Taxpayers Railroaded in California

In this essay on government construction projects, I discuss how promoters use “strategic misrepresentation” to subdue taxpayer opposition and get dubious spending schemes approved. The low-balling of projected costs is a tried and true deception used by infrastructure promoters the world over.

A variation on the strategy was apparently used to gain support for California’s expensive bullet train project. The Los Angeles Times reports that while people were aware that taxpayers would pay the system’s huge construction costs, officials promised that the operating costs would be covered by rail system revenues, not taxpayers. That promise appears to have been a fraud:

When a Spanish firm submitted a bid last year to help build the California bullet train, it cautioned that taxpayer money probably would be needed to keep the system operating.

Having reviewed data on 111 high-speed train lines around the world, construction giant Ferrovial said, it found that all but three could not make ends meet.

“More than likely, the California high speed rail will require large government subsidies for years to come,” the proposal said. 

That warning, however, was expunged from the version of Ferrovial’s proposal posted on the state’s website. The only record of it was on a data disk provided to The Times and others under a public records act request.

The state rail authority repeatedly has asserted that it will not need a subsidy and that every high-speed system in the world operates without taxpayer assistance — despite significant evidence to the contrary. A number of projects around the world have failed financially, others require direct operating subsidies and many more benefit from government taxes and regulations on competing airline and highway systems, according to audits, studies and interviews.

But in asking taxpayers to help build the Los Angeles-to-San Francisco line, officials assured the state would be able to pay the operating costs purely from the system’s revenues — and thus not sap money needed for social services, education or other projects.

When California voters committed the $9 billion in bonds in 2008, the measure stipulated that the system would have to operate without future public funding.

How can citizens fight such deceptions? This episode illustrates the importance of citizen engagement and transparency in government fiscal matters. It was not a state auditor that discovered the operating subsidy cover-up, but a concerned citizen doing some poking around:

The change in Ferrovial’s proposal was first noticed this spring by Morris Brown, a Bay Area resident and former Caltech chemistry professor who closely monitors documents and statements issued by the bullet authority.

    

How Terrorism Has Hijacked American Foreign Policy

Terrorism has hijacked American foreign policy. First Al Qaeda and now the Islamic State have come to dominate thinking about international affairs so completely that there is hardly any issue that has not been “terrorized.” Issues that once had significance because they were important in their own right now only matter insofar as they affect the fight against terrorism. Russia? Now discussed primarily with respect to whether their air campaign affects ISIS in Syria. Syria? Important only because of ISIS and other jihadists who want to rule. Iraq? The birthplace of ISIS. Iran? A regional power broker who supports terrorism as whose support for Assad in Syria matters because of…ISIS. Libya, the latest concern du jour? You guessed it: concern for Libya is in fact concern for the growth of ISIS in the country.

The figures below illustrate just how deeply ISIS has infiltrated American foreign policy news. In the first figure, you can see that over the past three years almost every foreign policy topic has taken on a distinct ISIS flavor. As the second figure shows, after reaching a historical high after September 11, news coverage of terrorism dropped steadily in the following years until rebounding in 2013. Attention to ISIS only really took off after June 2014 when ISIS started calling itself ISIS and simultaneously announced the establishment of a global caliphate.

(News data from Factiva’s Top US newspaper file)

Balkanization and Immigration in America

One common critique of immigration and multiculturalism is that it will cause Balkanization in the United States. Usually, the evidence that purportedly shows Balkanization in America is underwhelming.  Real Balkanization, in the Balkans, quickly led to terrorism, civil war, genocide, and some of the uglier nationalist movement of recent centuries.  By comparison, there is hardly any ethnic separatist nationalist terrorism in the United States inspired by immigrant groups or their descendants.

