U.K.’s “Unexplained Wealth Orders” Give the State Too Much Power

I’ve got a piece in the Washington Examiner this morning on a remarkable new law enforcement tool in Britain:

It’s like, “Your papers, please,” but for things you own.

Authorities in Britain have begun trying out a new police power called unexplained wealth orders under a law that took effect last year. The police go to a court and say you’re living way above any known legitimate income. The judge then signs an order compelling you to show that your possessions (whether a house, fancy car, or jewelry) have been obtained honestly and not with dirty money. In the meantime, the boat or artwork or other assets get frozen, and you can’t sell them until you’ve shown you obtained them innocently.

The kicker: The burden of proof falls on you, not the government. If you don’t prove the funds were clean, Her Majesty may be presumed entitled to keep the goodies….

Related to the flipping of the burden of proof, the law says information dug up via one of the orders can’t then be used in criminal charges against the target.

…advocates want this to be the start of hundreds of seizure actions against other rich foreigners in the British capital.

Some are already calling for bringing a law like this to the United States, and maybe we’re halfway there already. Asset forfeiture laws, blessed by the Supreme Court, already let police seize your property on suspicion of involvement in a crime and make you go to court to get it back. We’ve been chipping away at financial privacy in this country for decades, through Know Your Customer, suspicious-activity reports, and FATCA (expatriate tax) rules.

Ironically — though recent enactments by Parliament may be changing this, too — Britain’s own peripheral territories and dependencies, including the Channel Islands, British Virgin Islands, Cayman Islands, etc. have long made a good business out of furnishing the rest of the world with the means of financial privacy.

The reversal of the presumption of innocence troubles many Britons, too. For the moment, use of the orders is limited to a few elite law enforcement agencies. One of those agencies, however, is Her Majesty’s Revenue and Customs — the tax collectors. It’s not wrong to worry about where this idea is headed.

Whole thing here.

Federal Aid Fuels Corruption

In a recent study, I described 18 reasons why federal aid-to-state programs should be eliminated. Aid programs are federal subsidies for state and local activities such as K-12 schools, transit, roads, and housing. 

One problem I did not explore in detail is how federal aid fuels political corruption. A Politico story the other day describes a classic case. Apparently, Senate Majority Leader Mitch McConnell has been successfully pressing the Department of Transportation (DOT)—headed by his wife—to give grants to favored projects in his home state of Kentucky.   

Corruption is a harsh word, but consider this contrast. On the one hand, Politico quotes the DOT spokesperson in response to the McConnell scandal: “No state receives special treatment from DOT … Discretionary grant programs are competitive and based on merit.”

On the other hand, McConnell himself frequently brags about bringing home pork to Kentucky. He has never been shy about it, as the Politico story illustrates. And in the story, DOT grant recipients in Kentucky are quite sure that McConnell’s arm-twisting made the difference.

If DOT grants are supposed to be allocated on merit, but they are actually steered by self-interested power politics, that’s corruption. And that pork-barrel dynamic exacerbates inefficiencies in the aid system, such as the misuse of resources in low-value activities, as discussed in my study.

It is more efficient to fund state and local activities with state and local money, and doing so would reduce the fuel that powers corruption in Washington.

Here are excerpts from the Politico story by Tucker Doherty and Tanya Snyder:

The Transportation Department under Secretary Elaine Chao designated a special liaison to help with grant applications and other priorities from her husband Mitch McConnell’s state of Kentucky, paving the way for grants totaling at least $78 million for favored projects as McConnell prepared to campaign for reelection.

Chao’s aide Todd Inman, who stated in an email to McConnell’s Senate office that Chao had personally asked him to serve as an intermediary, helped advise the senator and local Kentucky officials on grants with special significance for McConnell — including a highway-improvement project in a McConnell political stronghold that had been twice rejected for previous grant applications.

Beginning in April 2017, Inman and Chao met annually with a delegation from Owensboro, Ky., a river port with long connections to McConnell, including a plaza named in his honor.

… Chao’s designation of Inman as a special intermediary for Kentucky — a privilege other states did not enjoy — gave a special advantage to projects favored by her husband, which could in turn benefit his political interests.

… In fact, days after launching his 2020 reelection campaign McConnell asked Owensboro’s mayor to set up a luncheon with business and political leaders at which the senator claimed credit for delivering the grant. “How about that $11 million BUILD grant?” McConnell asked the crowd rhetorically, according to the Owensboro Times. He then recalled his role in securing earlier grants to the city, adding, “It’s done a lot to transform Owensboro, and I was really happy to have played a role in that.”

