A War on Crime or on Business?

Since the Bank Secrecy Act (BSA) came into force in 1970, banks and other financial institutions have been subject to extensive reporting requirements on the transactions they perform on customers’ behalf. In subsequent years, notably after 9/11 with passage of the USA PATRIOT Act, Congress has expanded the range of firms subject to these rules and the information that they must collect. In the nearly half-century since the BSA’s passage, so-called anti-money laundering/ know your customer (AML/ KYC) reporting duties have also expanded fortuitously, as the dollar thresholds – typically, $5,000 or $10,000 – for reporting transactions have not been adjusted with inflation.

Law enforcement agencies have encouraged this expansion, warning that, without copious access to transaction activity, they cannot effectively prosecute criminal networks and terrorist groups. National security and the fight against crime are major public policy concerns, so it’s no surprise that politicians from both sides of the aisle tend to support financial regulation aimed at making it harder for the bad guys to engage in nefarious activities. Just last week, the House of Representatives passed a resolution affirming its resolve to “close loopholes that allow corruption, terrorism, and money laundering to infiltrate our country’s financial system.”

Whether AML/ KYC rules are cost-effective, or even just effective, is a different question. A 2016 study by David Burton and Norbert Michel of the Heritage Foundation showed an inverse relationship between the number of BSA-related reports from financial institutions, on one hand, and money-laundering investigations and convictions by the FBI and IRS, on the other. Indeed, of the 5,241,847 suspicious activity reports (SARs) that financial institutions filed with the Treasury’s Financial Crimes Enforcement Network (FinCEN) in 2018, just 1,044,495 are tagged “cyber event,” “money laundering,” or “terrorist financing” – the kind of security threats that BSA regulations are meant to tackle.

Is This Infrastructure Really Necessary?

The United States has “at least $232 billion in critical public transportation” needs, claims the American Public Transportation Association (APTA). Among the “critically needed” infrastructure on APTA’s list are a streetcar in downtown Los Angeles, another one in downtown Sacramento (which local voters have rejected), one in Tempe, and streetcar extensions in Tampa and Kansas City.

Get real: even ardent transit advocates admit that streetcars are stupid. The economic development benefits that supposedly come from streetcars are purely imaginary, and even if they weren’t, it would be hard to describe streetcars – whose average speed, APTA admits, is less than 7.5 miles per hour – as “critically needed.”

Much of the nation’s transit infrastructure is falling apart, and the Department of Transportation has identified $100 billion of infrastructure backlog needs. (Page l – that is, Roman numeral 50 – of the report indicates a backlog of $89.9 billion in 2012 dollars. Converting to 2019 dollars brings this up to $100 billion.) Yet APTA’s “critical needs” list includes only $24 billion worth of “state of good repair” projects. Just about all of the other “needs” listed – $142 billion worth – are new projects or extensions of existing projects.

In fact, few if any of these new projects are “needed” – they are simply transit agency wish lists. For example, it includes $6 billion for phase 2 of New York’s Second Avenue Subway, but no money for rehabilitating New York’s existing, and rapidly deteriorating, subway system. Similarly, it includes $140 million for a new transitway in Alexandria, Virginia, but no money for rehabilitating the DC area’s also rapidly deteriorating Metrorail system. (In case anyone is interested, I’ve converted APTA’s project list into a spreadsheet for easy review and calculations.)

The $166 billion total on APTA’s “Project Examples” list is less than the $232 billion APTA says is needed, but even if all of the difference is “state of good repair” projects, that difference plus the $24 billion on APTA’s list doesn’t add up to what the DOT says is needed to restore transit infrastructure. This shows that even APTA doesn’t take public safety and “crumbling infrastructure” seriously.

I’ve previously pointed out that the best-maintained infrastructure is funded out of user fees. For example, Federal Highway Administration data show that only 2.9 percent of toll bridges are “structurally deficient,” compared with 5.5 percent of state-owned bridges funded mainly out of gas taxes and 12.2 percent of locally-owned bridges that are funded mainly out of general tax dollars. Gas taxes are a user fee, so state bridges are better maintained than local bridges, but tolls are an even better user fee so toll-funded bridges are in the best shape.

Politicians allow infrastructure funded out of tax dollars to deteriorate because they would rather spend money on new projects than maintain old ones. APTA’s list simply confirms this: APTA is trying to entice politicians into funding all sorts of new projects rather than maintain the existing ones that are falling apart.

To justify this spending, APTA claims that transit produces $4 in economic benefits for every $1 spent. This is based on a report prepared for APTA in 2009. This report includes two kinds of benefits from transit spending.