The best example of ethnic separatism from a migrant group is terrorism caused by Puerto Rican socialist-inspired nationalists who demanded independence for their island. From 1970 onwards, Puerto Rican terrorist groups like the United Force for Armed Independence (FALN), Armed Forces of the Popular Resistance (FARP), People’s Revolutionary Commandos (CRP), Patriotic Anti-Annexation Committee (COPAAN), Organization of Volunteers of the Revolution of Puerto Rico (OVRP), the Macheteros, and others carried out 232 attacks, killed 15 people, and injured 115 (Chart 1). 

The most notorious and brutal of the FALN’s terrorist attacks was the bombing of Fraunces Tavern on January 24, 1975, that killed four innocent people and injured about 50 others.  Eventually, many FALN members were apprehended as Bryan Burroughs expertly documents in his Days of Rage and the rest of the violent nationalist movement petered out.  According to the RAND Corporation and the University of Maryland Global Terrorism Databases (through 2014), the last reported attack by Puerto Rican nationalists was on that island in 1998.  Their datasets exclude the attempt on President Truman’s life in 1950 and the armed attack on the House of Representatives in 1954

 

Hunger in Venezuela

Hunger is very a strong word. It evokes images of famine and destitution in failed nations half a world away. I was hesitant to use it when describing the situation in Venezuela. I had visited that country four times in the last seven years and witnessed its economic decline first hand. During a trip to the industrial city of Barquisimeto in November 2014, I saw for the first time the effects of shortages, with hundreds of people lining up outside of a drugstore to get toilet paper and toothpaste. I knew things had deteriorated further since, with reports of widespread scarcity of food all over the country. But hunger?

I went back to Venezuela last month expecting chaotic crowds and queues everywhere in the city. And that was certainly the case: I saw lines outside supermarkets, drugstores, bakeries, and, tellingly, embassies (people trying to get their paperwork ready to leave the country). But I wasn’t prepared to find out that my friends and colleagues there are struggling to eat properly. They don’t say it openly. After all, Venezuelans are proud people. But after my first interactions with them, I noticed that the number one topic in every conversation was food: when was the last time they ate meat, how long they’ve been without drinking milk, etc.

Admittedly, I didn’t interact much with poor Venezuelans on this trip. My friends and colleagues are middle class, or what is left of them: the minimum wage is just $33 per month, and the salaries of the middle class aren’t much higher than that. Still, I was appalled to realize that if the people I know are struggling to eat properly, the poorest are indeed going hungry.

Today the New York Times has a harrowing account of the depth of hunger in Venezuela. The country that received nearly $1 trillion in oil revenues in the last decade and a half, is now suffering from a humanitarian crisis of significant proportions. Let’s never forget, or let others forget, that this is the end result of yet another failed socialist experiment.

“So Little Justification that the State Has Never Tried to Defend Its Legality”

Today, the Supreme Court struck yet another blow against the Fourth Amendment and the exclusionary rule. The case, Utah v. Strieff, involved a man who was illegally stopped outside of a suspected drug house and investigated for possible criminal activity. Mr. Strieff had an outstanding warrant for a minor traffic offense and was arrested. The search that resulted from the arrest turned up drugs. The question at issue was whether the undisputed illegality of the stop would render the drugs found inadmissible as evidence because of the exclusionary rule. In a 5-3 decision written by Justice Clarence Thomas, the Court decided that the “discovery of the arrest warrant attenuated the connection between the unlawful stop and the evidence seized” and thus the drug evidence could be used against Mr. Strieff.

In short, this case incentivizes police officers to break the law to make stops looking for drugs and contraband. As the late William Stuntz discussed in his book, The Collapse of American Criminal Justice, the way police read Supreme Court decisions is similar to a How-To blueprint to get around individuals’ constitutional rights. As Justice Elena Kagan ably notes in her dissent, today’s decision says that so long as there is an arrest on a warrant made from a bad stop, anything officers find as a result of that stop is fair game for prosecution.

Justice Sonia Sotomayor writes in her dissent:

Do not be soothed by the opinion’s technical language: This case allows the police to stop you on the street, demand your identification, and check it for outstanding traffic warrants—even if you are doing nothing wrong. If the officer discovers a warrant for a fine you forgot to pay, courts will now excuse his illegal stop and will admit into evidence anything he happens to find by searching you after arresting you on the warrant. 

