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Marc Joffe

The New York Metropolitan Transportation Authority is moving forward with plans to extend its Second Avenue Subway, incurring unprecedented costs and potentially jeopardizing the transit system’s state of good repair. Before shovels go into the ground, federal and local officials should consider shortening or even shelving this project.

The Second Avenue Subway Phase 2 promises to add 1.76 miles of track and three new stations in Upper Manhattan at an estimated cost of $7.7 billion, working out to more than $4 billion per mile.

Planners and transit advocates see the extension as long overdue. The Second Avenue Subway was first proposed in 1920 and a portion of the tunnel was dug in the early 1970s before the New York City financial crisis. Meanwhile, elevated lines on Manhattan’s East Side were demolished, leaving the Lexington Avenue line (the sole north‐​south subway on the East Side) with more passengers than it could handle by the early 2010s.

But subsequent events have reduced pressure on the Lexington Avenue line and thus the necessity of this project. Overall subway ridership peaked in 2014 and fell 6 percent by 2019 before cratering with the onset of the COVID pandemic. Ridership is now rebounding but is expected to remain below pre‐​pandemic levels for the foreseeable future. Also, ridership is less concentrated at rush hours when the Lexington Avenue line’s capacity was being exceeded.

In addition, the first phase of the Second Avenue Subway has taken riders off the Lexington Avenue line, further relieving pressure on the 4, 5 and 6 trains (for readers outside New York City, it is worth noting that Second Avenue and Lexington Avenue are only 0.2 miles apart, or about a five‐​minute walk).

If capacity pressure on the Lexington Avenue line returns, the MTA has a less costly alternative to building a new subway extension. It could replace the Lexington Avenue line’s antiquated signaling system with Communications‐​Based Train Control (or CBTC), which uses “wireless connectivity to keep trains in constant contact with a centralized system that controls their movement.” This advanced signaling system has already been implemented on two other New York subway lines. It would allow MTA to run trains closer together on the line increasing its capacity.

Project advocates contend that East Harlem is a transit desert, a place where underprivileged residents have insufficient access to public transportation. But a bus rapid transit line already serves the area. The line, M15 Select Bus Service (SBS), begins in East Harlem, parallels the Second Avenue Subway through the Upper East Side, and terminates at South Ferry, running south on 2nd Avenue and north on 1st Avenue. SBS lines differ from local buses in that they have dedicated and enforced bus lanes, curbside fare collection, and longer intervals between stops—approximately the same as the distance between subway stops—all to speed up travel.

A Shorter, Less Expensive Option

If MTA decides to pursue the expansion, it could get some of the passenger convenience benefits at much lower costs by shortening the project. The planned terminus at 125th and Lexington Avenue, to provide a transfer to the Lexington Avenue line, involves adding a curve at 125th Street and tunneling under Lexington Avenue tracks. By terminating at 125th and 2nd, MTA would avoid the necessity of digging this deeper tunnel. It would also limit construction‐​related disruptions to users of 125th Street, a busy commercial thoroughfare.

If MTA concludes that a free transfer at 125th Street is essential, it could fulfill that need more economically by providing an underground walkway between Second and Lexington Avenues.

A shorter project would mostly use the tunnels previously dug in the early 1970s, which MTA has been maintaining ever since. MTA could further reduce costs by building more modest stations at 106th Street and 116th Street. In their analysis of Phase 1 of the Second Avenue Subway, researchers at NYU’s Transit Cost project found that the new MTA stations at 72nd, 86th, and 96th Streets had much more excess space than comparable metro stations in Europe. Overbuilding stations requires additional excavation which can greatly increase the costs of construction.

Congestion Pricing and Funding Risk

This week, the Federal Transit Administration is committing to provide $3.4 billion of the project costs, leaving MTA responsible for the remaining $4.3 billion, along with any cost overruns (although it should be noted that MTA’s project budget includes a large contingency to absorb such overruns).

One source of MTA funds is supposed to be the proceeds of a $15‐​billion bond issue whose principal and interest are to be repaid by the proceeds of New York City’s new congestion pricing system. This new system will collect tolls from most of the motor vehicles travelling through the city’s downtown core.

But because congestion pricing is untested in the US and MTA has yet to establish key parameters of the congestion pricing system such as toll levels, discounts and exemptions, the amount of revenue the new system will realize is uncertain. New York State legislation requires that the city’s congestion pricing raise at least $1 billion per year. But it remains to be seen whether projected revenues are ultimately realized. Further, the congestion pricing initiative is facing lawsuits from New Jersey, which may delay implementation or limit annual revenues. Finally, the recent spike in municipal bond interest rates will make it more challenging to service the $15‐​billion bond issue.

If MTA experiences extreme cost overruns on the Second Avenue Subway Phase 2 project and/​or does not receive enough congestion pricing proceeds to service its bonds, it will be challenged to fund its full capital program, which includes money for making basic repairs. The Second Avenue Subway project could thus jeopardize MTA’s ability to keep the subway system in a state of good repair. As a result, safety and reliability issues that plagued the subways in the 1970s and again in the 2010s could return.

Rather than take on these risks, MTA should review its longstanding plans for the Phase 2 project. Given lower ridership on the subway system and escalating costs, a more modest extension or no extension at all would be more prudent options.

Jeffrey Miron

This article appeared on Substack on November 2, 2023.

The Biden administration recently announced its intention to expand the border wall between Mexico and the United States; the goal is to limit illegal immigration. This effort will fail.

The US‐​Mexico border is nearly 2,000 miles long with a terrain that makes a barrier across the whole distance nearly impossible. Even with a complete wall, constant surveillance is necessary to prevent migrants from going over or under the barrier, or utilizing other avenues like boat crossings to California or the Gulf Coast. Another avenue is visa overstays, which are a bigger source of illegal immigration than border crossings. Immigration bans, like those of drugs or guns, mainly fail.

