Stromata Blog

Backward, Turn Backward, O Time, in Your Flight

Whenever this blog has been active, I have posted semiannual denunciations of DST (“Deranged System of Timekeeping”), marking both its imposition and its (alas, temporary) end. I suppose that everything that can be said on the topic has been repeated ad infinitum. The arguments for DST were already past their sell-by date when I first heard them over sixty years ago, when my then and future home state of Washington put the question to a popular vote. TV commercials promised that a “yes” would give voters “an extra hour of daylight”, suggesting that jumping clocks ahead would slow the Earth’s rotation on its axis. The vote was very close – 51.71% to 48.29% – so the fools had only a slim majority. (In the same year, the similarly specious JFK lost the state.)

This year I’ll pursue the soul of wit by limiting myself to a paragraph from Scott Johnson’s Powerline post:

Redistributing daylight is the kind of zero-sum game that underlies the liberals’ vision of the world. The hour of daylight in the evening comes at the expense of the morning. At least it is in fact only a zero-sum game. [emphasis added]

If DST affected nature the same way that progressive policies affect the economy, “springing forward” would take an hour away from morning and add only about fifty minutes to the afternoon.

Impeding Infrastructure

Although the infrastructure bill that Congress passed last year has more to do with climatic virtue signaling (bicycle lanes, electric car chargers) than roads and bridges, it does devote some money to those essentials (though not, per a Biden Administration maneuver, to building new roads or expanding the capacity of old ones). The President has now, however, acted to ensure that construction projects will cost more and buy less.

An executive order issued last Friday requires “project labor agreements” for construction projects valued at $35 million or more. There are some exceptions, and the order applies only to projects directly funded by the federal government, but the White House estimates that it will apply to $262 billion of contracts, that is, to the vast majority of work under the infrastructure bill.

An article on Law360, a left-leaning legal news site (you can easily get past its pay wall if you’re a lawyer; for others it’s more of a challenge), describes how the PLA mandate undercuts the goal of improving transportation.

A project labor agreement is a collective bargaining agreement that covers work on a particular project. The George W. Bush Administration banned them on federal projects. The Obama Administration rescinded the ban but “PLAs were only sparsely used under the Obama administration, and not at all under the Trump administration”. The Biden order will, as Joe might say, turn them into a BFD.

PLAs will “improve timeliness, lower costs and increase quality in federal construction projects” by ensuring all companies working on a contract follow the same labor terms and have a common dispute resolution mechanism, the White House said.

But construction companies that don’t already employ a unionized workforce may find it difficult to comply with employment terms they don’t typically have to follow, such as union job delineations, which may discourage some companies from bidding on construction solicitations, said Brian Lundgren, a principal at Jackson Lewis PC.

“You’ll see issues with how it can reduce competition, because [a PLA] can be an impediment to contractors, and [particularly] smaller contractors, who are not familiar with this and are nonunion,” he said. . . .

If nonunionized companies react to the order by pulling back from federal work, the effect on competition could be significant. The Bureau of Labor Statistics’ annual report on union membership, released in January, indicated that the vast majority of the industry is not unionized. According to the BLS, 86.4% of people working in construction in 2021 were either not a member of a union or not represented by a union.

The availability of construction workers for federal construction jobs is already tight, with the industry having struggled with shortages in skilled labor going back long before the recent “Great Resignation,” said Neil Wilcove, a member at Miller & Martin PLLC, whose litigation practice focuses on the construction industry.

“I think the unintended consequence of this is that the [labor] shortage is going to be more than what we’re already dealing with now, which is significant,” he said.

I doubt that the consequence is unintended; it’s simply not as important for an automobile-hostile Administration as doing favors for union bosses. That fewer potholes get fixed is a problem only for the deplorables.

The Dystopia They Embrace

When progressive artistes conjure images of the future that ought not to be, they foresee a world where monopolistic corporations rule, a handful of plutocrats live in luxury, and the masses are ground beneath gold-slippered feet. If I were pitching a film along the lines of Soylent Green and Elysium, the plot might go something like this:

A man who manages ten trillion dollars of other people’s money decides that the government isn’t doing enough to implement his ideas on how the world should be run. Cutting democracy out of the picture, he demands that corporations carry out his preferred policies and announces that those that don’t will lose access to his trillions. Corporations fall into line, some out of fear, many because they agree with him that political processes too often yield the wrong results. In the final scenes, we see a world run by oligarchs who bask in self-congratulation and feed crumbs of welfare to the lower classes whose livelihoods have been suppressed for the sake of the greater good.

That pitch couldn’t be used, though, because it’s real life, not fiction. The CEO of ten trillion dollar investor BlackRock touts it in the form of “stakeholder capitalism”, which he has marketed with increasing success to the executives who run major corporations.

Why? They, and many of their colleagues in the C-suite, have realized that, in a regime where stakeholder, rather than shareholder, capitalism is the dominant ethos in the “private” sector, their rewards will be less dependent on delivering value to shareholders (who can be a demanding bunch) than in the past. Rather, they will be expected to pay increased attention to the somewhat nebulously defined aspirations of their almost as nebulously defined stakeholders. In practice, that means putting “their” companies’ capital, and the power that comes with it, behind a social, political, and economic agenda set by the state, various interest groups (unions, say, or NGOs, to take two examples), and, yes, business, a set-up that may not only offer them a pathway to (in many cases, even more) wealth but also to a degree of political power. And the latter comes with the advantage that it is largely free of conventional democratic control.

Whatever the merits of the causes that the stakeholder capitalists pursue, their method of pursuing them is a naked exercise in rule by the rich. Progressives would see that if BlackRock were withholding funds from corporations that pour money into “green energy” projects powered by Sun, wind and noble intentions or that indoctrinate employees with the fashionable variety of anti-white racism.

But one should not accuse our progressive friends of inconsistency. Left-wing politics has always followed one unwavering policy: Decisions must be made through whatever mechanism is most likely to ensure progressive outcomes. Democracy was fine when the “deplorables” could be counted on to vote for Democrats. Now that the American version of aristocracy is converting en masse to the Woke Religion, oligarchy is the only acceptable form of government. The world must be saved By Any Means Necessary, dystopia included.

Further reading: Andrew Stuttaford, “The Dangers of ‘Stakeholder Capitalism’”
Milton Friedman, “The Social Responsibility of Business is to Increase its Profits”

A Simple SALT Solution

The Biden Administration’s Build Back Bankrupt bill, as passed by the House of Representatives, proposes to cut income taxes for two-thirds of taxpayers in the upper one percent. Republicans are adamantly opposed. Yes, that seems like a strange role reversal, but the provision at the center of the controversy, the deduction for state and local taxes (the “SALT deduction”), eludes simple intuitions.

Until the 2017 tax act limited the deduction to $10,000, state and local income taxes were deductible in full on taxpayers’ federal income tax returns, subject only to overall limitations on total itemized deductions. The rationale for the deduction was fairness. To the extent that someone’s earnings are taxed, they aren’t really “his”; he is just an involuntary conduit from the source of the income to the taxing authority. It is arguably inequitable to treat those amounts in the same way as income over whose disposition taxpayers can exercise discretion. That is the case for allowing state taxes to be deducted when figuring federal income tax liability.

But fairness has more than one side. State tax income tax rates vary widely, from zero to over 13 percent. The federal income tax deduction effectively transfers tax burdens from high-tax to low-tax states. Equal treatment of citizens by the federal government, regardless of the tax policies of different states, is the rationale for capping the SALT deduction.

Equity is in the eye of the beholder and less easy to agree on than beauty. So long as one looks only at the federal level, there will never be consensus on which unfairness is worse. The debate can, however, be transcended by turning our gaze to the states. Indeed, one state has long had a fully equitable regime in place.

In Missouri, federal income taxes are deductible on state income tax returns. Hence, earnings passed through mandatorily to the federal government are taxed by the feds alone. At the same time, the tax liabilities of people who live outside Missouri are unaffected. Both notions of fairness are satisfied to a reasonable degree. Moreover, every state is free to adopt this solution without any action by the federal government. New Jersey, whose Congresscritters are leaders in advocating the SALT deduction (top N.J. marginal tax rate: 10%), could enact it tomorrow.

New Jersey won’t, nor will any of the other high-tax states. Their reticence illustrates the SALT deduction opponents’ contention: The proponent states are willing to be fair to upper-bracket taxpayers only if other states pay the price.

Thanksgiving Vacation

For Thanksgiving weekend, my wife and I drove to Los Angeles to attend Loscon, a regional SF convention to which we’ve become attached. On Thanksgiving Day itself, we visited Disneyland’s new “Avengers Campus” (ma femme is an enthusiast for Marvel movies), and I was reminded of Yogi Berra’s famous apothegm: “Nobody goes there; it’s too crowded.”

My attention has therefore been rather distracted for the past several days, but a few items leaked through.

• The weekend’s big topic, I gather, was the Nu Xi Omicron coronavirus variant, which inspired the stock market to fall out of fear that the panicdemic will intensify, even though the first reports suggest that it probably has less serious effects than previous variants. That is consistent with the commonsensical observation that viruses maximize their reproductive potential by becoming more infectious but less lethal. A virus doesn’t hate humanity. It just tries to survive long enough to spawn offspring, which it can’t do efficiently if it kills its host. There is strong reason to believe that the viruses behind past pandemics remain with us today as causes of the annoying but mostly harmless “common cold”.
• Egregious Xi-aspirant Jack Dorsey has resigned his positions with Twitter. I’m not such an optimist as to think that the platform will improve under his successor, who just last week gave an enlightening interview to Technology Review. What I infer is that Parag Agrawal sees Twitter as a conversational referee whose benign objective to ensure that discussion takes place solely within bounds determined by “credible sources”. Credibility will be determined, naturally, by the wise bureaucrats of Twitter Central.
• Dr. Fauxi leaped over the shark last Sunday. Did Aristotle or Isaac Newton or Albert Einstein ever proclaim, “I represent science”? Even Hyman Rickover had to be eased out eventually. Dr. Fauxi is no Rickover.
• By far the most ominous news report of the weekend was the Wall Street Journal’s “Taliban Covert Operatives Seized Kabul, Other Afghan Cities From Within”, an account of how the Haqqani Network established Fifth Columns throughout Afghanistan’s major metropolitan areas, activated them when Joe Biden announced that America was going to scuttle, and took control of the country with hardly a shot fired. That subversion could proceed undetected and unhindered for so many years is a blacker blot on the U.S. military and intelligence services than the botched withdrawal. If we don’t learn from this massive failure, it will inevitably recur.
• The Daily Telegraph hears “Whispers in Washington [that] suggest Joe Biden's camp has a plan to find a more popular replacement ahead of the 2024 White House battle”. The “plan” is supposedly to shuffle Cackling Kamala off to the Supreme Court when Justice Breyer retires. The whispers are, however, mere tintinnabulation. Should a Court vacancy occur before the 2022 elections, vacating the Vice Presidency would leave the Senate tied 50-50 with no tie breaker, which would spell the end of the Biden agenda. The chance that any Republican Senator will vote to confirm a replacement is about equal to the chance that Donald Trump will endorse Liz Cheney’s reelection bid. After 2022, unless the Democrats gain an actual Senate majority (a fading though not impossible prospect), Kamala will be unconfirmable as a Supreme Court nominee. Her qualifications for the bench aren’t just nil; they’re negative.
• A couple of noteworthy articles: In City Journal, Charles Fain Lehman explores “The Genealogy of Woke Capital”. National Review’s Kevin Williamson asks, “Enjoying Autarky?” and reminds readers of the vices of restrictive trade policies:

Some of you who went shopping on Black Friday may have noticed substantially higher prices, or found that certain products you were looking for were not to be had at any price. Some of you experienced the same thing when shopping for your Thanksgiving dinner. You have heard about “supply-chain disruptions,” which have made it difficult to get the world’s splendid produce to the United States with the ease and plenty to which we have become accustomed. Another way to think of that situation is that COVID-19 managed to do quickly what our anti-trade protectionists have tried to do slowly: deprive American consumers of inexpensive imports.

