Monthly Archives: February 2015

Value and meaning of Fiduciary

Barry Ritholtz owns a financial advisory business, and has a very successful blog, as does his coworker Josh Brown.  They are both excellent writers and I agree with most of what they post.  In addition, they are both highly critical of the default position of the financial industry, which is to steal as much as possible from everyone with whom it interacts.

Here are some select portions of an excellent essay by Mr. Ritholtz on finding a financial advisor.  The entire essay is worth reading:

Find a financial adviser who will put your interests first
Barry Ritholtz
October 25, 2014

If you want financial advice, there are two things you should be aware of: First, the quality of advice you receive varies widely. You probably knew this already. The quality of everything you buy varies widely. It is as true for financial advice as it is for any product or service you may buy or otherwise consume. You can buy a Yugo or a Mercedes-Benz. They may both be automobiles, but they vary dramatically.

Regardless, everywhere these cars are sold, they each must meet the same government rules. Safety regulations, crash worthiness standards, fuel economy, consumer warranties, etc., apply equally to both vehicles.

This is decidedly not true of the people who provide you with financial advice. So we come to the second point: There are two completely different standards for these people — they are governed by two wholly different sets of regulations. The two standards are “suitability” and “fiduciary.”

People who operate under the suitability standard typically are called “brokers,” but they also go by the name registered representative — or, on their business cards, vice president. (On Wall Street, no one ever has a title below VP.). People who adhere to the fiduciary standard are called registered investment advisers, or RIAs.

Fiduciaries have a much stricter duty and legal obligation than do those who operate under suitability rules.

…The fiduciary legally obligates the registered investment adviser to act at all times for the sole benefit and interest of the client. That straightforward, cut-and-dried standard has enormous ramifications.

The standard is simple. There is zero wiggle room. Any advice, product or service offered to a client must meet the test of “Is this in the client’s best interest?” If the answer is “No,” then it cannot be performed by a fiduciary. It is against the law.

In contrast, the suitability standard is far more complicated — and offers much less protection to investors.

The simplest way to describe this standard is “Don’t sell AliBaba IPO to Grandma.” In other words, all that matters is the investor is “suitable” for a particular product. This is true regardless of how expensive that product might be or how much of a dog the investment is. There are lots of wrinkles and permutations, but the bottom line is that the client’s best interest is not part of the equation.

How they charge

The RIAs operating under the fiduciary standard charge fees — typically, a percentage of assets under management. These range from 25 basis points up to 2 percent per year.

The brokers governed by suitability rules typically charge commissions. This is a transactional rate, and ranges from the online broker who gets $8 a trade to the full- service operation that charges thousands of dollars per trade.

…My personal observations and experiences indicate that over the course of a year, brokers charge from five to 10 times (or more) what an investment adviser will charge per account. So long as it is for “suitable” investments, it is all perfectly legal.

So the ordinary individual investor has three problems with the suitability standard:

1. It favors the brokerage firm and its employees over the investor.

Note:  Not only is someone working for a brokerage firm compensated and in all ways motivated to look out for the best interest of the firm ahead of the client, in fact, they are legally bound by the employer-employee relationship to do so.

2. It costs much more than services provided under other standards.

3. And it creates an inherent conflict of interest between the adviser and the investor.

The last one is perhaps the most important. Any conflict of interest between an investor and their adviser is extremely problematic.

Any time the client’s best interest is not the focus, what occurs instead is the opportunity to “max out” the revenue each client generates. Brokers under the suitability standard are allowed to do this, yet remain within their rules. Since “maxing out fees” is not in the client’s best interest, fiduciaries cannot.

… fiduciary rules protect investors from adviser malfeasance, while suitability rules protect brokers from investor lawsuits.When seeking out advice, do yourself this favor: Find an adviser who is legally obligated to put your interests first.

Our President Obama recently came out in favor of requiring anyone advising individual or group retirement plans to be required to act as a fiduciary.  The reasons stated above are why.  Having been repeatedly hoped-up and disappointed over the last 6 years, I do not think we will hear any more about this.  However, I am glad that at least it got a little press.  Every little bit helps, for people to understand this.

I would add to what Barry wrote, that not only are there brokers and RIAs, (and, confusingly, brokers that are also RIAs), but there are also people out there working for lots of other financial related companies who call themselves financial advisors.  People working for insurance companies, banks (usually these are also brokers), accountants, and now robo-advisors (not even people).