The US has only two options for meaningfully reducing illegal immigration. Legalizing more immigration is the obvious response, even to the extent of open borders. This is the only long‐​term solution, since the demand for migration will persist so long as wages remain substantially lower in poorer countries, and so long as violence, corruption, and political chaos permeate many such countries.

The complementary approach is to reduce the demand to migrate, via policies that make sense irrespective of immigration.

One example is trade liberalization. Despite “free trade” agreements between the US and Latin America, the region still suffers from significant US‐​imposed barriers. The US should abandon these, including ending the sanctions that contribute to Venezuela’s bleak economic situation, which stimulates emigration. Similarly, the US should normalize trade relations with Cuba. Freer trade will boost the demand for labor in foreign countries and reduce international wage disparities.

The second key policy change is abandoning the war on drugs, which would allow other countries to scale back their prohibitions, thereby reducing the violence and corruption the drug war creates. Prohibition‐​induced turmoil in these countries is one reason for their immigrant outflows.

Most people want to stay where they live rather than make a long and dangerous trek to a different country, so the United States does not have to make other countries perfect. The US can, however, stop making them worse, and in ways that benefit the United States. This is far better than a border wall.

David Kemp and Peter Van Doren

The Hamas attack on Israel last month occurred one day after the 50‐​year anniversary of the start of the 1973 Yom Kippur War between Israel and a coalition of Arab nations. This parallel quickly led commentators to ask whether, like in 1973, the current crisis would coincide with an increase in world oil prices.

In 1973, Arab oil‐​exporting countries embargoed the United States and other Western nations that supported Israel. According to the American collective memory, the Arab oil embargo was responsible for the indelible oil price hikes and gasoline shortages of the early 1970s and helped solidify the power of the Organization of Petroleum Exporting Countries (OPEC), which includes some of the Arab oil exporters, over oil prices.

Many observers today have highlighted various reasons why the Israel‐​Hamas War is unlikely to be a repeat of the past. Notably absent from most commentary is that, according to economists and energy experts, the 1973 oil embargo was ineffective. Arab oil was simply rerouted through the international oil market, price hikes were actually caused by accelerating global oil demand, and US gasoline shortages and rationing were a consequence of US price controls on crude oil. The only long‐​term effect of the oil embargo seems to have been to prop up misunderstandings of OPEC’s ability to dictate oil prices.

In the widespread view of the American public, media, and politicians, OPEC, which consists of 13 nations that produce roughly 40 percent of the world’s crude oil (including Saudi Arabia which alone produces about 13 percent), can control oil prices by adjusting its oil production.

Our new Cato policy analysis, “Misperceptions of OPEC Capability and Behavior: Unmasking OPEC Theater,” released today, asks whether OPEC can easily adjust oil production and if actual OPEC behavior aligns with the general understanding of OPEC’s power over oil markets.

Contrary to conventional beliefs about what OPEC does and how it operates, we conclude that:

OPEC members’ ability to quickly adjust their oil production is constrained by the geological and technical realities of oil extraction. The production rate of existing oil wells and reservoirs cannot be rapidly ramped up or down without significant tradeoffs and, in general, increasing overall oil production rates requires drilling new oil wells. In other words, Saudi Arabia, and OPEC overall, cannot turn up or down the amount of oil they produce as if they were varying water flow from a spigot.
Saudi Arabia and other OPEC nations have, at most, relatively small amounts of excess production capacity, or “spare capacity.” In the 1980s and 1990s, OPEC did have large amounts of spare capacity, but this was the result of happenstance, not a specific policy choice. Investing in excess capacity is expensive and in politically unstable countries and regions increases the risk of military takeover of that capacity.
In general, OPEC members deplete their reserves at a slower rate than non‐​OPEC nations. But the reason why is less likely a conscious decision to limit oil supply and more likely a consequence of difficulties acquiring the large amount of capital necessary to fully invest in oil production capacity. In particular, countries like Saudi Arabia use most of their oil revenue (at times, more than 90 percent of yearly Aramco profit) to fund expansive welfare states, leaving little behind for investment in increased capacity.
Academic evidence on OPEC’s ability to influence oil prices is inconclusive. Though OPEC may have at one time more explicitly attempted to set oil prices, since the 1980s it seems unlikely that OPEC has been a successful oil cartel.
On the surface, OPEC sets production quotas for its members, but cheating on these quotas is rampant and large. From 1993 to 2007, for example, OPEC members produced more than their quota on average 80 percent of the time. And OPEC members demonstrated little adherence to changes in their quotas. On average, they adjusted their production by less than a third of prescribed cuts or increases.

Most tellingly, we also examine the production behavior of three key members of OPEC: Saudi Arabia, Kuwait, and the United Arab Emirates. These three members are some of the most politically stable. Together, they produce a majority (55 percent in an average month from 2003 to 2022) of OPEC’s total output and possess nearly all (roughly 95 percent) of OPEC’s supposed spare capacity.

If OPEC were rapidly adjusting its oil production to control oil prices, as is commonly thought, the month‐​to‐​month change in oil production of these three countries would likely show large swings. Interestingly, however, what we see is that their production profiles are actually strikingly similar to the United States.

Figure 1 shows the month‐​to‐​month production change of the three OPEC members and the United States. Before 1993, the production profiles of the OPEC nations are very volatile whereas the US is much more consistent. This period coincides with more explicit attempts by OPEC nations to set an oil price and defend it by adjusting production. Since 1993, however, the OPEC nations’ profiles have become much less volatile and look similar to that of the United States. In fact, the production variation of the three countries is statistically indistinguishable from the variation of the US.

Altogether, what we find suggests that the attention paid to OPEC is undue and, on the part of politicians, largely self‐​serving. Political scientist Jeff Colgan argues that OPEC is a “rational myth” that confers domestic and international political benefits to its members. We add that Western leaders are happy to play along as OPEC provides a convenient scapegoat when oil prices are rising or falling, an event that politicians cannot control. This view of OPEC implies that the American public, media, and politicians should be less concerned with OPEC’s actions.