Finally, let me note that a small tax on unsolicited e-mails sent between the day before Thanksgiving and the following Tuesday would easily raise enough revenue to replace the income tax.

The Future of the ESG Bubble

The Wall Street Journal has published a symposium of ten brief essays addressing the question, “Where Will ESG Investing Be in Five Years?” The authors are split between academics specializing in finance and various sorts of investment professionals. They express, as the symposium’s subtitle notes, “some very different views”.

Two of the contributors caught my eye, because they are well known figures in the pension commentariat: Olivia S. Mitchell, a Wharton School professor and director of the Pension Research Council, and Alicia H. Munnell, Peter F. Drucker professor of management sciences at the Carroll School of Management (Boston College) and director of the Center for Retirement Research. Both, I’ll note at the outset, are political liberals, but “everyone is conservative about what he [she in this instance] knows best”.

Professor Munnell is the more emphatic:

Where will ESG investing be in five years? Dead, I hope.

In my view, ESG funds are a marketing ploy by financial-services firms to repackage actively managed investments – which were becoming increasingly less appealing – in a trendy wrapper. They are expensive and accomplish nothing. And they divert people’s attention from the hard work that needs to be done.

Proponents argue that integrating ESG factors into existing methods of financial analysis allows investors to reduce risk and earn higher returns, while supporting socially beneficial practices and outcomes. But it isn’t clear that ESG money is even reaching the right targets. The Securities and Exchange Commission has started to crack down on greenwashing – the claim that investments will save the world with little evidence to support it.

An even more pernicious aspect of social investing through ESG funds is that it allows people to think that they’re really solving an important world problem when, in fact, they are doing nothing. It’s delusional to think that business can lead the way on fighting climate change or racism. The only people gaining from ESG investments are financial-services firms that monitor corporate promises in exchange for higher fees.

Professor Mitchell, without calling for ESG’s demise, says that the growth of ESG investment faces “several big obstacles” and is “skeptical” that they can be overcome. The obstacles include:

• the lack of any “coherent and unique definition of what ESG involves, making it impossible for investment professionals as well as everyday investors to identify whether these approaches are actually being carried out”;
• the consequent inability “to show that ESG helps (or hurts) invest performance”;
• the general absence of any correlation of “ESG ratings developed by corporate ratings firms . . . with each other or with firm performance”; and
• the very high expense ratios of ESG funds.

I have provided links to supporting studies cited by Professor Mitchell under “Further Reading”. She concludes by drawing attention to what seems to me to be one of the glaring weaknesses of ESG: that it puts three very different eggs into a single basket.

A better system would delink the environmental, the sustainable and the governance criteria, require disclosure of firms’ policies along each dimension, and require them to lay out their efforts to change.

The ESG-positive contributors don’t all ignore the murkiness of the concept. Some of them want more clarity, but for a reason that suggests a fundamental misunderstanding of the difference between investments and political contributions. Derek Tharp, a professor of finance and, perhaps more pertinently, founder of a wealth management firm, writes:

A major limitation of ESG funds is that it is hard to find a fund that perfectly aligns with one’s own values. Even two individuals who agree on the broader focus of a fund – say, protecting the environment – may still disagree on the best way to implement that. Nuclear energy is a popular example that splits environmental advocates. There is no neutral resolution to this divide, so a fund will inevitably need to take a stance on how to handle nuclear energy within the portfolio – and that will inevitably leave some potential investors in disagreement with the fund’s stance.

We may wish that companies of whose goods and services we approve will prosper, but that doesn’t mean that they will. If all users of word processing software or Internet browsers shared my own preferences, WordPerfect and Opera would dominate their markets, and Mr. Gates’s toy products would occupy minor niches, but my velleities would be a poor guide to increasing the value of my portfolio.

A final note: It’s striking that in these essays, the academics for the most part write clearly, while the investment professionals churn out jargon-heavy word salads, such as this from “Manisha Thakor, founder of financial well-being consultancy MoneyZen”:

I see ESG investing growing in effectiveness as it becomes knitted into the fabric of the global business ecosystem. At the board-of-directors level, ESG will become a clearly delineated component of existing subcommittees or a distinct subcommittee on its own. Institutional analysts and portfolio managers, irrespective of investment strategy and asset class, will discuss why they do, or don’t, incorporate ESG factors into their portfolio-construction process in the same manner as discussing whether they focus on P/E ratios and debt ratings. Institutional clients such as pensions, endowments, foundations and their consultants will consider their stance on ESG to be as vital a component of their investment-policy statements as asset allocation.

If your financial advisor starts talking to you like that, you’re probably better off with meme stocks and RobinHood.

Further Reading: David F. Larcker, Brian Tayan and Edward M. Watts, “Seven Myths of ESG”
Florian Berg, Julian F Kölbel, Anna Pavlova and Roberto Rigobon, “ESG Confusion and Stock Returns: Tackling the Problem of Noise”
Rebecca Moore, “Morningstar Finds ESG Funds Are More Expensive Than Conventional Funds”
Matt Wirz, “Green Junk Bonds May Not Deliver Green Results”

Capital Gains in Wonderland

Ron Wyden (D–Ore.), chairman of the Senate Finance Committee, has released the text of his proposed “Billionaires Income Tax Act”. It’s a mere 107 pages, a trifle over 20,000 words, and I’ve felt no impulse to do more than browse through it. The Wall Street Journal summarizes the high points, and I’ll summarize its summary, supplemented by dipping occasionally into the bill itself:

Senator Wyden aims to tax unrealized capital gains as they accrue, a huge change from present law, which taxes gains only when taxpayers realize them in sales, exchanges or other taxable transactions. Commentators have noted how tricky it is to tax gains that may prove transitory (asset values go down as well as up) and will often be hard to calculate (many assets don’t trade in liquid markets). Senator Wyden has made an effort to overcome these formidable difficulties, which is why his bill is novella length.

The tax would be imposed on anyone who, for three consecutive years, had net worth of over one billion dollars or adjusted gross income of over $100 million. Once a taxpayer fell into this disfavored class, he would remain in it until his net worth fell to $500 million or less and his AGI to $50 million or less and remained below those levels for three consecutive years. These thresholds are not indexed. We can thus anticipate, especially as Bidenflation takes hold, that the 700 “billionaires” reportedly subject to the new tax will eventually have lots of company, albeit probably not (we hope!) as much as the 155 individual taxpayers who initially had to pay the alternative minimum tax; their number grew to 5.1 million.

There would be two distinct regimes, one for assets that are traded on established markets, such as shares of public companies, and one for nontraded assets.

The net increase in fair market value of traded assets would be taxed annually at the maximum long-term capital gain rate (20% plus a 3.8% Medicare tax). In the first year in which an individual became subject to the tax (2022 for a Bezos, Musk or Zuckerberg), he would be allowed to spread payment over five years.

A net decrease in the value of traded assets could be carried back for up to three years to offset past gains and obtain a refund of capital gain taxes previously paid. The loss could also be carried forward indefinitely to offset future realized or unrealized capital gains and $3,000 a year of ordinary income. (When the limit on the ordinary income offset was increased from $1,000 to $3,000 in 1970, it wasn’t quite so nugatory: the equivalent of about $22,000 today.)

Gains on nontraded assets would be taxed only when realized, as under current law, but the definition of “realization” would be expanded to include gifts, bequests, transfers to irrevocable grantor trusts and various other transactions that ordinarily aren’t taxable (with an exception for transfers to spouses). Also, the tax rate would increase above 23.8% as the asset’s holding period increased, up to a maximum of 49%.

Those are the basics. The rest of the 107 pages are devoted to closing every loophole and work-around that Senator Wyden’s staff could imagine. You may be sure that by next Monday Mark Zuckerberg’s tax lawyers will have devised half a dozen schemes that are beyond the imaginative capacity of Congressional staffers, spurring yet more pages of statute in the future.

A couple of economic effects of this tax structure are predictable and will have an impact well beyond the small circle of ultra-wealthy targets.

First, the taxes assessed in 2022 will be gargantuan, which is why payment will be allowed over five years. After 2022, if the economy doesn’t fall into permanent stagnation (a scenario that shouldn’t be ruled out; President Biden’s policies could usher in a period that will make Japan’s lost decade look like exuberance), entrepreneurs will continue to found companies that grow from almost nothing to multi-billion dollar valuations in a short space of time. Even with five years to pay the tax, the 2022 and later billionaire cadres will face urgent needs for cash. They may avoid the tax for the moment by refraining from taking their companies public, a strategy that will make it harder to raise capital for further expansion and will also increase their eventual tax rate. Alternatively, they may go public and begin selling their personal stock holdings to raise money to cover tax liabilities. The latter course will exert a steady downward pressure on the stock price, to the detriment of other stockholders and the company’s future prospects.

Second, government revenue from the tax will fluctuate convulsively. The three-year loss carryback means that a broad stock market decline, like the one in 2008, could lead to multi-billion dollar tax refunds to men like Jeff Bezos at the very time when the federal fisc was most severely strained. Conversely, stock market booms will produce high but short-lived revenue streams, which, unless legislative habits alter radically, will be drawn on to establish programs whose expenditures will continue and swell after the boom has faded. California, which relies heavily on capital gains taxes to fund its government, illustrates how hard it can be to budget rationally when income is unforeseeable.

