Wednesday, March 15, 2017View Showroom
CASH COSTS AMERICANS $200 BILLION A YEAR.
I recently read the September 2013 report from Tufts University that seeks to calculate the cost of cash handling in the US (“The Cost of Cash in the United States”). In the report the authors, Bhaskar Chakravorti and Benjamin D. Mazzotta, identify that cash has digital substitutes and wonder why it has not seen the same level of disruption as other information goods (i.e. “communication, music, movies, and, increasingly, books”).
This is a very good question, and one that deserves analysis. However, the headline that gets picked up by the media tends to focus primarily on the cost of cash, like this one from CNBC, “Cash costs Americans $200 billion a year.”
The cost of cash is a very interesting topic and one that has been studied several times around the world. Total cash transactions in the US are estimated to be $1.6 trillion on an annual basis. If the cost of cash is really $200B then this represents 12.5% of the total value paid. This is much, much higher than any other numbers that I have seen (usually less than 1% of total value) and would be a very significant finding.
Let’s take a look then at the numbers from the study and see what we can find. We will start by isolating the largest cost components. As shown in the chart below, there are 3 that make up roughly 85% of the (Tax Gap, Retail Theft and Household Time). I have concerns with all 3 of them.
- Tax gap ($100B)– This is largest component by far and represents 50% of the total cost of cash. The Tax Gap as defined in the study essentially represents unpaid taxes. This is not a component that I have seen included in other studies. The authors contend that the untraceable nature of cash enables off-books transactions which make underreporting of taxes easier. As a result, these missing taxes should be included as a cost of cash. While this makes sense in principle, I have a couple of problems with it:
- Quality of data – The “conservative estimate” of $100B is based on 2 key figures. An IRS estimate of total underreported taxes ($400B) and an estimate made by the authors that 25% of these taxes would be paid if cash was replaced with some payment mechanism with an electronic record. The only basis for author’s estimate of 25% is statement from Nina Olsen, National Taxpayer Advocate that “52% of under-reported taxes can be attributed to under-reporting attributable to self-employed tax payers who file their own taxes.” The statement from Ms. Olsen does not mention cash at all. While I do not doubt that cash has some impact on taxes, this seems like a very weak set of assumptions for something that makes up half of the total cost.
- Impact of switching on taxes – As noted above, these estimates also assume that replacing cash with some alternative will result in increased tax payments. I’m not so sure about that. In my experience, people who want to get around paying taxes are going to figure out a way to get around taxes. In other words, “cheaters gonna cheat.” While I don’t have any data to back this up, the authors do not present any data to support the contention that the additional taxes will be paid either.
- Aggregation – When calculating the total cost, the authors aggregate the costs to consumers, business and the government. If taxes are unpaid then does that represent a benefit to the consumers and businesses who avoid paying them? Stated differently, if the taxes were paid, would they now be shown as a cost to consumers and businesses? I am not an economist, but this does not make sense to me. Some costs (like taxes) would seem to need to be “eliminated” in consolidation.
- Retail Theft ($40B)– The second largest cost component is cash theft losses from retailers. The authors state that “Cash theft losses are greater than bad checks, credit card fraud, refund fraud, and internet fraud combined.” There is only one slight problem with this, the source of the data is listed as “Richard Hollinger, National Retail Security Survey, 2010.” If you read Mr. Hollinger’s survey you will note that the figure that is reported (which incidentally is only $34.5 billion) reflects “retail shrinkage—a loss of inventory due to employee theft, shoplifting, paperwork errors, or supplier fraud.” This, of course, is much broader than “cash theft losses” which only represent a small percentage of this total. I contacted Mr. Holliger and he confirmed that cash losses are only a small percentage of the total. He also gave me access to his study and my calculation of cash losses for retail would be less than $200 million. This is less than 1/200th of the $40B figure shown in the study.
The fact that I have issues with all of these 3 items representing 85% of the $200B total cost of cash is concerning to me. I have to add that I did not spend a significant amount of time in identifying and calculating the discrepancies that I identified. I am sure that there are errors in my logic. However, I do have a pretty good amount of experience in the industry and the figures in the study just do not make sense to me. As always, I welcome your comments.
Nevertheless, I have no doubt that the $200B figure will continue to be used as “truth” by those who need to show how expensive cash is. I also note that authors intend to replicate this work in other countries (Egypt, India, and Mexico). If you hear that these are occurring in your country, you may want to reach out to the authors to make sure that the figures are calculated accurately.
PS: I sent a draft copy of this post to the authors of the study and they responded very quickly. They sent me a fairly detailed explanation (which I will admit was not convincing to me). I have alerted them to this final post so they may post any comments or views directly [to this blog]. 16
IS THERE SUCH A THING AS HAVING TOO MUCH CASH?