Instead, each time OPEC comes up in the news cycle we get another round of OPEC theater. As our paper concludes, “OPEC members bluster to their citizens with the appearance of controlling the West, while Western countries reciprocate by using OPEC as a scapegoat for unpleasant oil supply or demand shocks. The most effective way to undermine OPEC would be for Western leaders to stop paying attention to—and playing along with—the theatrics.”

Marc Joffe

Washington Metro’s extension to Dulles Airport and beyond to Loudoun County provides a new travel option for air travelers and airport employees, but, thus far, it is not attracting enough riders to justify its high costs.

As with most other recent rail transit construction projects, the extension provides a cautionary tale for those who think that massive public investments in new rail infrastructure will greatly improve mobility or solve climate change. It also now seems a particularly unwise move in the face of Washington Metro’s projected $750 million shortfall for fiscal year 2025 as the pandemic‐​related federal aid runs out, with threats of drastic service cuts if additional funding is not secured.

In September 2023, the six stations on the extension reportedly served 6,567 passengers on an average weekday of which 8.3 percent did not pay a fare. Weekend ridership was somewhat lower. These are modest numbers for a project that cost over $3 billion, and ridership numbers are well below expectations.

In 2015, a study referenced by this Washington Post article anticipated the extension would serve 50,000 passengers daily. An earlier study somewhat more plausibly anticipated 17,900 daily trips by the seventh year of operation, which still appears unattainable. The Covid‐​19 pandemic is cited as the reason for low ridership, but even before the pandemic, this estimation would have been extremely optimistic, partly due to an existing decade‐​long downward trend in ridership.

Furthermore, the Dulles enplanement rate has rebounded to pre‐​pandemic levels, so the rather dismal ridership at Dulles Metro station should not be blamed on the pandemic. Nevertheless, of the six new stations, Dulles Airport is the most popular. Two more lightly used stations lie beyond the airport. Planners would have been well advised to terminate service at the airport, avoiding the need to lay five miles of track further to the west.

Furthermore, this is a very expensive subsidy for quick transportation to the exurbs. This volume of riders could easily have been served by a rapid bus service. The former western terminus at Reston is located on a toll road that seldom sees heavy traffic to and from points west, so from the perspective of alleviating traffic it is ineffective.

Some interstates in Northern Virginia feature express lanes for vehicles with at least three passengers or paying drivers. The incentive of free use of the express lanes by high occupancy vehicles has led to the phenomenon known as “slugging”, whereby drivers can pick up riders to freely use the express lanes and beat the traffic. It is to the mutual benefit of both drivers and riders and is an effective and low‐​cost method of reducing motor vehicle traffic and use.

Disappointing cost/​benefit ratios might be a sign to those planning other projects, but, unfortunately, they continue to plow ahead. Next up for the capital region is the Maryland Transit Administration’s Purple Line, a light rail route that will connect New Carrolton, College Park, Silver Spring, and Bethesda. Undoubtedly, it is hard to commute between these destinations via rail now because it is necessary to travel into DC and back out. But it remains to be seen whether the demand for direct service between various Maryland suburbs will justify the project’s costs which recently ballooned to over $9.4 billion.

Rail transit was a great fit for America’s needs in the early twentieth century when systems could be built inexpensively, and many commuters did not yet have access to cars. A century later, conditions have changed. Federal, state, and local governments—unconstrained by the need to cover costs at the farebox—can continue to resist the new reality, but by doing so they make inefficient use of taxpayer funds.

David Boaz

Newspaper headlines proclaim that President Biden has issued a “massive, sweeping, wide‐​ranging” executive order on artificial intelligence. And no one seems to be saying that whatever the content of the order is, “massive, sweeping, wide‐​ranging” regulations should not be issued by one man.

President Biden, members of Congress, and the judiciary should take a look at the White House’s own website, where they would read: “Under Article II of the Constitution, the President is responsible for the execution and enforcement of the laws created by Congress.” Not to make the laws, but to execute and enforce them. If AI needs government attention, it should come from Congress.

Biden is not the first president to believe that his office was invested with kingly powers. Both President George W. Bush and President Barack Obama used executive orders to grant themselves extraordinary powers to deal with terrorism. Lawmaking by the president, through executive orders, is a clear usurpation of both the legislative powers granted to Congress and the powers reserved to the states.

Clinton aide Paul Begala once boasted: “Stroke of the pen, law of the land. Kind of cool.” President Obama declared: “We’re not just going to be waiting for legislation.… I’ve got a pen, and I’ve got a phone, and I can use that pen to sign executive orders and take executive actions and administrative actions that move the ball forward.” President Donald Trump upped the ante: “I have an Article II, where I have the right to do whatever I want as president.”

One of the great concerns of the Founders was to rein in executive power. Thus they wrote a Constitution to divide and limit the powers of all elected officials. But they thought that each branch would be jealous of its own authority and would not tolerate a usurpation of its power by the other branches. Somehow Congress and the courts have lost their taste for conflict with the executive.

No matter what agenda the president seeks to impose by executive order, Congress should stop him. The body to which the Constitution delegates “all legislative powers herein granted” must assert its authority. In a constitutional republic, one man should not have kingly powers — and the Constitution doesn’t grant them to him.

Michael Chapman

When Senator Bernie Sanders (I‑VT) talks about Sweden as a socialist paradise, he is promoting a tax‐​the‐​rich “pipedream” from the 1970s that never really existed, said Johan Norberg, a Swedish author, historian of ideas, and a senior fellow at the Cato Institute. Norberg added that Sweden today is a “much better and much freer place” than it was in the 1970s.