… Owensboro wasn’t the only beneficiary of Inman’s assistance. He also communicated with McConnell’s office about multiple requests from county executives to meet with Chao to speak about potential projects in Kentucky, according to emails which, like the others, were obtained under the Freedom of Information Act by the watchdog group American Oversight.


Macroeconomic Forecasting Seems Pretty Hopeless

The yield on 10-year Treasury securities is currently 2.1 percent. Now look at the chart below from the Wall Street Journal showing expert predictions about what the current rate would be.

The Journal reports:

  • “Not a single respondent in January’s Wall Street Journal survey of economists predicted the yield on the 10-year Treasury note would fall below 2.5% this year.”
  • “In October, when yields on the 10-year Treasury were near their peak of around 3.2%, none of the more than 50 respondents in The Wall Street Journal’s monthly survey of economists predicted yields would dip below 2.75% by June 2019. The average forecast was 3.39%.”

Forecasts of interest rates appear pretty awful, and this is a market where vast profits are at stake so there are big incentives to get it right. I’ve noted (here and here) that economists are also lousy at predicting economic growth.

What are the policy implications? The economy is too complex and uncertain for even the best economists to predict, so politicians stand no chance. It seems unlikely that political schemes from Washington to manage and manipulate our future economy would work.

Furthermore, while businesses are forced to eat humble pie and change direction when the economy changes, the government is a rigid institution led by people who never admit their mistakes. So when politicians move economic resources around, the resources often get stuck in low-value uses for years on end.


Note: my critique here regards macroeconomic predictions. Microeconomic analysis is different.

The Fairness Doctrine Was Terrible for Broadcasting and It Would Be Terrible for the Internet

Skepticism of big tech companies is surging on both sides of the political spectrum, from Democratic Senator Elizabeth Warren calling for breaking up Amazon to Republican Senator Josh Hawley advocating rules that would prohibit online viewpoint discrimination. This wave of techno-progressivism finds its latest expression in Slate journalist April Glaser’s article, “Bring Back the Golden Age of Broadcast Regulation.”

Glaser argues that the problems of internet discourse—eg hate speech, haphazard content moderation, and conspiracy peddling—are so trenchant that government intervention is warranted. She calls for applying the rules that once governed mid-twentieth century radio and television broadcasting to the internet, the most important of which was the mandate that broadcasting be done in the “public interest, convenience, and necessity” as laid out in the 1934 Communications Act. Inspired by that mandate, reform-minded progressives at the Federal Communications Commission (FCC) enacted the Fairness Doctrine in 1949, which required broadcasters to provide multiple points of view when discussing political disagreements.

Glaser’s proposal is light on details about how exactly broadcast rules would be adapted for the internet, but it is heavy on assurances that any such regulations would be “light-touch.” Those who worry that inviting the feds to just “do something” could lead to violations of free speech need not be concerned. As Glaser argues, “For decades, radio and television followed regulations—hardly heavy-handed ones—meant to ensure they served the information needs of their audiences and did not actively harm political discourse.”

That would be lovely, if it were true, but not a single part of that statement is correct. The belief that government regulation of internet content providers will be effective and minimally-invasive is rooted in a poor understanding of the history of broadcast regulation. That history actually suggests the opposite, that these regulations will be ineffective, highly-intrusive, and will create significant unintended consequences.

Enforcement in the USMCA: The Draft SAA and the Trump Administration’s Elevation of Section 301

Enforcement of the U.S.-Mexico-Canada Agreement (USMCA) has proven to be an important stumbling block to its ratification in the United States. Democratic law makers have demanded that enforcement provisions be strengthened, particularly with regard to labor and environment provisions. Specifically, some have asked for the correction of a major flaw in the NAFTA state-to-state dispute settlement chapter, under which the appointment of dispute panels had been blocked (in part due to the absence of a roster of panelists to draw from). U.S. Trade Representative Lighthizer stated in congressional testimony that this issue had been addressed in the renegotiated text. In a response to a question from Sen. Ron Wyden (D-OR), asking “Would you be opposed to clarifying that the text of Chapter 31 of the revised NAFTA is not meant to allow panel blocking?,” Lighthizer said:

The text of Chapter 31 of the United States – Mexico – Canada Agreement (USMCA) is not meant to allow panel blocking. Indeed, panels have been successfully formed under Chapter 20 of the NAFTA (its precursor). As we move forward with Congressional consideration of the USMCA, we look forward to discussing this and any other issues related to enforcement with you and your colleagues.

However, as we have pointed out on multiple occasions, it’s not clear that the problem of panel blocking has been resolved by the new USMCA text. Notably, Lighthizer did not say it has been, instead emphasizing that the agreement “is not meant to allow panel blocking,” which is vague enough to suggest it does not preclude it.

