Topic: Regulatory Studies

Unintended Consequences of Money-Laundering Laws, Cont’d

As Dan Mitchell pointed out this morning, proposals to abolish the $100 bill, on the grounds that it’s too easily used in underground-economy activities such as tax evasion and drug dealing, are another instance in which ordinary citizens are called on to sacrifice convenience and privacy to help in the ever-expanding federal fight against “money laundering.” I’ve long been fascinated by the unintended consequences that arise from these laws, especially from the federal “know your customer” rules under which banks (and increasingly other businesses) are required to pry into their customers’ earnings sources, family relationships, overseas ties and other sensitive matters. Those who cannot furnish satisfactory answers – such as Americans who lack a suitable recent domestic credit record because they have long lived as dependents, overseas, or even as nuns in convents – may find that banks turn them away as customers or even freeze their existing accounts. The same is true of established customers who cannot explain a large or irregular series of cash deposits or remittances from abroad to a bank officer’s satisfaction.

A new example of this has emerged this fall, and it’s embarrassing even by the standards of federal government foul-ups. According to a Foreign Policy report last month, no fewer than 37 foreign governments with embassies in the United States are on the brink of losing, or have already lost, access to the routine banking services they need to pay their staff salaries and keep the lights and heat on in their consulates. The reason? These governments cannot prove to the satisfaction of U.S. banks that their accounts are not potentially open to use for illicit money transfers. From the banks’ point of view, there is no particular benefit to be had from an account which is relatively small in the first place – the countries involved are mostly poorer nations, many in Africa, with small embassy staffs – when these are dwarfed by the paperwork costs and potential legal exposures from a misstep.

The consequences for American foreign interests have already been unpleasant, and will become more so if the problem isn’t fixed. Angola, which saw its accounts closed down by Bank of America, has already had to cancel planned national independence day celebrations and has hinted at retaliation against unrelated U.S. companies that happen to do business in Angola. Extend that sort of anger to 37 countries, and some significant international frictions could result.

Now, I have no doubt that some embassy bank accounts, of smaller and bigger countries alike, are pressed into service for improper or even criminal money transfers. (I always assumed the whole point of “diplomatic pouches” was to transfer things back and forth that the host country would have preferred to stop and inspect). But the odds are near zero, I think, that the latest wave of bank refusals-to-deal was somehow a planned or intended consequence of the original federal calls for wide-ranging bank regulation in the name of money-laundering prevention. How many such unintended consequences will the new Dodd-Frank law turn out to have?

To Track or Not to Track? That’s Actually Not the Question.

A subcommittee of the House Committee on Energy and Commerce held a hearing last week to consider a proposal, floated in a recent Federal Trade Commission report, for “Do Not Track” legislation aimed at giving Web users greater control over how information about their online activities is collected and used by sites and advertisers. The name is a deliberate reference to the wildly popular “Do Not Call” list, a sort of virtual “No Tresspassing” sign for the telephone, which has spared scores of Americans the annoyance of telemarketers pitching FABULOUS DEALS! and LOW INTEREST RATES! during dinner. Subcommittee Chair Bobby Rush repeatedly invoked the Do Not Call program’s success in his opening remarks. And under the headline “Don’t Track technology is simple, experts say” USA Today declared that a “Do Not Track” policy for the Internet would be even “simpler and more powerful than Do Not Call.”

But as technology researcher Harlan Yu has argued, it’s actually a good deal less simple than it sounds—and the analogy to “Do Not Call” may obscure more than it illuminates. The experts consulted by USA Today are right that a Do Not Track policy would, in one respect, be technically simpler to implement than Do Not Call. It would not be necessary—or, indeed feasible—to have some kind of centrally administered list of people who have opted out of tracking. Instead, the idea seems to be that browsers could incorporate a “Do Not Track” mode which, when activated by users, would send a legally enforceable signal to deactivate tracking in the header of all communications, which would be automatically recognized by sites and ad networks.

What’s not so simple—as the FTC official who testified at last week’s hearing acknowledged—is determining exactly what “tracking” means, who is obligated to listen to the Do Not Track request, and what compliance with it entails. The appeal of a legally enforceable Do Not Track header is that it targets a functional class of behavior rather than any particular technological tracking mechanism, with the goal of ending the “arms race” that characterizes individual efforts by users to safeguard their privacy. So as users learn that they can delete tracking cookies, or block cookies from ad networks using their browser’s privacy settings, the advertisers turn to Flash cookies. When users figure that out, the trackers turn to system fingerprinting or history sniffing. How much simpler for users to simply be able to know they can demand not to be tracked without worrying about whether they’ve anticipated the latest clever method.