“So today, if Bernie Sanders wants to imitate Sweden, he would have to reform Social Security, partially privatize it,” said Norberg in an interview with ReasonTV, a division of Rea​son​.com. “He would have to … abolish property taxes and inheritance taxes, and stuff like that, implementing national school voucher systems…. So, Sweden today is not what he remembers from the 1970s. It’s a much better and freer place than it was back then.”

Norberg, also a documentary filmmaker, earned his M.A. in the History of Ideas at Stockholm University. His latest book is The Capitalist Manifesto, which was praised by Elon Musk on X. During the ReasonTV interview, Norberg was asked to respond to some of Sanders’ glowing comments about Sweden, which the self‐​described socialist had made during his 2015 presidential campaign.

In an inserted news clip, Sanders said, “In countries in Scandinavia, like Denmark, Norway, Sweden, they are very democratic countries obviously. Their voter turnout is a lot higher than it is in the United States. In those countries, health care is a right of all people. In those countries, college education, graduate school is free. In those countries, retirement benefits, child care are stronger than in the United States of America. And in those countries, by and large, government works for ordinary people and the middle class rather than, as is the case right now, in our country, for the billionaire class.”

When news host George Stephanopoulos then said that Republicans would run an attack ad accusing Sanders of wanting to make America more like Scandinavia, the senator replied, “That’s right, that’s right.” 

ReasonTV host Zach Weissmuller then asked Norberg to comment on Sanders’ remarks.

Norberg replied, “This is why Sweden is not a libertarian paradise. We might have free markets, but we do have a very generous welfare state. It’s true that many of these things are handed out by the government – it’s funded by the government at least through private providers. But the thing is we pay for these things ourselves. That’s an incredibly important point to make. Because there is this pipedream of Bernie Sanders and others that this will somehow be paid for somehow by the rich.”

Norberg continued:

“But Sweden learned in the 1970s. You can pick one: a big generous welfare state or you can make the rich pay for it all. You can’t have both. If you have a universal generous welfare state, and make the rich pay for it all, they will stop being rich. They will move. They will stop starting those businesses, the Ikeas of the future, and will move. Instead, you have to get most of the taxes from low‐ and middle‐​income households. That’s the dirty little secret of the Swedish welfare state.

“The socialists love the poor taxpayers because they are reliable, loyal taxpayers. They don’t dodge. They don’t move to Monaco. They don’t have tax attorneys. So we have the bulk of our government revenue coming from regional and local income taxes, which are flat. Income taxes are not progressive…. Also, things like a value‐​added tax at 25%, in general, on most goods. It’s obviously regressive. The poor pay as much as the rich when they buy food, in taxes.

“This means that when the OECD club of mostly rich countries look at different tax systems around the world, they say that the Swedish system is one of the least progressive tax systems of all. Much less progressive than the United States because America’s welfare state is so small, so you can rely more on the rich. Whereas here, we all have to pay for it.

“The Swedish welfare state mostly just redistributes over an individual’s life cycle. We get lots of stuff when we’re young, in preschool and school, and then we work hard and pay for it all, and then we get much of it back in health care and retirement benefits. Which mostly means, yes, we get lots of stuff but we pay for it all….

“It’s so interesting that socialists keep coming back to Sweden and I think that’s because all their favorite countries constantly fail. Every Cuba and Venezuela ends up with bread lines, millions trying to escape from that horror show. But they always have Sweden. It seems so friendly and successful and yet socialist.

“We have been socialist in Sweden and we have been successful but never at the same time. That’s what Sanders and the others fail to realize. We had that period in the 1970s and 1980s when Sweden was doubling the size of public consumption, raising taxes, regulating everything – price controls, what have you. This is the moment when Bernie Sanders and all those who are sort of stuck in the 1970s, this is what they still remember: ‘Look at Sweden! They’re socialist! But they’re also one of the richest countries on the planet! It seems to be working in Sweden.’

“The problem, of course, is that it’s like that old joke, how do you end up with a small fortune? Well, you start with a large fortune and then you waste most of it. That’s what Sweden did in the 70s and 80s. We were one of the richest countries on the planet before this experiment. And this was based on a 100‐​year period of limited government, free markets, free trade, as late as 1960. We had lower taxes than the United States and most European countries. This brought us all the wealth and all those successful international companies, the Ikeas and stuff, that brought us so much wealth that politicians thought they could just redistribute everything and begin to just jack up spending and taxes.

“Well, they couldn’t. Because the 70s and 80s, that’s the one period in modern Swedish economic history when we lagged behind other countries. This is the moment when we didn’t create a single net job in the private sector, and when entrepreneurs and businesses left Sweden. Ikea left Sweden. Tetra Pak left Sweden. Most successful entrepreneurs left because it was impossible to do business in Sweden. This all ended in a terrible financial crash in the early 1990s.

“So that was a brief period of time and it’s one that we don’t want to go back to in Sweden. Not even Swedish socialists – even they say, okay, we went too far. The Social Democrat finance minister at the time said it was actually absurd and perverse in many ways, what we were trying to do. Since then, Sweden has again become successful. But that’s based on a new period of liberalization and of economic reform.”

Perhaps that is the Swedish model policymakers should try to emulate.

Jeffrey A. Singer

Today, the Reason Foundation released the Drug Legalization Handbook, to which I contributed a chapter. The handbook is a guide for citizens and policymakers who seek a world in which governments no longer arbitrarily ban certain psychoactive substances and wage war on people who consume them.

A key word here is “arbitrarily.” For example, governments allow people to ingest alcohol. This dangerous, potentially addictive, psychoactive depressant can cause liver, heart, and brain damage, stomach and esophageal cancer, and, in some people, induce belligerent behavior. Yet governments put people in cages if they consume opioids—which causes none of those problems—unless they get a permission slip from another adult in the form of a doctor’s prescription. Governments allow people to consume psychostimulants like caffeine and nicotine but punish people for consuming stimulants like cocaine, methamphetamine, and other amphetamine derivatives unless they, too, receive permission from a doctor. Meanwhile, governments incarcerate doctors if their prescribing decisions deviate from government‐​imposed “guidelines.”