From a lawyer’s point of view, the most interesting question about taxing unrealized gains is whether it is permitted by the Sixteenth Amendment. If not, that is, if unrealized gains are not income within the amendment’s meaning, any tax levied on them is subject to the Constitution’s requirement that direct taxes be apportioned among the states by population (Art. I, sec. 9, cl. 4). The question is interesting enough that I’m going to ponder it longer before offering a definitive opinion. Here are a couple of preliminary observations:

The starting point should be Merchants’ Loan & Trust Co. v. Smietanka, 255 U.S. 509 (1921), in which the Supreme Court held that realized capital gains are “income”. The decision’s originalist analysis strongly implies that income arises only as the result of some act or transaction. Id. at 520. A later case, Helvering v. Bruun, 309 U.S. 461 (1940), refined that concept by holding that it was constitutional to tax the gain a landlord realized when he recovered real estate whose value had been increased by the tenant’s improvements. This case has been cited for the proposition that realization isn’t a necessary component of “income”, but that hardly seems consistent with what the Court itself said:

Here, as a result of a business transaction, the respondent received back his land with a new building on it, which added an ascertainable amount to its value. It is not necessary to recognition of taxable gain that he should be able to sever the improvement begetting the gain from his original capital. If that were necessary, no income could arise from the exchange of property; whereas such gain has always been recognized as realized taxable gain. [Id. at 469 (emphasis added)]

As an interesting sidelight, the legislature of my home state of Washington recently enacted a tax on realized capital gains. The state’s Supreme Court held long ago that income taxes violate the state constitution, unless the rate of tax is completely uniform. Culliton v. Chase, 174 Wash. 363 (1933). A lawsuit challenging the new tax is moving forward. The state doesn’t deny that the tax isn’t uniform. (It exempts gains on various classes of asset, such as personal residences, whose taxation would have led to legislators' donning coats of tar and feathers.) The argument in defense of the statute is that taxes on realized gains aren’t taxes on income. Meanwhile, Senator Wyden argues that unrealized gains are income. One must twist one’s mind into knots to be a true progressive these days.

Today’s Acronyms: ESG and ERISA

The statute to which I’ve devoted almost all of my legal career – the Employee Retirement Income Security Act of 1974 (“ERISA”) – gets only intermittent (and usually only modestly accurate) attention from the media. A new burst occurred on October 14th, when the Department of Labor published a proposed regulation designed to prod investment managers of employer-sponsored retirement plans to give greater consideration to “the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action”.

The proposed regulation is the latest volley in a back-and-forth that began in 1994, when the Clinton Administration published an “interpretive bulletin” (a document included in the Code of Federal Regulations but of considerably lower status than a real regulation) designed to dispel “a perception [that] exists within the investment community that investments in ETIs are incompatible with ERISA’s fiduciary obligations”. “ETI” was the acronym for “economically targeted investment”, which the bulletin described as “an investment that is selected for the economic benefit it creates, in addition to the investment return to the employee benefit plan investor”. This was the predecessor to the wider-ranging acronym that enjoys favor today: “ESG” for “environmental, social and governance” factors.

The (W.) Bush Administration revoked the Clinton interpretive bulletin, replacing it with one declaring that “ERISA’s plain text thus establishes a clear rule that in the course of discharging their duties, fiduciaries may never subordinate the economic interests of the plan to unrelated objectives, and may not select investments on the basis of any factor outside the economic interest of the plan except in very limited circumstances”. The Obama Administration revoked the revocation and reinstated the Clinton bulletin verbatim.

The Trump Administration sought to put its own reversal of its predecessor’s position on firmer ground by promulgating an actual regulation, whose philosophy is summarized by the statement, “A fiduciary may not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to other objectives, and may not sacrifice investment return or take on additional investment risk to promote non-pecuniary benefits or goals.” 29 C.F.R. §2550.404a-1(c)(1).

The Biden Administration’s proposed amendment to the regulation doesn’t overturn that principle. Rather, it amounts to an op-ed in the guise of regulatory text. The current regulation states that investment managers must consider “The projected return of the portfolio relative to the funding objectives of the plan”. The proposed amendment adds, “which may often require an evaluation of the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action”.

Similar editorializing shows up in a paragraph that begins innocuously: “A prudent fiduciary may consider any factor in the evaluation of an investment or investment course of action that, depending on the facts and circumstances, is material to the risk-return analysis, which might include, for example”, followed by a list heavily weighted toward “woke” favorites like “exposure to the physical and transitional risks of climate change”, “the positive or negative effect of Government regulations and policies to mitigate climate change”, “board composition”, and “progress on workforce diversity, inclusion, and other drivers of employee hiring, promotion, and retention”.

There isn’t a word in the proposed amendment that puts a fiduciary who wants to make climate stasis or racial discrimination (to call things by their correct names) a key investment criterion in any better position than under the current regulation. What’s more, notwithstanding a quarter century of abrupt volte-faces in official guidance, no reported decision in any case involving ERISA fiduciary duties has turned on, or so much as discussed, plan fiduciaries’ attention or inattention to “environmental, social and governance” factors.

Why, then, are the progressives who now control policymaking at the Department of Labor eager to insert ineffectual pro-ESG propaganda into the regulations? To grasp that, one must look at what the ESG movement is in practice.

ESG advocates don’t call for granular consideration of each of the variety of practices that fall under the headings “environmental”, “social” and “governance”. No one disputes that some of those are of vital importance to some companies. No rational being would evaluate investment in a coal company without taking into account government hostility to the industry (and without also taking into account, one might add, that coal is one of the world’s most efficient and abundant energy sources, a fact that can frustrate governments’ hostile plans). On the other hand, it is doubtful that a coal company with a minuscule proportion of female miners could become more profitable by hiring a sexually balanced work force.

What ESG analysis typically does is aggregate all kinds of disparate practices to produce ratings whose objective is to influence investment decisions. As the DOL noted in the preamble to the proposed version of the Trump regulation, there has been “a steady upward trend in use of the term ESG among institutional asset managers, an increase in the array of ESG-focused investment vehicles available, a proliferation of ESG metrics, services, and ratings offered by third-party service providers, and an increase in asset flows into ESG funds”. To the best of my knowledge, none of the “ESG metrics, services, and ratings” weights its factors by their importance to the individual companies under review. A high or low rating can flow from elements that are of no consequence for the bottom line.

As a further complication, “There is no consensus about what constitutes a genuine ESG investment, and ESG rating systems are often vague and inconsistent, despite featuring prominently in marketing efforts” – another point that the Trump DOL made in the preamble to its proposed regulation. In other words, there’s no way to be confident that an “ESG rating” genuinely rates ESG performance.

ESG evaluations are an expensive exercise. The evaluators must assemble data that don’t appear in financial statements and that can’t be easily acquired from other sources. Once acquired, the data must be updated regularly to watch for significant changes. Somebody must pay for those exertions, and that cost is inevitably passed on to the users of the evaluations. As the Wall Street Journal observes, “According to Morningstar, the asset-weighted average expense ratio of U.S. ‘sustainable’ funds was 0.61% in 2020 compared to 0.41% for all open-ended mutual and exchange-traded funds and 0.12% for passive funds.”

As already noted, ESG has been a non-factor in ERISA litigation to date, but that could change if it continues to make inroads among investment decision makers. Both the dubious linkage of ESG ratings to factors pertinent to particular companies’ performance and the high cost of producing those ratings raise ERISA red flags, and plaintiffs throw red flags with increasing frequency these days. Lawsuits alleging that plans acquiesce in excessive fees for inferior performance have become commonplace over the past several years. One of them, Hughes v. Northwestern University, is on next term’s Supreme Court docket. (It has no ESG angle; the Court will consider pleading standards for complaints that charge plan fiduciaries with allowing the payment of excessive investment fees.)

The Biden Administration wants to encourage greater use of ESG. ERISA-governed retirement plans are one of the world’s largest sources of investment capital. Unhappily for the ESG battalion, ERISA isn’t particularly favorable to the concept, nor does its categorical language leave room for an “ESG exception” to plan fiduciaries’ duties to participants.

For want of a better alternative, the Biden regulators have resorted to erecting a cardboard façade. Their proposed regulation implies that letting ESG factors influence investments is a great idea but doesn’t succeed in turning it into an idea that can be lawfully pursued. The reaction of the trade press, which has overwhelmingly reported the proposed regulation as a retraction of restrictions on ESG investing (restrictions attributed to the Trump Administration in 2020 rather than the Congress that enacted ERISA in 1974), suggests that the façade can withstand minimal poking by reporters who have trouble spelling “ERISA”.

Judges will be a bigger challenge. The proposed regulation doesn’t approve evaluating an investment on the basis of an aggregated rating that includes factors that both do and do not have a bearing on performance. Nor does it authorize paying fees for advice of dubious value. We’re probably a few years away, though, from the first ERISA ESG case. Until it arises, the purveyors of ESG ratings – I’ll take wild guesses that many of them make substantial campaign contributions and that little of that money goes to Republican candidates (well, maybe to Liz Cheney) – have received a boost to their industry.

More About Meritocracy

Having recently penned a three-part post on the progressive attack on “meritocracy” (Part I, Part II, Part III), I was interested to see Peter Berkowitz’s lengthy review of pop-professor Michael J. Sandel’s The Tyranny of Merit: Can We Find the Common Good?. Part I of my series took note of Charles Murray’s review of the same book. The Berkowitz and Murray reviews concentrate on different themes: Murray on the how “Today’s elites have a remarkable obliviousness about the lives and contributions of ordinary people that bespeaks an unseemly indifference – not to mention disdain – for those people”, a point on which he and Professor Sandel agree; Berkowitz on the book’s thesis, which he summarizes as “the greatest threat to equality, community, the common good, and justice in America is freedom in America”.

[T]he distinguished Harvard professor argues that the antagonism in America between equality, community, the common good, and justice, on the one side, and freedom on the other has reached catastrophic proportions. Amid the bitter divide in the United States between progressive elites and conservative-leaning middle-class and working-class voters, Sandel elaborates the sensational claim that it is meritocracy – the view, central to the modern tradition of freedom, that a “just society” provides all individuals “an equal chance to rise as far as their talent and hard work will take them” – that is tearing the United States apart. It turns out, however, that Sandel is not opposed to the rule of every form of merit. The thrust of his argument indicates that he wishes to replace the allegedly despotic rule of technocrats, economists, and financiers with the ostensibly refined and compassionate rule of experts in moral reasoning capable of leading national conversations about a common good in America that, in his telling, has been and remains elusive.