First, when anyone spends money on anything, the recipients of that money turn around and spends it again. That’s called “indirect” or “secondary” benefits. Spending money on digging holes and filling them up would produce similar secondary spending. That doesn’t mean the government should pay people to dig holes and fill them up (although that’s really what it’s doing for many rail transit projects). For one thing, if government didn’t spend that money, there would be more money in the hands of taxpayers, who would spend it, generating just as many secondary benefits.

Second, the study counts cost savings to transit riders and other travelers, such as the savings from not having to own a car, from getting to destinations faster, or from congestion relief. But transit costs far more and travels far slower than automobiles; there is no cost or time savings from substituting expensive, slow methods of transportation for inexpensive, fast methods of transportation. Transit also does not provide a significant amount of congestion relief; in fact, large buses, streetcars, light rail, and commuter trains that have many grade crossings often do more to increase congestion than reduce it.

The study’s arguments are even less plausible today, when transit ridership is shrinking, than they were in 2009, when transit ridership had been growing. Charlotte, Los Angeles, and Portland recently spent hundreds of millions or billions on new light-rail lines or light-rail extensions, yet transit ridership in those regions dropped after the new lines opened. There is no way that can that be good for transit riders or other travelers.

APTA’s wish-list is just one more reason why Congress should only pass an infrastructure bill if it is one that is funded exclusively out of user fees. An infrastructure bill funded out of tax dollars or deficit spending would impose huge costs on taxpayers in order to build unnecessary projects that we won’t be able to afford to maintain. 

Government: High Subsidies, Low Satisfaction

The OECD has released results from a survey of 22,000 people in 21 countries regarding their views of government social programs.

Governments in the high-income OECD countries hand out more subsidies than ever, yet many people feel that they are not getting what they want. The OECD survey finds, “There is clear dissatisfaction with existing social policy. Across the surveyed countries, many respondents believe public services and benefits are inadequate and hard to reach.” And the survey finds, “More than half of respondents say they do not receive their fair share of benefits given the taxes they pay.”

Those responses make it sound like people may want a bigger welfare state. But other responses show that people don’t believe that the existing welfare state works very well. Two-thirds of the OECD respondents think, “Many people receive public benefits without deserving them,” as shown in the chart below. And 60 percent across the OECD think that “government does not incorporate the views of people like them when designing social policy.”

In my study of government failure, I found that even as the U.S. government has vastly expanded social programs, the public has not grown fonder of the government, but rather has become more alienated. Public polls show that the share of people who trust the federal government has plunged from about 70 percent in the 1960s to about 20 percent today. Today, about 80 percent of Americans are “angry” or “frustrated” by the federal government, according to Pew. Americans have grown less fond of the government even as the number of programs ostensibly created to help them has increased.

What seems to be going on is that politicians relentlessly propagate myths that the government should coddle the citizenry and that it can do so efficiently. They propagate an expansive public interest theory of government. But actual government programs are inefficient, wasteful, and often counterproductive, which the public choice theory of government better describes. Government realities are different than government dreams.

Governments overpromise and underdeliver, and that seems to underlie the dissatisfaction coming through in these polls.   

A Win on Student Speech in Rhode Island

The government can’t force people to promote messages they disagree with, even when – particularly when – the government actors are public university professors and the speaker is a student who needs to pass certain classes to get a degree.

William Felkner, a self-identified “conservative libertarian,” studied social work at Rhode Island College, a state school. His views unsurprisingly clashed with those of his professors, who consider the social work course – and the profession itself – to be “devoted to the value of social and economic justice.” In keeping with this philosophy, one of his professors assigned him to lobby the state legislature for a progressive bill.

Felkner refused to speak against his beliefs by lobbying in favor of progressive legislation. His term paper instead reflected his honest opinion of the bill. As a result, his professor gave him a failing grade and Felkner ultimately never completed the program.

That incident, in addition to a long string of events in which professors disparaged Felkner’s politics and tried to stifle his opinions, led him to sue the college. He argued, among several claims, that the school infringed on his right to free speech, compelled him to speak against his conscience, and placed unconstitutional conditions on his earning his degree.

Conservatives and libertarians are often pushed out of progressive academic circles by faculty or administrators. For private universities, such behavior is alarming and worth counteracting, but mostly comes down to academic freedom. Public institutions like Rhode Island College are government actors, however, and must afford students the rights guaranteed to them by the Constitution, especially the freedom of speech. The U.S. Supreme Court has long understood that the First Amendment prohibits the government from compelling an individual to express an opinion that violates his or her conscience.

