Showing posts with label gov't intervention. Show all posts
Showing posts with label gov't intervention. Show all posts

Monday, January 9, 2017

A way to market to conservatives the science behind climate change more effectively

Past-focused environmental comparisons promote pro-environmental outcomes for conservatives. By Matthew Baldwin and Joris Lammers
http://www.pnas.org/content/113/52/14953.abstract

Significance

Political polarization on important issues can have dire consequences for society, and divisions regarding the issue of climate change could be particularly catastrophic. Building on research in social cognition and psychology, we show that temporal comparison processes largely explain the political gap in respondents’ attitudes towards and behaviors regarding climate change. We found that conservatives’ proenvironmental attitudes and behaviors improved consistently and drastically when we presented messages that compared the environment today with that of the past. This research shows how ideological differences can arise from basic psychological processes, demonstrates how such differences can be overcome by framing a message consistent with these basic processes, and provides a way to market the science behind climate change more effectively.


Abstract

Conservatives appear more skeptical about climate change and global warming and less willing to act against it than liberals. We propose that this unwillingness could result from fundamental differences in conservatives’ and liberals’ temporal focus. Conservatives tend to focus more on the past than do liberals. Across six studies, we rely on this notion to demonstrate that conservatives are positively affected by past- but not by future-focused environmental comparisons. Past comparisons largely eliminated the political divide that separated liberal and conservative respondents’ attitudes toward and behavior regarding climate change, so that across these studies conservatives and liberals were nearly equally likely to fight climate change. This research demonstrates how psychological processes, such as temporal comparison, underlie the prevalent ideological gap in addressing climate change. It opens up a promising avenue to convince conservatives effectively of the need to address climate change and global warming.

Tuesday, December 6, 2016

My Unhappy Life as a Climate Heretic. By Roger Pielke Jr.

My Unhappy Life as a Climate Heretic. By Roger Pielke Jr.
My research was attacked by thought police in journalism, activist groups funded by billionaires and even the White House.http://www.wsj.com/articles/my-unhappy-life-as-a-climate-heretic-1480723518
Updated Dec. 2, 2016 7:04 p.m. ET

Much to my surprise, I showed up in the WikiLeaks releases before the election. In a 2014 email, a staffer at the Center for American Progress, founded by John Podesta in 2003, took credit for a campaign to have me eliminated as a writer for Nate Silver’s FiveThirtyEight website. In the email, the editor of the think tank’s climate blog bragged to one of its billionaire donors, Tom Steyer: “I think it’s fair [to] say that, without Climate Progress, Pielke would still be writing on climate change for 538.”

WikiLeaks provides a window into a world I’ve seen up close for decades: the debate over what to do about climate change, and the role of science in that argument. Although it is too soon to tell how the Trump administration will engage the scientific community, my long experience shows what can happen when politicians and media turn against inconvenient research—which we’ve seen under Republican and Democratic presidents.

I understand why Mr. Podesta—most recently Hillary Clinton’s campaign chairman—wanted to drive me out of the climate-change discussion. When substantively countering an academic’s research proves difficult, other techniques are needed to banish it. That is how politics sometimes works, and professors need to understand this if we want to participate in that arena.

More troubling is the degree to which journalists and other academics joined the campaign against me. What sort of responsibility do scientists and the media have to defend the ability to share research, on any subject, that might be inconvenient to political interests—even our own?

I believe climate change is real and that human emissions of greenhouse gases risk justifying action, including a carbon tax. But my research led me to a conclusion that many climate campaigners find unacceptable: There is scant evidence to indicate that hurricanes, floods, tornadoes or drought have become more frequent or intense in the U.S. or globally. In fact we are in an era of good fortune when it comes to extreme weather. This is a topic I’ve studied and published on as much as anyone over two decades. My conclusion might be wrong, but I think I’ve earned the right to share this research without risk to my career.

Instead, my research was under constant attack for years by activists, journalists and politicians. In 2011 writers in the journal Foreign Policy signaled that some accused me of being a “climate-change denier.” I earned the title, the authors explained, by “questioning certain graphs presented in IPCC reports.” That an academic who raised questions about the Intergovernmental Panel on Climate Change in an area of his expertise was tarred as a denier reveals the groupthink at work.

Yet I was right to question the IPCC’s 2007 report, which included a graph purporting to show that disaster costs were rising due to global temperature increases. The graph was later revealed to have been based on invented and inaccurate information, as I documented in my book “The Climate Fix.” The insurance industry scientist Robert-Muir Wood of Risk Management Solutions had smuggled the graph into the IPCC report. He explained in a public debate with me in London in 2010 that he had included the graph and misreferenced it because he expected future research to show a relationship between increasing disaster costs and rising temperatures.

When his research was eventually published in 2008, well after the IPCC report, it concluded the opposite: “We find insufficient evidence to claim a statistical relationship between global temperature increase and normalized catastrophe losses.” Whoops.

The IPCC never acknowledged the snafu, but subsequent reports got the science right: There is not a strong basis for connecting weather disasters with human-caused climate change.

Yes, storms and other extremes still occur, with devastating human consequences, but history shows they could be far worse. No Category 3, 4 or 5 hurricane has made landfall in the U.S. since Hurricane Wilma in 2005, by far the longest such period on record. This means that cumulative economic damage from hurricanes over the past decade is some $70 billion less than the long-term average would lead us to expect, based on my research with colleagues. This is good news, and it should be OK to say so. Yet in today’s hyper-partisan climate debate, every instance of extreme weather becomes a political talking point.

For a time I called out politicians and reporters who went beyond what science can support, but some journalists won’t hear of this. In 2011 and 2012, I pointed out on my blog and social media that the lead climate reporter at the New York Times,Justin Gillis, had mischaracterized the relationship of climate change and food shortages, and the relationship of climate change and disasters. His reporting wasn’t consistent with most expert views, or the evidence. In response he promptly blocked me from his Twitter feed. Other reporters did the same.

In August this year on Twitter, I criticized poor reporting on the website Mashable about a supposed coming hurricane apocalypse—including a bad misquote of me in the cartoon role of climate skeptic. (The misquote was later removed.) The publication’s lead science editor, Andrew Freedman, helpfully explained via Twitter that this sort of behavior “is why you’re on many reporters’ ‘do not call’ lists despite your expertise.”

I didn’t know reporters had such lists. But I get it. No one likes being told that he misreported scientific research, especially on climate change. Some believe that connecting extreme weather with greenhouse gases helps to advance the cause of climate policy. Plus, bad news gets clicks.

Yet more is going on here than thin-skinned reporters responding petulantly to a vocal professor. In 2015 I was quoted in the Los Angeles Times, by Pulitzer Prize-winning reporter Paige St. John, making the rather obvious point that politicians use the weather-of-the-moment to make the case for action on climate change, even if the scientific basis is thin or contested.

Ms. St. John was pilloried by her peers in the media. Shortly thereafter, she emailed me what she had learned: “You should come with a warning label: Quoting Roger Pielke will bring a hailstorm down on your work from the London Guardian, Mother Jones, and Media Matters.”

Or look at the journalists who helped push me out of FiveThirtyEight. My first article there, in 2014, was based on the consensus of the IPCC and peer-reviewed research. I pointed out that the global cost of disasters was increasing at a rate slower than GDP growth, which is very good news. Disasters still occur, but their economic and human effect is smaller than in the past. It’s not terribly complicated.

That article prompted an intense media campaign to have me fired. Writers at Slate, Salon, the New Republic, the New York Times, the Guardian and others piled on.

In March of 2014, FiveThirtyEight editor Mike Wilson demoted me from staff writer to freelancer. A few months later I chose to leave the site after it became clear it wouldn’t publish me. The mob celebrated. ClimateTruth.org, founded by former Center for American Progress staffer Brad Johnson, and advised by Penn State’s Michael Mann, called my departure a “victory for climate truth.” The Center for American Progress promised its donor Mr. Steyer more of the same.

Yet the climate thought police still weren’t done. In 2013 committees in the House and Senate invited me to a several hearings to summarize the science on disasters and climate change. As a professor at a public university, I was happy to do so. My testimony was strong, and it was well aligned with the conclusions of the IPCC and the U.S. government’s climate-science program. Those conclusions indicate no overall increasing trend in hurricanes, floods, tornadoes or droughts—in the U.S. or globally.

In early 2014, not long after I appeared before Congress, President Obama’s science adviser John Holdren testified before the same Senate Environment and Public Works Committee. He was asked about his public statements that appeared to contradict the scientific consensus on extreme weather events that I had earlier presented. Mr. Holdren responded with the all-too-common approach of attacking the messenger, telling the senators incorrectly that my views were “not representative of the mainstream scientific opinion.” Mr. Holdren followed up by posting a strange essay, of nearly 3,000 words, on the White House website under the heading, “An Analysis of Statements by Roger Pielke Jr.,” where it remains today.

I suppose it is a distinction of a sort to be singled out in this manner by the president’s science adviser. Yet Mr. Holdren’s screed reads more like a dashed-off blog post from the nutty wings of the online climate debate, chock-full of errors and misstatements.

But when the White House puts a target on your back on its website, people notice. Almost a year later Mr. Holdren’s missive was the basis for an investigation of me by Arizona Rep. Raul Grijalva, the ranking Democrat on the House Natural Resources Committee. Rep. Grijalva explained in a letter to my university’s president that I was being investigated because Mr. Holdren had “highlighted what he believes were serious misstatements by Prof. Pielke of the scientific consensus on climate change.” He made the letter public.

The “investigation” turned out to be a farce. In the letter, Rep. Grijalva suggested that I—and six other academics with apparently heretical views—might be on the payroll of Exxon Mobil (or perhaps the Illuminati, I forget). He asked for records detailing my research funding, emails and so on. After some well-deserved criticism from the American Meteorological Society and the American Geophysical Union, Rep. Grijalva deleted the letter from his website. The University of Colorado complied with Rep. Grijalva’s request and responded that I have never received funding from fossil-fuel companies. My heretical views can be traced to research support from the U.S. government.