There’s the rub, though: There are many different kinds of information sites collect when interacting with users—much of which can be used for tracking, but which is also necessary for other purposes. So, for instance, IP addresses are not a particularly good way of tracking users for behavioral marketing purposes—on many networks they’re dynamically assigned and change frequently, and a single IP may actually represent many different computers and users behind a NAT firewall. Nevertheless, they often will be relatively persistently identified with a particular user—yet it would be utterly infeasible to suggest that sites be forbidden from maintaining their own server logs, including visitor IPs, for any connection that includes a Do Not Track header. Similarly, while sites can collect information about a user’s system configuration for the purpose of “fingerprinting” and tracking, there are lots of other reasons to collect that data—providing browser or OS-specific functionality or a smoother user experience, diagnosing bugs, and so on.

A browser-embedded header may be technically simpler than a government-administered “Do Not Call” list, but “Do Not Call” is conceptually much simpler: A marketer either places an unsolicited call to a particular number, or it doesn’t. When it comes to the information generated by the interaction between a user and a Website, the datastream may be binary, but the question of whether someone is being “tracked” or not is anything but. And as the “arms race” alluded to above shows, it’s not always going to be clear in advance which kinds of information will facilitate tracking. And of course, users will find it useful and convenient to permit the collection of certain types of information even as they prohibit others, making it desirable, as the FTC’s David Vladeck put it in his testimony, for Do Not Track to enable “granular control” by users, rather than a simple on-off switch. But the more types of data collection and sharing need to be controlled—including new types that become prevalent as technology evolves—the more elusive the clarity and simplicity promised by Do Not Track (relative to mechanism-specific self help) becomes.

Maybe there’s a solution to these difficulties—it would be premature to declare it hopeless a priori without seeing a proposed standard. But while the Internet is global, the reach of the FTC is confined to the United States. Even if the arms race could be halted within those borders, many users would frequently—and probably unwittingly—visit sites that are based abroad, or include content from third-party sites that are. (Expect that to increase if legislation gives those foreign ad networks a competitive advantage.) If the sense of security provided by Do Not Track therefore proves to be largely illusory, a more openly acknowledged arms race might be preferable.

FDA Expansion and the ‘Arcane’ U.S. Constitution

Last Tuesday, despite warnings of regulatory overreach, the Senate voted 73-25 in favor of S. 510, the Food Safety Modernization Act, which would greatly expand the powers of the federal Food and Drug Administration and impose extensive new testing and paperwork requirements on farmers and food producers. Almost at once, however, the bill was derailed – whether temporarily or otherwise remains to be seen – by what the New York Times called an “arcane parliamentary mistake” and the L.A. Times considered a purely “technical flaw”. Roll Call put it more bluntly: “[Senate] Democrats violated a constitutional provision requiring that tax provisions originate in the House.” While the New York Times weirdly cast Senate Republicans as the villains in the affair, other news sources more accurately reported that it was the (Democratic) House leadership that was standing up for its prerogatives:

“Unfortunately, [the Senate] passed a bill which is not consistent with the Constitution of the United States, so we are going to have to figure out how to do that consistent with the constitutional requirement that revenue bills start in the House,” [House Majority Leader Steny] Hoyer said.

According to Hoyer, this has happened multiple times this Congress, causing severe legislative angina.

“The Senate knows the rule and should follow the rule and they should be cognizant of the rule,” Hoyer scolded. “Nobody ought to be surprised by the rule. It is in the Constitution, and you have all been lectured and we have as well about reading the Constitution.”

To those familiar with the history of the U.S. Constitution, the Origination Clause should hardly count as arcane or technical. It stands as the very first sentence of Article I, Section 7: “All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.” Behind that simple statement were centuries of history in which one of the most dearly fought battles for partisans of liberty was to secure for the more popular of the parliamentary branches, in Britain’s case the House of Commons, the “power of the purse,” that is, the power to raise public revenue through taxation. While tinkering with the exact details a bit, the framers of the U.S. Constitution would never for a moment have thought of dropping the general principle, in those days familiar as it was to every schoolchild. Thus it is that the House Ways and Means Committee, with its jurisdiction over revenue measures, descends to this day as a much more important entity on Capitol Hill than its counterpart Senate Finance Committee.

With its two-year terms of office and less populous constituencies, the House of Representatives was of course designed to be the legislative branch closest to the people, most readily thrown out of office when it strays from the public mood. Those considerations aside, the Constitution is rightly celebrated for the way its framers made the House and Senate different from each other precisely in order to ensure jealousies and dissensions between the two, those jealousies and dissensions serving as a safeguard against hasty or ill-considered legislation. In this case it worked exactly as planned, and the self-regard of the House leadership will serve as the reason for another round of scrutiny for a bill that could badly use some. Somewhere up above the spirit of James Madison may have heard the scolding words of Rep. Hoyer, and smiled.