That is a good summary of a central political issue of our contentious era. Progressives see individuals’ “equal chance to rise as far as their talent and hard work will take them” as a threat to “equality, community, the common good, and justice”, as defined by progressives like Professor Sandel, of course. Their solution is to impose inequalities. One is reminded of an anecdote recounted by Herodotus, describing what happened when Periander, the tyrant of Corinth –

sent a herald to Thrasybulus [an older, more experienced tyrant] and inquired in what way he would best and most safely govern his city. Thrasybulus led the man who had come from Periander outside the town, and entered into a sown field. As he walked through the corn, continually asking why the messenger had come to him from Corinth, he kept cutting off all the tallest ears of wheat which he could see, and throwing them away, until he had destroyed the best and richest part of the crop. Then, after passing through the place and speaking no word of counsel, he sent the herald away. When the herald returned to Corinth, Periander desired to hear what counsel he brought, but the man said that Thrasybulus had given him none. The herald added that it was a strange man to whom he had been sent, a madman and a destroyer of his own possessions, telling Periander what he had seen Thrasybulus do.

But Periander understood his fellow tyrant’s advice. Progressives do, too, and seek to make their hegemony secure in the same way.

A Cold, Expensive Winter Is Coming

The U.S. Energy Information Administration (which only reports information; we aren’t yet at the point where information is administered) released its updated Winter Fuels Outlook today. Here is the summary:

• We expect that the nearly half of U.S. households that heat primarily with natural gas will spend 30% more than they spent last winter on average – 50% more if the winter is 10% colder-than-average and 22% more if the winter is 10% warmer-than-average.
• We expect the 41% of U.S. households that heat primarily with electricity will spend 6% more – 15% more in a colder winter and 4% more in a warmer winter.
• The 5% of U.S. households that heat primarily with propane will spend 54% more – 94% more in a colder winter and 29% more in a warmer winter.
• The 4% of U.S. households that heat primarily with heating oil will spend 43% more – 59% more in a colder winter and 30% more in a warmer winter.

The White House reportedly reacted as one would expect, that is, with a display of economic illiteracy:

The White House has been speaking with U.S. oil and gas producers in recent days about helping to bring down rising fuel costs, according to two sources familiar with the matter. . . .

“We are closely monitoring the cost of oil and the cost of gas Americans are paying at the pump. And we are using every tool at our disposal to address anti-competitive practices in U.S. and global energy markets to ensure reliable and stable energy markets,” a White House official said.

Higher energy prices shouldn’t be a surprise, given the Biden Administration’s efforts to cut domestic oil and natural gas production, but those steps won’t be reversed. It’s pretty obvious that the White House would like to see “voluntary” price controls. Maybe it’s starting to lay the groundwork for controls that are not even nominally voluntary.

One of the clearest lessons of economic history is that lowering prices by fiat creates shortages as demand outstrips supply. Some of us remember Jimmy Carter’s gasoline price controls and the endless lines at such stations as had gasoline to sell. Then Ronald Reagan was elected. To the horror of liberals, he abolished the controls. A couple of mornings later, the lines were gone.

The predictable result of artificially suppressing energy prices is that many consumers won’t pay higher heating bills. Instead, they won’t be able to buy heat at all. The White House will then blame “anti-competitive practices” or, if Joe Biden continues his steep slide to the left, “saboteurs and wreckers”.

Button up your overcoat, and get out the long underwear.

Meritocracy and Its Cultured Despisers (Part III)

Part I of this series looked at the original, pejorative meaning of the term “meritocracy” and the criticism directed at it by the term’s coiner, the English Baron Young of Dartington. What he meant by “meritocracy” might have been better labeled “sapientocracy”, rule by individuals of high natural intelligence. Part II examined the more recent, broader attack on a somewhat different notion of “meritocracy”. Progressive anti-meritocrats reject merit itself. It is unfair, they contend, to reward people for being “better on the merits” than others, because those merits ultimately derive from external circumstances, most notably the genes, upbringing and education passed on by successful fathers and mothers to their offspring. Worse yet, when preference is given to merit, competition ensues, blighting the lives of the competitors.

In this part, I wish to examine more closely one aspect of the progressive complaint. Once again, the anti-meritocratic spokesman is Daniel Markovits of Yale Law School, who has summarized his case in an interview with the keen teens of the web site Vox. As noted in the previous installment, Professor Markovits believes that parents who “spend enormous sums of money . . . on educating their children, on getting their children into prestigious kindergartens and high schools, on coaches and tutors and music teachers”, with the result that their kids “do better on the merits”, are morally indistinguishable from participants in the Varsity Blues scandal, where actors and hedge fund managers circumvented merit through outright bribery.

Professor Markovits doesn’t deny that the beneficiaries of a top-flight education possess the qualities that top-tier colleges are looking for. Why, then, is admitting them over applicants with fewer of those qualities unfair? Usually, we think that unfairness means evaluating people on the basis of irrelevant criteria. It is unfair for a teacher to give A’s to student brown nosers who don’t understand the material. It is unfair for an executive to promote his incompetent nephew. It is unfair for a movie producer to give leading roles to women who sleep with him.

Meritocracy, in the sense that progressives denounce, is the practice of refusing to take irrelevant factors into account. (That leaves much room to argue about what is, in fact, irrelevant and who should answer that question, but those are matters for another time.) From a utilitarian point of view, it’s hard to argue with giving preference to merit. As we saw in Part II, however, critics like Professor Markovits reject the utilitarian argument. They believe that society would be better off without the inordinate level of competition that meritocracy engenders. If one accepts that premise, one is left simply with the moral question: If it is not useful to prefer merit, is it nonetheless the morally superior option?

The instinctive response is that rewarding merit is right, indeed a tautology. The progressive counterargument can be found in Professor Markovits’s equation of education with bribery. The student whose superlative preparation for college has been arranged and paid for by his parents has, from the progressive point of view, done no more than the one whose father paid off the college admissions department. The “merit” belongs in each case not to the student but to his forebears, and their “merit” isn’t relevant to determining whether their children should be admitted to college.

That argument crucially assumes that the qualities instilled by the first student’s preparation don’t truly belong to him. It isn’t surprising that progressives would make that assumption. It underlies the common progressive idea that criminals aren’t responsible for their actions, because social conditions beyond their control formed their characters.

Ultimately, that line of argument denies that human beings exist as moral actors. We are the puppets of heredity and environment, who ridiculously believe that we (and others) are responsible for our own actions. The upshot is what C. S. Lewis described as “the abolition of man”.

Whether human do or do not have moral autonomy is not a question that is amenable to rational dispute, because it is an axiom rather than an inference. If we are puppets whose moral ideas are pulled by strings, our philosophical ideas are pulled in the same way. Presenting a finely crafted argument that those ideas are wrong is as futile as debating with an automobile that won’t start. Debate and persuasion are possible only among those who believe that other people are not puppets.

In arguments about “meritocracy”, as well as in many other spheres, the crucial cleavage today is between those who would and those who would not abolish man. We might want to think for a moment about what an abolitionist victory would mean. If reason is an illusion, the monsters that arise while it sleeps will be real – and vicious.

Meritocracy and Its Cultured Despisers (Part II)

“Meritocracy” was coined as a pejorative, has enjoyed a few decades as an aspiration, and is now returning to its original status, as progressives denounce the notion that attention to “merit” is anything more than camouflage for racism, sexism, homophobia, transphobia, ableism and what new isms and phobias have been discovered since three o’clock yesterday. Part I of this series examined the “soft” anti-meritocratic argument, the one advanced by the term’s originator, Baron Michael Young, and carried on today by Charles Murray, ideologically a very different figure.

The “soft” objections to meritocracy specifically address the tendency to equate “merit” with natural intelligence. Baron Young would have forestalled a great deal of confusion if he had labeled the idea that he was satirizing “sapientocracy”. Progressives attack a broader concept of “merit”. The ultimate foundation of their argument is that no one “merits” anything, because our merits don’t originate within ourselves. Rather they are bestowed by others: ancestors, parents, people with whom we associate, society as a whole.

An example of this thinking can be found in an interview that Vox, a web site popular with TikTok influencers and other pre-adolescents, conducted with Daniel Markovits, a Yale Law School professor who has written The Meritocracy Trap: How America’s Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite. I will here borrow from the Vox interview to explicate the logic of the “hard” case against meritocracy, which is much like a case against merit itself

Asked to define “meritocracy”, Professor Markovits replies, “Meritocracy is the idea that people get ahead based on their own accomplishments rather than, for example, on their parents’ social class. And the moral intuition behind meritocracy is that it creates an elite that is capable and effective and that it gives everybody a fair chance at success.”

He concedes that contemporary America is “something like a meritocracy”, because “the bulk of the reason why certain people have gotten ahead is that they have genuinely accomplished things” but objects that “the moral intuition behind meritocracy is not at all realized. This system does not give everybody a fair chance at success and it hasn’t been particularly good for society as a whole.”

Although Professor Markovits undoubtedly regards inequality as undesirable, he is not devoted to leveling all the hills and filling up all the valleys. If he advocated “From each according to his ability, to each according to his need”, he would hardly be interested in whether meritocracy gave “everybody a fair chance at success”. A fair game that produced unequal results would be just as objectionable as one that was rigged.

He summarizes meritocracy’s unfairness thus: “[B]ecause the rich can afford to educate their children in a way nobody else can, when it comes time to evaluate people on the merits, rich kids just do better.” The proof of that proposition is that students at top-tier colleges predominantly have parents who are well above average in income and education.

The premise is that the key to admission to a top-tier college is the preparation furnished by affluent, well educated parents and that the recipients of that preparation have an unfair advantage. Those advantages are of many kinds, including (i) native intelligence (assuming that intelligence is linked to either heredity or family environment), (ii) attendance at good schools, (iii) parental encouragement to do well academically and in extracurricular activities, (iv) lower incidence of family breakup, crime, drug abuse and other detriments to achievement, (v) association with other children of the same “cognitive elite” class, (vi) superior access to cultural and intellectual resources and (vii) in a pinch, the availability of special tutoring and similar support. There are doubtless more that haven’t crossed my mind.

Those advantages foster the qualities that selective colleges look for in students, but to Professor Markovits they are no better than the bribes paid by the celebrity parents involved in the “Varsity Blues” scandal.

In that scandal, some rich and famous people paid bribes to get their kids into college.

Now, I’m not saying the scandal wasn’t wrong – it absolutely was scandalous. But the bulk of the reason why our colleges, particularly our elite colleges, are filled with kids of rich parents isn’t that. Instead, it’s that rich parents spend enormous sums of money not on bribing anybody but on educating their children, on getting their children into prestigious kindergartens and high schools, on coaches and tutors and music teachers, and this means the children of rich people simply do better on the merits.