But the damage to my reputation had been done, and perhaps that was the point. Studying and engaging on climate change had become decidedly less fun. So I started researching and teaching other topics and have found the change in direction refreshing. Don’t worry about me: I have tenure and supportive campus leaders and regents. No one is trying to get me fired for my new scholarly pursuits.

But the lesson is that a lone academic is no match for billionaires, well-funded advocacy groups, the media, Congress and the White House. If academics—in any subject—are to play a meaningful role in public debate, the country will have to do a better job supporting good-faith researchers, even when their results are unwelcome. This goes for Republicans and Democrats alike, and to the administration of President-elect Trump.

Academics and the media in particular should support viewpoint diversity instead of serving as the handmaidens of political expediency by trying to exclude voices or damage reputations and careers. If academics and the media won’t support open debate, who will?

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Mr. Pielke is a professor and director of the Sports Governance Center at the University of Colorado, Boulder. His most recent book is “The Edge: The Wars Against Cheating and Corruption in the Cutthroat World of Elite Sports” (Roaring Forties Press, 2016).

Sunday, April 17, 2016

The Great Recession Blame Game - Banks took the heat, but it was Washington that propped up subprime debt and then stymied recovery

The Great Recession Blame Game

Banks took the heat, but it was Washington that propped up subprime debt and then stymied recovery.

By Phil Gramm and Michael Solon
WSJ, April 15, 2016 6:09 p.m. ET

When the subprime crisis broke in the 2008 presidential election year, there was little chance for a serious discussion of its root causes. Candidate Barack Obama weaponized the crisis by blaming greedy bankers, unleashed when financial regulations were “simply dismantled.” He would go on to blame them for taking “huge, reckless risks in pursuit of quick profits and massive bonuses.”
That mistaken diagnosis was the justification for the Dodd-Frank Act and the stifling regulations that shackled the financial system, stunted the recovery and diminished the American dream.

In fact, when the crisis struck, banks were better capitalized and less leveraged than they had been in the previous 30 years. The FDIC’s reported capital-to-asset ratio for insured commercial banks in 2007 was 10.2%—76% higher than it was in 1978. Federal Reserve data on all insured financial institutions show the capital-to-asset ratio was 10.3% in 2007, almost double its 1984 level, and the biggest banks doubled their capitalization ratios. On Sept. 30, 2008, the month Lehman failed, the FDIC found that 98% of all FDIC institutions with 99% of all bank assets were “well capitalized,” and only 43 smaller institutions were undercapitalized.

In addition, U.S. banks were by far the best-capitalized banks in the world. While the collapse of 31 million subprime mortgages fractured financial capital, the banking system in the 30 years before 2007 would have fared even worse under such massive stress.

Virtually all of the undercapitalization, overleveraging and “reckless risks” flowed from government policies and institutions. Federal regulators followed international banking standards that treated most subprime-mortgage-backed securities as low-risk, with lower capital requirements that gave banks the incentive to hold them. Government quotas forced Fannie Mae and Freddie Mac to hold ever larger volumes of subprime mortgages, and politicians rolled the dice by letting them operate with a leverage ratio of 75 to one—compared with Lehman’s leverage ratio of 29 to one.

Regulators also eroded the safety of the financial system by pressuring banks to make subprime loans in order to increase homeownership. After eight years of vilification and government extortion of bank assets, often for carrying out government mandates, it is increasingly clear that banks were more scapegoats than villains in the subprime crisis.

Similarly, the charge that banks had been deregulated before the crisis is a myth. From 1980 to 2007 four major banking laws—the Competitive Equality Banking Act (1987), the Financial Institutions, Reform, Recovery and Enforcement Act (1989), the Federal Deposit Insurance Corporation Improvement Act (1991), and Sarbanes-Oxley (2002)—undeniably increased bank regulations and reporting requirements. The charge that financial regulation had been dismantled rests almost solely on the disputed effects of the 1999 Gramm-Leach-Bliley Act (GLBA).

Prior to GLBA, the decades-old Glass-Steagall Act prohibited deposit-taking, commercial banks from engaging in securities trading. GLBA, which was signed into law by President Bill Clinton, allowed highly regulated financial-services holding companies to compete in banking, insurance and the securities business. But each activity was still required to operate separately and remained subject to the regulations and capital requirements that existed before GLBA. A bank operating within a holding company was still subject to Glass-Steagall (which was not repealed by GLBA)—but Glass-Steagall never banned banks from holding mortgages or mortgage-backed securities in the first place.

GLBA loosened federal regulations only in the narrow sense that it promoted more competition across financial services and lowered prices. When he signed the law, President Clinton said that “removal of barriers to competition will enhance the stability of our financial system, diversify their product offerings and thus their sources of revenue.” The financial crisis proved his point. Financial institutions that had used GLBA provisions to diversify fared better than those that didn’t.

Mr. Clinton has always insisted that “there is not a single solitary example that [GLBA] had anything to do with the financial crisis,” a conclusion that has never been refuted. When asked by the New York Times in 2012, Sen. Elizabeth Warren agreed that the financial crisis would not have been avoided had GLBA never been adopted. And President Obama effectively exonerated GLBA from any culpability in the financial crisis when, with massive majorities in both Houses of Congress, he chose not to repeal GLBA. In fact, Dodd-Frank expanded GLBA by using its holding-company structure to impose new regulations on systemically important financial institutions.

Another myth of the financial crisis is that the bailout was required because some banks were too big to fail. Had the government’s massive injection of capital—the Troubled Asset Relief Program, or TARP—been only about bailing out too-big-to-fail financial institutions, at most a dozen institutions might have received aid. Instead, 954 financial institutions received assistance, with more than half the money going to small banks.

Many of the largest banks did not want or need aid—and Lehman’s collapse was not a case of a too-big-to-fail institution spreading the crisis. The entire financial sector was already poisoned by the same subprime assets that felled Lehman. The subprime bailout occurred because the U.S. financial sector was, and always should be, too important to be allowed to fail.

Consider that, according to the Congressional Budget Office, bailing out the depositors of insolvent S&Ls in the 1980s on net cost taxpayers $258 billion in real 2009 dollars. By contrast, of the $245 billion disbursed by TARP to banks, 67% was repaid within 14 months, 81% within two years and the final totals show that taxpayers earned $24 billion on the banking component of TARP. The rapid and complete payback of TARP funds by banks strongly suggests that the financial crisis was more a liquidity crisis than a solvency crisis.

What turned the subprime crisis and ensuing recession into the “Great Recession” was not a failure of policies that addressed the financial crisis. Instead, it was the failure of subsequent economic policies that impeded the recovery.

The subprime crisis was largely the product of government policy to promote housing ownership and regulators who chose to promote that social policy over their traditional mission of guaranteeing safety and soundness. But blaming the financial crisis on reckless bankers and deregulation made it possible for the Obama administration to seize effective control of the financial system and put government bureaucrats in the corporate boardrooms of many of the most significant U.S. banks and insurance companies.

Suffocating under Dodd-Frank’s “enhanced supervision,” banks now focus on passing stress tests, writing living wills, parking capital at the Federal Reserve, and knowing their regulators better than they know their customers. But their ability to help the U.S. economy turn dreams into businesses and jobs has suffered.

In postwar America, it took on average just 2 1/4 years to regain in each succeeding recovery all of the real per capita income that had been lost in the previous recession. At the current rate of the Obama recovery, it will take six more years, 14 years in all, for the average American just to earn back what he lost in the last recession. Mr. Obama’s policies in banking, health care, power generation, the Internet and so much else have Europeanized America and American exceptionalism has waned—sadly proving that collectivism does not work any better in America than it has ever worked anywhere else.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Solon is a partner of US Policy Metrics.

 

Saturday, March 12, 2016

A New Tool for Avoiding Big-Bank Failures: ‘Chapter 14.’ By Emily C. Kapur and John B. Taylor

A New Tool for Avoiding Big-Bank Failures: ‘Chapter 14.’ By Emily C. Kapur and John B. Taylor

Bernie Sanders is right, Dodd-Frank doesn’t work, but his solution is wrong. Here’s what would work.

WSJ, Mar 11, 2016



For months Democratic presidential hopeful Bernie Sanders has been telling Americans that the government must “break up the banks” because they are “too big to fail.” This is the wrong role for government, but Sen. Sanders and others on both sides of the aisle have a point. The 2010 Dodd-Frank financial law, which was supposed to end too big to fail, has not.

Dodd-Frank gave the Federal Deposit Insurance Corp. authority to take over and oversee the reorganization of so-called systemically important financial institutions whose failure could pose a risk to the economy. But no one can be sure the FDIC will follow its resolution strategy, which leads many to believe Dodd-Frank will be bypassed in a crisis.

Reflecting on his own experience as overseer of the U.S. Treasury’s bailout program in 2008-09, Neel Kashkari, now president of the Federal Reserve Bank of Minneapolis, says government officials are once again likely to bail out big banks and their creditors rather than “trigger many trillions of additional costs to society.”

The solution is not to break up the banks or turn them into public utilities. Instead, we should do what Dodd-Frank failed to do: Make big-bank failures feasible without tanking the economy by writing a process to do so into the bankruptcy code through a new amendment—a “chapter 14.”

Chapter 14 would impose losses on shareholders and creditors while preventing the collapse of one firm from spreading to others. It could be initiated by the lead regulatory agency and would begin with an over-the-weekend bankruptcy hearing before a pre-selected U.S. district judge. After the hearing, the court would convert the bank’s eligible long-term debt into equity, reorganizing the bankrupt bank’s balance sheet without restructuring its operations.

A new non-bankrupt company, owned by the bankruptcy estate (the temporary legal owner of a failed company’s assets and property), would assume the recapitalized balance sheet of the failed bank, including all obligations to its short-term creditors. But the failed bank’s shareholders and long-term bondholders would have claims only against the estate, not the new company.

The new firm would take over the bank’s business and be led by the bankruptcy estate’s chosen private-sector managers. With regulations requiring minimum long-term debt levels, the new firm would be solvent. The bankruptcy would be entirely contained, both because the new bank would keep operating and paying its debts, and because losses would be allocated entirely to the old bank’s shareholders and long-term bondholders.

