The Skinny on The Narrow Bank

Dedicated readers may recall my having reported here several years ago the suit filed by Colorado’s Four Corner’s Credit Union against the Kansas City Fed — after the Fed refused it a Master Account on the grounds that it planned to cater to Colorado’s marijuana-related businesses. Until then the episode was almost unique, for the Fed had scarcely ever refused a Master Account to any properly licensed depository institution. Eventually the Fed and Four Corners reached a compromise, of sorts, with the Fed agreeing to grant the credit union an account so long as it promised not to do business with the very firms it was originally intended to serve!

Well, as The Wall Street Journal’s Michael Derby reported last week, the Fed once again finds itself being sued for failing to grant a Master Account to a duly chartered depository institution. Only the circumstances couldn’t be more different. The plaintiff this time, TNB USA Inc, is a Connecticut-chartered bank; and its intended clients, far from being small businesses that cater to herbalistas, include some of Wall Street’s most venerable establishments. Also, although TNB is suing the New York Fed for not granting it a Master Account, opposition to its request comes mainly, not from the New York Fed itself, but from the Federal Reserve System’s head honchos in Washington. Finally, those honchos are opposed to TNB’s plan, not because they worry that TNB’s clients might be breaking Federal laws, but because of unspecified “policy concerns.”

Just what are those concerns? The rest of this post explains. But I’ll drop a hint or two by observing that the whole affair (1) has nothing to do with either promoting or opposing safe banking and (2) has everything to do with (you guessed it) the Fed’s post-2008 “floor” system of monetary control and the interest it pays on bank reserves to support that system.

What’s In a Name?

To understand the Fed’s concerns, one has first to consider TNB’s business plan. Doing that in turn means demolishing a myth that has already taken root concerning that enterprise — one based entirely on it’s name.

Poole’s New Book on Highways

 The Reason Foundation’s Bob Poole has published a new book, Rethinking America’s Highways: A 21st Century Vision for Better Infrastructure.

The book examines the structure of U.S. highway ownership and financing and describes why major reforms are needed. Bob has a deep understanding of both the economics and engineering of highways.

Bob puts U.S. highways in international context. He describes, for example, how Europe has more experience with private highways than we do. The photo below is the Millau Viaduct in southern France. Wiki says it is “ranked as one of the great engineering achievements of all time.” The structure includes the tallest bridge tower in the world, and it was built entirely by private money. Isn’t that beautiful? I mean both the bridge and the fact that it is private enterprise.

Bob’s book regards the institutional structure for highways, which is different that the often superficial highway discussions in D.C. Those often surround the total amount of money the government spends. But the more important issue is ensuring that we spend on projects where the returns outweigh the costs.

D.C. policymakers often focus on the jobs created by highway construction. But labor is a cost of projects, not a benefit. Instead, policymakers should focus on generating long-term net value.

Finally, spending advocates often decry potholes and deficient bridges, but the optimal amount of wear-and-tear on infrastructure is not zero, else we would spend an infinite amount.

So the challenge is to spend the right amount, and to focus it on the most needed repairs and expansions. To do that, we need to get the institutional structure right, and that is what Bob’s book is about.

Every policy wonk and politician interested in infrastructure should read Bob’s book.

 

The Independent said this of the bridge: “The viaduct, costing €400m (£278m), has been built in record time (just over three years) for a project of this size. The French construction company, Eiffage, the direct descendant of the company started by Gustav Eiffel, the builder of the celebrated tower beside the Seine, has raised the money entirely from private financing. In return, the company has been given a 75 -year concession to run the viaduct as a toll-bridge.”

E-Verify Wouldn’t Have Prevented Mollie Tibbetts’ Murder

Shortly after Iowa prosecutors charged illegal immigrant Christian Rivera with the murder of Molly Tibbetts in August, his Iowa employer erroneously stated that E-Verify had approved him for legal work. That later turned out to be false as his employer, Yarrabee Farms, ran his name and Social Security Number (SSN) through another system called Social Security Number Verification Service (SSNVS) that merely verified that the name and number matched, not E-Verify.  That mix-up has inspired many to argue that an E-Verify mandate for all new hires would have stopped Rivera from working and, thus, prevented the murder of Mollie Tibbetts.  That’s almost certainly not true.  New details reveal that E-Verify would likely not have prevented Rivera from working.    