An Examination of the Links Between Cash Usage and Bad Behavior
The estimates of cash usage prepared for this paper suggest that cash usage in many economies far outstrips what would be expected of consumers making rational micro-economic choices, and inasmuch as cash seems to be facilitating bad behavior, this preference for cash is not a good thing.17
The information presented here can in no way be seen as implying any causation between cash usage and bad behavior. To blame bad behavior like corruption on a preference for cash would be like blaming high unemployment on too many job seekers. 18
TO FIGHT CRIME IN YOUR COMMUNITY, STOP USING CASH
A new study has found that paying welfare benefits via debit card, rather than cash, caused a 10 percent drop in crime. 19
The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Although there is little consensus regarding the overall importance of any single factor, it is generally agreed that a significant fraction of the decline has yet to be identified empirically, with some arguing that it likely is the result of a complex interaction of factors (see Blumstein and Wallman, 2006; Zimring, 2008). 21
Finally, we implement a back of the envelope calculation of the degree to which removal of cash on the streets is related to reduction of crime.
This amount is $671.2 million, which can be interpreted as the maximum amount of cash that needs to be removed from circulation in order to produce a decrease of 9.8 percent in the total crime rate. 23
FROM ROBBERS TO VENDORS, SWEDES BRACE FOR CASHLESS FUTURE
“The hypothesis that a cashless economy would make crime and under-the-table dealing more difficult is almost certainly true,” said Harvard economics professor Raj Chetty. After all, the black market runs on greenbacks for
a reason: Unlike digital ones, cash transactions don’t leave a paper trail. Ray Fisman, a professor at the Columbia Business School (and a Slate contributor) is less optimistic. He contends that black market mavens would simply develop alternatives to paper money, keeping crime rates more or less constant. For instance, traders might resort to using diamonds, opals, or gold pieces...
Latin America already offers a glimpse of one such substitute mechanism in action. As its economy grows ever more fluid (most South and Central Americans bank on their phones, using mobile apps that offer accounting and brokerage services), people have turned to “stored value cards,” which hold a fixed amount of money and can be bought or sold like any other good. Since they don’t draw from a bank account—funds and data are maintained by the card issuers and accessed by scanning a magnetic stripe—these cards are much harder to track. In a cashless world, SVCs might join precious metals and gems as currencies favored for illegal transactions.
Ellen Zimiles, a lawyer and expert on fraud and money laundering, has a different hypothesis. She suspects that financial crime would increase in a cashless society, since it’s easier to move electronic currency fast. Paper bills can be unwieldy, she pointed out: Because withdrawing reams of Benjamins might raise a red flag, most illegal sales involve tens and twenties. A suitcase containing large amounts of money thus tends to weigh a lot—plus, it’s far more vulnerable to interception than an instantaneous wire transfer. And we shouldn’t forget about the hackers who would be delighted by a world in which all financial dealings took place online, she said. 28
DID REMOVING LEAD FROM PETROL SPARK A DECLINE IN CRIME?
FOR IMMEDIATE RELEASE
May 11, 2014
AFRICAN COUNTRIES LOSE BILLIONS THROUGH MISINVOICED TRADE
Fraudulent Trade Transactions Channeled at Least US$60.8 Billion Illegally in or out of 5 African Countries from 2002-2011
Tax Loss from Trade Misinvoicing Potentially at 12.7% of Uganda’s Total Government Revenue, followed by Ghana (11.0%), Mozambique (10.4%), Kenya (8.3%), & Tanzania (7.4%)
COPENHAGEN, Denmark / WASHINGTON, DC – The fraudulent misinvoicing of trade is hampering economic growth and potentially resulting in billions of U.S. dollars in lost tax revenue in Ghana, Kenya, Mozambique, Tanzania, and Uganda, according to a new report [ HTML | PDF ] to be published Monday by Global Financial Integrity (GFI), a Washington DC-based research and advocacy organization. The study—funded by the Ministry of Foreign Affairs of Denmark—finds that the over- and under-invoicing of trade transactions facilitated at least US$60.8 billion in illicit financial flows into or out of the five African countries between 2002 and 2011.30
UNCONTAINED: TRADE IS THE WEAKEST LINK IN THE FIGHT AGAINST DIRTY MONEY
Cuddly toys don’t have to be stuffed with cocaine or cash to be useful to traffickers. A few years ago American customs investigators uncovered a scheme in which a Colombian cartel used proceeds from drug sales to buy stuffed animals in Los Angeles. By exporting them to Colombia, it was able to bring its ill-gotten gains home, convert them to pesos and get them into the banking system.31
A hidden, or at least unreported, non-cash payments market is emerging as new regions become more active and non-banks take an increasing share of the market via instruments such as e- and m-payments, prepaid cards, and virtual currency. Improved statistical data collection would help firms make more informed investment decisions in addition to helping combat future market risk.32