Responsible Investing Goes Back to the Future
Let's start with a cartoon lambasting the business as usual corporate model:
This week, there was some backslapping after the Labor Department announced it was rolling back a 2008 rule preventing pension funds from considering anything other than financial risk and return when making investments. Over at Forbes, Jean Case had this to say:
The announcement is ... a big deal because it recognizes that our standards for investing have changed fairly dramatically over the past 10 years. As the preamble to the new guidance states, it is now accepted practice for fiduciaries to consider the long-term impacts of their investments on the environment and on society, in addition to the potential short-term financial returns. Of course, a change in guidance won’t move billions of dollars right away. There is much work to do to educate pension fund managers and their investors on the new opportunities to support socially responsible business. But, there is also now much more widely available data on the financial returns that are possible from a range of socially responsible investments.
The new rule comes after a clarification last month from the Treasury Department for institutional investors that said they could include environmental, social and governance in their investing practices without running afoul of fiduciary duty. Meanwhile, Brookings' Joshua Gotbaum argues that the Dept. of Labor also should roll back 2008 rules impeding shareholder activism by pensions.
Speaking of shareholders, in the Financial Times John Authers looks at whether shareholder capitalism is being rolled back thanks to excessive short-termism:
Indeed, since 2011, global non-financial corporates have bought back more than $2.2tn of their own shares, equivalent to 9 per cent of average market value over the period, according to Citi.
This is de-equitisation, to use the term coined more than a decade ago by Rob Buckland, Citi’s equity strategist. Through share buybacks, cash mergers and high dividends, all egged on by shareholders in the low-yield environment of recent years, the total amount of shares on issue has declined.
Second, there is a growing sense that going public is not all it is cracked up to be. Companies are choosing to stay private far later into their development than they would ever have done before...Finally, environmental, social and governance, or ESG, investing is on the rise, with more than half of institutional investments in Europe now taking into account at least one of these factors, while $6.6tn in assets in the US are run along these lines. Again this betrays a sense that the invisible hand of shareholder market capitalism cannot be trusted to drive good outcomes.
Your editor could not resist including this hilarious cartoon:
Similarly the Economist looks at what it is says is the reinvention of the company:
[A]fter a century of utter dominance, the public company is showing signs of wear. One reason is that managers tend to put their own interests first. The shareholder-value revolution of the 1980s was supposed to solve this by incentivising managers to think like owners, but it backfired. Loaded up with stock options, managers acted like hired guns instead, massaging the share price so as to boost their incomes...
It is no accident that other corporate organisations are on the rise. Family companies have a new lease of life. Business people are experimenting with “hybrids” that tap into public markets while remaining closely held...[But] ownership in these new companies is cut off from the rest of the economy. Public companies give ordinary people a stake in capitalism.
You might also want to check out this lengthy piece on Al Gore's Generation Investment Management shop in the Atlantic:
The most sweeping way to describe this undertaking is as a demonstration of a new version of capitalism, one that will shift the incentives of financial and business operations to reduce the environmental, social, political, and long-term economic damage being caused by unsustainable commercial excesses. What this means in practical terms is that Gore and his Generation colleagues have done the theoretically impossible: Over the past decade, they have made more money, in the Darwinian competition of international finance, by applying an environmentally conscious model of “sustainable” investing than have most fund managers who were guided by a straight-ahead pursuit of profit at any environmental or social price...
[H]e and his colleagues are aiming at a small audience within the financial world that steers the flow of capital, and at the political authorities that set the rules for the financial system. “It turns out that in capitalism, the people with the real influence are the ones with capital!,” Gore told me during one of our talks this year. The message he hopes Generation’s record will call attention to is one the world’s investors can’t ignore: They can make more money if they change their practices in a way that will, at the same time, also reduce the environmental and social damage modern capitalism can do.
Who Needs Taxes?
The Center for American Progress is back this week with a new report attempting to debunk seven myths on tax reform, including whether flat taxes, corporate tax cuts, and consumption taxes provide any better benefits for the economy. Let's take look at tax cuts for the wealthy because they are job creators as an example:
Proponents of these reforms claim that tax cuts for high-income taxpayers would encourage them to work harder or free up capital that would be invested in job-creating enterprises, which, in turn, would increase economic growth. This is the logic that underlies the old “tax cuts pay for themselves” theory, whereby tax cuts generate so much economic growth that tax receipts actually increase enough to overcome the revenue lost from the tax cut.
But this theory—that tax cuts for the rich will dramatically increase economic growth—has been consistently refuted by experience. In reality, economic growth in the United States since World War II has tended to be greater in times with relatively high top marginal income tax rates. This is not to say that high tax rates promote economic growth—correlation does not prove causation—but this data makes it hard to believe that low tax rates on the wealthy are a powerful engine for economic growth...