An examination by one of us (Emily Kapur) of previously unexplored discovery and court documents from Lehman Brothers’ September 2008 bankruptcy shows that chapter 14 would have worked especially well for that firm, without adverse effects on the financial system.

Here is how Lehman under chapter 14 would have played out. The process would start with a single, brief hearing for the parent company to facilitate the creation of a new recapitalized company—a hearing in which the judge would have minimal discretion. By contrast, Lehman’s actual bankruptcy involved dozens of complex proceedings in the U.S. and abroad, creating huge uncertainty and making it impossible for even part of the firm to remain in business.

When Lehman went under it had $20 billion of book equity and $96 billion of long-term debt, while its perceived losses were around $54 billion. If the costs of a chapter 14 proceeding amounted to an additional (and conservative) $10 billion, then the new company would be well capitalized with around $52 billion of equity.

The new parent company would take over Lehman’s subsidiaries, all of which would continue in business, outside of bankruptcy. And the new company would honor all obligations to short-term creditors, such as repurchase agreement and commercial paper lenders.

The result: Short-term creditors would have no reason to run on the bank before the bankruptcy proceeding, knowing they would be protected. And they would have no reason to run afterward, because the new firm would be solvent.

Without a run, Lehman would have $30 billion more liquidity after resolution than it had in 2008, easing subsequent operational challenges. In the broader marketplace, money-market funds would have no reason to curtail lending to corporations, hedge funds would not flee so readily from prime brokers, and investment banks would be less likely to turn to the government for financing.

Eventually, the new company would make a public stock offering to value the bankruptcy estate’s ownership interest, and the estate would distribute its assets according to statutory priority rules. If the valuation came in at $52 billion, Lehman shareholders would be wiped out, as they were in 2008. Long-term debtholders, with $96 billion in claims, would recover 54 cents on the dollar, more than the 37 cents they did receive. All other creditors—the large majority—would be paid in full at maturity.

Other reforms, such as higher capital requirements, may yet be needed to reduce risk and lessen the chance of financial failure. But that is no reason to wait on bankruptcy reform. A bill along the lines of the chapter 14 that we advocate passed the House Judiciary Committee on Feb. 11. Two versions await action in the Senate. Let’s end too big to fail, once and for all.
 
Ms. Kapur is an attorney and economics Ph.D. candidate at Stanford University. Mr. Taylor, a professor of economics at Stanford, co-edited “Making Failure Feasible” (Hoover, 2015) with Kenneth Scott and Thomas Jackson, which includes Ms. Kapur’s study.

Sunday, November 29, 2015

The Fed: shortcomings in policies & procedures, insufficient model testing & incomplete structures & information flows for proper oversight

The Fed Is Stressed Out. A WSJ Editorial
www.wsj.com/articles/the-fed-is-stressed-out-1448574493
What if a bank had the same problem the regulators have?Wall Street Journal, Nov 28, 2015

Almost nobody in Washington cares, and most of the financial media haven’t noticed. But the inspector general’s office at the Federal Reserve recently reported the disturbing results of an internal investigation. Last December the central bank internally identified “fundamental weaknesses in key areas” related to the Fed’s own governance of the stress testing it conducts of financial firms.

The Fed’s stress tests theoretically judge whether the country’s largest banks can withstand economic downturns. So the Fed identifying a problem with its own management of the stress tests is akin to an energy company noticing that something is not right at one of its nuclear reactors.

According to the inspector general, “The governance review findings include, among other items, a shortcoming in policies and procedures, insufficient model testing” and “incomplete structures and information flows to ensure proper oversight of model risk management.” These Fed models are essentially a black box to the public, so there’s no way to tell from the outside how large a problem this is.

The Fed’s ability to construct and maintain financial and economic models is much more than a subject of intellectual curiosity. Given that Fed-approved models at the heart of the so-called Basel capital standards proved to be spectacularly wrong in the run-up to the last financial crisis, the new report is more reason to wonder why anyone should expect them to be more accurate the next time.

The Fed’s IG adds that last year’s internal review “notes that similar findings identified at institutions supervised by the Federal Reserve have typically been characterized as matters requiring immediate attention or as matters requiring attention.”

That’s for sure. Receiving a “matters requiring immediate attention” letter from the Fed is a big deal at a bank. The Journal reported last year that after the Fed used this language in a letter to Credit Suisse castigating the bank’s work in the market for leveraged loans, the bank chose not to participate in the financing of several buy-out deals.

But it’s hard to tell if anything will come from this report that seems to have fallen deep in a Beltway forest. The IG office’s report says that the Fed is taking a number of steps to correct its shortcomings, and that the Fed’s reform plans “appear to be responsive to our recommendations.”

The Fed wields enormous power with little democratic accountability and transparency. This was tolerable when the Fed’s main job was monetary, but its vast new regulatory authority requires more scrutiny. Congress should add the Fed’s stressed-out standards for stress tests to its oversight list.

Friday, October 9, 2015

Daniel Schuchman's review of Harry G. Frankfurt's On Inequality

Beggar Thy Neighbor. By Daniel Schuchman
Daniel Schuchman's review of Harry G. Frankfurt's On Inequality (Princeton, 102 pages, $14.95)
http://www.wsj.com/articles/beggar-thy-neighbor-1444345359
Wall Street Journal, Oct 09, 2015

In a 2005 best seller, Harry Frankfurt, a Princeton philosophy professor, explored the often complex nature of popular false ideas. “On Bulls—” examined outright lies, ambiguous forms of obfuscation and the not-always-transparent intentions of those who promote them. Now, in “On Inequality,” Mr. Frankfurt eviscerates one of the shibboleths of our time: that economic inequality—in his definition, “the possession by some of more money than others”—is the most urgent issue confronting society. This idea, he believes, suffers from logical and moral errors of the highest order.

The fixation on equality, as a moral ideal in and of itself, is critically flawed, according to the professor. It holds that justice is determined by one person’s position relative to another, not his absolute well-being. Therefore the logic of egalitarianism can lead to perverse outcomes, he argues. Most egregiously, income inequality could be eliminated very effectively “by making everyone equally poor.” And while the lowest economic stratum of society is always associated with abject poverty, this need not be the case. Mr. Frankfurt imagines instances where those “who are doing considerably worse than others may nonetheless be doing rather well.” This possibility—as with contemporary America’s wide inequalities among relatively prosperous people—undermines the coherence of a philosophy mandating equality.

Mr. Frankfurt acknowledges that “among morally conscientious individuals, appeals in behalf of equality often have very considerable emotional or rhetorical power.” The motivations for pursuing equality may be well-meaning but they are profoundly misguided and contribute to “the moral disorientation and shallowness of our time.”

The idea that equality in itself is a paramount goal, Mr. Frankfurt argues, alienates people from their own characters and life aspirations. The amount of wealth possessed by others does not bear on “what is needed for the kind of life a person would most sensibly and appropriately seek for himself.” The incessant egalitarian comparison of one against another subordinates each individual’s goals to “those that are imposed on them by the conditions in which others happen to live.” Thus, individuals are led to apply an arbitrary relative standard that does not “respect” their authentic selves.

If his literalist critique of egalitarianism is often compelling, Mr. Frankfurt’s own philosophy has more in common with such thinking than is first apparent. For Mr. Frankfurt, the imperative of justice is to alleviate poverty and improve lives, not to make people equal. He does not, however, think that it is morally adequate merely to provide people with a safety net. Instead, he argues for an ideal of “sufficiency.”

By sufficiency Mr. Frankfurt means enough economic resources for every individual to be reasonably satisfied with his circumstances, assuming that the individual’s satisfaction need not be disturbed by others having more. While more money might be welcome, it would not “alter his attitude toward his life, or the degree of his contentment with it.” The achievement of economic and personal contentment by everyone is Mr. Frankfurt’s priority. In fact, his principle of sufficiency is so ambitious it demands that lack of money should never be the cause of anything “distressing or unsatisfying” in anyone’s life.

What’s the harm of such a desirable, if unrealistic goal? The author declares that inequality is “morally disturbing” only when his standard of sufficiency is not achieved. His just society would, in effect, mandate a universal entitlement to a lifestyle that has been attained only by a minuscule fraction of humans in all history. Mr. Frankfurt recognizes such reasoning may bring us full circle: “The most feasible approach” to universal sufficiency may well be policies that, in practice, differ little from those advocated in the “pursuit of equality.”

In passing, the author notes another argument against egalitarianism, the “dangerous conflict between equality and liberty.” He is referring to the notion that leaving people free to choose their work and what goods and services they consume will always lead to an unequal distribution of income. To impose any preconceived economic distribution will, as the philosopher Robert Nozick argued, involves “continuous interference in people’s lives.” Like egalitarianism, Mr. Frankfurt’s ideal of “sufficiency” would hold property rights and economic liberty hostage to his utopian vision.

Such schemes, Nozick argued, see economic assets as having arrived on earth fully formed, like “manna from heaven,” with no consideration of their human origin. Mr. Frankfurt also presumes that one person’s wealth must be the reason others don’t have a “sufficient” amount to be blissfully carefree; he condemns the “excessively affluent” who have “extracted” too much from the nation. This leaves a would-be philosopher-king the task of divvying up loot as he chooses.

On the surface, “On Inequality” is a provocative challenge to a prevailing orthodoxy. But as the author’s earlier book showed, appearances can deceive. When Thomas Piketty, in “Capital in the Twenty-First Century,” says that most wealth is rooted in theft or is arbitrary, or when Mr. Frankfurt’s former Princeton colleague Paul Krugman says the “rich” are “undeserving,” they are not (just) making the case for equality. By arguing that wealth accumulation is inherently unjust, they lay a moral groundwork for confiscation of property. Similarly, Mr. Frankfurt accuses the affluent of “gluttony”—a sentiment about which there appears to be unanimity in that temple of tenured sufficiency, the Princeton faculty club. The author claims to be motivated by respect for personal autonomy and fulfillment. By ignoring economic liberty, he reveals he is not.