This practice isn’t a minor issue affecting a small population. Justice Sotomayor points out that between the federal government and the states, there are over 7.8 million outstanding warrants, a large portion of which appear to be for minor infractions such as unpaid parking tickets or civil fines. It certain areas, the outstanding municipal warrants engulf more than half of the local population. For example, she cited the Department of Justice’s report on Ferguson, Missouri that found 16,000 of the city’s 22,000 residents had outstanding warrants. Justice Sotomayor’s dissent is an impassioned and practical argument against the racial profiling this case will almost certainly encourage across the country.  

Justice Kagan’s dissent is no less damning, though she gives a more technical analysis of the relevant jurisprudence that allows for exceptions to the exclusionary rule. To be kind, she finds the majority opinion wanting. In fact, she goes through the argument with the metaphor of a baseball player at bat, and the majority strikes out under the three-part inquiry in Brown v. Illinois, 422 U.S. 590 (1975). Although the Strieff opinion was written by Justice Thomas, perhaps the metaphor was a thinly veiled jab at the Chief Justice’s famous quip about justices calling balls and strikes in cases rather than, say, going to bat for the team in blue.

Special Favors for IEX Will Not Fix Bad Regulation

It isn’t often that an SEC decision involves the star of a best seller, a “magic shoe box,” and fundamental questions about the meaning of words like “immediate” and “fair.”  The SEC made such a decision on Friday. 

Last fall, the trading system IEX applied for designation as a stock exchange.  IEX, and its CEO Brad Katsuyama, rose to fame several years ago with the publication of Michael Lewis’s popular book Flash Boys.  Lewis, ever the artful storyteller, cast Katsuyama as the likeable underdog, exposing and undermining high-frequency traders (HFTs) through the development of IEX.  IEX, an alternative trading system, or in the more colorful industry jargon, a “dark pool,” has allowed investors to trade away from market scrutiny and the HFTs that populate “lit” exchanges.  But there are advantages to being an exchange, and IEX wants in.

At issue in determining whether to approve the application was the meaning of the word “immediate” in an SEC regulation known as Regulation NMS.  Regulation NMS, approved by the SEC in 2005, was intended to increase competition among trading exchanges, resulting in better execution of trades and better prices for investors.  In furtherance of that goal, a part of the regulation requires that trades be made at the best price listed on any exchange and that exchanges make their quotations “immediately” and automatically available.  In the past “immediate” has been defined as “immediately and automatically executable, without any programmed delay.”  Seems clear enough, right?

Philadelphia’s Soda Tax

The Philadelphia City Council has voted to become the second city in the United States to impose a tax on the sale of particular types of sweetened beverages. The tax applies to sugared soda, diet soda, sports drinks and more, while excluding drinks that are more than half milk or fruit, as well as drinks to which sugar is added such as coffee. The tax will be 1.5 cents per ounce, amounting to 18 cents per standard size can of soda or $1 per two-liter bottle.

Public health advocates often propose taxes on sugary drinks, colloquially known as “soda taxes,” as a means of improving public health outcomes. They argue that such beverages disproportionately cause obesity and that consumers of sugary beverages impose external costs on others through higher medical costs associated with obesity.

The evidence supporting the disproportionate effect of sugar beverages on obesity is not powerful.  An article in Obesity Review concluded, “The current evidence does not demonstrate conclusively that nutritively sweetened beverage consumption has uniquely contributed to obesity or that reducing NSB consumption will reduce BMI levels in general.” 

And the externalities of the obese also appear to be minimal.  “The existing literature … suggests that obese people on average do bear the costs and benefits of their eating and exercise habits.”

But for purposes of discussion assume that consumption of such beverages does result in obesity and its health effects, which, in turn, create costs for others.  Are the taxes a good corrective?