[A] study, conducted by William Gale and Andrew Samwick at the Brookings Institution, found no evidence that increased economic growth resulted from major tax cuts under President Reagan in 1981 or President George W. Bush in 2001 and 2003. Likewise, the study found no evidence of reduced economic growth from tax increases under President Bill Clinton in 1993.
Meanwhile, the Manhattan Institute's Jason Riley in the Wall Street Journal defends tax cuts since it has shown to increase government revenue:
The irony is that liberals who want the federal government to secure more revenue for redistribution ought to favor a tax code that’s less progressive. Time and again, history has shown that the rich pay more when the top marginal rate is reduced. The income-tax rate on high earners fell to 24% in 1929 from 73% in 1921. Over that same period both the amount and fraction of taxes paid by the rich increased, while the amount and proportion of taxes paid by low earners went down...
The Reagan and Bush tax cuts of the 1980s and 2000s continued this pattern. In both decades, the rich reported much more taxable income after the top rate was reduced. By contrast, an increase in the top marginal rate in 1990 under George H.W. Bush was followed by a reduction in the fraction of taxes paid by higher earners. The reason liberals find this history unpersuasive is because their soak-the-rich rhetoric is more about politics than about economics.
(Dear readers, do you have thoughts on this? Please write to email@example.com)
In other tax news, the Atlantic has named Tennessee's tax system the most regressive in the country and the state maybe starving for revenue. And in California, a fight over hotel taxes Airbnb comes out not looking so good in a new ad campaign intended to stave off voter proposition.
Entering the great debate over direct cash transfer, we have the New York Times' Eduardo Porter, who this week argues U.S. welfare reform is wrong-headed:
Today, almost 20 years after Mr. Clinton signed a law that stopped the federal entitlement to cash assistance for low-income families with children, the argument has solidified into a core tenet influencing social policy not only in the United States but also around the world.
And yet, to a significant degree, it is wrong...Its core objective — getting the poor into jobs — was laudable. In the early years, the effects seemed almost too good to believe. The number of families on welfare plummeted. The labor supply of single mothers soared. Child poverty declined sharply. But the cheering faded. Over time the labor supply of less-educated single mothers, those with at most a high school education, returned to its earlier level. Poverty rebounded, as did births outside marriage.
After the fact, many independent researchers concluded that the strong economy of the late 1990s, combined with bigger wage subsidies through an expanded earned-income tax credit, deserved most of the credit for the improvement. Meanwhile, pushing the poor off welfare — replacing the entitlement to cash assistance with limited state-run programs that sharply curtailed access to aid for all sorts of reasons — had definite costs, borne by the poorest of the poor.
In Shelter Force, Rick Jacobus discusses why he thinks having a "poor door" is better than the alternative of geographic segregation:
For inclusionary housing programs, I think this research says that if offsite units are located in a distressed part of town, the public loses something valuable. Cities require onsite units, not because they expect neighbors to barbecue together, but because onsite affordable units provide the best way to actually get affordable homes in higher income neighborhoods where NIMBYs routinely block development of dedicated affordable buildings. But when market-rate builders include affordable buildings on adjacent land, we have a rare opportunity for an even better outcome–we can build more units and help more families without giving up any of the proven benefits of neighborhood integration.
New York has now banned immediately adjacent affordable developments, but they continue to allow across-town offsite development. In fact, most Manhattan developers are providing their affordable housing not next door but in the Bronx.
The intensity of the public outcry against placing low-income units adjacent to luxury development is deeply ironic. Somehow the "poor doors," by making economic separation present and visible, cause a discomfort that we can easily ignore when income groups are segregated by neighborhood.
Also in the New York Times, we have discussion of NYC's eviction policies driving many families into homelessness:
More than two-thirds of the people in our shelters are families with vulnerable children, and the most common cause of their homelessness isn’t drug dependency or mental illness. It’s eviction. If we can slow the pace of evictions, we will make a major dent in the homelessness crisis...Housing law in New York is byzantine and challenging even for lawyers to navigate. For low-income tenants representing themselves, winning a case against a landlord’s attorney is a steep uphill climb. Unscrupulous landlords are fully aware of this dynamic and attempt to capitalize on it by routinely hauling tenants into housing court on weak grounds — knowing full well that the deck is stacked in their favor. Randomized studies have shown that those few tenants who do have attorneys are 80 percent less likely to be evicted as those representing themselves. Landlords know this, too — and will sometimes simply drop their case as soon as they realize a tenant is represented.
You might of heard that Bard's Prison Initiative is producing debaters capable of beating both Harvard and West Point's debate teams but as the Washington Post reports, what you might not know is they manage to pull it off without use of the internet. The program helps incarcerated folks get associate degrees and seems successful at reducing recidivism for participants. You also might be interested in knowing that the United States is exporting its punitive--and expensive supermax model to poorer countries. For Brazilian taxpayers, that amounts to $120,000 a year per prisoner reports the Atlantic.