Mr. Shuchman is a fund manager in New York.

Sunday, July 26, 2015

International Courts and the New Paternalism - African leaders are the targets because ambitious jurists consider them to be 'low-hanging fruit'

International Courts and the New Paternalism. By Jendayi Frazer
African leaders are the targets because ambitious jurists consider them to be ‘low-hanging fruit.’
http://www.wsj.com/articles/international-courts-and-the-new-paternalism-1437778048
WSJ, July 24, 2015 6:47 p.m. ET
Nairobi, Kenya

President Obama arrived in Kenya on Friday and will travel from here to Ethiopia, two crucial U.S. allies in East Africa. The region is not only emerging as an economic powerhouse, it is also an important front in the battle with al Qaeda, al-Shabaab, Islamic State and other Islamist radicals.

Yet grievances related to how the International Criminal Court’s universal jurisdiction is applied in Africa are interfering with U.S. and European relations on the continent. In Africa there are accusations of neocolonialism and even racism in ICC proceedings, and a growing consensus that Africans are being unjustly indicted by the court.

It wasn’t supposed to be this way. After the failure to prevent mass atrocities in Europe and Africa in the 1990s, a strong consensus emerged that combating impunity had to be an international priority. Ad hoc United Nations tribunals were convened to judge the masterminds of genocide and crimes against humanity in Yugoslavia, Rwanda and Sierra Leone. These courts were painfully slow and expensive. But their mandates were clear and limited, and they helped countries to turn the page and focus on rebuilding.

Soon universal jurisdiction was seen not only as a means to justice, but also a tool for preventing atrocities in the first place. Several countries in Western Europe including Spain, the United Kingdom, Belgium and France empowered their national courts with universal jurisdiction. In 2002 the International Criminal Court came into force.

Africa and Europe were early adherents and today constitute the bulk of ICC membership. But India, China, Russia and most of the Middle East—representing well over half the world’s population—stayed out. So did the United States. Leaders in both parties worried that an unaccountable supranational court would become a venue for politicized show trials. The track record of the ICC and European courts acting under universal jurisdiction has amply borne out these concerns.

Only when U.S. Defense Secretary Donald Rumsfeld threatened to move NATO headquarters out of Brussels in 2003 did Belgium rein in efforts to indict former President George H.W. Bush, and Gens. Colin Powell and Tommy Franks, for alleged “war crimes” during the 1990-91 Gulf War. Spanish courts have indicted American military personnel in Iraq and investigated the U.S. detention facility in Guantanamo Bay.

But with powerful states able to shield themselves and their clients, Africa has borne the brunt of indictments. Far from pursuing justice for victims, these courts have become a venue for public-relations exercises by activist groups. Within African countries, they have been manipulated by one political faction to sideline another, often featuring in electoral politics.
The ICC’s recent indictments of top Kenyan officials are a prime example. In October 2014, Kenyan President Uhuru Kenyatta became the first sitting head of state to appear before the ICC, though he took the extraordinary step of temporarily transferring power to his deputy to avoid the precedent. ICC prosecutors indicted Mr. Kenyatta in connection with Kenya’s post-election ethnic violence of 2007-08, in which some 1,200 people were killed.

Last December the ICC withdrew all charges against Mr. Kenyatta, saying the evidence had “not improved to such an extent that Mr Kenyatta’s alleged criminal responsibility can be proven beyond reasonable doubt.” As U.S. assistant secretary of state for African affairs from 2005-09, and the point person during Kenya’s 2007-08 post-election violence, I knew the ICC indictments were purely political. The court’s decision to continue its case against Kenya’s deputy president, William Ruto, reflects a degree of indifference and even hostility to Kenya’s efforts to heal its political divisions.

The ICC’s indictments in Kenya began with former chief prosecutor Luis Moreno-Ocampo’s determination to prove the court’s relevance in Africa by going after what he reportedly called “low-hanging fruit.” In other words, African political and military leaders unable to resist ICC jurisdiction.

More recently, the arrest of Rwandan chief of intelligence Lt. Gen. Emmanuel Karenzi Karake in London last month drew a unanimous reproach from the African Union’s Peace and Security Council. The warrant dates to a 2008 Spanish indictment for alleged reprisal killings following the 1994 Rwandan genocide. At the time of the indictment, Mr. Karenzi Karake was deputy commander of the joint U.N.-African Union peacekeeping operation in Darfur. The Rwandan troops under his command were the backbone of the Unamid force, and his performance in Darfur was by all accounts exemplary.

Moreover, a U.S. government interagency review conducted in 2007-08, when I led the State Department’s Bureau of African Affairs, found that the Spanish allegations against Mr. Karenzi Karake were false and unsubstantiated. The U.S. fully backed his reappointment in 2008 as deputy commander of Unamid forces. It would be a travesty of justice if the U.K. were to extradite Mr. Karake to Spain to stand trial.

Sadly, the early hope of “universal jurisdiction” ending impunity for perpetrators of genocide and crimes against humanity has given way to cynicism, both in Africa and the West. In Africa it is believed that, in the rush to demonstrate their power, these courts and their defenders have been too willing to brush aside considerations of due process that they defend at home.

In the West, the cynicism is perhaps even more damaging because it calls into question the moral capabilities of Africans and their leaders, and revives the language of paternalism and barbarism of earlier generations.

Ms. Frazer, a former U.S. ambassador to South Africa (2004-05) and assistant secretary of state for African affairs (2005-09), is an adjunct senior fellow for Africa studies at the Council on Foreign Relations.

Saturday, May 30, 2015

Magna Carta: Eight Centuries of Liberty

June marks the 800th anniversary of Magna Carta, the ‘Great Charter’ that established the rule of law for the English-speaking world. Its revolutionary impact still resounds today, writes Daniel Hannan

http://www.wsj.com/articles/magna-carta-eight-centuries-of-liberty-1432912022 

King John, pressured by English barons, reluctantly signs Magna Carta, the ‘Great Charter,’ on the Thames riverbank, Runnymede, June 15, 1215, as rendered in James Doyle’s ‘A Chronicle of England.’ Photo: Mary Evans Picture Library/Everett Collection http://si.wsj.net/public/resources/images/BN-IQ808_MAGNA_J_20150529103352.jpg

Eight hundred years ago next month, on a reedy stretch of riverbank in southern England, the most important bargain in the history of the human race was struck. I realize that’s a big claim, but in this case, only superlatives will do. As Lord Denning, the most celebrated modern British jurist put it, Magna Carta was “the greatest constitutional document of all time, the foundation of the freedom of the individual against the arbitrary authority of the despot.”

It was at Runnymede, on June 15, 1215, that the idea of the law standing above the government first took contractual form. King John accepted that he would no longer get to make the rules up as he went along. From that acceptance flowed, ultimately, all the rights and freedoms that we now take for granted: uncensored newspapers, security of property, equality before the law, habeas corpus, regular elections, sanctity of contract, jury trials.

Magna Carta is Latin for “Great Charter.” It was so named not because the men who drafted it foresaw its epochal power but because it was long. Yet, almost immediately, the document began to take on a political significance that justified the adjective in every sense.

The bishops and barons who had brought King John to the negotiating table understood that rights required an enforcement mechanism. The potency of a charter is not in its parchment but in the authority of its interpretation. The constitution of the U.S.S.R., to pluck an example more or less at random, promised all sorts of entitlements: free speech, free worship, free association. But as Soviet citizens learned, paper rights are worthless in the absence of mechanisms to hold rulers to account.

Magna Carta instituted a form of conciliar rule that was to develop directly into the Parliament that meets at Westminster today. As the great Victorian historian William Stubbs put it, “the whole constitutional history of England is little more than a commentary on Magna Carta.”

And not just England. Indeed, not even England in particular. Magna Carta has always been a bigger deal in the U.S. The meadow where the abominable King John put his royal seal to the parchment lies in my electoral district in the county of Surrey. It went unmarked until 1957, when a memorial stone was finally raised there—by the American Bar Association.

Only now, for the anniversary, is a British monument being erected at the place where freedom was born. After some frantic fundraising by me and a handful of local councilors, a large bronze statue of Queen Elizabeth II will gaze out across the slow, green waters of the Thames, marking 800 years of the Crown’s acceptance of the rule of law.

Eight hundred years is a long wait. We British have, by any measure, been slow to recognize what we have. Americans, by contrast, have always been keenly aware of the document, referring to it respectfully as the Magna Carta.

Why? Largely because of who the first Americans were. Magna Carta was reissued several times throughout the 14th and 15th centuries, as successive Parliaments asserted their prerogatives, but it receded from public consciousness under the Tudors, whose dynasty ended with the death of Elizabeth I in 1603.

In the early 17th century, members of Parliament revived Magna Carta as a weapon in their quarrels with the autocratic Stuart monarchs. Opposition to the Crown was led by the brilliant lawyer Edward Coke (pronounced Cook), who drafted the first Virginia Charter in 1606. Coke’s argument was that the king was sidelining Parliament, and so unbalancing the “ancient constitution” of which Magna Carta was the supreme expression.
United for the first time, the four surviving original Magna Carta manuscripts are prepared for display at the British Library, London, Feb. 1, 2015.
United for the first time, the four surviving original Magna Carta manuscripts are prepared for display at the British Library, London, Feb. 1, 2015. Photo: UPPA/ZUMA PRESS

The early settlers arrived while these rows were at their height and carried the mania for Magna Carta to their new homes. As early as 1637, Maryland sought permission to incorporate Magna Carta into its basic law, and the first edition of the Great Charter was published on American soil in 1687 by William Penn, who explained that it was what made Englishmen unique: “In France, and other nations, the mere will of the Prince is Law, his word takes off any man’s head, imposeth taxes, or seizes any man’s estate, when, how and as often as he lists; But in England, each man hath a fixed Fundamental Right born with him, as to freedom of his person and property in his estate, which he cannot be deprived of, but either by his consent, or some crime, for which the law has imposed such a penalty or forfeiture.”

