hood Tax. (n.d.). Retrieved March 05, 2017, from http://www.robinhoodtax.org/how/everything-you-need-to-know

Sanders, B. (2015, May 19). Text – S.1373 – 114th Congress (2015-2016): College for All Act. Retrieved March 05, 2017, from https://www.congress.gov/bill/114th-congress/senate-bill/1373/text

Taylor, A. (2011, September 30). Sweden Explains Why A European Financial Transaction Tax Won’t Work. Retrieved March 05, 2017, from http://www.businessinsider.com/sweden-explains-why-a-european-financial-transaction-tax-wont-work-2011-9

U.S. Student Loan Debt Statistics for 2017. (2017, February 8). Retrieved March 05, 2017, from https://studentloanhero.com/student-loan-debt-statistics

Wexler, E. (2016, February 9). Study: Increased student aid, not faculty salaries, drives tuition up. Retrieved March 05, 2017, from https://www.insidehighered.com/news/2016/02/09/study-increased-student-aid-not-faculty-salaries-drives-tuition

Hit or Miss? Determining the Success of Economic Sanctions

“Governments have used economic sanctions increasingly more to achieve their foreign policy goals, but do they work?”

By Oleg Biletsky

     On April 2nd of 2015, the international community had reached a historic nuclear deal with Iran that lifted the economic sanctions imposed on the country in exchange for restrictions on its nuclear activities. Iran’s economy took a huge hit after the UN, EU, US and several other individual countries imposed heavy sanctions on the country’s energy and financial sectors to halt its nuclear ambitions. Ever since the restrictions began to take effect, Iran’s GDP fell by 9% between March 2012 and March 2014 and its oil revenues decreased by more than $160 billion since 2012. The damage that was created by these sanctions forced Iran to accept restrictions on its nuclear plans. Although there is still plenty of debate regarding the overall success of the deal, with some critics stating that Iran was much better off from the deal than the US, EU and other individual countries, the general consensus is that it was successful in fulfilling its goal: preventing Iran from acquiring a nuclear weapon.

 

     In this particular case, economic sanctions were effective in halting a potential nuclear threat, but they haven’t always been successful in other countries. Sanctions on North Korea, for instance, have been largely ineffective, as the country is still accused of human rights abuse against its people and hasn’t made any effort to reduce its nuclear and missile programs. This mixed success rate of economic sanctions makes one wonder about the factors that most strongly play into their effectiveness.

 

Are Tougher and Longer Lasting Sanctions More Effective?

 

     When thinking about the aspects of sanctions that have the greatest influence on their success, the first couple that come to mind are the strength of the restrictions and their duration. Tougher sanctions such as trade embargoes will have a greater effect on a targeted country’s economy, but as history shows, they aren’t necessarily going to be more effective. For instance, the sanctions the Allied powers imposed on Japan in early 1940s reduced its overseas trade by 75% and decreased its oil imports by 88%. Instead of halting its expansion in Asia, the sanctions prompted Japan to enter World War II. The duration of sanctions is also an unreliable measurement of the success of sanctions. The US embargo on Cuba, for example, lasted for over half a century and was unsuccessful in ending the Castro regime. If the strength and duration of the sanctions do not necessarily determine the success of the economic restrictions, what aspects then correlate to the effectiveness of the sanctions?

 

     In response to the overall historic success of economic sanctions, Sir Adam Roberts, the senior research fellow at Oxford University’s Centre for International Studies, was quoted in the BBC Article “Analysis: Do Economic Sanctions Work?” stating that many times the country’s common people are the ones that suffer the most from sanctions, while the people with power find ways to get around restrictions. Those restrictions thus fail to affect the people in charge of the country who then decide how to respond to those restrictions.

 

Are “Smart Sanctions” the Answer?

 

     The argument then becomes that effective economic sanctions should target the wealthy, as they often have the final say in their country’s political process. These type of sanctions are known as “smart sanctions” or “targeted sanctions,” and they aim to hurt the political and financial elites of a targeted country while minimizing any impact on the rest of society. Smart sanctions are intended to leave no room for loopholes the wealthy might use to transfer the impact of the restrictions to the poor. Some examples of these types of restrictions include asset freezes, travel bans and arms embargoes. The overall argument for targeted sanctions then is if the people with power are strongly affected, eventually they won’t have any other choice but to cooperate with the country/countries imposing the sanctions. Smart sanctions seem to be effective in theory, but are they successful in practice?

 

     Since the 1990s, the international community has been increasingly advocating for smart sanctions to achieve foreign policy goals, and after analyzing various cases of targeted sanctions over the years, one can conclude that they are largely ineffective in achieving their goals. According to the Peterson Institute for International Economics, only 5 out of 20 cases of targeted sanctions were determined to be successful, and such a low success rate becomes clearer if we examine some of the main instances of smart sanctions in recent years. The targeted sanctions against Russia, for example, have been unsuccessful in ending Russia’s occupation of Crimea and several other Ukrainian territories. The US and EU’s restrictions placed asset freezes and travel bans on hundreds of people that were part of the Russian political and financial elite after Russia annexed Crimea. These sanctions were also helped by the collapse of global oil prices that made the Russian oil industry unprofitable. All of these factors have certainly hurt the Russian elite and oil industry but they haven’t been effective enough in ending Russia’s occupation of Crimea.

 

Where Do We Go From Here?

 

     Economic sanctions overall have a mixed record of success, and it seems that countries can’t rely solely on these restrictions to achieve foreign policy goals. Targeted sanctions may be better in regards to minimizing the damage on the poor, but they are also rarely effective. Although they may not be the ideal tool to combat various activities of other countries, they are one of the few options available to countries that do not involve any military actions. In a world with a vast amount of nuclear weapons and deadly missiles, war poses a considerable risk of devastating outcomes, and the international community must find peaceful solutions to world problems. Economic sanctions will continue to be used to address various issues around the globe, as they represent a non military action that nevertheless damages the targeted country. We mustn’t expect these restrictions to achieve their goals by themselves; rather, we should think of them as pushing blocks that force the targeted country to rethink their violating actions.

 

References:

 

Iran’s Economy, By the Numbers. (2015, May 11). Retrieved February 18, 2017, from http://iranprimer.usip.org/blog/2015/may/11/irans-economy-numbers

 

Daniel Griswold October 12, 2005. (2005, October 12). Four Decades of Failure: The U.S. Embargo against Cuba. Retrieved February 18, 2017, from https://www.cato.org/publications/speeches/four-decades-failure-us-embargo-against-cuba

 

Hufbauer, G. C., & Oegg, B. (2016, April 19). Targeted Sanctions: A Policy Alternative? Retrieved February 18, 2017, from https://piie.com/commentary/speeches-papers/targeted-sanctions-policy-alternative

 

Marcus, J. (2010, July 26). Analysis: Do economic sanctions work? Retrieved February 18, 2017, from http://www.bbc.com/news/world-middle-east-10742109

 

United States freezes Japanese assets. (n.d.). Retrieved February 18, 2017, from http://www.history.com/this-day-in-history/united-states-freezes-japanese-assets

 

Wysong, W. (2016, October 20). Keeping Up with Sanctions Regulations. Retrieved February 18, 2017, from http://www.corporatecomplianceinsights.com/u-s-economic-sanctions-navigating-the-compliance-challenges