When you go see someone, ask them these questions:

  1. How are you compensated?  The answer to this must include ALL the ways that the advisor is compensated.  If it is something other than “fee-only,” then there is an immediate, built in conflict of interest.
  2. What other businesses do you have an interest in?  If they also are connected to an insurance business, or any other financial services related business, then there is a conflict of interest.
  3. Are you acting as my fiduciary?  If so, is that ALL the time, or only part of the time?  Some advisors may act as your fiduciary when they come up with the plan itself, that is, save X dollars and invest them in allocation scheme A, but then when it is time to select the specific products making up A, they are brokers working for a company selling you only a certain set of products.  The WSJ has an excellent article on this issue:

In one common arrangement, an adviser might own his or her own advisory business but distribute securities as a representative of a securities firm that specializes in working with such independent contractors.

Financial firms can similarly wear two hats: They can operate and be supervised as both registered investment advisers and securities broker/dealers.

But it can get even more confusing, because both advisers who act as fiduciaries and those who fall under the suitability rule can charge commissions and fees. The difference: A fiduciary adviser should disclose what commissions he earns and why a particular investment is chose over another.

Please be aware, there are legitimate reasons to do business with these non-fiduciaries, or other advisors with conflicts of interest, that may make them worth your while.

  • If you need a large line of credit for your business, and you can get a good deal on that in combination with financial advisory services from a bank, that might be better for you in the short run, and maybe even in the long run.
  • If you are young and just starting to save, and you are looking for a cheap and easy way to start out, a robo-advisor may suit your needs for a few years.


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The Fed vs. Congress

Insert laugh track here.

From Wall Street on Parade:

Republicans are locked in some kind of mind warp where the remedy for every problem is to deregulate. Despite six years of books, academic studies, investigative findings, and a 600-page report from the Financial Crisis Inquiry Commission proving that deregulation was responsible for the financial crash of 2008 – the greatest financial implosion since the Great Depression – Republicans refuse to let facts get in the way of pushing for more deregulation.

Democrats on the other hand, despite overwhelming proof that the Dodd-Frank Wall Street Reform and Consumer Protection Act has actually allowed Wall Street to grow systemically more dangerous and more corrupt since its passage, is irrationally wedded to this legislation.

No amount of evidence will change the Democrats’ position on Dodd-Frank. JPMorgan gambling with hundreds of billions of bank depositors’ money in the London Whale fiasco where $6.2 billion got flushed down the toilet will not change their mind. Cartel activity among the big banks in the interest rate market, precious metals market, foreign currency market will not change their mind. Bank chat rooms called “The Bandits Club,” “The Mafia” and “The Cartel,” where brazen market rigging is alleged to have occurred will not change their mind. Endless criminal investigations and multi-billion dollar settlements will not change their mind. Scandal after scandal destroying public trust in Wall Street and its regulators will not change their mind.

Then there is the New York Fed – the least appropriate body in all the world to be simultaneously carrying out monetary policy via instructions from the Federal Open Market Committee with the involvement of the biggest Wall Street banks while simultaneously attempting to engage in regulatory oversight of the same banks. (See related articles below.)

On Tuesday, Senator Richard Shelby (R-Ala), chair of the Senate Banking Committee indicated he is aware of the conflicted role of the Fed in regulating Wall Street banks. In his opening statement prior to Yellen’s appearance before that body, Shelby said:

“Our central bank has expanded its influence over households, businesses and markets in recent years. Not only has it pushed the boundaries of traditional monetary policy, but it has also consolidated unmatched authority as a financial regulator. As the Fed grows larger and more powerful, much of this authority has become more concentrated in Washington, DC and New York.

“The Fed emerged from the financial crisis as a super-regulator, with unprecedented power over entities that it had not previously overseen. With such a delegation of authority comes a heightened responsibility for Congress to know the impact these new requirements place on our economy as a whole.

“The role of Congress is not to serve on the Federal Open Market Committee.  But, it is to provide strong oversight and, when times demand it, bring about structural reforms.

“As part of this process, the Committee will be holding another hearing next week to discuss options for enhanced oversight and reforming the Fed.”