Nevertheless, the lower state court was not convinced that the school compelled Felkner to speak and found that the school’s actions did not violate his constitutional rights. On appeal to the Rhode Island Supreme Court, Cato filed an amicus brief, arguing that students don’t shed their free speech rights at the schoolhouse door.

In a decision released on Monday, the state supreme court agreed, reversing the lower court’s grant of summary judgment for the school on several claims and allowing the case to go to trial. Citing the U.S. Supreme Court’s decision in Hazelwood School District v. Kuhlmeier (1988), the Rhode Island Supreme Court explained that schools and teachers have broad authority to exercise “editorial control” over student speech “so long as their actions are reasonably related to legitimate pedagogical concerns.” However, a teacher can’t limit student speech as a punishment for a student’s political views. The court held that Felkner raised legitimate issues of material fact – meaning that a jury will get to decide whether in fact the professors’ and administrators’ actions were appropriate (unless the college now decides to settle with Mr. Felkner, which is what I would advise if I were its lawyer).

Proponents of free speech should regard this as a win for students’ First Amendment rights on college campuses. The court’s decision here comes not a moment too soon, as schools increasingly attempt to silence students and regulate their speech. As a procedural matter, it also bodes well that state supreme courts still adhere to the “material facts in dispute” standard for summary judgment.

In sum, no person in a public university, whether a student or a teacher, should be forced to say something that they find objectionable, and the case of Felkner v. Rhode Island College stands in recognition of that important principle. 

MMT’s Big Coin Gambit

Modern Monetary Theory has been accused, not always fairly, of more serious shortcomings than you can shake a stick at. Among other things, critics have faulted it for not being all that modern, for passing-off tautologies as profundities, for wrongly assuming that the value of fiat money rests upon the government’s power to levy taxes, and for misunderstanding the causes of inflation while being grotesquely overconfident in fiscal authorities’ ability to control it.

But a shortcoming of Modern Monetary theorists seems to me more irksome than any of the flaws in their theories. I mean their habit of confounding things they would like government officials to do with things those officials are both able and willing to do. They acknowledge legal constraints on public policy options, though only according to their own often strained interpretations of what existing laws allow.  As for other sorts of constraints — political, ethical, psychological, etc. — they brush them aside altogether. Because they wish that policymakers would play by different rules, they claim that the rules are in fact those they’d prefer. In other words, they mix-up normative with positive economics. Then, to add insult to injury, they heap scorn upon their critics for having the brass gall to note particular ways in which the real world stubbornly refuses to conform to their desires.

In a previous Alt-M post, I offered as an example of these habits Stephanie Kelton’s suggestion, in her article “We Can Pay for a Green New Deal,” that Congress can write checks willy-nilly, without ever having to worry about them bouncing, because (she claims) the Federal Reserve is bound to create new money to cover any difference between what Congress spends and the funds it raises though taxation and borrowing. In effect, Professor Kelton assumes that the Treasury has unlimited Fed overdraft privileges. Yet the truth, I pointed out, is that the Treasury has been altogether prohibited from overdrawing its Fed account since 1980. Nor, I added, is there any other mechanism by which the Fed would be automatically compelled to accommodate the Treasury’s needs.

Cuban Credible Fear Asylum Claims Surge After Ending Wet Foot, Dry Foot

In January 2017, President Obama eliminated the decades-long policy of “wet foot, dry foot” that allowed Cubans who made it to the United States to enter legally in order to apply for a green card under the Cuban Adjustment Act of 1966. Prior to the change, the numbers of Cubans had steadily increased to the highest levels since the early 1990s. At the time, I wrote:

Because the normal asylum system is so backlogged, [ending wet foot, dry foot] could result in Cubans filing asylum claims under the normal system, as Central Americans do … The current asylum system, which is already massively backlogged, will only grow more so as a result. At a time when a record number of asylum seekers from Central America are coming to the border, the United States is going to throw the Cuban refugees in with the rest, making a dysfunctional system that much more broken.

While the number of Cuban arrivals did drop precipitously, the numbers have spiked once Cubans understood that they could access the normal asylum process. Figure 1 shows the number of “credible fear” claims—which trigger the start of the asylum process at the border or ports of entry—by Cubans since December 2016, rising from none to more than 1,000 in December 2018 and January 2019. Altogether, Cubans have submitted about 11,000 asylum claims. They first cracked the top 5 nationalities for credible fear claims in April 2017, and they have seen a 708 percent increase since then.

Figure 1: Cuban Credible Fear Claims by Mont

So far in the first four months of fiscal year 2019 (starting in October 2018), Cubans have averaged 11 percent of all credible fear claims, which is remarkable given the surge of Central Americans during this time. In December 2018, they reached 14 percent of all claims and cracked the top 3 nationalities with the most claims for the first time (knocking out Salvadorans). It is clear that the end of wet foot, dry foot has only contributed to further overwhelming the nation’s asylum system.