No Soccer for Oil!

Fans of soccer and liberal democracy — I’m in both groups — were disappointed to hear that the FIFA grandees awarded the 2018 World Cup to Putinland Russia and the 2022 event to Qatar (!).  My friend Grant Wahl has a typically sharp immediate reaction for Sports Illustrated that boils down to three points: (1) the choices prove once again that FIFA is not exactly a model of integrity and transparency; (2) Qatar?  Really?  Really?; and (3) the U.S. put together a strong bid and left everything on the pitch.

I would expand Grant’s first point to darned-near all elite international organizations, from the International Olympic Committee all the way to the United Nations (though the Wall Street Journal today said FIFA makes the UN look like a model).  Where there is no democratic accountability and plenty of rent-seeking opportunities, is corruption and non-merit-based decisionmaking all that surprising?

And of course this isn’t a matter of the United States losing out to a nation with a deep soccer (or any athletic) tradition, or even to a developing country set to burst onto the geo-political stage (like awarding the 1968 Olympics to Mexico City, the 1988 Games to Seoul, or the 2008 Games to Beijing).  No, this was a matter of petro-wealthy sheiks buying a major sporting event.  Bully for commercial competition, of course, but (a) those are sovereign, not private funds in play (though the distinction is observed in the breach in the Middle East); (b) playing in 110-degree heat can’t make sense (see the problems with the relatively balmy 1996 Atlanta Olympics — and I’ll believe the air-conditioned outdoor stadiums when I see them); and (c) who knows what the political situation will be in the region 12 years hence.  Plus bribing officials and riding anti-American sentiment — shocking, I know, given that George W. Bush was not part of the Bill Clinton/Morgan Freeman-led lobbying team — ain’t exactly a testament to the free market.

Speaking of economics, though, one silver lining to the U.S. disappointment — and that of England, once favored for the 2018 Cup but finishing with only two votes — is that hosting a “mega-event” like the World Cup or Olympics really doesn’t do much for a national economy (and more often than not has a detrimental economic impact).  And while I haven’t studied the details of the U.S. bid, it’s safe to assume that whatever public stadium and other subsidies were in it — probably not much compared to luring/keeping pro sports teams — paled in comparison to Qatar’s bid (let alone Russia’s).  And so American soccer fans’ loss is almost certainly American taxpayers’ gain.

In short, the Russia-Qatar double is a cynical course of events that will harm soccer’s long-term prospects in the United States and the reputation of international athletic bodies everywhere.  (Just in time for the annual peak in anti-BCS vitriol among lovers of American football, this time with a neat antitrust twist — on which more at some later point.)

Perhaps the biggest question, though, is how will Qatar’s strict alcohol laws affect fans’ enjoyment of “the beautiful game”?

Robert H. Frank’s Non-argument for Higher Tax Rates

In The New York Times, Robert H. Frank of Cornell University repeated his perpetual argument that high tax rates on the rich do no harm to demand (not supply) because the rich can just draw down savings, year after year,  to pay more taxes yet maintain a showy lifestyle.   Then he resorts to the old trick of asserting there is no “credible” evidence that tax disincentives and distortions have any ill effects on the economy.

Frank asks, rhetorically, if an increase in top tax rates might reduce economic growth.  And he replies, “There’s no credible evidence that it would.”   This is a timeworn trick among people too intellectually lazy to look for a single academic study or statistical fact.  

As I have shown before, Mr. Frank has a history of abusing bogus statistics culled from dubious sources. 

To simply assert “there’s no credible evidence,” however, is much worse than distorting the facts. 

It amounts to claiming that he has the ability and the right to suppress facts not to his liking. 

Over the past year I have repeatedly cited several major studies showing that pushing the highest marginal tax rates even higher is extremely dangerous to economic growth; Stanford economist Michael Boskin lists half a dozen of them in his latest Wall Street Journal op-ed.   

For Mr. Frank to assert that such studies are not “credible” simply reveals his own inability to find credible evidence to support his own untenable position.

Bright Spots in Fiscal Commission Report

President Obama’s Fiscal Commission has produced a serious and sobering analysis of the government’s budget mess, and it provides some of the needed solutions. Three of the report’s main themes are on target: the need to make government leaner, the need to cut business taxes to generate economic growth, and the need to impose tighter budget rules to discipline spending.