I disagree with the first paragraph.  Republicans say that deregulation is the answer to everything, but it is not what they do.  At least, not alone.  In fact, the deregulation that occurred was a bipartisan effort.  And it wasn’t really deregulation, at least not for everyone.  It was just deregulation for the big guys – the ones who could afford to buy out each other and bunches of the littler competitors, set up these gigantic universal bank holding companies, and invent the new miracle financial products to trade without any restrictions.

The paragraph in bold is completely correct, but Congress aids and abets this process (sometimes pretty obviously, by giving them $700B).  They aren’t really going to change it.

And the idea that congress is somehow going to act as a check and balance on the Fed is ludicrous.  If you believe that, I’ve got a bunch of hope and change posters dated 2008 that I’d like to sell you.

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Check your assumptions: Inequality Data

From Scott Sumner:

Beware of income inequality data

A few years back I got so exasperated reading a Journal of Economic Perspectives piece on income inequality (by Emmanuel Saez and Peter Diamond) that I did a post calling it “propaganda.”  I probably shouldn’t have used that term, but I was reminded of my frustration when reading a very good Alphaville post by Cardiff Garcia:

The issue of whether US inequality has climbed since the recession of 2008 has been relitigated this week. A short analysis by Stephen Rose claimed that income inequality had actually fallen, assigning the credit to public policy.

David Leonhardt of the New York Times discussed Rose’s findings, followed by further analyses and critiques from Ben Walsh and Nick Bunker. I’ll present the findings first before adding my own thoughts at the end.

Mainly in response to the heavily cited claim by Emmanuel Saez that 95 per cent of the income gains in this recovery have gone to the top 1 per cent of earners, Rose emphasizes a couple of broad points.

There are two problems with the 95% claim, one has already been discussed by David Henderson, while the other is often overlooked.  David pointed out that when evaluating income equality you want to remove cyclical effects, as it’s a long term problem.  It’s not unusual for the share of income going to the rich to fall during recessions (as capital gains plunge), and then rise during expansions.  It would make more sense to compare 2014 to a year with similar unemployment, say 2004.

The less often discussed problem is that talking about shares of growth can be very misleading, especially when growth is slow.

I would file this under “check your assumptions.”  Most people do not look to see exactly what any given data set is really measuring, or how this data might be expected to change under specific circumstances (that is, the “normal” behavior of the data).  They just hear the headline name of the data set and start making their own assumptions about its meaning.

It’s not propaganda, either way.  It’s just data, and if you want to have an opinion about it that has any basis in reality, you should find out what the data really IS.  Check your assumptions.

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Calling Bill Gates Foundation

This looks like a great opportunity for some competent group to follow after the failed projects in developing countries for the benefit of the citizens.  From World Economic Forum:

A recently published Lancet paper looks at the impact of the erstwhile Total Sanitation Campaign in the coastal Puri district in Odisha. The study finds that the government’s rural sanitation programme, implemented by NGOs and community-based organisations, was unable to reduce exposure to faecal matter. As a result, this sanitation programme had no impact on the incidence of diarrhoea and malnutrition. The authors of the paper conclude that in order to realise concrete and sustainable health benefits, sanitation programmes need to increase both the coverage and use of toilets, as well as improved hygienic practices.

Here’s the data:

Over an implementation period of 13 months (January 2011—January 2012), the villages where the programme was implemented saw an increase in toilet coverage from 9% to 63%, but only 38% of the households had a functional toilet. It would have been interesting to learn more about the gap between toilet construction and usage (25 percentage points). In any case, the state of implementation, the authors point out, is typical of the prevalent Total Sanitation Campaign across the country.

…without total coverage, the gains from improved sanitation cannot be realised in a community. Even before one begins to debate the balance of priorities between sound construction and behaviour change communication, implementers need to acknowledge that sanitation programmes follow an ‘all or nothing’ logic. Unless all families adopt hygienic sanitation practices, we will not make a dent on the incidence of disease prevalence.

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Electric Utilities and Solar

From ThinkProgress:

Starting in April, solar users across Arizona will be subject to an additional rate charge of about $50 per month. This new “demand charge” will be based on a solar users’ peak power demand during the month and will be levied regardless of how much electricity is offset by their residential solar units.

The Salt River Project (SRP), one of the nation’s largest public power utilities, has been fighting for this and other renewable energy fees because of what the company argues is needed to cover grid infrastructure and maintenance costs. This final approval of the plan by the elected board, which also includes a 3.9 percent rate increase for all customers, actually dropped proposals to raise existing solar customers’ charges in ten years as well as a new charge on buyers of solar homes.