E-Verify is an electronic eligibility for employment verification system run by the federal government at taxpayer expense. Created as a pilot program in 1996, E-Verify is intended to prevent the hiring of illegal immigrants by verifying the identity information they submit for employment against federal government databases in the Social Security Administration and Department of Homeland Security.  The theory behind E-Verify is that illegal immigrants won’t have the identity documents to pass E-Verify (hold your laughter) so they won’t be able to work, thus sending them all home and preventing more from coming.  That naïve theory fails when confronted with the reality of the Rivera case.

Rivera submitted the name John Budd on an out of state drivers license and an SSN that matched that name to his employer, Yarrabee Farms, when he was hired in 2014.  Yarrabee Farms ran the SSN and name John Budd through the Social Security Number Verification Service (SSNVS) to guarantee that they matched for tax purposes (Yarrabee Farms confused SSNVS with E-Verify).  SSNVS matched the name with the SSN and approved Rivera-disguised-as-Budd to work. 

E-Verify would also have matched the name with the SSN and approved Rivera for work.  The systematic design flaw in E-Verify is that it only verifies the documents that a worker hands his employers, not the worker himself.  Thus, if an illegal immigrant hands the identity documents of an American citizen to an E-Verify-using employer then it verifies the documents and the worker with the documents gets the job – just as happened here with Rivera handing Yarrabee Farms the identity of John Budd.  That’s why 54 percent of illegal immigrants run through E-Verify are approved for legal work.  E-Verify is worse than a coin toss at identifying known illegal immigrants. 

Rivera’s identity would even have gotten around the DRIVE program in Iowa because he handed his employer an out-of-state drivers license.  DRIVE is intended to link other identity information from the Iowa state’s DMV to the job applicants as an extra layer of security.  If any of that information doesn’t match the information that the applicant gives to his employer then his employer is supposed to realize the applicant is an illegal worker.  However, the flaw in DRIVE is that it only works for the state-level DMV and fails to add extra security for out-of-state drivers licenses.  Thus, Rivera’s out-of-state identity would not have been caught by DRIVE.     

Rivera is a low-skilled and poor illegal immigrant from Mexico whose English language skills are so bad that he needs an interpreter in court.  Yet he would easily have been able to fool E-Verify, a sophisticated government immigration enforcement program praised by members of Congress, the President, and the head of at least one DC think-tank, by using somebody else’s name and SSN with a driver’s license from another state. 

A law passed in 1986 has required workers in the United States to present a government identification to work legally – a requirement that has resulted in an explosion in identity theft.  Rivera likely stole Budd’s identity to get a job, an unintended consequence of that 1986 law. A national E-Verify mandate will vastly expand identity theft

As a further wrinkle, if Yarrabee Farms found any of Rivera’s identity documents or information suspicious and confronted Rivera with their suspicions concerning Rivera’s identity, his name, race, or age, then Yarrabee Farms would likely have run afoul of other labor laws and exposed itself to a serious lawsuit.  The federal government expects employers to enforce immigration laws but not to the point that they can profile applicants.  The safe choice is not to profile anyone and hire those who present documents so long as they are not obviously fake.

The last wrinkle is that many businesses don’t comply with E-Verify in states where it is mandated.  In the second quarter of 2017, only 59 percent of new hires in Arizona were run through E-Verify even though the law mandates that 100 percent be run through.  Arizona has the harshest state-level immigration enforcement laws in the country and they can’t even guarantee compliance with E-Verify.  There is even evidence that Arizona’s E-Verify mandate temporarily increased property crime committed by a subpopulation that is more likely to be illegally present in the United States, prior to that population learning that E-Verify is easy to fool.  South Carolina, the state with the best-reputed enforcement of E-Verify, only had 55 percent compliance in the same quarter of 2017.  The notion that a lackluster Washington will do better than Arizona or South Carolina is too unserious a charge to rebut. 

Since SSNVS matched the name John Budd with a valid SSN and Rivera used an out-of-state drivers license, E-Verify would not have caught him.  E-Verify is a lemon of a system that is not a silver bullet to stop illegal immigration.  It wouldn’t have stopped Rivera from working legally in Iowa.  E-Verify’s cheerleaders should stop using the tragic murder of Mollie Tibbetts as a sales pitch for their failed government program.

 

Americans Are Migrating to Low-Tax States

Cato released my study today on “Tax Reform and Interstate Migration.”