The report rejects the view of many Democratic leaders that the welfare state built over the last 80 years must be defended against any and all budget cuts. “Every aspect of the discretionary budget must be scrutinized, no agency can be off limits, and no program that spends too much or achieves too little can be spared. The federal government can and must adapt to the 21st century by transforming itself into a leaner and more efficient operation.” How lean the government should be, and how many agencies to eliminate, will be the central fiscal debate in coming years. Downsizing government is the order of the day.

The report recognizes the need to spur economic growth, particularly by cutting the corporate tax rate. “The corporate income tax, meanwhile, hurts America’s ability to compete… statutory rates in the U.S. are significantly higher than the average for industrialized countries … and our method of taxing foreign income is outside the norm…. the current system puts U.S. corporations at a competitive disadvantage against their foreign competitors.” The report recommends cutting the 35 percent federal corporate tax rate to 28 percent or less to respond to the Global Tax Revolution and to “make America the best place to start a business and create jobs.”

Finally, the report suggests that Congress impose new procedures to enforce budget restraint. However, the rules suggested by the commission are complex and not tight enough. It would be simpler and more powerful to impose a cap on overall federal spending. For example, a law could require that the government’s overall budget not grow faster than general inflation each year else the president would sequester spending across-the-board. Such a cap would be easy for the public to understand and enforce.

In sum, the report provides a useful menu of reform options that incoming members of a more conservative Congress can pursue next year. We need bigger spending cuts than the commission has laid out—as I’ve outlined in this balanced-budget plan—but the commission deserves credit for spurring a national discussion on how to downsize the federal government.

The CPSC’s Defective New Complaints Database

We are told constantly that government can play a beneficial role in the marketplace by taking steps to make sure consumers are more fully informed about the risks of the goods and services they use. But what happens when the government itself helps spread health and safety information that is false or misleading? That question came up recently in the controversy over New York City’s misleading nutrition-scare ad campaign, and it now comes up again in a controversy over a new database of complaints about consumer products sponsored by the federal Consumer Product Safety Commission (CPSC).

As part of the Consumer Product Safety Improvement Act of 2008 (CPSIA), Congress mandated that the CPSC create a “publicly available consumer product safety information database” compiling consumer complaints about the safety of products. Last week, by a 3-2 majority, the commission voted to adopt regulations that have dismayed many in the business community by ensuring that the database will needlessly include a wide range of secondhand, false, unfounded or tactical reports. The Washington Times editorializes:

…[Under the regulations as adopted last week] anybody who wants to trash a product, for whatever reason, can do so. The commission can leave a complaint on the database indefinitely without investigating its merits “even if a manufacturer has already provided evidence the claim is inaccurate,” as noted by Carter Wood of the National Association of Manufacturers’ “Shopfloor” blog….

Trial lawyers pushing class-action suits could gin up hundreds of anonymous complaints, then point the jurors to those complaints at the “official” CPSC website as [support for] their theories that a product in question caused vast harm. “The agency does not appear to be concerned about fairness and does not care that unfounded complaints could damage the reputation of a company,” said [Commissioner Nancy] Nord.

Commissioners Nord and Anne Northup introduced an alternative proposal (PDF) aimed at making the contents of the database more reliable and accurate but were outvoted by the Democratic commission majority led by Chairman Inez Tenenbaum. Nord: “under the majority’s approach, the database will not differentiate between complaints entered by lawyers, competitors, labor unions and advocacy groups who may have their own reasons to ‘salt’ the database, from those of actual consumers with firsthand experience with a product.” Commissioner Northup has published posts criticizing the regulations for their definitions of who can submit a report, who counts as a consumer, and who counts as a public safety entity.

For those interested in reading further, Rick Woldenberg, a leading private critic of the law who blogs at, has critically commented on the politics of the proposal here, here, here, here, and here. More coverage: ShopFloor with followups here and here, New York Times, Sean Wajert/Mass Tort Defense. I’ve been blogging for the past two years at my website Overlawyered about the wider problems with the CPSIA law, including its effects on books published before 1985, thrift stores, natural wooden toys, ballpoint pens, bicycles, plush animals, Irish dance costumes, rocks used in science class and many more. Most of these problems remain unresolved thanks to the inflexible wording of the law as well as, sometimes, the unsympathetic attitude of the commission majority. I’ve heard that bringing overdue investigative oversight to the ongoing CPSIA disaster is shaping up as a priority for many incoming lawmakers on the (newly Republican-led) House Energy and Commerce Committee, whose outgoing chair, California Democrat Henry Waxman, is closely identified with the law and its consumer-group backers.