“Reliability is our most important product,” said Chief Financial Executive Aidan McSheffrey. “To retain the level of service our customers have come to expect from SRP, we must continue to invest in modernizing our energy grid to adapt to new technologies and that will improve reliability and allow for more customer choice.”

What is the progression of solar power going to be?  Now that the solar panels themselves are getting competitive with traditional utilities, people hook up to the utility along with their solar and presumably buy less power from the utility, while maybe even sometimes putting power in for a credit.

From the utility’s perspective, they have all the same responsibilities, plus the added task of dealing with the incoming power.  They probably buy it back at a reduced rate.  And they are selling less power.  This changes their business model, and it really should not be too difficult to come up with income models, given estimates of sales that companies like SolarCity include in their shareholder filings.

For this model, everyone still needs to be hooked up to the grid.

Once affordable batteries are available, the model will change again.  This is kind of inevitable given the intensity and $ investment going on in battery research.  Places that have abundant renewable energy, like desert areas, and windy areas, will see users drop off the grid completely.  Not a few, but a lot, maybe majority in some places.  As this occurs, the business model will have to be modified again.  And again, as this begins, it should not be difficult for the utilities to come up with models for how their business is changing.

What will the end result be?  Will there be haves and have-nots, based on availability of renewable energy?  Will there be co-ops for small communities that are, for instance, down in a shaded valley, that set up large solar and/or wind community resources on the higher elevations above, and use the old utility assets for distribution?  Or will the utilities find some way to remain relevant to consumers?

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Active Bond ETFs

Active bond funds are awful.  But the ETFs are even worse, because people think that they are transparent, and thus, less likely to own undesirable assets.  Which, in theory, they are.  But how often do those who own or those who recommend those products actually go check and see what they are made of?  And when they do, how much can they really find out?

Part of the reason that people use active bond funds or ETFs rather than index based products is because bond indices have a lot of built in issues.  It’s difficult to make a representative index that is both complete and can actually be owned.  Bond index rules typically cause a lot of drag on return because other market participants can easily front run the required trades.  This is true of equity indices as well, but bonds are worse, because the bond market is less liquid, in general, and the rules are just not conducive to efficient trading.

But thanks to Bill Gross, people expect bond funds to have some kind of stellar returns, not the very low, conservative, boring, low volatility kind of returns that many bonds actually have.  His bond mutual fund made all kinds of risky investments, and getting outsize returns, and it got huge.  Which made it mainstream and acceptable.  The size of that fund removed the career risk from recommending it.  But it was not “bonds” in the traditional sense of portfolio diversification.  Additionally, some of his returns were due to insider trading action during the crisis, when he was trading on behalf of the Fed.  Disgusting.

Now, Gundlach has started an ETF with the same sort of goals.  From

Many have said that a fixed-income investor today needs to be tactical to survive, and active management is one way to do it. State Street’s ETF head Jim Ross himself has told recently there’s opportunity in the active management space, particularly in fixed income.

“I think one of the most important new funds of 2015 will be the SPDR DoubleLine Total Return Tactical ETF,” Matt Hougan, president of, recently said in an outline of his top ETF picks for 2015.

“Gundlach has built a company from scratch into a $55 billion juggernaut in a few short years, and has delivered solid performance,” Hougan said, pointing out that Gundlach’s Core Fixed Income mutual fund has outperformed the Barclays Aggregate by an annualized 2 percent over the past three years.

“What’s exciting about this launch is that it brings the best of active management to the ETF space,” he added.

TOTL will be part of a “master feeder” structure, in which the fund invests most of its assets in a corresponding “master fund.” That master fund is a separate mutual fund that has an investment objective, investment policies and risks substantially identical to the ETF, according to the prospectus.

 The portfolio will strive to have at least 20 percent allocated to mortgage-backed securities, and may allocate as much as 25 percent to high yield debt at any point, and 15 percent to foreign-currency-denominated securities, according to the prospectus.

Re-read that last paragraph.  This is a lot like BOND.  Will they also hold 30-40% cash?

Also important to note, the ETF will invest in a mutual fund.  Which means that it is NOT transparent.  And they are comparing this incredibly risky portfolio to AGG.

Unconscionable.  The purveyors of this crap are only one tiny step better than Madoff.  Consumers think bonds are safe.  This fund is anything but safe.   It does not diversify a portfolio of equities.