The 2017 federal tax law increased the tax pain of living in a high-tax state for millions of people. Will the law induce those folks to flee to lower-tax states?

To find clues, the study looks at recent IRS data and reviews academic studies on interstate migration.

For each state, the study calculated the ratio of domestic in-migration to out-migration for 2016. States losing population have ratios of less than 1.0. States gaining population have ratios of more than 1.0. New York’s ratio is 0.65, meaning for every 100 residents that left, only 65 moved in. Florida’s ratio is 1.45, meaning that 145 households moved in for every 100 that left.

Figure 1 maps the ratios. People are generally moving out of the Northeast and Midwest to the South and West, but they are also leaving California, on net.

People move between states for many reasons, including climate, housing costs, and job opportunities. But when you look at the detailed patterns of movement, it is clear that taxes also play a role.

I divided the country into the 25 highest-tax and 25 lowest-tax states by a measure of household taxes. In 2016, almost 600,000 people moved, on net, from the former to the latter.

People are moving into low-tax New Hampshire and out of Massachusetts. Into low-tax South Dakota and out of its neighbors. Into low-tax Tennessee and out of Kentucky. And into low-tax Florida from New York, Connecticut, New Jersey, and just about every other high-tax state.

On the West Coast, California is a high-tax state, while Oregon and Washington fall just on the side of the lower-tax states.

Of the 25 highest-tax states, 24 of them had net out-migration in 2016.

Of the 25 lowest-tax states, 17 had net in-migration.  

 

https://object.cato.org/sites/cato.org/files/pubs/pdf/tbb-84-revised.pdf

Transit Industry Claims That Correlation Proves Causation

A new report from the American Public Transportation Association (APTA) comes out firmly in support of the belief that correlation proves causation. The report observes that traffic fatality rates are lower in urban areas with high rates of transit ridership, and claims that this proves “that modest increases in public transit mode share can provide disproportionally larger traffic safety benefits.”


Here is one of the charts that APTA claims proves that modest increases in transit ridership will reduce traffic fatalities. Note that, in urban areas with fewer than 25 annual transit trips per capita – which is the vast majority of them – the relationship between transit and traffic fatalities is virtually nil. You can click the image for a larger view or go to APTA’s document from which this chart was taken.

In fact, APTA’s data show no such thing. New York has the nation’s highest per capita transit ridership and a low traffic fatality rate. But there are urban areas with very low ridership rates that had even lower fatality rates in 2012, while there are other urban areas with fairly high ridership rates that also had high fatality rates. APTA claims the correlation between transit and traffic fatalities is a high 0.71 (where 1.0 is a perfect correlation), but that’s only when you include New York and a few other large urban areas: among urban areas of 2 million people or less, APTA admits the correlation is a low 0.28.

The United States has two kinds of urban areas: New York and everything else. Including New York in any analysis of urban areas will always bias any statistical correlations in ways that have no application to other urban areas.

In most urban areas outside of New York, transit ridership is so low that it has no real impact on urban travel. Among major urban areas other than New York, APTA’s data show 2012 ridership ranging from 55 trips per person per year in Los Angeles to 105 in Washington DC to 133 in San Francisco-Oakland. From the 2012 National Transit Database, transit passenger miles per capita ranged from 287 in Los Angeles to 544 in Washington to 817 in San Francisco.

Since these urban areas typically see around 14,000 passenger miles of per capita travel on highways and streets per year, the 530-mile difference in transit usage between Los Angeles and San Francisco is pretty much irrelevant. Thus, even if there is a weak correlation between transit ridership and traffic fatalities, transit isn’t the cause of that correlation.

San Francisco and Washington actually saw slightly more per capita driving than Los Angeles in 2012, yet APTA says they had significantly lower fatality rates (3.7 fatalities per 100,000 residents in San Francisco and 3.6 in Washington vs. 6.4 in Los Angeles). Clearly, some other factor must be influencing both transit ridership and traffic fatalities.

With transit ridership declining almost everywhere, this is just a desperate attempt by APTA to make transit appear more relevant than it really is. In reality, contrary to APTA’s unsupported conclusion, modest rates in transit ridership will have zero measurable effect on traffic fatality rates.