To add another healthy dose of skepticism to Lighthizer’s claim, a draft [$] of the Statement of Administrative Action, which was submitted on May 30th (the final version of which will be part of the implementing legislation), seems to suggest he has something else in mind when it comes to enforcement.  Two relevant aspects are as follows.

First, on the problem of the roster, the draft SAA states:

b. Dispute Settlement: Nominations for Dispute Settlement Roster

Article 31.8 of the USMCA requires that by the date of entry into force of the USMCA the Parties establish a roster of up to 30 individual[sic] who are willing to serve as panelists. USTR will consult with the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate (“Trade Committees”) as it considers nominees for the roster of panelists and will provide the Trade Committees with the names of the experts it is considering, and detailed background information on each, at least 30 days before submitting the names of any nominees.

On its face, this appears to suggest that a roster will be established by the date of entry into force of the USMCA. However, there may be a problem ensuring that this happens. The problem is, there is nothing that guarantees that USTR will submit the names of nominees. Furthermore, even if they are submitted and a roster is established, there is no guarantee that the roster will be maintained.

In comments to the House Ways and Means Committee on enforcement of the agreement, we suggested two options for Congress to address this problem. First, they can call on the U.S. Trade Representative to reopen the USMCA and introduce new language to Chapter 31 that addresses the three principles we highlighted in a recent paper: the roster should not be a hurdle to appointing panelists; an independent third party can act as a facilitator in the panel appointments; and, in the absence of an independent third party, the complainant should have the power itself to appoint, in order to prevent the respondent from delaying panel formation. And second, Congress could call on the U.S. Trade Representative to work with Canada and Mexico to establish a roster of panelists right now, thus ensuring a roster is in place upon entry into force of the agreement.

Second, on the issue of enforcement more generally, the SAA devotes substantial attention to the use of Section 301 of the Trade Act of 1974 as an enforcement tool. The document states, at length:

c. Enforcement of U.S. Rights

Legislative authority currently exists for the Executive Branch fully to enforce U.S. rights under Chapter 31. Section 301 of the Trade Act of 1974, as amended, authorizes the United States Trade Representative (“USTR”) to take specific action, subject to the President’s direction, and to take all “appropriate and feasible action” in the President’s power that the President directs the USTR to take to enforce U.S. rights under trade agreements such as the USMCA.

The United States shall enforce its rights under the USMCA through consultations and the dispute settlement mechanism provided for in Chapter 31 when possible. However, a decision by Canada or Mexico to prevent or unreasonably delay formation of a dispute settlement panel would not prevent the Executive Branch from enforcing U.S. rights. In this circumstance, the USTR’s determination on whether the USMCA partner breached USMCA obligations or impaired U.S. rights under the USMCA would be based on the USTR’s evaluation of the relevant legal and factual issues, including the fact that the USMCA partner failed to cooperate in the dispute settlement process.

Once the USMCA enters into force, an interested person may file a petition with the USTR requesting section 301 action in any case in which the person considers that another USMCA government has failed to honor a provision of the Agreement or has caused the nullification or impairment of benefits that the United States could reasonably have anticipated under the Agreement. Alternatively, the USTR may, on his or her own initiative, institute a section 301 proceeding.

If the USTR decides to initiate an investigation under section 301 with respect to alleged Canadian or Mexican practices, section 303(a) of the Trade Act requires the USTR initially to attempt consultations with the government of the relevant USMCA country to resolve the matter. If the case involved a possible breach of the USMCA or impairment of U.S. rights under the USMCA, and if consultations have failed to produce a mutually acceptable solution, then section 303(a) requires that the matter be submitted to the formal dispute resolution procedures of the Agreement, or to the applicable dispute settlement procedures of another trade agreement to which the United States and the other USMCA country are parties. The USTR will seek information and advice from the private sector, including form the petitioner, if any, in preparing U.S. presentations for consultations and formal dispute resolution procedures.

Section 301 provides the USTR with authority to take appropriate retaliatory action in the event that a panel report upholds a U.S. allegation that another USMCA government has breached the Agreement or nullified or impaired U.S. benefits and the other government does not take satisfactory remedial action or provide satisfactory compensation.

There are few things worth highlighting here. First in its description of enforcement under the USMCA, USTR seems to be emphasizing and prioritizing the use of unilateral enforcement tools, as it tries to make the case that enforcement authority exists even without a functioning state-to-state dispute settlement mechanism. The contrast with the draft SAA for the Trans Pacific Partnership (TPP) is interesting, as the TPP SAA did not mention Section 301 in the context of dispute settlement at all.