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STEM shortage?

This graph is from NYT via Barry Ritholtz:


This is showing number of jobs per 1,000 middle class jobs, with middle class being defined as salary in the range $40,000 – $80,000.

In the loser column, we have “Engineering and Related Technologists and Technicians” going from 17 to 10, and “Engineers” going from 20 to 15.  What ever happened to the big STEM gap?  All those unfilled engineering jobs?  This doesn’t add up.

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Healthy Diet

It’s finally hitting MSM.  Aaron Carroll is in the NYT:

For decades, many dietary recommendations have revolved around consuming a low percentage of your daily calories from fat. It has been widely thought that doing so would reduce your chance of having coronary heart disease. Most of the evidence for that recommendation has come from epidemiologic studies, which can be flawed.

Use of these types of studies happens far more often than we would like, leading to dietary guidelines that may not be based on the best available evidence. But last week, the government started to address that problem, proposing new guidelines that in some cases are more in line with evidence from randomized controlled trials, a more rigorous form of scientific research.

Sometimes we have to settle for epidemiologic or other less reliable studies because we can’t do a randomized controlled trial to prove causality. We’ll never have one for smoking and cancer, for instance, because the evidence from cohort and case-control studies, which are observational and not interventional, is so compelling that telling a random population to smoke “to see if it’s harmful” would be unethical. But there’s no reason we couldn’t randomly assign people to diets.

It turns out that we have. In fact, randomized controlled trials existed when the previous low-fat guidelines were published. It appears they were ignored.

Just recently, a study was published in the journal Open Heart in which researchers performed a systematic review and meta-analysis of the randomized controlled trials that were available when those guidelines were announced. They wanted to explore what evidence those creating the guidelines might have been able to consider at the time.

Before 1983, six randomized controlled trials involving 2,467 men were conducted. None were explicit studies of the recommended diet (and none involved women), but all explored the relationship between dietary fat, cholesterol and mortality. Five of them were secondary prevention trials — meaning that they involved only men with known problems already. Only one included healthy participants, who would be at lower risk, and therefore would be likely to have less benefit from dietary changes.

That’s a lot of participants. Moreover, many of them were at high risk. And in all of them, there was no significant difference among them in the rate of death from coronary heart disease. There were also no differences in mortality from all causes, which is the metric that matters.

The study did show that cholesterol levels went down more in the groups that ate low-fat diets. Some have used this as justification for a low-fat diet. But the difference between them was small. Mean cholesterol went down 13 percent in the intervention groups, but it went down 7 percent in the control groups. And these groups didn’t have different clinical outcomes, and that’s what we really care about.

Small changes in cholesterol levels from dietary changes also aren’t surprising to those who follow the research. About 70 percent of people are thought to be “hyporesponders” to dietary cholesterol. This means that after consuming three eggs a day for 30 days, they would see no increase in their plasma cholesterol ratios. Their cholesterol levels have almost no relationship to what they eat.

Don’t take my word for it. Again, there have been randomized controlled trials in this area. In 2013, researchers published a systematic review of all studies from 2003 or after. Twelve met the researchers’ criteria for inclusion in the analysis, and seven of them controlled for background diet. Most of the studies that controlled for background diet found that altering cholesterol consumption had no effect on the concentration of blood LDL (or “bad”) cholesterol. A few studies could detect differences only in small subgroups of people with certain genes or a predisposition to problems.

In other words, in most studies, all people didn’t respond. In the rest, only a minority of patients responded to changes in dietary cholesterol.

Did recommendations change when these studies were published? No, but they got closer to changing on Thursday, when a government committee urged repeal of the guideline that Americans limit their cholesterol intake to 300 milligrams a day, saying, “Cholesterol is not a nutrient of concern for overconsumption.” I’m sure this will come as a surprise to a vast majority of Americans, who for decades have been watching their cholesterol intake religiously. (The change won’t be official until it is approved by the Department of Health and Human Services and the Department of Agriculture, but they usually closely follow the committee’s recommendations.)

I wrote here at The Upshot not long ago about how a growing body of epidemiologic data was pointing out that low-salt diets might actually be unhealthy. But randomized controlled trials exist there, too. A 2008 study randomly assigned patients with congestive heart failure to either normal or low-sodium diets. Those on the low-sodium diet had significantly more hospital admissions. The “number needed to treat” for a normal-sodium diet above a low-sodium diet to prevent a hospital admission in this population was six — meaning that for every six people who are moved from a low-sodium diet to a normal diet, one hospital admission would be prevented. That’s a very strong finding.