The drug war created a dangerous black market governed by the “iron law of prohibition”: the harder the law enforcement, the harder the drug. The “iron law” causes a never‐​ending cycle where more potent drugs emerge to replace older versions sold in the underground market. Heroin replaced prescription pain pills in the black market. Fentanyl replaced heroin. Now, fentanyl mixed with xylazine (“tranq”) has emerged on the scene, along with isotonitazine (“iso”), both of which are more potent than fentanyl. As a result, overdose deaths among people who use black‐​market drugs have skyrocketed.

Yet the drug war criminalizes individuals and organizations who want to prevent death and disease among people who use black‐​market drugs by providing them with harm‐​reduction tools.

The US government arm‐​twists other governments into joining its drug war, fueling corruption and destabilizing the governments of our hemispheric neighbors.

America’s war on some drugs has caused innocent people to die, destroyed families, corrupted institutions, destabilized the governments of neighboring countries, and, in the process, fueled the development of ever more dangerous drugs on the black market. It is the most destructive public policy in modern times.

The Drug Legalization Handbook, a joint project of the Reason Foundation, the Law Enforcement Action Partnership, Students for Sensible Drug Policy, and the National Coalition for Drug Legalization, shows policymakers how to end the destruction.

The chapter that I contributed to the handbook discusses how drug war enforcers get in the way of providing proper therapy for drug dependence, an example of cops practicing medicine.

Cato Vice President for Research Jeffrey Miron and former Cato Research Associate Erin Partin contributed a chapter called “Taking Drugs Off The Schedule: Eliminating The Controlled Substances Act.”

I encourage people to obtain hard copies of the handbook from the Reason Foundation or download the PDF version and share it with their friends and colleagues.

Jack Solowey and Jennifer J. Schulp

Following Hamas’s blood‐​soaked atrocities in the State of Israel, Senators Elizabeth Warren (D‑MA) and Roger Marshall (R‑KS) have sought to use the October 7 pogrom to gain support for a bill purporting to combat cryptocurrency’s use in financing terror and other crimes.

While the full extent and impact of Hamas’s use of cryptocurrency involves ongoing investigation, we want to leave no room for doubt about the reprehensibility of Hamas’s terror against innocent men, women, and children, including, in the words of President Biden, “Children slaughtered. Babies slaughtered. Entire families massacred. Rape, beheadings, bodies burned alive.”

As for the Warren‐​Marshall crypto anti‐​money laundering (AML) bill that’s being shopped as a response to this terrorism, it’s bad public policy that would, in essence, grant terrorists veto power over the lawful use of technology.

What We Do and Don’t Know About Hamas’s Use of Cryptocurrency

In general, cryptocurrency is not believed to be terrorists’ primary financial tool. According to the US Treasury Department’s 2022 National Terrorist Financing Risk Assessment, “terrorist use of virtual assets appears to remain limited when compared to other financial products and services.” Similarly, the Treasury Department’s 2023 Illicit Finance Risk Assessment of Decentralized Finance concluded that “money laundering, proliferation financing, and terrorist financing most commonly occur using fiat currency or other traditional assets as opposed to virtual assets.”

At Thursday’s (Oct. 26) Senate Banking Committee hearing on “Combating the Networks of Illicit Finance and Terrorism,” witness Dr. Shlomit Wagman—the former Chair of the Israel Money Laundering and Terror Financing Prohibition Authority—put it powerfully:

Let’s not lose sight and focus from the big picture. Crypto is currently a very small part of the puzzle. The major funding channels are, were, and remain state funding. Iran and others, those are the major players. Most of the funds are still being transferred by the traditional channels that we all know from the past: banks, money transmitters, payment systems, hawala, money exchange, trade‐​based terrorism financing, charity, cash, shell companies, and crypto.

This appears to track with respect to Hamas specifically. The terrorist group has used cryptocurrency as only one of many financial tools, fundraising vehicles, and money‐​transfer methods, including fiat currency—in cash and through banks—credit cards, hawalas (informal banking networks relying on credit, cash, and barter), taxation within Gaza, misappropriation of (and indirect subsidies from) humanitarian aid, and investment assets. In addition, Hamas uses webs of shell companies, non‐​profit foundations, and NGOs to conceal its financial activity—methods that long predate crypto’s existence.

An October 10 article in the Wall Street Journal stated that between approximately August 2021 and June 2023, crypto wallets connected with Hamas received around $41 million worth of crypto, based on research from the Israel‐​based crypto analytics firm BitOK, and that wallets linked by Israeli law enforcement to Palestinian Islamic Jihad (PIJ)—a terrorist organization that participated in the October 7 attacks alongside Hamas—received up to $93 million worth of crypto, based on research by Elliptic, another analytics firm.

Notably, Elliptic has since disputed this characterization in an October 25 post. Regarding the claim that Hamas and PIJ raised over $130 million in crypto, Elliptic stated, “there is no evidence to suggest that crypto fundraising has raised anything close to this amount, and data provided by Elliptic and others has been misinterpreted.” The Wall Street Journal has subsequently updated the October 10 article to note that “Elliptic says it isn’t clear if all of the transactions it identified directly involved PIJ, because some of the wallets belonged to crypto brokers that may have also served non‐​PIJ clients.”

Relatedly, in an October 18 post, Chainalysis (another crypto analytics firm) had provided additional context for Hamas‐​linked crypto numbers being floated. While not calling out any specific report or source by name, Chainalysis discussed how “recent estimates” of crypto activity following Hamas’s attack may significantly overestimate the funds in the hands of terrorists, as such figures appeared to Chainalysis to include all funds flowing through service providers, not merely the explicitly terror‐​related funds. According to Chainalysis, the known terror‐​related funds flowing through service providers could be a small fraction of the overall funds those service providers process.