Second, it is interesting that “a decision by Canada or Mexico to prevent or unreasonably delay formation of a dispute settlement panel” is singled out as the problem. As far as we know, these countries have never done this. Instead, it was the United States that prevented a panel being appointed. Thus, the key question to ask here is, what happens if the United States takes a decision to delay the formation of a panel? If the United States were to do so again, perhaps Canada or Mexico would retaliate by doing the same thing. But the real concern here is whether USTR will allow panels to be appointed.

Third, and most troubling, is the statement that a breach of the obligations “would be based on the USTR’s evaluation of the relevant legal and factual issues, including the fact that the USMCA partner failed to cooperate in the dispute settlement process.” At the core of all this, it seems as though Lighthizer is looking to create a shift away from neutral adjudication, and towards unilateral determinations and enforcement.  That would be a major step backwards for the rule of law in international trade agreements.

There is still time to address these issues before USMCA is ratified. Members of Congress are working with the administration to address these enforcement issues.  Ideally, they will be able to fix the flaws in NAFTA so that the USMCA actually works the way that it was intended: The three parties will be held to account for the obligations they have agreed to.


Mexico Deported More Central Americans Than the U.S. in 2018

President Trump has decided to blame Mexico for the border crisis, rescinding and then reiterating his threat to impose tariffs on America’s neighbor to the south if it doesn’t stop migrants from Central America’s Northern Triangle from coming. Yet Mexico’s enforcement of immigration laws against Central Americans has been more vigorous than the United States for some time.

In 2018, Mexico deported more immigrants back to the Northern Triangle than the United States did, and it deported nearly all the immigrants who it apprehended in that year. The United States did not. It’s just not true that Mexico is less vigorous in its anti-immigration efforts than the Trump administration.

Indeed, from 2004 to 2018, Mexico deported 1.7 million Central Americans back to the Northern Triangle countries of Guatemala, Honduras, and El Salvador. The comparable U.S. figure was just 1.1 million. As Figure 1 shows, the gap has narrowed in recent years, but in 2018, Mexico still deported 6,177 more Northern Triangle migrants than the United States did in that year. Mexico also deported more in 2015, 2016, and 2017.

Figure 1: Deportations to the Northern Triangle From the United States and Mexico

The United States is a richer country with a much larger immigrant population from the Northern Triangle than the Mexico (3 million compared to 80,000, according to the United Nations), yet it has still not deported nearly as many as its poorer neighbor to the south.

Moreover, Mexico deported 1.75 million of 1.85 million apprehensions during the same period, meaning that 94 percent of apprehensions are removed (Figure 3). Meanwhile, the United States has routinely apprehended at the border far more Central Americans than it has deported in recent years (Figure 2). The U.S. deported 1.1 million Central Americans from 2004 to 2018, while it apprehended 1.7 million at the border alone (about 10 percent are apprehended in the interior).

Figure 2: U.S. Border Patrol Apprehensions and U.S. Removals of Northern Triangle Migrants
Figure 3: Mexican Apprehensions and Deportations of Northern Triangle Migrants

President Trump is wrong to blame Mexico for the U.S. inability to enforce its own immigration laws or deter Central Americans. Mexico is carrying out more deportations of Central Americans than the United States is, and it is more likely to deport those who it apprehends than the United States is. The United States should work with Mexico to make legal immigration options more readily available for Central Americans to deter illegal immigration.

Elizabeth Warren Should Give Up Her Stake In A Bad Idea

Senator Elizabeth Warren’s “Plan For Economic Patriotism” is causing ideological convulsions on right and left. Yet one part of her controversial plan has so far largely gone uncommented upon: she wants taxpayers (read: government) to have stakes in companies utilizing government research and development.

Far from seeing knowledge and government R&D as some form of public good that can be freely commercialized by profit-making businesses, she wants government to benefit from its investments by being an equity investor in firms – being given shares in companies who utilize public research, retaining royalties on publicly funded innovation, or even keeping a golden share of patent revenue. The misguided idea here is essentially that there should be a return to taxpayers for their money being risked on government research projects.

Such a policy appears to have been lifted from Mariana Mazzucato’s The Entrepreneurial State. This book posits extensive evidence that public money has helped develop some of the technologies or advances that we see around us, including the internet, touch-screens, GPS, and, soon, the self-driving car.

Through its role in procurement, investments in national security technologies through DARPA, and direct support for research, government agencies no doubt have contributed to building knowledge that has then been successfully commercialized through products such as smartphones.