EconSouth (Third Quarter 2005)

Research Notes and News

Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta.

Examining the pros and cons
of credit cards

The digital age has seen a proliferation of identity theft—the malicious use of personal identifying data. Although the media have focused on a few incidents in which hackers gained access to large amounts of personal data, the more pervasive problem is smaller in scale: the theft of credit card numbers or Social Security numbers. Policymakers have been reluctant to address this problem because the collection of personal data is central to the effective allocation of credit.

A recent working paper by Charles M. Kahn and William Roberds explores the advantages and disadvantages of payment instruments such as credit cards. The credit card’s main advantage, the authors note, is its economy for the merchant, who can cheaply verify it without having to verify the identity of the individual using the card. The card’s advantage also opens the door to its disadvantage: the introduction of the possibility of fraud and identity theft.

Kahn and Roberds construct a theoretical model of money and payments that shows that the advantage of payment instruments such as credit cards outweighs the disadvantage of the possibility of identity theft. They suggest that identity theft could be better controlled by more intense initial monitoring of individuals’ identities and that the use of money could reduce the incidence of transaction fraud since an individual’s identity is not associated with money. But it is up to society, they argue, to determine the acceptable equilibrium between convenient credit card use and the fraud that can arise from credit transactions.
Working Paper 2005-19
May 2005

Canadian ambassador emphasizes
trade ties with Georgia and U.S.

Speaking at the Atlanta Fed in June, Canada’s ambassador to the United States, Frank McKenna, extolled the importance of trade between the two neighboring countries. “Everybody wins with respect to freer trade between Canada and the United States,” said McKenna, who noted that Canada purchases one-fourth of all U.S. exports.

During his remarks to 100 Atlanta-area business leaders and visitors, McKenna expressed concern, however, about a growing backlash against free trade in the United States. “We can’t lose our nerve on globalization,” he said. Specifically, McKenna decried the “Byrd Amendment,” or the Continued Dumping and Subsidy Offset Act, informally named after Sen. Robert Byrd of West Virginia. This legislation directs the distribution of antidumping duties collected by the U.S. government to the businesses that petitioned for trade protection. “The Byrd Amendment is a silent killer of jobs,” McKenna said. “The only big winners are the lawyers.”

He cited growing commercial ties between Georgia and Canada. Trade between Georgia and Canada totals nearly $9 billion a year, McKenna said, and these transactions have created about 152,000 jobs in the state. Canada is Georgia’s leading trading partner, and trade with Canada amounts to more than the combined volume of Georgia’s trade with Japan, the United Kingdom, and the Netherlands. Lumber is an important component of the trade between Georgia and Canada, McKenna said, noting that “Canada does more business with Home Depot here in Atlanta than with all of France.”

McKenna also touted Canada’s role as a steady source of energy during a time of geopolitical instability in the oil-rich Middle East. He noted that Canada is currently the largest supplier of natural gas and petroleum to the United States. “Your biggest energy supplier is a mature, stable democracy,” he said.

How risky are private Social Security accounts?
In the ongoing debate over Social Security, private accounts have been recommended as one part of the resolution of the funding difficulties the system faces in coming years. In a recent article, Gerald P. Dwyer Jr. discusses what private accounts can and cannot do for individuals who choose to use them and for future Social Security deficits.

Under current proposals, private accounts would give account holders personal ownership rights and could be willed to heirs at death. Most proposals would limit the range of assets that can be held but would permit account owners to determine their investments based on personal risk preferences. To the extent that financial asset returns can be higher than returns on Social Security, private accounts can be more worthwhile for those with a longer time until retirement because any difference in returns can compound over a longer period.

Private accounts carry the risks inherent in holding financial assets, Dwyer notes, but Social Security carries a real risk of lower benefits in the future. Holders of private accounts would be trading one type of risk for another.

Dwyer concludes that the creation of private accounts can reduce Social Security’s future problems if the reductions in benefits in exchange for deposits in private accounts reflect the initial deposit plus interest earned.
Economic Review
Third Quarter 2005


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