When trying to make sense of reports regarding terrorist‐​linked crypto funds and the relevant caveats, one consideration to bear in mind is that policymakers and law enforcement agencies have different missions—or at least they should. As the Chainalysis post notes, two things can be true at the same time: (1) where service providers specifically serve as terrorist facilitators, “cutting off terrorist access to them” can be an important law enforcement tactic and (2) it may be “incorrect to assume” that all activity of a service provider used by terrorists is terror‐​related. When policymakers fail to understand these nuances, they can end up overstating the relative role that cryptocurrency plays in terror finance.

Additional assumptions regarding the relationship between cryptocurrency and terror finance can include the faulty notion that crypto is somehow a universally untraceable financial silver bullet for terrorists. However, because cryptocurrency transactions settle on open, public ledgers, they produce more of a traceable record than cash does. And while there are privacy‐​enhancing cryptocurrencies and applications, as George Mason University law professor J.W. Verrett explained in a recent Wall Street Journal commentary, such privacy tools “have limited transaction capacities,” making them ill‐​suited to largescale transfers.

Moreover, while self‐​custodied crypto assets can resist seizure where law enforcement lacks access to the relevant user and/​or device, cryptocurrencies that are housed with intermediaries (in one form or another) can be, and have been, interdicted. In 2020, the U.S. Department of Justice seized hundreds of crypto accounts related to the financing of al‐​Qaeda, ISIS, and Hamas. Since 2021, Israel’s National Bureau for Counter‐​Terror Financing (NBCTF) reportedly confiscated nearly 200 crypto accounts alleged to be linked to ISIS and Hamas. In 2023, the NBCTF seized millions of dollars’ worth of crypto related to Hezbollah and Iran’s Quds Force. And in the days following the October 7 massacre, the investigations division of the Israeli Police—Lahav 433—stated that they froze certain Hamas crypto accounts.

Dr. Wagman has noted that such seizures address only a fraction of Hamas‐​linked crypto. But that claim should not be mistaken for the separate claim, which Wagman herself debunks, that crypto is an outsized terror finance tool compared to other financial instruments.

In fact, in the face of challenges like crypto asset seizures, Hamas announced in April 2023 that they would stop raising funds with Bitcoin to protect their donors. And although subsequent crypto fundraising efforts in support of Hamas have been identified since October 7, early reports suggest those have raised only minimal funds, and some already have been frozen.

Perhaps one of the best summaries of the crypto landscape’s complex mix of both opportunities and challenges for counterterrorism was stated by Ari Redbord, Global Head of Policy at TRM Labs (a crypto analytics firm): “Crypto and illicit finance is a paradox to some extent. We do have more visibility than before, but don’t have the full visibility.”

The Warren‐​Marshall Bill Is Bad Public Policy

Senators Warren and Marshall have couched their bill—the Digital Asset Anti‐​Money Laundering Act of 2023—as a common‐​sense effort to fill loopholes and “apply the same anti‐​money‐​laundering rules to crypto that already apply to banks, brokers, check cashers and even precious‐​metal dealers.”

This is a gross mischaracterization. Their bill is not designed to fill loopholes but rather gum up the works of the US crypto ecosystem and risk forcing it offshore (and outside the reach of US law).

It’s misleading to suggest that the parts of the crypto ecosystem that are most analogous to banks and brokers—i.e., centralized, custodial crypto exchanges that allow users to buy and sell crypto with fiat money—don’t already face AML rules in the US. Typically, these businesses (so‐​called “fiat on/​off ramps”) are considered money transmitters and “money services businesses,” which are subject to a suite of federal AML and Know Your Customer (KYC) regulations under the Bank Secrecy Act (BSA)—including requirements to register with the Treasury Department, maintain AML programs, verify customers’ identification, employ compliance personnel, report transactions in currency over $10,000, and report suspicious activity. Coinbase, for example, plainly states on its website that it’s required to comply with the BSA, and is quite open about its approach to combatting terror financing.

The Warren‐​Marshall bill would go much further than simply ensuring that like rules are applied to like institutions. By defining digital asset miners and validators—which constitute the computing infrastructure securing cryptocurrency networks and do not directly interface with transacting parties—as “financial institutions” subject to AML/KYC requirements, the bill would place obligations to identify customers and their financial activity on entities for whom this simply wouldn’t make sense and who are incapable of doing so.

The result would be, in essence, a de facto ban on operating the backbone of the crypto ecosystem within the US. (Unfortunately, imposing de facto bans on US crypto activity by subjecting the square peg of crypto technology to the round hole of legacy regulatory frameworks has been a hallmark of the US regulatory approach to date.)

As Ben Samocha, co‐​founder of a number of Israeli crypto projects, including Crypto Aid Israel (a project raising money for the victims of Hamas terror and their families), put it “[c]rypto is here to stay.” Creating unworkable laws in the US would not uninvent crypto, it simply would route it through other jurisdictions and make it impractical for law‐​abiding US citizens to use (for example, to donate to humanitarian projects like Crypto Aid Israel). It’s unclear how driving crypto activity offshore would benefit or protect the US and its allies.

Don’t Give Terrorists the Destroyer’s Veto

Ultimately, crypto technology is a particular type of tool: infrastructure. In a sense, it’s a tool to build other tools. Perhaps unsurprisingly, Israel—nicknamed the Start‐​up Nation—is home to hundreds of crypto startups.

It is, of course, true that one person’s tool is another person’s weapon. Indeed, there’s a salient analogy here: Hamas reportedly has used water pipes—another form of infrastructure—not to irrigate but to manufacture rockets to fire at civilians. Destruction is terrorists’ vocation, and terrorists should not be granted veto power over those using technology to build.