There was a divergence between English and American conceptions of Magna Carta. In the Old World, it was thought of, above all, as a guarantor of parliamentary supremacy; in the New World, it was already coming to be seen as something that stood above both Crown and Parliament. This difference was to have vast consequences in the 1770s.

The American Revolution is now remembered on both sides of the Atlantic as a national conflict—as, indeed, a “War of Independence.” But no one at the time thought of it that way—not, at any rate, until the French became involved in 1778. Loyalists and patriots alike saw it as a civil war within a single polity, a war that divided opinion every bit as much in Great Britain as in the colonies.

The American Revolutionaries weren’t rejecting their identity as Englishmen; they were asserting it. As they saw it, George III was violating the “ancient constitution” just as King John and the Stuarts had done. It was therefore not just their right but their duty to resist, in the words of the delegates to the first Continental Congress in 1774, “as Englishmen our ancestors in like cases have usually done.”

Nowhere, at this stage, do we find the slightest hint that the patriots were fighting for universal rights. On the contrary, they were very clear that they were fighting for the privileges bestowed on them by Magna Carta. The concept of “no taxation without representation” was not an abstract principle. It could be found, rather, in Article 12 of the Great Charter: “No scutage or aid is to be levied in our realm except by the common counsel of our realm.” In 1775, Massachusetts duly adopted as its state seal a patriot with a sword in one hand and a copy of Magna Carta in the other.

I recount these facts to make an important, if unfashionable, point. The rights we now take for granted—freedom of speech, religion, assembly and so on—are not the natural condition of an advanced society. They were developed overwhelmingly in the language in which you are reading these words.

When we call them universal rights, we are being polite. Suppose World War II or the Cold War had ended differently: There would have been nothing universal about them then. If they are universal rights today, it is because of a series of military victories by the English-speaking peoples.

Various early copies of Magna Carta survive, many of them in England’s cathedrals, tended like the relics that were removed during the Reformation. One hangs in the National Archives in Washington, D.C., next to the two documents it directly inspired: the Declaration of Independence and the Constitution. Another enriches the Australian Parliament in Canberra.

But there are only four 1215 originals. One of them, normally housed at Lincoln Cathedral, has recently been on an American tour, resting for some weeks at the Library of Congress. It wasn’t that copy’s first visit to the U.S. The same parchment was exhibited in New York at the 1939 World’s Fair, attracting an incredible 13 million visitors. World War II broke out while it was still on display, and it was transferred to Fort Knox for safekeeping until the end of the conflict.

Could there have been a more apt symbol of what the English-speaking peoples were fighting for in that conflagration? Think of the world as it stood in 1939. Constitutional liberty was more or less confined to the Anglosphere. Everywhere else, authoritarianism was on the rise. Our system, uniquely, elevated the individual over the state, the rules over the rulers.

When the 18th-century statesman Pitt the Elder described Magna Carta as England’s Bible, he was making a profound point. It is, so to speak, the Torah of the English-speaking peoples: the text that sets us apart while at the same time speaking truths to the rest of mankind.

The very success of Magna Carta makes it hard for us, 800 years on, to see how utterly revolutionary it must have appeared at the time. Magna Carta did not create democracy: Ancient Greeks had been casting differently colored pebbles into voting urns while the remote fathers of the English were grubbing about alongside pigs in the cold soil of northern Germany. Nor was it the first expression of the law: There were Sumerian and Egyptian law codes even before Moses descended from Sinai.

What Magna Carta initiated, rather, was constitutional government—or, as the terse inscription on the American Bar Association’s stone puts it, “freedom under law.”

It takes a real act of imagination to see how transformative this concept must have been. The law was no longer just an expression of the will of the biggest guy in the tribe. Above the king brooded something more powerful yet—something you couldn’t see or hear or touch or taste but that bound the sovereign as surely as it bound the poorest wretch in the kingdom. That something was what Magna Carta called “the law of the land.”

This phrase is commonplace in our language. But think of what it represents. The law is not determined by the people in government, nor yet by clergymen presuming to interpret a holy book. Rather, it is immanent in the land itself, the common inheritance of the people living there.

The idea of the law coming up from the people, rather than down from the government, is a peculiar feature of the Anglosphere. Common law is an anomaly, a beautiful, miraculous anomaly. In the rest of the world, laws are written down from first principles and then applied to specific disputes, but the common law grows like a coral, case by case, each judgment serving as the starting point for the next dispute. In consequence, it is an ally of freedom rather than an instrument of state control. It implicitly assumes residual rights.

And indeed, Magna Carta conceives rights in negative terms, as guarantees against state coercion. No one can put you in prison or seize your property or mistreat you other than by due process. This essentially negative conception of freedom is worth clinging to in an age that likes to redefine rights as entitlements—the right to affordable health care, the right to be forgotten and so on.

It is worth stressing, too, that Magna Carta conceived freedom and property as two expressions of the same principle. The whole document can be read as a lengthy promise that the goods of a free citizen will not be arbitrarily confiscated by someone higher up the social scale. Even the clauses that seem most remote from modern experience generally turn out, in reality, to be about security of ownership.

There are, for example, detailed passages about wardship. King John had been in the habit of marrying heiresses to royal favorites as a way to get his hands on their estates. The abstruse-sounding articles about inheritance rights are, in reality, simply one more expression of the general principle that the state may not expropriate without due process.

Those who stand awe-struck before the Great Charter expecting to find high-flown phrases about liberty are often surprised to see that a chunk of it is taken up with the placing of fish-traps on the Thames. Yet these passages, too, are about property, specifically the freedom of merchants to navigate inland waterways without having arbitrary tolls imposed on them by fish farmers.

Liberty and property: how naturally those words tripped, as a unitary concept, from the tongues of America’s Founders. These were men who had been shaped in the English tradition, and they saw parliamentary government not as an expression of majority rule but as a guarantor of individual freedom. How different was the Continental tradition, born 13 years later with the French Revolution, which saw elected assemblies as the embodiment of what Rousseau called the “general will” of the people.

In that difference, we may perhaps discern explanation of why the Anglosphere resisted the chronic bouts of authoritarianism to which most other Western countries were prone. We who speak this language have always seen the defense of freedom as the duty of our representatives and so, by implication, of those who elect them. Liberty and democracy, in our tradition, are not balanced against each other; they are yoked together.

In February, the four surviving original copies of Magna Carta were united, for just a few hours, at the British Library—something that had not happened in 800 years. As I stood reverentially before them, someone recognized me and posted a photograph on Twitter with the caption: “If Dan Hannan gets his hands on all four copies of Magna Carta, will he be like Sauron with the Rings?”

Yet the majesty of the document resides in the fact that it is, so to speak, a shield against Saurons. Most other countries have fallen for, or at least fallen to, dictators. Many, during the 20th century, had popular communist parties or fascist parties or both. The Anglosphere, unusually, retained a consensus behind liberal capitalism.

This is not because of any special property in our geography or our genes but because of our constitutional arrangements. Those constitutional arrangements can take root anywhere. They explain why Bermuda is not Haiti, why Hong Kong is not China, why Israel is not Syria.

They work because, starting with Magna Carta, they have made the defense of freedom everyone’s responsibility. Americans, like Britons, have inherited their freedoms from past generations and should not look to any external agent for their perpetuation. The defense of liberty is your job and mine. It is up to us to keep intact the freedoms we inherited from our parents and to pass them on securely to our children.

Mr. Hannan is a British member of the European Parliament for the Conservative Party, a columnist for the Washington Examiner and the author of “Inventing Freedom: How the English-speaking Peoples Made the Modern World.”

Friday, April 3, 2015

The Federal President would not stay in power if he did not talk human rights. So look at it as a political imperative.

Joe Biden on Human Rights
The Vice President tells China’s leaders to ignore the U.S.
WSJ, Apr 01, 2015

White House officials can be oddly candid in talking to their liberal friends at the New Yorker magazine. That’s where an unnamed official in 2011 boasted of “leading from behind,” and where last year President Obama dismissed Islamic State as a terrorist “jayvee team.” Now the U.S. Vice President has revealed the Administration line on human rights in China.

In the April 6 issue, Joe Biden recounts meeting Xi Jinping months before his 2012 ascent to be China’s supreme leader. Mr. Xi asked him why the U.S. put “so much emphasis on human rights.” The right answer is simple: No government has the right to deny its citizens basic freedoms, and those that do tend also to threaten peace overseas, so U.S. support for human rights is a matter of values and interests.

Instead, Mr. Biden downplayed U.S. human-rights rhetoric as little more than political posturing. “No president of the United States could represent the United States were he not committed to human rights,” he told Mr. Xi. “President Barack Obama would not be able to stay in power if he did not speak of it. So look at it as a political imperative.” Then Mr. Biden assured China’s leader: “It doesn’t make us better or worse. It’s who we are. You make your decisions. We’ll make ours.” [not the WSJ's emphasis.]

Mr. Xi took the advice. Since taking office he has detained more than 1,000 political prisoners, from anticorruption activist Xu Zhiyong to lawyer Pu Zhiqiang and journalist Gao Yu. He has cracked down on Uighurs in Xinjiang, banning more Muslim practices and jailing scholar-activist Ilham Tohti for life. Anti-Christian repression and Internet controls are tightening. Nobel Peace laureate Liu Xiaobo remains in prison, his wife Liu Xia under illegal house arrest for the fifth year. Lawyer Gao Zhisheng left prison in August but is blocked from receiving medical care overseas. Hong Kong, China’s most liberal city, is losing its press freedom and political autonomy.

Amid all of this Mr. Xi and his government have faced little challenge from Washington. That is consistent with Hillary Clinton’s 2009 statement that human rights can’t be allowed to “interfere” with diplomacy on issues such as the economy and the environment. Mr. Obama tried walking that back months later, telling the United Nations that democracy and human rights aren’t “afterthoughts.” But his Administration’s record—and now Mr. Biden’s testimony—prove otherwise.