And so the big problem that we face isn’t merely that the rich cheat, it’s that the meritocracy favors the rich even when everybody plays by the rules.

In this discussion, Professor Markovits takes us only as far as the gates of the campus, which isn’t where many men and women other than star athletes accrue wealth and fame. I’ll assume arguendo that matriculation brings with it yet more advantages – acquisition of monetizable knowledge, friendship with fellow students who are on their way to success and will be helpful in later life, credentials that will impress future employers, etc. – that lead to “the children of rich people” doing yet “better on the merits”. If that isn’t the case, Professor Markovits’s argument peters out, for all that an elite college education then does is make rich people a little less rich as they pay monstrous sums for their children’s four-year vacations.

At this point one may ask why, even if it is in some sense “unfair” for those who are “better on the merits” to earn the greatest rewards, society doesn’t benefit from the arrangement. Leaving aside “rent seeking” activities (for which Yale or Harvard may or may not be a good preparation), getting rich generally is the result of providing goods or services that other people want. Professor Markovits himself says, as already noted, that “the bulk of the reason why certain people have gotten ahead is that they have genuinely accomplished things”. Jeff Bezos isn’t a multi-billionaire simply because he graduated from Princeton, nor Bill Gates because he attended (but dropped out of) Harvard.

“Genuinely accomplishing things” isn’t a prime, or even especially desirable, goal for Professor Markovits. Accomplishment has become enmeshed in the greater evil of competitiveness. He shares Baron Young’s nostalgia for pre-meritocratic privilege:

Look, one way to think about this is that if you take a longer historical view, meritocracy in its deeper origins came to the English-speaking world around 1833 [sic; sc. 1854], which is the date in which the administrative division of the British East India Company entrance and promotion based on social class was replaced with entrance and promotion based on competitive examinations.

The eventual upshot was –

It takes enormous effort to win and keep winning in this competition, so elite schooling has become enormously more intensive than it was 20 or 50 years ago. And elite jobs have become enormously more intensive. The toll that this takes is quite heavy and I think it’s destructive of human well-being.

Meritocrats are constantly struggling and being evaluated and tested, and they constantly have to shape and manipulate themselves in order to pass the test. And in a way, it’s like they’re portfolio managers whose assets include just themselves, and they have kind of an instrumental and alienated attitude toward their own lives because they have to treat their life that way.

The interviewer asks, “Is there any way to organize a competitive society that doesn’t inevitably tend toward these sorts of excesses?” Professor Markovits has something of a solution at hand:

I think it’s possible, yes. So one distinction I draw is between excellent education and superior education. Excellent education is education that makes a person good at something that’s worth doing, and superior education is education that makes somebody better than other people at something, regardless of whether it’s worth doing or not.

You can imagine a society which has widespread, excellent education and invests in training people to be good at all the tasks that the society needs and fills up its jobs with people who are excellent at them. And that would be a kind of a meritocratic society that structures its education and work so that once you’re excellent, being a little bit better doesn’t make that much of a difference.

Damping down education from “superior” to “excellent” sounds like an excellent way to stifle innovation, while suppressing “education that makes somebody better than other people at something” is an obvious formula for producing cookbook followers who unimaginatively do what their predecessors did. Stagnation almost sounds like the objective behind Professor Markovits’s denunciation of “superior education”:

It gives huge advantages to people who are better than somebody else or than everybody else in all sorts of things that probably aren’t worth doing, like being great at high-tech finance, which most economists think has almost no social value.

But if you’re really good at it you can make millions and millions of dollars a year, and to get really good at it you have to master all sorts of difficult skills and you have to get degrees at the top of your class in the very best universities in the country. And that’s the kind of system that we have now.

This is such a strange view of the economy that I suspect the professor of amusing himself at the expense of his teenage-level interviewer. He was perhaps waiting to be asked how those “who are better than somebody else or than everybody else in all sorts of things that probably aren’t worth doing” get paid “millions and millions of dollars a year”. Alas, the question didn’t come, so we didn’t get to hear his answer. I’m going to go out on a limb and bet that it wouldn’t have been convincing.

Whether meritocracy is useful is, however, only part of the story. As should be clear by now, Professor Markovits has moral, as well as utilitarian, criticisms. To those I’ll turn when I get around to the next installment in this series.

Costs and Opportunities

Everyone who has ever taken an introductory course in economics learned that “cost” is a short, punchy synonym for “forgone opportunities”. When you spend a dollar – or a minute – you choose one possible use for that money or time, and you give up a vast array of alternative uses. Your choice shows what you then judged to be the most desirable of the available opportunities. Whether your choice was wise depends on the value of what you got, as compared to the value of what you could have had. You may realize later that you misjudged; in that case, you paid “too much”. Or you may be satisfied, so that the price was “just right”. In neither case, though, is the cost “nothing”.

Whether Joe Biden ever took Econ 101, I don’t know. If he did, he has forgotten the meaning of “cost”. To be fair, he was a college freshman about sixty years ago. It’s natural that a few bits of book learning would slip from his mind over the decades. (After all, he apparently doesn’t remember what advice his military advisors gave him a few months ago about Afghanistan.) Forgetfulness explains the President’s defense of his multi-trillion dollar spending proposals: “My Build Back Better Agenda costs zero dollars”, because “it adds zero dollars to the national debt”.

Let’s make the implausible assumption that the second statement is accurate, that the trillions spent will be matched by trillions in tax revenue gained through shutting down “tax breaks, loopholes, and tax evasion for big corporations and the wealthy”. What that means is that the trillions whose disposal that Biden Administration proposes to take out of the hands of “corporations and the wealthy” – a cohort of hundreds of thousands, if not millions, of decision makers with a wide range of values – won’t be available for the goods and services that they would have purchased and the investments that they would have made.

The President could argue that the forgone opportunities are less valuable than the ones that he and his party choose to pursue. He can’t argue that nothing will be given up. The obvious motive for insisting that his program “costs zero dollars” is to sidestep questions about whether the thousands of items of “Build Back Better” expenditure are more valuable than the alternatives chosen by individuals. Making that case would necessitate, as a starting point, a much clearer description of what the Biden agenda contains, followed by a close analysis of whether, for instance, three billion dollars for “tree planting and related activities to increase community tree canopy and associated societal and climate co-benefits, with a priority for projects that increase tree equity” is worth forgoing what the same sum in private hands would buy.

Whether the Democrats’ spending extravaganza increases the national debt is a secondary, albeit not trivial, question. The primary one is whether the country is better served by seizing the the opportunities that millions of American taxpayers choose or by accepting the preferences curated by a gaggle of Congresscritters, supplemented with input from whomever Joe Biden listens to these days.

Meritocracy and Its Cultured Despisers (Part I)

A decade after World War II, while the Labour Party was in the early throes of an electoral drought that would keep it out of power from 1951 through 1964, a socialist sociologist named Michael Young (later Baron Young of Dartington), draftsman of Labour’s 1945 election manifesto but somewhat disillusioned with the party’s intellectual stagnation, wrote a satirical novel titled The Rise of the Meritocracy, 1870-2033: An Essay on Education and Equality. The word “meritocracy” was his coinage, and he meant it as a pejorative.

Baron Young’s concept of a “meritocracy” was a society in which men were rigidly classified by intelligence, for which they were tested in childhood. The results of the test (conducted as early as age three at the time of the book’s notional date of writing, early 2034) determined the future course of each child’s life. The outcome was a drastically unequal society, which the baron saw as worse than the old aristocrat-dominated era. Like many a radical (vide William Cobbett’s The Reformation in England and William Morris’s medieval romances), his condemnation of the present led to as sentimentalized a view of the past as any reactionary ever entertained. In the era before meritocracy gained power –

A sort of egalitarianism flourished then because two contradictory principles for legitimizing power were struggling for mastery – the principle of kinship and the principle of merit – and nearly everyone, in his heart of hearts, believed in both. . . .

Many people were catapulted forward by their parents’ riches and influence; not only did they benefit from the culture festooning their homes, they were sent to the best schools and colleges, dispatched on trips abroad and given expensive training for Bar, countinghouse, or surgery – all the advantages, in short, which we in our day try to keep for the deserving. But since such treatment was sanctioned by only half the moral code, the beneficiaries were only half at home in their station in life. They could not say to themselves with complete conviction ‘I am the best man for the job’ because they knew that they had not won their place in open competition and, if they were honest, had to recognize that a dozen of their subordinates would have been as good, or perhaps better. Although they sometimes sought to deny self-doubt by too brassy an assertion of self-confidence, such denial was hard to sustain when it plainly ran against the facts. The upper-class man had to be insensitive indeed not to have noticed, at some time in his life, that a private in his regiment, a butler or ‘charlady’ in his home, a driver of taxi or bus, or the humble workman with lined face and sharp eyes in the railway carriage or country pub – not to have noticed that amongst such people was intelligence, wit, and wisdom at least equal to his own, not to have noticed that every village had its Jude the Obscure. If he had so observed, if he had so recognized that his social inferiors were sometimes his biological superiors, if the great variety of people in all social classes had made him think in some dim way that ‘a man’s a man for a’ that’, was he not likely to respond by treating them with a kind of respect?

Charles Murray takes up the same theme in a review (illustrated by a scene drawn from Animal Farm) of The Tyranny of Merit: What’s Become of the Common Good? by political philosopher Michael J. Sandel. Professor Sandel quotes Baron Young favorably, and Mr. Murray concurs in a large part of the critique:

As Young predicted, far too many members of today’s elites really do believe that they deserve their place in the world. They have gotten too big for their britches. They are unseemly, albeit in different ways. The billionaire’s 30,000-square-foot home is visibly unseemly. But so is a faculty lounge of academics making snide remarks about rednecks – meaning the people without whom the academics would have no working mechanical transportation, be in the dark after sundown, have to use chamber pots, and, literally, starve. Today’s elites have a remarkable obliviousness about the lives and contributions of ordinary people that bespeaks an unseemly indifference – not to mention disdain – for those people.

True enough, but is the triumph of “meritocracy” the cause of that disdain? And, whatever the cause, is there any cure?

In Baron Young’s and Charles Murray’s view (and perhaps in Professor Sandel’s, though I know his opinions only as mediated through Murray), the “merit” in “meritocracy” is intelligence – the ability to absorb information rapidly and accurately and then recombine it in enlightening ways. Mr. Murray has elsewhere labeled the possessors of that merit the “cognitive elite”. As a marker of elite status, intelligence has largely superseded older markers, such as ancestry and wealth. More precisely, it has assimilated them: The cognitive elite are not merely smart; they are rich, and they intermarry, forming a social class that functions in much the same way way as hoi kaloi kai agathoi (“the beautiful and the good”) of ancient Greece or the pre-Great War European aristocracies.