Topics:

Google’s Problem and Ours

Content moderation remains in the news following President Trump’s accusation that Google manipulated its searches to harm conservatives. Yesterday Congress held two hearings on content moderation, one mostly about foreign influence and the other mostly about political bias. The Justice Department also announced Attorney General Sessions will meet soon with state attorneys general “to discuss a growing concern that these companies may be hurting competition and intentionally stifling the free exchange of ideas on their platforms.” 

None of this is welcome news. The First Amendment sharply limits government power over speech. It does not limit private governance of speech. The Cato Institute is free to select speakers and topics for our “platform.” The tech companies have that right also even if they are politically biased. Government officials should also support a culture of free speech. Government officials bullying private companies contravenes a culture of free speech. Needless to say, having the Justice Department investigate those companies looks a lot like a threat to the companies’ freedom. 

So much for law and theory. Here I want to offer some Madisonian thoughts on these issues. No one can doubt James Madison’s liberalism. But he wanted limited government in fact as well as in theory. Madison thought about politics to realize liberal ideals. We should too. 

Let’s begin with the question of bias. The evidence for bias against conservatives is anecdotal and episodic. The tech companies deny any political bias, and their incentives raise doubts about partisan censorship. Why take the chance you might drive away millions of customers and invite the wrath of Congress and the executive branch on your business? Are the leaders of these companies really such political fanatics that they would run such risks? 

Yet these questions miss an important point. The problem of content moderation bias is not really a question of truth or falsity. It is rather a difficult political problem with roots in both passion and reason. 

Now, as in the past, politicians have powerful reasons to foster fear and anger among voters. People who are afraid and angry are more likely to vote for a party or a person who promises to remedy an injustice or protect the innocent. And fear and anger are always about someone threatening vital values. For a Republican president, a perfect “someone” might be tech companies who seem to be filled with Progressives and in control of the most important public forums in the nation. 

But the content moderation puzzle is not just about the passions. The fears of the right (and to a lesser degree, the left) are reasonable. To see this, consider the following alternative world. Imagine the staff of the Heritage Foundation has gained potential control over much of the online news people see and what they might say to others about politics. Imagine also that after a while Progressives start to complain that the Heritage folks are removing their content or manipulating new feeds. The leaders of Heritage deny the charges. Would you believe them? 

Logically it is true that this “appearance of bias” is not the same as bias, and bias may be a vice but cannot be a crime for private managers. But politically that may not matter much, and politics may yet determine the fate of free speech in the online era. 

Companies like Google have to somehow foster legitimacy for their moderation of content, moderation that cannot be avoided if they are to maximize shareholder value. They have to convince most people that they have a right to govern their platforms even when their decisions seem wrong. 

Perhaps recognizing that some have reasonable as well as unreasonable doubts about their legitimacy would be a positive step forward. And people who harbor those reasonable doubts should keep in mind the malign incentives of politicians who benefit from fostering fear and anger against big companies. 

If the tech companies fail to gain legitimacy, we all will have a problem worse than bias. Politicians might act, theory and law notwithstanding. The First Amendment might well stop them. But we all would be better off with numerous, legitimate private governors of speech on the internet. Google’s problem is ours.

Brett Kavanaugh, Merrick Garland, and the Cohesion of the Federal Bench

In Supreme Court nominee Brett Kavanaugh’s opening statement at his hearing Tuesday, he praised Merrick Garland, with whom he serves on the D.C. Circuit, as “our superb chief judge.”

If you were surprised by that, you shouldn’t have been. When President Obama nominated Garland to the high court, Judge Kavanaugh described his colleague as “supremely qualified by the objective characteristics of experience, temperament, writing ability, scholarly ability for the Supreme Court … He has been a role model to me in how he goes about his job.”

In fact, it has been reported in at least one place that one reason Kavanaugh was left off Trump’s initial list of SCOTUS nominees was that he had been so vocal and public in praising Garland’s nomination.

Now, it would be understandable if neither side in the partisan confirmation wars chose to emphasize this bit of background to the story. Republican strategists might not be keen on reminding listeners of what their party did with Garland’s nomination, and might also worry about eroding enthusiasm for Kavanaugh among certain elements of their base. Democratic strategists, meanwhile, might see the episode as one in which the present nominee comes off as not-a-monster, and, well, you can’t have that.

The lesson, if there is one, might be that the federal courts are not as polarized and tribal as much of the higher political class and punditry at nomination time.