Thursday, January 29, 2015

In the name of ‘affordable’ loans, we are creating the conditions for a replay of the housing disaster


Building Toward Another Mortgage Meltdown. By Edward Pinto


In the name of ‘affordable’ loans, the White House is creating the conditions for a replay of the housing disaster

http://www.wsj.com/articles/edward-pinto-building-toward-another-mortgage-meltdown-1422489618
The Obama administration’s troubling flirtation with another mortgage meltdown took an unsettling turn on Tuesday with Federal Housing Finance Agency Director Mel Watt ’s testimony before the House Financial Services Committee.

Mr. Watt told the committee that, having received “feedback from stakeholders,” he expects to release by the end of March new guidance on the “guarantee fee” charged by Fannie Mae and Freddie Mac to cover the credit risk on loans the federal mortgage agencies guarantee.

Here we go again. In the Obama administration, new guidance on housing policy invariably means lowering standards to get mortgages into the hands of people who may not be able to afford them.

Earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums “to make mortgages more affordable and accessible.” While that sounds good in the abstract, the decision is a bad one with serious consequences for the housing market.

Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail. In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives, private lenders will be blamed—and homeowners and taxpayers will once again pay dearly.

Lowering annual mortgage-insurance premiums is part of a new affordable-lending effort by the Obama administration. More specifically, it is the latest salvo in a price war between two government mortgage giants to meet government mandates.

Fannie Mae fired the first shot in December when it relaunched the 30-year, 97% loan-to-value, or LTV, mortgage (a type of loan that was suspended in 2013). Fannie revived these 3% down-payment mortgages at the behest of its federal regulator, the Federal Housing Finance Agency (FHFA)—which has run Fannie Mae and Freddie Mac since 2008, when both government-sponsored enterprises (GSEs) went belly up and were put into conservatorship. The FHA’s mortgage-premium price rollback was a counteroffensive.

Déjà vu: Fannie launched its first price war against the FHA in 1994 by introducing the 30-year, 3% down-payment mortgage. It did so at the behest of its then-regulator, the Department of Housing and Urban Development. This and other actions led HUD in 2004 to credit Fannie Mae’s “substantial part in the ‘revolution’ ” in “affordable lending” to “historically underserved households.”

Fannie’s goal in 1994 and today is to take market share from the FHA, the main competitor for loans it and Freddie Mac need to meet mandates set by Congress since 1992 to increase loans to low- and moderate-income homeowners. The weapons in this war are familiar—lower pricing and progressively looser credit as competing federal agencies fight over existing high-risk lending and seek to expand such lending.

Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers.

Starting in 2009 the FHFA released annual studies documenting the widespread nature of these cross-subsidies. The reports showed that low down payment, 30-year loans to individuals with low FICO scores were consistently subsidized by less-risky loans.

Unfortunately, special interests such as the National Association of Realtors—always eager to sell more houses and reap the commissions—and the left-leaning Urban Institute were cheerleaders for loose credit. In 1997, for example, HUD commissioned the Urban Institute to study Fannie and Freddie’s single-family underwriting standards. The Urban Institute’s 1999 report found that “the GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” By 2000 Fannie and Freddie did away with down payments and raised debt-to-income ratios. HUD encouraged them to more aggressively enter the subprime market, and the GSEs decided to re-enter the “liar loan” (low doc or no doc) market, partly in a desire to meet higher HUD low- and moderate-income lending mandates.

On Jan. 6, the Urban Institute announced in a blog post: “FHA: Time to stop overcharging today’s borrowers for yesterday’s mistakes.” The institute endorsed an immediate cut of 0.40% in mortgage-insurance premiums charged by the FHA. But once the agency cuts premiums, Fannie and Freddie will inevitably reduce the guarantee fees charged to cover the credit risk on the loans they guarantee.

Now the other shoe appears poised to drop, given Mr. Watt’s promise on Tuesday to issue new guidance on guarantee fees.

This is happening despite Congress’s 2011 mandate that Fannie’s regulator adjust the prices of mortgages and guarantee fees to make sure they reflect the actual risk of loss—that is, to eliminate dangerous and distortive pricing by the two GSEs. Ed DeMarco, acting director of the FHFA since March 2009, worked hard to do so but left office in January 2014. Mr. Watt, his successor, suspended Mr. DeMarc o’s efforts to comply with Congress’s mandate. Now that Fannie will once again offer heavily subsidized 3%-down mortgages, massive new cross-subsidies will return, and the congressional mandate will be ignored.

The law stipulates that the FHA maintain a loss-absorbing capital buffer equal to 2% of the value of its outstanding mortgages. The agency obtains this capital from profits earned on mortgages and future premiums. It hasn’t met its capital obligation since 2009 and will not reach compliance until the fall of 2016, according to the FHA’s latest actuarial report. But if the economy runs into another rough patch, this projection will go out the window.

Congress should put an end to this price war before it does real damage to the economy. It should terminate the ill-conceived GSE affordable-housing mandates and impose strong capital standards on the FHA that can’t be ignored as they have been for five years and counting.

Mr. Pinto, former chief credit officer of Fannie Mae, is co-director and chief risk officer of the International Center on Housing Risk at the American Enterprise Institute.

Saturday, November 15, 2014

Jonathan Gruber’s ‘Stupid’ Budget Tricks

Jonathan Gruber’s ‘Stupid’ Budget Tricks. WSJ Editorial
His ObamaCare candor shows how Congress routinely cons taxpayers.Wall Street Journal, Nov. 14, 2014 6:51 p.m. ET

As a rule, Americans don’t like to be called “stupid,” as Jonathan Gruber is discovering. Whatever his academic contempt for voters, the ObamaCare architect and Massachusetts Institute of Technology economist deserves the Presidential Medal of Freedom for his candor about the corruption of the federal budget process.

In his now-infamous talk at the University of Pennsylvania last year, Professor Gruber argued that the Affordable Care Act “would not have passed” had Democrats been honest about the income-redistribution policies embedded in its insurance regulations. But the more instructive moment is his admission that “this bill was written in a tortured way to make sure CBO did not score the mandate as taxes. If CBO scored the mandate as taxes, the bill dies.”

Mr. Gruber means the Congressional Budget Office, the institution responsible for putting “scores” or official price tags on legislation. He’s right that to pass ObamaCare Democrats perpetrated the rawest, most cynical abuse of the CBO since its creation in 1974.

In another clip from Mr. Gruber’s seemingly infinite video library, he discusses how he and Democrats wrote the law to game the CBO’s fiscal conventions and achieve goals that would otherwise be “politically impossible.” In still another, he explains that these ruses are “a sad statement about budget politics in the U.S., but there you have it.”

Yes you do. Such admissions aren’t revelations, since the truth has long been obvious to anyone curious enough to look. We and other critics wrote about ObamaCare’s budget gimmicks during the debate, and Rep. Paul Ryan exposed them at the 2010 “health summit.” President Obama changed the subject.

But rarely are liberal intellectuals as full frontal as Mr. Gruber about the accounting fraud ingrained in ObamaCare. Also notable are his do-what-you-gotta-do apologetics: “I’d rather have this law than not,” he says.

Recall five years ago. The White House wanted to pretend that the open-ended new entitlement would spend less than $1 trillion over 10 years and reduce the deficit too. Congress requires the budget gnomes to score bills as written, no matter how unrealistic the assumption or fake the promise. Democrats with the help of Mr. Gruber carefully designed the bill to exploit this built-in gullibility.

So they used a decade of taxes to fund merely six years of insurance subsidies. They made-believe that Medicare payments to hospitals will some day fall below Medicaid rates. A since-repealed program for long-term care front-loaded taxes but back-loaded spending, meant to gradually go broke by design. Remember the spectacle of Democrats waiting for the white smoke to come up from CBO and deliver the holy scripture verdict?

On the tape, Mr. Gruber also identifies a special liberal manipulation: CBO’s policy reversal to not count the individual mandate to buy insurance as an explicit component of the federal budget. In 1994, then CBO chief Robert Reischauer reasonably determined that if the government forces people to buy a product by law, then those transactions no longer belong to the private economy but to the U.S. balance sheet. The CBO’s face-melting cost estimate helped to kill HillaryCare.

The CBO director responsible for this switcheroo that moved much of ObamaCare’s real spending off the books was Peter Orszag, who went on to become Mr. Obama’s budget director. Mr. Orszag nonetheless assailed CBO during the debate for not giving him enough credit for the law’s phantom “savings.”

Then again, Mr. Gruber told a Holy Cross audience in 2010 that although ObamaCare “is 90% health insurance coverage and 10% about cost control, all you ever hear people talk about is cost control. How it’s going to lower the cost of health care, that’s all they talk about. Why? Because that’s what people want to hear about because a majority of Americans care about health-care costs.”

***

Both political parties for some reason treat the CBO with the same reverence the ancient Greeks reserved for the Delphic oracle, but Mr. Gruber’s honesty is another warning that the budget rules are rigged to expand government and hide the true cost of entitlements. CBO scores aren’t unambiguous facts but are guesses about the future, biased by the Keynesian assumptions and models its political masters in Congress instruct it to use.

Republicans who now run Congress can help taxpayers by appointing a new CBO director, as is their right as the majority. Current head Doug Elmendorf is a respected economist, and he often has a dry wit as he reminds Congressfolk that if they feed him garbage, he must give them garbage back. But if the GOP won’t abolish the institution, then they can find a replacement who is as candid as Mr. Gruber about the flaws and limitations of the CBO status quo. The Tax Foundation’s Steve Entin would be an inspired pick.

Democrats are now pretending they’ve never heard of Mr. Gruber, though they used to appeal to his authority when he still had some. His commentaries are no less valuable because he is now a political liability for Democrats.

Tuesday, July 15, 2014

The Citigroup ATM - Jack Lew and Tim Geithner escape mention in the bank settlement.

The Citigroup ATM, WSJ Editorial
Jack Lew and Tim Geithner escape mention in the bank settlement.The Wall Street Journal, July 14, 2014 7:37 p.m. ET
http://online.wsj.com/articles/the-citigroup-atm-1405379378

The Department of Justice isn't known for a sense of humor. But on Monday it announced a civil settlement with Citigroup over failed mortgage investments that covers almost exactly the period when current Treasury Secretary Jack Lew oversaw divisions at Citi that presided over failed mortgage investments. Now, that's funny.