Were those past elites in fact less disdainful of the thetes and the “commoners” than today’s elite is of the “rednecks”? That isn’t the impression that one garners from the history and literature of those times. It is also quite possible for disdain to be accompanied by acknowledgement that the lower orders are essential to the elite’s own comforts. The patrician fable of the revolt of the other bodily parts against the stomach, recounted by Livy, Aesop, Plutarch and Shakespeare, concedes as much but concludes that the elite’s superiority is justified; the inferior parts are simply doing their duty by making it possible for their betters to carry on their far more important work.

Condescension and snobbery are elements of the human condition. Political reform and lectures on their irrationality won’t banish them. Universal and whole-hearted acceptance of the Sermon on the Mount might make a start.

The Young/Murray critique of meritocracy isn’t the only one. It is a “soft” critique, ultimately asking only that the members of the cognitive elite be mindful of their limitations and appreciative of the vital role of those outside their circle. Moreover, the elite whose attitudes it criticizes may already be dissolving. College education has played a major role in creating the cognitive elite (a point that Mr. Murray has often made). Co-education made it easy for men and women on the right-hand side of the intelligence Bell Curve to meet and marry their intellectual peers, then beget children who could gain admission to the parents’ almae matres without relying on alumni preferences, thus setting in motion a self-reinforcing cycle.

Now the cycle seems to be stuttering, as colleges transform themselves into ideology-obsessed credentialing factories that are decreasingly attractive to one of the halves of the human species that is essential to reproduction. When the men whom cognitively elite women would prefer to marry are scattered throughout the population rather than conveniently concentrated on campus, the segments of the Bell Curve will intermingle, as they did in the past. Highly intelligent people will still be born (and many of them will still become billionaires), but they will be less of an identifiable, self-conscious social grouping.

Side by side with the “soft” critique is a “harder” version: that allowing people to gain wealth by exercising their talents is unjust, because those talents owe their existence to factors – genetics, upbringing, education, luck – that were bestowed on them by others. The nub of that argument is that there is no such thing as “merit”.

Since this post has already meandered long enough, I’ll reserve discussion of the “hard” critique for a later day. It “merits” extended examination, for its premise is that there are no such entities as individual human beings with responsibility for their own lives, a version of what C. S. Lewis called “the abolition of man”. It thus goes beyond denigration of the role of merit to rejection of the reasoning intellect.

Good News from Red China (Though Not So Good for the Chinese)

If the Wall Street Journal reports accurately, Xi Jinping has grown weary of prosperity and wants change for China, just as the contemporary Democratic Party wants it for the United States. President Xi –

is trying to roll back China’s decadeslong evolution toward Western-style capitalism and put the country on a different path entirely, a close examination of Mr. Xi’s writings and his discussions with party officials, and interviews with people involved in policy making, show.

For most of the 40 years after Deng Xiaoping first unleashed economic reforms in China, Communist Party leaders gave market forces wider room to flourish. That opening helped lift hundreds of millions of people out of poverty and created trillions of dollars in wealth, but also led to rampant corruption and eroded the ideological basis for continued Communist rule.

In Mr. Xi’s opinion, private capital now has been allowed to run amok, menacing the party’s legitimacy, officials familiar with his priorities say. The Wall Street Journal examination shows he is trying forcefully to get China back to the vision of Mao Zedong, who saw capitalism as a transitory phase on the road to socialism.

Mr. Xi isn’t planning to eradicate market forces, the Journal examination indicates. But he appears to want a state in which the party does more to steer flows of money, sets tighter parameters for entrepreneurs and investors and their ability to make profits, and exercises even more control over the economy than now. In essence, this suggests that he aims to rewrite the rules of business in what could someday be the world’s biggest economy.

“China has entered a new stage of development,” Mr. Xi declared in a speech in January. The goal, he said, is to build China into a “modern socialist power.”

“Modern socialist power” has invariably been synonymous with “failed command economy”. The attempt to manage a complex economy by substituting the guesses and assumptions of bureaucrats for the knowledge possessed by producers and consumers has always come a cropper.

Xi’s motives include an interesting commingling of Bernie Sanders and Donald Trump.

Mr. Xi has talked about the need to differentiate China’s economic system. Western capitalism, in his view, focuses too heavily on the single-minded pursuit of profit and individual wealth, while letting big companies grow too powerful, leading to inequality, social injustice and other threats to social stability.

Early this year, when Facebook Inc. and Twitter Inc. took down former U.S. President Donald Trump’s accounts, Mr. Xi saw yet another sign America’s economic system was flawed – it let big business dictate what a political leader should do or say – officials familiar with his views said.

For the Mini-Mao, that’s the wrong way around. Political leaders should be able to dictate what everyone else says or does.

As almost no one has failed to observe, Red China labors under the handicap of an aging population that can be supported only by steadily increasing productivity, which is exactly what government’s highly visible hand is certain to stultify. Assuming that, as the press routinely asserts, Xi’s position is unchallengeable, forecasting the mainland’s future trajectory doesn’t require consulting the I Ching. The next generation of Chinese will be poorer and will also be afflicted with greater “inequality, social injustice and other threats to social stability”.

Red China’s eclipse will owe nothing to American strategic genius and even less to the Western capitalists who blithely import Chinese values along with Chinese manufactures. Otto von Bismarck has once again been proven right.

On the Payroll, or Just on the Team?

The Wall Street Journal has just reported that the World Bank has “canceled” the biennial update of its “Doing Business” report, which evaluates business climates in countries around the world. The reason is that “an investigation concluded that senior bank management pressured staff to alter data affecting the ranking of China and other nations”. Publication of the report was suspended last year after data irregularities came to light.

The leaders implicated include then World Bank Chief Executive Kristalina Georgieva, now managing director of the International Monetary Fund, and then World Bank President Jim Yong Kim [former president of Dartmouth College, now with a hedge fund].

The Doing Business report has been the subject of an external probe into the integrity of the report’s data. On Thursday, the bank released the results of that investigation, which concluded that senior bank leaders including Ms. Georgieva were involved in pressuring economists to improve China’s 2018 ranking. At the time, she and others were attempting to persuade China to support a boost in the bank’s funding.

Red China’s rank in the report rose from 90th place in 2013 to 31st in 2019, aided by data manipulation. Showing that equal opportunity cheaters were at work, Azerbaijan leaped from 80th to 34th in the same period.

Ms. Georgieva has, needless to say, denied any wrongdoing. The Journal has no reaction from Mr. Kim. He was, it may be noted, president of the Bank when its chief economist raised concerns about the report and was promptly forced to resign.

I leave it up to readers to draw their own conclusions.

Proof That Men Are Smarter Than Women

For centuries, higher education was the gateway to affluence, status and a successful life. It was also a masculine preserve. Women began to trickle in barely a century ago. That both of my grandmothers were college graduates was, in my early Baby Boomer generation, a rarity.

Now the men are being routed from the Groves of Academe. The Wall Street Journal (summarized here if you can’t get past the WSJ paywall) reports that, in every racial grouping and income bracket, females top males in college enrollment, often by large margins. In a striking break with the past (and it’s a pretty recent past),

For the most part, white men – once the predominant group on American campuses – no longer hold a statistical edge in enrollment rates, said Mr. Mortenson of the Pell Institute. Enrollment rates for poor and working-class white men are lower than those of young Black, Latino and Asian men from the same economic backgrounds, according to an analysis of census data by the Pell Institute for the Journal.

The trend is remarkable. There’s another remarkable trend on the campuses, too, namely, the trend toward more and more expense for less and less education. Yale will charge $59,950 for tuition in the 2021-22 academic year. In the 1964-65 year, when I matriculated, the figure was $1,550 ($13,600 in 2021 dollars).

The sticker prices are slightly misleading, because schools give large discounts to desirable students who can’t pay the tab. Still, they aren’t very misleading. Student loan debt has reached $1.73 trillion, nearly doubling in the past ten years. At the same time, colleges are devoting far more attention to denigrating the accumulated learning of the past than enriching it. Added to that is a pathological fixation on a “systemic racism” that, like the luminiferous ether of yore, pervades everything yet is utterly undetectable.

When one thinks about it, why would any rational being want to spend four years of his youth in what now passes for higher education? While some may attribute the male exodus to the hostility men routinely encounter on campus, it impresses me as a simple cost-benefit calculation.

Fifty or sixty years ago, colleges didn’t train students in marketable skills, as many, in between fits of wokeness, futilely try to do today. The economic value of a college degree was as a marker of intelligence and a decent work ethic. In the process of earning this marker, one learned, or at least was granted the opportunity to learn, something about history, literature, science, art, philosophy and other beautiful things.

The marker is nowadays much tarnished, because courses lack rigor and often aspire to nothing more than instilling preposterous theories in undergraduate minds. A degree in a real field of studies, obtained by taking courses whose teachers gave grades that were meaningful indicators of mastery of the subject, told future employers something worth knowing. A degree in Gender Studies where all courses were pass/fail is a goat feather.

Perhaps young men have figured this out and prefer not to pile up debt to gain an unenjoyable experience that yields little or no value intellectually or economically. I wonder how long it will be before young women come to the same realization.

America’s Most Oppressed Class

Once upon a time, my family were landlords on a small scale. I owned a townhouse in Virginia and a single family home in Florida. My wife owned the home where she had lived before our marriage. We rented the properties and endured the headaches that a landlord expects: deadbeat tenants, damage to the structures, in one instance a property manager whose rent collector embezzled tenants’ checks. Luckily, we are no longer in that business. I sold my real estate empire before Covid, and my wife got rid of hers last year.

American law has long disfavored landlords, which is no surprise. Lessees are a much bigger voting block than lessors, and voters who aren’t one or the other mostly have an image of the rental market in which corporations and millionaires are on one side and working class families on the other.

In fact, a very large proportion of rental housing stock is owned by people like me and my wife, those who have one or a few properties and aren’t especially wealthy. While they may not depend on their rental income, its absence is a hardship. Maintenance and taxes have to be paid whether or not tenants are paying rent.

The rent moratorium that the Trump Administration enacted and the Biden Administration tried to extend by executive fiat, despite President Biden’s acknowledgment it had no chance of surviving a Supreme Court challenge, was rough on small-time landlords, a situation aggravated by the inability of the federal government to distribute subventions that were supposed to ease the burden. (It tells you something about bureaucratic sclerosis when the government is incapable of spending money.)