Figure 2: Cuban Share Credible Fear Claims by Month

Cubans who used to come to the U.S. ports of entry along the Mexican border to seek wet foot, dry foot protection continue to apply for asylum at ports of entry. The Trump administration’s metering policy at ports—which places a hard cap on the number of asylum claims that can be made per day—is actually limiting the growth in the Cuban asylum claims.

The limit is causing long backups at ports of entry as rejected applicants pile up on the Mexican side awaiting their turn. Cubans first tried to enter at ports in the Laredo field office in Texas because it is the shortest trip. But Figure 3 illustrates how the policy of metering—which came into full force in mid-2018—caused Cubans who were pushed back at the Laredo ports to move further west to the El Paso ports and try again there. This increased the share of Cuban claims at El Paso from 1 percent to 54 percent.

Figure 3: Share of Undocumented Cuban Arrivals (Inadmissibles) at Ports of Entry by Field Office

Partly as a result of the metering, the arrivals at ports are still far below the levels in late 2016 (Figure 4). But we don’t have figures for Cuban arrivals between ports of entry, and we know that metering already causes Central Americans seeking asylum to cross illegally between ports. Cubans have such a long tradition of entering through ports and may face fewer cartel threats in Mexico that it is possible that they are still waiting on the other side of the border. On the other hand, homelessness in Mexico is untenable, so it is likely that Border Patrol will witness an increase in crossings between ports by Cuban asylum seekers this year.

Figure 4: Undocumented Cuban Arrivals (Inadmissibles) at Ports of Entry

Whatever the case, ending wet foot, dry foot has exacerbated America’s immigration problems. Yes, the flow of Cubans is lower now, but under the old policy officials could simply parole the arrivals into the country without spending an enormous amount of resources on interviews, transportation, detention, and courts. Forcing Cubans to undergo the formal asylum process has only further burdened the system.

The administration should restore the wet foot, dry foot policy, which worked for this country for decades. The ultimate result was that more than a million Cubans freed themselves from a communist regime under the policy. As I have stated before, Cubans don’t receive special treatment because they are inherently unique but because Cuba was—until Venezuela—the only not free country in the Americas, according to Freedom House. The law states that the Cuban Adjustment Act of 1966 would end only when “a democratically elected government in Cuba is in power.”

This was a sound principle and one that should be expanded to Venezuelans. Taking Cubans and Venezuelans out of the broken asylum system would streamline the process for everyone else and make the asylum process function better than it does under the status quo.

Community Development Block Grant Spending is Poorly Targeted, Part II

Last week the White House budget called for eliminating Community Development Block Grant (CDBG) spending a third year in a row. Similar to political years past, media outlets are running glowing stories in defense of CDBG.

Of course, these articles strenuously avoid mentioning any less-useful activities that CDBG pours money into, and avoid mentioning that if politicians cared about these activities as much as they claim then they would likely be willing to support them with local money in CDBG’s absence.

In reality, CDBG supports crony spending and a variety of activities that cater to high income preferences rather than low-income needs, along with any activities that can reasonably be defended as beneficial to the poor. Additionally, because the mission of the program is broad and ambiguous, and the funding scattershot, results are mostly unmeasurable. As a recent Urban Institute report noted, “it is difficult to measure long-term outcomes and attribute them directly to CDBG.”

The White House budget correctly points out that CDBG is ineffective at targeting funding to need, and the allocation formula HUD uses to allocate funding is dated. New Cato analysis supports this and indicates program dollars are unevenly distributed among U.S. poor (see below).

Figure 1. CDBG spending per person in poverty, 2013-2018

Map: CDBG spending per person in poverty

Data Source: U.S. Department of Housing and Urban Development

The amount of CDBG spending per poor person varies substantially by location, and substantially more spending per poor person is concentrated among locations in the South Central, South Atlantic, and Midwestern states compared to Western, Southeastern, or Southwestern states.

This distribution is at least partly because HUD allocates CDBG money using formulas which prioritize funding to communities with older housing, crowding, and lags in population growth, among other things. Share of poverty is also considered in the allocation process, and constitutes between 30 and 50 percent of the allocation formula, but is often dominated by these other considerations.  

If CDBG were a program that served low-income people’s needs, spending would be allocated based on individual need rather than tenuously-related location-based characteristics. Benefits would be directed to poor people, rather than politicians, businesses, and buildings, and funding would be required to produce clear and measureable results. As the White House points out, that isn’t the CDBG program we know. 

Research assistance provided by Robert Orr.