Identify the fact to be explained. What is the main fact that Krugman is attempting to explain? Identify the possible explanations. What is Krugman’s preferred explanation of this fact? What, if any, are some rival explanations that he considered but rejected?

Read the following passage, and then answer the questions below. The passage contains something that looks like an inference to the best explanation. Your task is to reconstruct and evaluate the author’s argument.

Answer every question, including the sub-questions. Your answers should be complete, but avoid irrelevant details. Some questions can be answered in just a few sentences; others require more involved answers. Your aim should be to demonstrate solid understanding of the question/concepts.

The Weird New War on ‘Woke’ Money

Paul Krugman, New York Times Opinion

7 April 2023

“Florida,” said Gov. Ron DeSantis in his November victory speech, “is where woke goes to die.” Indeed, DeSantis — who currently seems to be the only halfway viable rival to Donald Trump for the 2024 Republican presidential nomination — has sought to crack down on wokeness in all its forms, whether that means acknowledging the role of racism in American history or accepting same-sex relationships or allowing the creation of a central bank digital currency.

Wait, what?

No, seriously: On March 20, DeSantis, speaking from a podium bearing a sign reading “Big Brother’s Digital Dollar,” announced that he plans to introduce legislation that would ban Floridians from making use of a digital currency issued by the federal government. Such a digital currency, he asserted, would be used to “impose an E.S.G. agenda” and would, for example, prevent people from spending too much on gas or from buying rifles.

If this sounds crazy, that’s because it is. I have no idea whether DeSantis believes any of it, or even knows what a central bank digital currency is or what it would do (more on that later). And it’s possible that he’s taking this stand out of general paranoia.

But my guess is that he’s being influenced by people who do in fact know what a digital currency might do and fear that it might make it more difficult to engage in such un-woke activities as tax evasion and money laundering. In that sense, DeSantis’s new crusade is a lot like the vote by House Republicans — one of their first legislative moves after taking control of the chamber — to rescind funding that would allow the I.R.S. to crack down on tax cheats.

Now, the United States doesn’t currently have a central bank digital currency. Still, the Federal Reserve has been studying the issue, and might conceivably issue such a currency in the future. If it did, it’s highly unlikely that a state government would have the right to prohibit its use. But first things first: What is this all about?

For the most part, our economy already runs on digital currencies, a.k.a. bank accounts. No, your bank balance isn’t a pile of cash sitting in some vault. It’s a string of 1s and 0s on a server somewhere. And most of us make most of our payments by moving those 1s and 0s around, making bank transfers on our computers, tapping or swiping our debit cards or using apps like Apple Pay and Venmo on our smartphones.

But some people don’t have bank accounts, while others, for reasons I’ll get into momentarily, don’t trust banks. So people still hold paper cash — a lot of paper cash. In fact, the value of paper currency out there is bizarre: $2.3 trillion, or roughly $7,000 for every man, woman and child in America. About half that total is probably held overseas, but still.

What’s that currency being used for? An important clue is the fact that about 80 percent of the total value is held in $100 bills, which are very difficult to use in daily life.

Why would someone sit on a large stack of $100 bills? Some people may not trust banks to keep their money safe. As the recent collapse of Silicon Valley Bank reminded us, while accounts worth less than $250,000 are guaranteed by the Federal Deposit Insurance Corporation, amounts in excess of that threshold can be lost if a bank fails, and if the F.D.I.C. doesn’t determine that depositors must be made whole to preserve financial stability.

But at least some, and by my guess most, of the vast hoard of Benjamins out there is held by people who want to avoid banks’ reporting requirements in order to hide activities like tax evasion, illegal purchases of drugs and weapons, extortion and so on.

The thing is, whatever one’s reason for holding a big pile of cash may be, paper currency is inconvenient. People can and do keep stacks of bills in their home safes and do business with briefcases full of greenbacks, but that’s increasingly annoying in a digital era. So there’s a demand for digital currency — virtual equivalents of old-fashioned cash that can be stored and transferred electronically.

Cryptocurrencies like Bitcoin were supposed to meet that demand, but as the Federal Reserve study notes, they “have not been widely adopted as a means of payment” because their prices are extremely volatile, they’re difficult to use and they “make consumers vulnerable to loss, theft and fraud.”

To the extent that cryptocurrencies have been used for legitimate transactions — as opposed to, say, ransom payments — the currencies in question have often been “stablecoins,” whose issuers promise to redeem the coins on demand for ordinary dollars. The problem is that a stablecoin issuer is basically just a reinvented version of an ordinary bank, without the regulations and guarantees that make conventional banks mostly safe. Indeed, the stablecoin sector has already suffered some spectacular failures, in which coin holders have lost much or all of their money.

Hence the proposal for a central bank digital currency, which would basically be a government-issued stablecoin whose tokens wouldn’t be pegged to the dollar — they would legally be dollars, and hence risk-free. It would capture much of the appeal of those stacks of physical cash, without the practical drawbacks.

The easiest way to create such a currency would be to allow individuals to hold deposits directly at the Federal Reserve. But as the Fed paper says, “The Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals.” What it doesn’t say is that any attempt to create such accounts would provoke a firestorm of opposition from the banking industry, which doesn’t want to have to compete for customers with a basically infallible government bank. So if a digital currency were to be created, it would be run through private-sector intermediaries.

These intermediaries would, however, be required to obey the same rules that apply to other financial institutions, rules “designed to combat money laundering and the financing of terrorism.” In particular, like banks and other financial institutions, these new intermediaries would be “required to verify the identity of their customers.”

And that observation brings the whole controversy into focus.

Right now the demand for cryptocurrency comes partly from people who honestly, rightly or wrongly, don’t trust banks, and partly from people engaged in illicit activities. The former group would probably flock to a central bank digital currency, which would offer the convenience of banking without its perceived risks. This would, however, help to deflate the crypto bubble. Maybe more important, it would suggest that those still using private digital currencies are probably up to no good. In effect, it would strip away the veil obscuring the dark side of crypto.

Which tells us what DeSantis’s attack on central bank digital currency would actually do. It wouldn’t protect the rights of Floridians to buy gas or guns; instead, it would protect the ability of wiseguys to evade taxes, launder money, buy and sell illegal drugs, and engage in extortion.

But hey, I guess thinking that money laundering and extortion are bad things is just another example of the wokeness that DeSantis is trying to kill.

Questions

1.Identify the fact to be explained. What is the main fact that Krugman is attempting to explain? (Hint: It has something to do with Ron DeSantis).

2.Identify the possible explanations.

a.What is Krugman’s preferred explanation of this fact?

b.What, if any, are some rival explanations that he considered but rejected?

c.What are some other possible explanations that he didn’t consider?

3.Krugman’s Evaluation of the Explanations.

a.What reasons, if any, does Krugman offer in favor of his preferred explanation?

b.What reasons, if any, does Krugman offer against the rival explanations? What reasons could he have offered?

4.Select the Best Explanation. What, in your view, is the best explanation of the fact Krugman is trying to explain? Defend your view.

a.Is Krugman’s preferred explanation the best, or is some other explanation (either one he considered or one he should have considered) better?

i.Recall the virtues/vices of different explanations. What virtues/vices might each explanation have?

b.If you think Krugman’s is the best, then is it sufficiently good (i.e. should we believe that it’s true)?

c.If you think some other explanation is the best, say why.

5.Wrap up. Put Krugman’s argument into the standard form for inferences to the best explanation.