The federal moratorium is now dead, and similar state moratoriums may expire as the panicdemic fades (assuming that it’s ever allowed to fade), but the rental market has already been damaged, probably for years to come.

At a time when rental housing, particularly for the less affluent, is in short supply, landlords who lost, or feared losing, money during the moratoriums now have strong motives to divest their properties. Some need the sales proceeds to rebuild their net worth. Others see the business as presenting too much risk for too little reward. Since residential real estate prices are currently high (some would say bubble-ish), selling is particularly attractive. The buyers aren’t likely to go into the rental business, for the same reasons that the previous owners are getting out of it. The predictable consequence is a further reduction of available rental properties and consequent increase in rents.

A probably more significant detriment to the rental market is the realization that, when the next major epidemic grips the country – and that is an inevitable event – rent moratoriums will be an accepted part of the arsenal for coping with it, along with lockdowns, “social distancing” and mask theater. The federal moratorium this time was struck down by the Supreme Court, but only after it was allowed to continue for a long, painful interval and only because Congress didn’t enact it. It was a frolic and detour of the Centers for Disease Control, an unelected body with authoritarian instincts. There’s no assurance that the next moratorium won’t be written into law by the legislature and thus be far less vulnerable to judicial overthrow.

There are, I believe, strong Constitutional arguments against moratoriums imposed by either the federal government (the Fifth Amendment’s prohibition against taking private property without just compensation) or the states (the prohibition against state laws that impair the obligation of contract), but it’s conceivable that landlords won’t confidently venture their own money in reliance on a pension lawyer’s authority as an interpreter of the Constitution. What they will do is reduce their risks by scrutinizing potential tenants more closely. Many who were acceptable in the past will be judged too hazardous in the future, owing to mediocre credit reports, spotty employment history, past troubles with other landlords, and so on. Particularly hard hit will be applicants with criminal records of any kind and members of groups that are stereotypically viewed as irresponsible. The latter biases may be illegal, but laws won’t suppress them very effectively.

Overall, it is highly foreseeable that the hardship inflicted on landlords today will rebound on the tenants of tomorrow. Progressives will, needless to say, blame greedy rent gougers rather than their own policies that brought the hardship about.

Further Reading: Ryan Mills, “Landlords Crushed by Eviction Bans Rush to Sell Properties, Stifling Rental Market”:

A National Rental Home Council survey conducted earlier this year of single-family rental home owners across the United States found that half had tenants who missed at least one rent payment since the beginning of the pandemic, and more than a third had to dip into their personal savings to cover shortfalls. Eleven percent of the respondents said they would be forced to sell at least one property, and 12 percent were liquidating all of their properties.

A recent survey of over 2,500 rental property owners in ten cities conducted by Harvard University’s Joint Center for Housing Studies found that 10 percent of all landlords collected less than half their yearly rent in 2020, with smaller landlords being the hardest hit.

The survey also found a 10 percent increase in the proportion of landlords who listed a property for sale in 2020. In Albany, NY, 22.5 percent of landlords listed a property for sale in 2020, up from 3.9 percent the year before. In Philadelphia, 20.9 percent of landlords listed a property for sale last year, up from 3.5 percent in 2019, according to the Harvard paper.

The Unreality of “Stakeholder Capitalism”

To mark “the second anniversary of the Business Roundtable’s Statement on the Purpose of a Corporation”, the director and associate director of the Harvard Law School Program on Corporate Governance examined whether corporations whose CEO’s signed the Statement have acted as if they regard themselves as “guardians of the interests of ‘stakeholders,’ such as customers, employees, suppliers and communities as well as shareholders”. The conclusion: They haven’t. The most decisive evidence:

We found that signatory companies universally continue to pay directors in company stock as a substantial portion of their total compensation. Further, most of the companies still have guidelines that explicitly align the interests of directors and stockholders. In contrast, no company’s compensation practices or guidelines link director compensation with stakeholder interests. The strong alignment of director pay with stock price sends a clear signal that shareholder value is the objective directors are expected to pursue.

Commenting on those findings, Veronique de Rugy characterized the Business Roundtable Statement as “costless virtue-signaling”. “In other words, corporations talk a big game, make big statements, and take actions with zero consequences for their bottom lines.”

That conclusion is about as surprising as “Children who say they want to eat healthy food prefer ice cream to brussels sprouts”. The fundamental problem with “stakeholder capitalism” is that, if seriously pursued, it cuts the stakeholders out of the decision making loop and thus reduces the likelihood that their interests will be well served.

”Shareholder value” is what Thomas Sowell, in his great work Knowledge and Decisions. refers to as a “residual claim”. The shareholders (along with another large residual claimant, the government) get what is left after the corporation has collected the revenues for its goods or services and satisfied the costs incurred in producing and delivering them. In other words, nothing that the shareholders can do generates value for them. That value is derived from other parties’ decisions. The shareholders who most acutely monitor the way in which corporate management utilizes the knowledge conveyed by those decisions are the ones who wind up with the largest residual claims.

The non-shareholder stakeholders listed by the Business Roundtable – customers, employees, suppliers and communities – know their own interests and desires. Moreover, they can communicate those in the form of – another Sowell term – “effective feedback”. Customers buy or don’t buy what the corporation offers for sale. Workers accept, remain in or leave employment with it. Suppliers decide whether, and at what prices, they will deal with it. Communities provide a welcoming or hostile business climate through taxes, zoning laws, the quality of municipal services and other measures. Shareholder value is ultimately the result of the stakeholders’ net evaluation of the benefits and costs of dealing with the corporation.

The Business Roundtable Statement’s signatories purport to substitute something else for the process just described. What the new process might be, they don’t say, but, whatever they had in mind, it will be better for the stakeholders only if it conveys their interests to the corporate decision makers more effectively than concentration on shareholder value, which can be maximized only by attending to the preferences of customers, employees, suppliers and communities, as expressed through their feedback. The implicit premise is that those expressed preferences are less than optimal for the stakeholders and would be improved if some other party substituted its judgment.

From the point of view of a third party, it’s obvious that workers would be better off if they were paid more for fewer hours, customers would be better off with lower prices, suppliers would be better off with higher prices, and communities would be better off if resident corporations paid higher taxes and acquiesced in fewer services. Everybody would be happy, except that, without effective feedback from those various parties, there is no way to balance their conflicting desiderata in a way that satisfies everyone to the greatest extent that is actually possible. In practice, “stakeholder capitalism”, if genuinely implemented, would have the same untoward consequences as wage and price controls: surpluses here and shortages there and everyone worse off than before

Among the worse off would be, naturally, the corporation's shareholders, whose residual claims would be diminished. They wouldn’t be likely to tolerate that situation for very long, at least not if a free economy allowed them to take their capital elsewhere. Practicing “stakeholder capitalism”, as opposed to preaching it, is corporate euthanasia. When they aren’t trying to impress others of their class with their superior sensitivity to the plights of others, CEO’s and their boards of directors understand that, and so they reconcile themselves to the sinful money grubbing that leaves all their stakeholders and, as a side effect, their shareholders too, better off.

Clambering Down the Fiscal Cliff

What would a blog be without an end-of-the-year Fiscal Cliff post?

Reading the vast outpouring from others, I can’t help thinking that conservatives are engaged in massive self-demoralization: The public wants higher taxes. . . . Republicans will be blamed for everything that goes wrong for the next four years. . . . The House GOP is surrendering. . . . There’s going to be a conservative civil war. . . . All is lost save honor (and maybe that, too). . . . and so on and on.

All that strikes me as short-sighted. Let’s start with taxes. Polls show that most Americans think that taxes should be higher for “the rich”, which could mean what the pessimists assume: that a majority now thinks that it can live at the expense of the minority. If so, that would be a remarkable departure from traditional attitudes. Bill Clinton’s tax increases in 1994 hit only a tiny proportion of taxpayers but were wildly unpopular, because, at least in the past, Americans rejected the concept of punitive taxation.

Has that changed, or is it possible that a large number of people are so alarmed by unprecedented budget deficits that they will acquiesce in limited tax increases as a lesser evil? They may underestimate the ill effects of overtaxing the most productive segment of the population, but that doesn’t mean that they’ve become class warriors.

Furthermore, the same polls show that the public’s preferred method of deficit reduction is cuts in federal spending, albeit without much specificity about what ought to be cut.

These considerations suggest to me that the country may wind up climbing down the Fiscal Cliff in roughly this fashion:

It’s unlikely that there will be any “bargain” before January 1st. Time is very short, and the President has shown no real interest in negotiating in good faith. And why should he, when failure to reach agreement will automatically increase taxes?

Senate Democrats say that their reaction to the Cliff will be to propose restoring the Bush tax rates for everyone who makes less than $200,000 a year ($250,000 for married couples). That measure will poll very well. I don’t know for sure how Republican senators will react, but their obvious counter is to offer amendments replacing the current sequestration with larger and more rational spending reductions (e. g., zeroing out “green energy” subsidies, cracking down on Medicare and Social Security disability fraud, capping as much discretionary spending as possible at the 2007 level plus an inflation adjustment, eliminating some of the less defensible tax subsidies, and converting Medicaid to a block grant program). To this could perhaps be added “baby step” entitlement reforms, and one might as well make the ATM and doc fixes officially permanent, since no rational observer expects them ever to lapse. That, too, would be a popular package.

We can assume that Senator Reid won’t let amendments like those come to a vote, precisely because of their popularity. Thus an unadorned tax package will go to the House. (I doubt that Senate Republicans will attempt, or be able to sustain, a filibuster in protest against the majority leader’s high-handedness.) The House can then pass a bill with all of the amendments that the Senate wouldn’t consider.

At that point, the President and the Democrats will face a trilemma. Do they accept the House bill, propose alternative spending cuts of their own, or defeat the Bush tax rate extension? I don’t think they’ll delight in that choice, but it may well be one they will soon face.

Is There an Election Next Month?

We always seem to be in the middle of an election campaign, but I checked the calendar carefully and am almost sure that no president, senator, congressman or governor has to face the voters during the next several weeks.

That’s not, however, the impression that one gets from much of the commentary on the “Fiscal Cliff”. (Hasn’t somebody claimed a trademark on that phrase yet?) Reading the agonized or shrilly defiant groans on the Right and the triumphant screeches on the Left, the natural inference is that not only are elections imminent but that they will turn on the single issue of whether “the rich” (vernacular for “people who make more money than” whoever is talking) ought to be smacked with higher marginal income tax rates. The consensus is that the Republican Party is hopelessly out of step on that question and will be severely punished for its recalcitrance.