One constructive application of crypto technology has been to use its underlying tamper‐​resistant recordkeeping system to securely document the testimony of Holocaust survivors. We personally could think of few more fitting applications of this idea than securely recording the evidence and testimonies of survivors of Hamas’s October 7 pogrom—the deadliest attack on the Jewish people since the Holocaust. Legislation that would render any use of crypto technology legally untenable would make such projects securing all‐​too‐​necessary witness to atrocities practically unworkable.

While investigations into the full extent of Hamas’s use of all financial tools, crypto included, should continue—just last week both the House Financial Services Committee and Senate Banking Committee held hearings on terror finance, for example—US policy should not give terrorists the right to deny technology to those using it to lawfully and constructively build.

Gabriella Beaumont-Smith

Last Halloween, I wrote about how the devilish Us sugar program makes candy more expensive. This year, as headlined by The New York Times, Halloween candy is even pricier. The New York Times article cites non‐​controllable factors like bad weather and high fertilizer costs, among other problems but curiously misses the US sugar program as a reason contributing to elevated sugar prices. Actually, the piece even goes as far as to blame US reliance on sugar imports as part of the problem:

The United States relies on sugar imports from Mexico, which saw sugar production fall by more than 15 percent this year as a result of drought conditions, according to the U.S. Department of Agriculture. The price of raw sugar traded in global markets, recently around 27 cents per pound, was the highest since 2011.

Parts of Asia, home to several top sugar producers, have also experienced dry weather that hit harvests. India, one of the largest sugar producers in the world, has restricted sugar exports to protect its domestic supply.

The U.S. candy consumer is essentially paying the price for poor crops in Mexico and also Asia,” said John Stansfield, a senior sugar analyst at commodity data platform DNEXT.

So, before I get to this year’s trade‐​related Halloween topic, I would like to fill in some of the gaps in this article. Firstly, while the price of raw sugar traded in global markets was indeed recently around 27 cents per pound, the US price was almost 43 cents per pound. The US sugar program’s purpose is to maintain a higher price for US sugar, thus the domestic sugar price is routinely almost double the global price (see the chart below).

Secondly, the US sugar program implements supply restrictions to keep domestic sugar off the consumer market to maintain a higher price—as my colleague, Colin Grabow puts it, the US government “is, in essence, the leader of a nationwide sugar cartel.” Lastly, the sugar program has strict tariff‐​rate quotas on imports of sugar so that extremely low quantities can be imported duty‐​free, but the excess is subject to tariffs reaching close to 100 percent.

To characterize the US as “reliant” on sugar imports and imply this reliance causes higher sugar prices is misleading. Consumers are paying higher prices because of the US government’s active reduction of the domestic sugar supply and taxes on sugar imports. When uncontrollable factors like weather impact the yields of foreign suppliers, consumers indeed pay even higher prices, but the original culprit of monstrous sugar prices (and thus, candy prices), is the US sugar program.

Now, to this year’s story.

Halloween is the biggest holiday for chocolate sales. Indeed, Americans’ love for chocolate is demonstrated in the time‐​honored tradition of Halloween candy trading with friends and family; most Americans say they would trade their gummy candy for chocolate treats.

The US chocolate trade is relatively free as most cocoa‐​based products and chocolate have zero or very low tariffs. The sugar program creates some hurdles but, overall, the story of bean to bar is a prime example of globalization:

Cacao trees can only grow in specific climates—primarily in Côte d’Ivoire, Ghana, Ecuador, Cameroon, and Brazil. The beans are then shipped around the world to be processed (roasted and ground into cocoa) and then made into cocoa butter, for chocolate manufacturing.

As illustrated in the figure below, based on 2022 trade flows, Germany, Belgium, and the Netherlands are the largest producers and exporters of chocolate and other cocoa‐​based food products, while the United States, France, and Germany are the leading importers of finished chocolate goods. Note, Germany, the Netherlands, and Belgium are leading exporters and importers of chocolate. (If you take our globalization quiz, you’ll learn that often the biggest exporters are also the biggest importers.)

Thanks to globalization, chocolate is integral to US culture, not only serving as currency on Halloween but as a gift on special occasions, and even a daily pick‐​me‐​up.

Travis Fisher

Senator Bill Cassidy (R‑LA) wants to slap a tariff on carbon‐​intensive imports. Last week he told reporters: “What we’re proposing is not a domestic carbon tax, and it is not intended to lead to a domestic carbon tax.” In an article published by Foreign Affairs, Senator Cassidy referred to his carbon tariff policy as a “foreign pollution fee.” One may quibble with the labels, but three things are clear: 1) Senator Cassidy’s proposal is a carbon tax on imports, 2) it will hurt American consumers and some manufacturers, and 3) it lays the groundwork for a domestic carbon tax.

What’s in a Name?

Let’s begin by defining the terms “tariff,” “fee,” and “tax.” According to Merriam‐​Webster, a tariff is “a schedule of duties imposed by a government on imported or in some countries exported goods.” Merriam‐​Webster defines a fee (in the payment context, not the real estate ownership context) as “a fixed charge.” Likewise, Merriam‐​Webster defines a tax as “a charge usually of money imposed by authority on persons or property for public purposes.”

Whether we use the terms tariff, fee, tax, duty, or charge is a matter of semantics. I prefer to use the word tax because people know what a tax is—and a tariff is just a tax on imports. No matter how you slice it or which name you give it, Senator Cassidy’s proposal boils down to the federal government taxing imports based on their carbon intensity. It’s a carbon tax. It may only apply to a narrow set of energy‐​intensive imported goods, but the partial application of a carbon tax doesn’t change the fact that it’s a carbon tax.

[Note: I’m intentionally leaving out the word “dioxide” after carbon for brevity—the compound in question is carbon dioxide or CO2 (or CO2 equivalents in the form of other greenhouse gases).]