Though Justice, five states and the FDIC are prying $7 billion from the bank for allegedly misleading investors, there's no mention in the settlement of clawing back even a nickel of Mr. Lew's compensation. We also see no sanction for former Treasury Secretary Timothy Geithner, who allowed Citi to build colossal mortgage risks outside its balance sheet while overseeing the bank as president of the New York Federal Reserve.

The settlement says Citi's alleged misdeeds began in 2006, the year Mr. Lew joined the bank, and the agreement covers conduct "prior to January 1, 2009." That was shortly before Mr. Lew left to work for President Obama and two weeks before Mr. Lew received $944,518 from Citi in "salary, payout for vested restricted stock," and "discretionary cash compensation for work performed in 2008," according to a 2010 federal disclosure report. That was also the year Citi began receiving taxpayer bailouts of $45 billion in cash, plus hundreds of billions more in taxpayer guarantees.

While Attorney General Eric Holder is forgiving toward his Obama cabinet colleagues, he seems to believe that some housing transactions can never be forgiven. The $7 billion settlement includes the same collateralized debt obligation for which the bank already agreed to pay $285 million in a settlement with the Securities and Exchange Commission. The Justice settlement also includes a long list of potential charges not covered by the agreement, so prosecutors can continue to raid the Citi ATM.

Citi offers in return what looks like a blanket agreement not to sue the government over any aspect of the case, and waives its right to defend itself "based in whole or in part on a contention that, under the Double Jeopardy Clause in the Fifth Amendment of the Constitution, or under the Excessive Fines Clause in the Eighth Amendment of the Constitution, this Agreement bars a remedy sought in such criminal prosecution or administrative action." We hold no brief for Citi, which has been rescued three times by the feds. But what kind of government demands the right to exact repeated punishments for the same offense?

The bank's real punishment should have been failure, as former FDIC Chairman Sheila Bair and we argued at the time. Instead, the regulators kept Citi alive with taxpayer money far beyond what it provided most other banks as part of the Troubled Asset Relief Program. Keeping it alive means they can now use Citi as a political target when it's convenient to claim they're tough on banks.

And speaking of that $7 billion, good luck finding a justification for it in the settlement agreement. The number seems to have been pulled out of thin air since it's unrelated to Citi's mortgage-securities market share or any other metric we can see beyond having media impact.

If this sounds cynical, readers should consult the Justice Department's own leaks to the press about how the Citi deal went down. Last month the feds were prepared to bring charges against the bank, but the necessities of public relations intervened.

According to the Journal, "News had leaked that afternoon, June 17, that the U.S. had captured Ahmed Abu Khatallah, a key suspect in the attacks on the American consulate in Benghazi in 2012. Justice Department officials didn't want the announcement of the suit against Citigroup—and its accompanying litany of alleged misdeeds related to mortgage-backed securities—to be overshadowed by questions about the Benghazi suspect and U.S. policy on detainees. Citigroup, which didn't want to raise its offer again and had been preparing to be sued, never again heard the threat of a suit."

This week's settlement includes $4 billion for the Treasury, roughly $500 million for the states and FDIC, and $2.5 billion for mortgage borrowers. That last category has become a fixture of recent government mortgage settlements, even though the premise of this case involves harm done to bond investors, not mortgage borrowers.

But the Obama Administration's references to the needs of Benghazi PR remind us that it could be worse. At least Mr. Holder isn't blaming the Geithner and Lew failures on a video.

Thursday, July 10, 2014

Our Financial Crisis Amnesia - Remember the S&L crisis? Nobody else does either. And we'll soon forget about 2008 too

Our Financial Crisis Amnesia. By Alex J. Pollock
Remember the S&L crisis? Nobody else does either. And we'll soon forget about 2008 too.WSJ, July 9, 2014 6:50 p.m. ET
http://online.wsj.com/articles/alex-pollock-our-financial-crisis-amnesia-1404946250

It is now five years since the end of the most recent U.S. financial crisis of 2007-09. Stocks have made record highs, junk bonds and leveraged loans have boomed, house prices have risen, and already there are cries for lower credit standards on mortgages to "increase access."

Meanwhile, in vivid contrast to the Swiss central bank, which marks its investments to market, the Federal Reserve has designed its own regulatory accounting so that it will never have to recognize any losses on its $4 trillion portfolio of long-term bonds and mortgage securities.

Who remembers that such "special" accounting is exactly what the Federal Home Loan Bank Board designed in the 1980s to hide losses in savings and loans? Who remembers that there even was a Federal Home Loan Bank Board, which for its manifold financial sins was abolished in 1989?

It is 25 years since 1989. Who remembers how severe the multiple financial crises of the 1980s were?

The government of Mexico defaulted on its loans in 1982 and set off a global debt crisis. The Federal Reserve's double-digit interest rates had rendered insolvent the aggregate savings and loan industry, until then the principal supplier of mortgage credit. The oil bubble collapsed with enormous losses.

Between 1982 and 1992, a disastrous 2,270 U.S. depository institutions failed. That is an average of more than 200 failures a year or four a week over a decade. From speaking to a great many audiences about financial crises, I can testify that virtually no one knows this.

In the wake of the housing bust, I was occasionally asked, "Will we learn the lessons of this crisis?" "We will indeed," I would reply, "and we will remember them for at least four or five years." In 2007 as the first wave of panic was under way, I heard a senior international economist opine in deep, solemn tones, "What we have learned from this crisis is the importance of liquidity risk." "Yes," I said, "that's what we learn from every crisis."

The political reactions to the 1980s included the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the FDIC Improvement Act of 1991, and the very ironically titled GSE Financial Safety and Soundness Act of 1992. Anybody remember the theories behind those acts?

After depositors in savings and loan associations were bailed out to the tune of $150 billion (the Federal Savings and Loan Insurance Corporation having gone belly up), then-Treasury Secretary Nicholas Brady pronounced that the great legislative point was "never again." Never, that is, until the Mexican debt crisis of 1994, the Asian debt crisis of 1997, and the Long-Term Capital Management crisis of 1998, all very exciting at the time.

And who remembers the Great Recession (so called by a prominent economist of the time) in 1973-75, the huge real-estate bust and New York City's insolvency crisis? That was the decade before the 1980s.

Viewing financial crises over several centuries, the great economic historian Charles Kindleberger concluded that they occur on average about once a decade. Similarly, former Fed Chairman Paul Volcker wittily observed that "about every 10 years, we have the biggest crisis in 50 years."

What is it about a decade or so? It seems that is long enough for memories to fade in the human group mind, as they are overlaid with happier recent experiences and replaced with optimistic new theories.

Speaking in 2013, Paul Tucker, the former deputy governor for financial stability of the Bank of England—a man who has thought long and hard about the macro risks of financial systems—stated, "It will be a while before confidence in the system is restored." But how long is "a while"? I'd say less than a decade.

Mr. Tucker went on to proclaim, "Never again should confidence be so blind." Ah yes, "never again." If Mr. Tucker's statement is meant as moral suasion, it's all right. But if meant as a prediction, don't bet on it.

Former Treasury Secretary Tim Geithner, for all his daydream of the government as financial Platonic guardian, knows this. As he writes in "Stress Test," his recent memoir: "Experts always have clever reasons why the boom they are enjoying will avoid the disastrous patterns of the past—until it doesn't." He predicts: "There will be a next crisis, despite all we did."

Right. But when? On the historical average, 2009 + 10 = 2019. Five more years is plenty of time for forgetting.

Mr. Pollock is a resident fellow at the American Enterprise Institute and was president and CEO of the Federal Home Loan Bank of Chicago 1991-2004.

Friday, April 25, 2014

Daniel Schuman's Thomas Piketty Revives Marx for the 21st Century

Thomas Piketty reviu Marx per al segle XXI. By Daniel Shuchman
Wall Street Journal, Apr 21, 2014
http://online.wsj.com/news/articles/SB10001424052702303825604579515452952131592

Translated by Un Liberal Recalcitrant from Thomas Piketty Revives Marx for the 21st Century, below.

Thomas Piketty li agrada el capitalisme, ja que assigna eficientment els recursos. Però ell no li agrada com es distribueix la renda. No, pensa que pràcticament és una il·legitimitat moral qualsevol acumulació de riquesa, i és una qüestió de justícia que aquesta desigualtat pot radicar en la nostra economia. La manera de fer això és eliminar les rendes altes i reduir la riquesa existent a través d'impostos.

"El capital al segle XXI" és una densa exploració de Thomas Piketty en la història dels salaris i de la riquesa en els últims tres segles. Presenta un desgavell de dades sobre la distribució dels ingressos en molts països, provant de demostrar que la desigualtat ha augmentat dràsticament en les últimes dècades i que aviat tornarà a ser pitjor. Independentment de si un està convençut per les dades del Sr Piketty  -i hi ha raons per a l'escepticisme, donat el cas de les pròpies advertències de l'autor i pel fet que moltes estadístiques es basen en mostres molt limitades dels registres de l'impost sobre béns de dubtosa extrapolació- en última instància aquest és un fet de poca importància. Conseqüentment aquest llibre no és tant un treball d'anàlisi econòmica com el d’una norma ideològica estranya.

Professor de l'Escola d'Economia de París, el Sr Piketty creu que només la productivitat dels treballadors de baixos ingressos pot ser mesurada de forma objectiva. Ell postula que quan un treball és replicable, com el d’un "treballador de la línia de muntatge o el d’un cambrer de menjar ràpid",  es pot mesurar de forma relativament fàcil el valor aportat per cada treballador. Per tant, aquests treballadors tenen dret al que guanyen. Ell troba que la productivitat de les persones amb alts ingressos ´rd més difícil de mesurar i creu que els seus salaris es troben en el final de la "gran mesura arbitrària".  Són el reflex d'una "construcció ideològica" més del mèrit.