Those conservative pundits who haven’t thrown up their hands in despair are mostly either excoriating the GOP leadership in Congress for its failure to do something a year and a half ago to forestall the Cliff or devising ever more convoluted and implausible strategies to look blameless when the country plunges over it.

At the risk of sounding blasé, might I suggest that it’s a long, long while from now to November 4, 2014, and that what happens on that day will depend much more on the totality of the next 23 months than on public perceptions of the next 23 days?

The first priority for Republicans should be the good of the country, not the allocation of blame. On that score, although the effects of falling off the “Cliff” would be bad, they would be less dire than the President’s preferred course, namely, a huge tax increase on top of the expiration of the Bush tax cuts, accompanied by new “stimulus” spending, no changes to entitlements and no actual spending reductions except on national defense. In both scenarios, a recession is likely, and America’s no-longer-so-long-term fiscal imbalances won’t be addressed. The difference is that the Obama plan will make the recession more expensive and the imbalances worse.

I’ve suggested before that the GOP should announce its willingness to acquiesce in any Presidential proposal that will in fact reduce deficits meaningfully. It’s now evident, of course, nothing like that will be forthcoming. In the alternative, why not have the House pass a simple extension of the current tax rates plus an alternative to the automatic “sequestration” cuts in defense spending and a mild first installment of entitlement reform? The Senate will initially ignore it, but the House can keep trying. Quite a few Democratic Senators, a number of them up for reelection in 2014, represent states where spending reductions are popular and tax increases aren’t. Eventually they may decide that minimizing economic pain is better for their own futures than maximizing the Obamis’ ability to crow over humiliated political enemies.

No doubt the “stubborn”, “hostage taking” Republicans would have to endure verbal sticks and stones. The temptation to give in to an inflexible President, in the hope that he will then be burdened with sole responsibility for the consequences of his own folly, will be severe. But that is Obama-like thinking. The honorable course is to do all one can to enact helpful, or at least less harmful, policies. That is also, unless the American public has radically changed character over the past few years (in which case nothing can be done anyway), the most likely route to electoral success.

Debunking the “91% Marginal Rate” Myth

A favorite left-wing talking point these days is that the highest marginal tax rate during the prosperous 1950’s was a staggering 91 percent. On the post hoc ergo propter hoc principle, progressives conclude that confiscating the income of “the rich” is the key to economic success or at least a reason to be complacent about the impact of President Obama’s favored top rates: 40.5 percent on salary and self-employment income, 43.4 percent on investment income. (Both figures are after adding Obamacare tax hikes to the Clinton era 39.6 percent bracket.)

A useful article in the Wall Street Journal points out how ahistorical this fantasy is. Sure, there was a 91 percent bracket, but it applied to almost nothing.

In fact, so little income was taxed at the highest rate that the IRS didn’t bother to keep statistics on it.

In 1958, an 81% marginal tax rate applied to incomes above $1.08 million, and the 91% rate kicked in at $3.08 million. These figures are in unadjusted 1958 dollars and correspond today to nominal income levels that are at least 10 times higher [No, those are the inflation-adjusted amounts – ETV]. That year, according to Internal Revenue Service records, just 236 [the correct number is about 10,000] of the nation's 45.6 million tax filers had any income that was taxed at 81% or higher. (The published IRS data do not reveal how many of these were subject to the 91% rate.)

Not only did the top marginal rates apply only at much higher income levels than today, but sheltering income from all taxes via paper losses and other gimmicks was a breeze.

The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich. The working wealthy – including doctors, lawyers, business owners and executives – were versed in the art of creating losses to lower their tax exposure.

For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses on depreciation from property he owned through a real-estate investment partnership [in which he had invested by using funds borrowed on a nonrecourse basis, so that he would never actually have to realize the losses – ETV]. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income [for capital losses; losses from passive real estate investments, once a favorite shelter, are postponed until the property is sold, and financing with nonrecourse loans generates no losses that are usable on a tax return – ETV], no matter how large the loss.

Reinstating the Internal Revenue Code as it existed in the "91 percent" days would be bad for the economy, as it would encourage the proliferation of wasteful tax schemes, but great for the President’s demonized “two percent”.

Update and correction: Mr. Schiff made serious errors in his op-ed, some of which I corrected in my original post, but I overlooked others. They don’t negate his main point, that the high marginal tax rates of the 1950’s affected very few taxpayers, but I have added further corrections.

Let Obama Be Obama

As the Fiscal Cliff draws nigh, Republicans suffer the angst of trying to strike a deal with an intractable President while avoiding either (i) real tax hikes coupled with illusory spending cuts or (ii) blame for the failure to agree. Since the President’s preference is higher taxes plus higher spending, and his default bargaining tactics are assaults on straw men and demonization of opponents, the prospects for a happy outcome for either country or party look dismal. In these bleak circumstances, I have a suggestion: Let Obama be Obama.

Why not announce that Republicans will not block whatever the President proposes, will not filibuster in the Senate and will clear passage in the House, subject to these two conditions?

First, at least 150 House Democrats must vote aye. Speaker Boehner will then see that enough Republican Congressmen abstain so that the bill passes.

Second, the President’s plan must actually reduce the deficit, starting in the current fiscal year rather than in the remote future. My concept is that the GOP would set deficit targets for the next several years: say, $800 billion in FY2013, decreasing by $100 billion in each year thereafter, until a balanced budget is reached. None of the gimmickry of the last Obama budget (the one that was defeated unanimously in both House and Senate), where a purported $4 trillion in “cuts” over ten years led to bigger deficits and a higher national debt at the end. And, needless to say, no reliance on zeroing out the line item for “fraud, waste and abuse”.

Within that framework, it would be up to the President to put forward his ideas. If he can’t or won’t, perhaps it will be obvious to even the obtuse fraternity of American journalists that he has no interest in resolving the country’s long-term fiscal problems. If he does come up with a program, it will be his and his party’s, and they will have undiluted accountability.

The best outcome, of course, would be for Barack Obama to accept the responsibilities of his office and devise rational means to restore national finances to a prosperous equilibrium. He hasn’t shown any talent in that direction, but – let’s not be inveterate pessimists – the challenge could bring out unsuspected abilities.

Can the Democrats Afford an Economic Recovery?

In the course of an interesting, albeit rather unfocused, piece on voting patterns at different income levels, Fred Bauer cites a fascinating fact: “While Romney lost households making between $30,000 and $49,999 by 15 points, George W. Bush lost them by only 1 point in 2004.” Indeed, John McCain lost them by only 12.

Mr. Bauer draws the moral that Republicans need a better economic message to appeal to less affluent voters, and no doubt that would be a good idea. Still, the striking difference between 2004 and 2012 is that the earlier year was prosperous and the later one somewhere between stagnant and recessionary. During the pre-financial crisis Bush Administration, low income workers could see a path to a more comfortable life. Under the Obama Administration, getting ahead by hard work and the full use of one’s abilities looks like a mug’s game. For those on the economic margins, unemployment checks, food stamps and other forms of welfare (now at their highest level ever) may well look like the only hope. Naturally, they’re inclined to vote for the candidate who promises to keep the benefits flowing, whether or not he’s responsible for their being needed in the first place.

An economic recovery would alter the balance between the attractions of welfare and work. Maybe President Obama would get some credit, but would gratitude overcome self-interest? The Democrats would be promoting taxes, regulation and handouts at a time when the “working poor” were looking forward to expanding opportunities and higher wages.

Perhaps that’s part of the reason why so many progressive Democrats are indifferent to the famous “Fiscal Cliff”. Slow growth, even recession, are what they need to keep their base intact.

First Glimpse of Four More Years: The Fiscal Cliff

President Obama offered his first post-election statement on the “Fiscal Cliff”, and his words, construed very literally, led optimists to imagine that there’s room for a deal with House Republicans. Speaker Boehner has already stated that his House majority won’t block revenue raising, so long as it consists of closing loopholes that benefit upper income taxpayers rather than raising tax rates. The President didn’t say that rate hikes were a non-negotiable demand. As the Washington Post described it,

Republicans say they are willing to entertain new tax revenue but will not allow rates to rise on upper-income earners, as is scheduled to happen at the end of the year. Notably, Obama did not say rates must rise on upper-income Americans — only that they must pay more in taxes — leaving room for a potential compromise.

Jen Rubin thought that Obama regretted his intransigence last year:

This is precisely where we were about 15 months ago when the grand bargain on precisely these terms broke down. It may shock dim reporters or confuse Democratic spinners, but this is nothing new. The only thing that has changed is that the president has the experience of seeing a grand bargain of historic proportions slip through his grasp. He and Boehner know precisely where the deal is to be had — where they were when Obama upped the ante on taxes and the grand bargain crumbled.

She speculated that, with no need to worry about reelection, “the President really has no interest in getting pushed around by unrealistic liberals in his party”, the “safe blue state Senate Democrats would just as soon demand a tax rate hike, let the country go over the cliff and blame Republicans”.

Doesn’t that sound a trifle Pollyannish? The reason why blue state liberals can be unrealistic is that they have no worries about reelection. Obama has no worries about reelection. Obama was in his day the Senate’s most liberal member. There’s a syllogism in there somewhere waiting to get out, and it doesn’t point to a strong aversion to “demand[ing] a tax rate hike, let[ting] the country go over the cliff and blam[ing] Republicans”. He’ll leave the White House in four years either way. If he stands firm, he’ll be a left-wing hero, whatever happens to the economy. If he compromises, his closest ideological compeers will complain that he has once again backed down before the GOP.

The President didn’t take questions, so no one could ask him whether he was in fact moving toward compromise. His press secretary, though, doused that prospect:

Jay Carney just said in the White House briefing Obama will only accept a deal that repeals the Bush tax cuts for the top tax bracket. “If a bill were to reach his desk that extends tax cuts for the wealthiest 2 percent, he will not sign,” said Carney. “We cannot afford it.” Interestingly enough, Carney also said the president wants to both repeal the top-level Bush tax cuts and reform the tax code.

The idea, then, is to restore Clintonian tax rates with fewer deductions and exclusions, so that “the rich” get hammered twice – three times when one adds in the Obamacare surtax on their investment income. The President’s constant refrain, repeated today, is that he is “asking the wealthiest Americans to pay a little more in taxes”. The combined effect of the already enacted Obamacare levy and his new proposals will be a 15 to 20 percent tax increase for the group that already pays the highest taxes in proportion to income. “A little more” is, I suppose, a flexible standard. Obama’s notion of it doesn’t sound like the first step toward reconciliation.

Answer to Pop Quiz: The last run of three consecutive Presidents elected to two terms was Jefferson-Madison-Monroe. Monroe’s second term was dubbed “The Era of Good Feelings”. I doubt that Obama’s will be remembered that way.