Taxing Imports Hurts American Consumers

Senator Cassidy’s plan would establish an import tax based on the carbon intensity of certain imported goods, such as steel from China. Although his Foreign Affairs piece does not mention the level of the tariff or the specific industries and countries involved (apart from targeting China), we know how tariffs tend to reduce the quantity of imported goods and raise prices for consumers.

The economic case against a carbon tax on imports mirrors the case against tariffs in general. Tellingly, the Foreign Affairs piece takes the perspective of American manufacturers of tariff‐​targeted goods rather than consumers (note that Senator Cassidy’s tariff would also hurt domestic manufacturers who use imported steel in their manufacturing process). The Foreign Affairs article refers to “manufacturing” or “manufacturers” more than a dozen times while failing to mention consumers.

An early passage in the article illustrates its anti‐​consumer bias:

The difference in environmental regulation enforcement between China and the United States lowers the cost of manufacturing in China, thereby encouraging US manufacturing and the jobs associated with it to migrate overseas. Such losses for the United States’ economy put downward pressure on its industrial base and American standards of living.

Low‐​cost manufacturing in other countries challenges domestic manufacturing. I do not dispute that point. I disagree, however, when the senator characterizes low‐​cost manufacturing in China as a loss “for the United States’ economy.” American consumers (including consumers of imported materials, some of which are manufacturers themselves) are also part of the economy. Consider this quote from French economist Frederic Bastiat:

There is a fundamental antagonism between the seller and the buyer. The seller wants the goods on the market to be scarce, in short supply, and expensive. The latter wants them abundant, in plentiful supply, and cheap. Our [trade] laws, which should at least be neutral, take the side of the seller against the buyer, of the producer against the consumer, of high prices against low prices, of scarcity against abundance.

A carbon tax on imports would hurt consumers just like other tariff protections enacted on behalf of domestic producers. Cato scholars have pointed out how “the US government systematically ignores consumer or broader ‘public interest’ impact when imposing trade remedy taxes on imports.” Given the lack of attention paid to the consumer by lawmakers, it is no surprise that so many companies can successfully lobby for tariff protection at the expense of consumers. Unfortunately, the consumer is missing from Senator Cassidy’s analysis.

Getting Closer to a Domestic Carbon Tax

Despite Senator Cassidy’s claim that his foreign pollution fee “is not intended to lead to a domestic carbon tax,” that is exactly what it would do, for at least three reasons. First, the foreign pollution fee concept may not be workable under World Trade Organization (WTO) rules without a domestic carbon tax. Second, applying a carbon tax on imports would require a new bureaucracy to keep tabs on the carbon intensity of traded goods. Third, a carbon tax on imports would require translating carbon emissions into dollar amounts, which is one of the biggest hurdles faced by advocates of a domestic carbon tax.

Regarding WTO rules, the CLC stated in a September 2023 report:

Commentators and some countries have raised concerns about the consistency of these measures with the rules of the [WTO], particularly to the extent that they rely on national average carbon intensity values for covered products, are not paired with a domestic carbon price, or attempt to address concerns about economic competitiveness in addition to reducing greenhouse gas emissions.

If advocates of a foreign pollution fee are faced with the choice of pairing it with a domestic carbon tax to satisfy WTO rules or dropping the scheme, which will they choose?

Regarding the new bureaucracy needed to count carbon, Senator Cassidy and others have drafted legislation called the PROVE IT Act to clear that hurdle. The PROVE IT Act would establish the Department of Energy as the carbon counter in chief. The act was introduced by Senators Chris Coons (D‑DE) and Kevin Cramer (R‑ND) and co‐​sponsored by Senator Cassidy along with Senators Angus King (I‑ME), Lisa Murkowski (R‑AK), Martin Heinrich (D‑NM), Lindsey Graham (R‑SC), Sheldon Whitehouse (D‑RI), and John Hickenlooper (D‑CO). This looks like a “who’s who” of bipartisan carbon taxers, but don’t take my word for it. The pro‐​carbon tax Niskanen Center said:

If the PROVE IT Act becomes law, it will be a meaningful step toward collecting product‐​level emissions data. Getting better at measuring, reporting, and validating product‐​level emissions is critical for implementing a border adjustment under a carbon tax.

Regarding the level of the carbon tax on imports, any legislative proposal (or the agency implementing it) will have to come up with a dollar amount to tax carbon dioxide emissions. Economists believe this is an all‐​important step—according to Pigouvian theory, the level of the tax determines whether it increases or decreases social welfare. But the “correct” level of a carbon tax is difficult to estimate and depends on a host of politically charged decisions, like how to count costs (and benefits) and whether to weigh impacts in the distant future heavily (by applying a low discount rate) or lightly (by applying a high discount rate).

Critics of carbon pricing are correct to point out that the “correct” level of the tax—the marginal social cost of carbon emissions—is so dependent on input assumptions as to be useless in guiding public policy. A neutral perspective might be that there is a lot of wiggle room. Interestingly, carbon tax supporters admit the same thing:

There is considerable uncertainty about the magnitude of the social cost of carbon. Under the Obama administration, a task force consisting of 12 US government agencies was put together to employ several climate‐​economy models and come up with an estimate of the social cost of carbon. They came up with a range—actually, a very wide range. They couldn’t rule out the possibility of a near zero social cost or a cost of around $100 a ton.

Further, establishing the level of carbon tax through protectionist trade policy almost guarantees the process will be guided by politics rather than a thorough, scientific, and economically informed attempt to price carbon at the marginal social cost of emissions. I predict that whatever carbon price is implied in defining the “foreign pollution fee” in Senator Cassidy’s plan will be held up by advocates of a domestic carbon tax, who will say “Aha! This is the magic number we’ve been looking for!”

Conclusion

Senator Cassidy’s foreign pollution fee proposal is a carbon tax on imports, and it would hurt consumers just like other tariffs. Contrary to the senator’s stated intentions, it would take us one step closer to a domestic carbon tax—one based on protectionist trade policy rather than environmental economics.