Segons Piketty, els sous altíssims per "supermanagers" corporatius ha estat la major font d'augment de la desigualtat, i aquests executius només poden haver arribat a la seva recompensa gràcies a la sort o falles en el govern corporatiu. Es requereix només una mirada ocasional a aquest diari per confirmar això. No obstant, l'autor creu que cap CEO podria mai justificar el seu salari en funció del rendiment. Ell no diu que qualsevol professional –atletes, metges, professors d'economia, que venen llibres electrònics per 21,99$ de marge amb cost zero per còpia- tingui dret a majors ingressos perquè no vol "gaudir de la construcció d'una jerarquia moral de la riquesa".

Ell admet que els empresaris són "absolutament indispensables" per al desenvolupament econòmic, però el seu èxit, també, està generalment contaminat. Mentre que alguns tenen èxit gràcies al "treball per part del veritable emprenedor," altres tenen senzillament sort o aconsegueixen l’èxit a través del "robatori descarat". Fins i tot seria el cas de les fortunes fetes del treball empresarial que evolucionen ràpidament cap a una "concentració excessiva i duradora del capital". Això és una injustícia d'auto-reforç, perquè "la propietat a vegades comença amb el robatori, i el retorn arbitrari sobre el capital pot perpetuar fàcilment el delicte inicial. "De fet tot el llibre incorpora com a una hostilitat gairebé medieval la idea de que el capital financer tingui un retorn o benefici.


El Sr Piketty creu que com més rica es torna una societat, més gent va a la recerca de la millor posició social relativa, condicionant més desigualtat. Rememora les atemporals autoritats econòmiques com Jane Austen i Honoré de Balzac en la cartografia del nostre futur. Al llarg del llibre es divaga amb les maquinacions inadequades, perseguint de personatges de novel·les com "Sentit i sensibilitat", i obsessivament, amb el calculador "Papà Goriot": Són els fruits del treball dur superiors a les intencions per casar-se i aconseguir una fortuna? Si no és així, "per què treballar, i per què comportar-se moralment bé?"

Mentre que els executius corporatius dels Estats Units són la seva “bèstia especial”, el Sr Piketty també està profundament preocupat per les desenes de milions de persones treballadores -un grup que ell anomena despectivament "petits rendistes"- que els seus ingressos els col·loca molt lluny de l’u per cent, però que encara tenen estalvis, comptes de jubilació i altres actius. Considera que aquest gran grup demogràfic es farà més gran i que el seu creixement de riquesa es transmetrà mitjançant les herències, essent això "una forma bastant preocupant de desigualtat". Es lamenta del difícil que és "corregir" tot això perquè es tracta d'un ampli segment de la població, no una petita elit, més fàcilment “satanitzable” .

Llavors, què cal fer ? El Sr Piketty insta a constituir una taxa impositiva del 80 % en els ingressos a partir del 500.000$ o 1 milió. "Això no és per recaptar diners per a l'educació o per augmentar les prestacions d'atur.  Contràriament, no ho espera d’un impost d'aquest tipus perquè el seu propòsit és, simplement, "posar fi a aquest tipus d'ingressos”. També serà necessari imposar una taxa -del 50/60%- sobre els ingressos més baixos, com els de 200.000$. Afegeix també ha ha d'haver un impost a la riquesa anual de fins el 10 % sobre les fortunes més grans i una càrrega fiscal, d'una sola vegada, de fins el 20% sobre els nivells de riquesa més baixos. Ell, alegrement, ens assegura que res d'això reduiria el creixement econòmic, la productivitat, l'emprenedoria o la innovació.

No és que el creixement i la millora no estigui en la ment del senyor Piketty,  sin´ó que es tracta com un assumpte econòmic i com un mitjà per a una major justícia distributiva. S'assumeix que l'economia és estàtica i de suma zero; si l'ingrés d'un grup de població augmenta, un altre necessàriament ha d’empobrir-se. Ell veu la igualtat de resultats com la finalitat última i exclusivament per al seu propi bé. Objectius -tals alternatives com la maximització de la riquesa general de la societat o l'augment de la llibertat econòmica o la recerca de la major igualtat possible d'oportunitats o fins i tot, com en la filosofia de John Rawls, el que garanteix que el benestar dels més desfavorits es maximitza -són ni mínimament esmentats.

No hi ha dubte que la pobresa, la desocupació i la desigualtat d'oportunitats són els principals reptes per a les societats capitalistes, i els diversos graus de la sort, el treball dur, la mandra i el mèrit són inherents a la humanitat. El Sr Piketty no és el primer visionari utòpic. Cita, per exemple, "l’experiment soviètic" que va permetre a l'home llançar "les seves cadenes juntament amb el jou de la riquesa acumulada." En el seu relat, només va portar el desastre humà perquè les societats necessiten mercats i propietat privada per tenir una economia que funcioni. Ell diu que les seves solucions ofereixen una "resposta menys violenta i més eficient per l'etern problema del capital privat i del seu benefici. En lloc d'Austen i Balzac, el professor hauria de llegir "Rebel·lió a la Granja” i "Darkness at Noon".

Shuchman és un gestor de fons de Nova York que escriu sovint sobre el dret i l'economia.


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Thomas Piketty Revives Marx for the 21st Century. By Daniel Schuman
An 80% tax rate on incomes above $500,000 is not meant to bring in money for education or benefits, but 'to put an end to such incomes.'
Wall Street Journal, April 21, 2014 7:18 p.m. ET
http://online.wsj.com/news/articles/SB10001424052702303825604579515452952131592

Thomas Piketty likes capitalism because it efficiently allocates resources. But he does not like how it allocates income. There is, he thinks, a moral illegitimacy to virtually any accumulation of wealth, and it is a matter of justice that such inequality be eradicated in our economy. The way to do this is to eliminate high incomes and to reduce existing wealth through taxation.

"Capital in the Twenty-First Century" is Mr. Piketty's dense exploration of the history of wages and wealth over the past three centuries. He presents a blizzard of data about income distribution in many countries, claiming to show that inequality has widened dramatically in recent decades and will soon get dangerously worse. Whether or not one is convinced by Mr. Piketty's data—and there are reasons for skepticism, given the author's own caveats and the fact that many early statistics are based on extremely limited samples of estate tax records and dubious extrapolation—is ultimately of little consequence. For this book is less a work of economic analysis than a bizarre ideological screed.

A professor at the Paris School of Economics, Mr. Piketty believes that only the productivity of low-wage workers can be measured objectively. He posits that when a job is replicable, like an "assembly line worker or fast-food server," it is relatively easy to measure the value contributed by each worker. These workers are therefore entitled to what they earn. He finds the productivity of high-income earners harder to measure and believes their wages are in the end "largely arbitrary." They reflect an "ideological construct" more than merit.

Soaring pay for corporate "supermanagers" has been the largest source of increased inequality, according to Mr. Piketty, and these executives can only have attained their rewards through luck or flaws in corporate governance. It requires only an occasional glance at this newspaper to confirm that this can be the case. But the author believes that no CEO could ever justify his or her pay based on performance. He doesn't say whether any occupation—athletes? physicians? economics professors who sell zero-marginal-cost e-books for $21.99 a copy?—is entitled to higher earnings because he does not wish to "indulge in constructing a moral hierarchy of wealth."

He does admit that entrepreneurs are "absolutely indispensable" for economic development, but their success, too, is usually tainted. While some succeed thanks to "true entrepreneurial labor," some are simply lucky or succeed through "outright theft." Even the fortunes made from entrepreneurial labor, moreover, quickly evolve into an "excessive and lasting concentration of capital." This is a self-reinforcing injustice because "property sometimes begins with theft, and the arbitrary return on capital can easily perpetuate the initial crime." Indeed laced throughout the book is an almost medieval hostility to the notion that financial capital earns a return.

Mr. Piketty believes that the wealthier a society becomes, the more people will claw for the best relative social station and the more inequality will ensue. He turns to those timeless economic authorities Jane Austen and Honoré de Balzac in mapping our future. Throughout the book, he importunately digresses with the dowry-chasing machinations of characters in novels like "Sense and Sensibility" and " Père Goriot. " He is obsessed with the following calculus: Are the fruits of working hard greater than those attainable by marrying into a top fortune? If not, "why work? And why behave morally at all?"

While America's corporate executives are his special bête noire, Mr. Piketty is also deeply troubled by the tens of millions of working people—a group he disparagingly calls "petits rentiers"—whose income puts them nowhere near the "one percent" but who still have savings, retirement accounts and other assets. That this very large demographic group will get larger, grow wealthier and pass on assets via inheritance is "a fairly disturbing form of inequality." He laments that it is difficult to "correct" because it involves a broad segment of the population, not a small elite that is easily demonized.

So what is to be done? Mr. Piketty urges an 80% tax rate on incomes starting at "$500,000 or $1 million." This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply "to put an end to such incomes." It will also be necessary to impose a 50%-60% tax rate on incomes as low as $200,000 to develop "the meager US social state." There must be an annual wealth tax as high as 10% on the largest fortunes and a one-time assessment as high as 20% on much lower levels of existing wealth. He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation.

Not that enhancing growth is much on Mr. Piketty's mind, either as an economic matter or as a means to greater distributive justice. He assumes that the economy is static and zero-sum; if the income of one population group increases, another one must necessarily have been impoverished. He views equality of outcome as the ultimate end and solely for its own sake. Alternative objectives—such as maximizing the overall wealth of society or increasing economic liberty or seeking the greatest possible equality of opportunity or even, as in the philosophy of John Rawls, ensuring that the welfare of the least well-off is maximized—are scarcely mentioned.

There is no doubt that poverty, unemployment and unequal opportunity are major challenges for capitalist societies, and varying degrees of luck, hard work, sloth and merit are inherent in human affairs. Mr. Piketty is not the first utopian visionary. He cites, for instance, the "Soviet experiment" that allowed man to throw "off his chains along with the yoke of accumulated wealth." In his telling, it only led to human disaster because societies need markets and private property to have a functioning economy. He says that his solutions provide a "less violent and more efficient response to the eternal problem of private capital and its return." Instead of Austen and Balzac, the professor ought to read "Animal Farm" and "Darkness at Noon."

Mr. Shuchman is a New York fund manager who often writes on law and economics.