Let’s not cherry-pick, though. A systematic review of randomized controlled trials of salt intake was published last year. Eight trials involving more than 7,200 participants looked at whether advising patients to cut down on salt, or reducing sodium intake, affected outcomes. None of the trials, including ones involving people with both normal and high blood pressure, showed a reduction in all-cause mortality.

Only one trial even showed an effect on death from cardiovascular causes, like heart attack or stroke. It was conducted on residents of an assisted-living facility who had high blood pressure — hardly representative of the population as a whole, which is what dietary guidelines are supposed to cover.

I’m pretty immersed in the medical literature, and all of this is still shocking to me. It’s hard to overestimate the effect of the dietary guidelines. Hundreds of millions of people changed their diets based on these recommendations. They consumed less fat, they avoided cholesterol and they reduced their intake of salt.

Since pretty much all calories come from fat, protein or carbohydrates, reducing your consumption of one means that you have to increase your consumption of another. (We are not talking here about recommendations for the total amount of calories you should eat. These recommendations assume you’re eating the proper amount of calories, and seek to govern the proportion of nutrients within them.)

So, as the guidelines have recommended cutting down on meat, especially red meat, this meant that many people began to increase their consumption of carbohydrates.

Decades later, it’s not hard to find evidence that this might have been a bad move. Many now believe that excessive carbohydrate consumption may be contributing to the obesity and diabetes epidemics. A Cochrane Review of all randomized controlled trials of reduced or modified dietary fat interventions found that replacing fat with carbohydrates does not protect even against cardiovascular problems, let alone death.

Interestingly, the new dietary recommendations may acknowledge this as well, dropping the recommendation to limit overall fat consumption in favor of a more refined recommendation to limit only saturated fat. Even that recommendation is hotly contested by some, though. The committee is also bending a bit on salt, putting less emphasis on the 1,500-milligram daily limit on sodium for special populations, in light of the mounting evidence that too little sodium may be as bad as too much, if not worse.

It is frustrating enough when we over-read the results of epidemiologic studies and make the mistake of believing that correlation is the same as causation. It’s maddening, however, when we ignore the results of randomized controlled trials, which can prove causation, to continue down the wrong path. In reviewing the literature, it’s hard to come away with a sense that anyone knows for sure what diet should be recommended to all Americans.

I understand people’s frustration at the continuing shifts in nutrition recommendations. For decades, they’ve been told what to eat because “science says so.” Unfortunately, that doesn’t appear to be true. That’s disappointing not only because it reduces people’s faith in science as a whole, but also because it may have cost some people better health, or potentially even their lives.


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Upper Middle Class is the Devil

According to Reihan Salam at Salon:

We often hear about the political muscle of the ultrarich. Billionaires like the libertarians Charles and David Koch and Tom Steyer, the California environmentalist who’s been waging a one-man jihad against the Keystone XL pipeline, have become bogeymen for the left and right respectively. The influence of these machers is considerable, no doubt. Yet the upper middle class collectively wields far more influence. These are households with enough money to make modest political contributions, enough time to email their elected officials and to sign petitions, and enough influence to sway their neighbors. Upper-middle-class Americans vote at substantially higher rates than those less well-off, and though their turnout levels aren’t quite as high as those even richer than they are, there are far more upper-middle-class people than there are rich people. One can easily turn the Kochs or the Steyers of the world into a big fat political target. It’s harder to do the same to the lawyers, doctors, and management consultants who populate the tonier precincts of our cities and suburbs.

You might be wondering why I’m so down on the upper middle class when they’re getting in the way of the tax hikes that will make big government even bigger. Doesn’t that mean that while liberals should be bothered by the power of the upper middle class, conservatives should cheer them on? Well, part of my objection is that upper-middle-income voters only oppose tax hikes on themselves. They are generally fine with raising taxes on people richer than themselves, including taxes on the investments that rich people make in new products, services, and businesses. I find that both annoyingly self-serving and destructive. The bigger reason, however, is that upper-middle-class people don’t just use their political muscle to keep their taxes low. They also use it to make life more expensive for everyone else.

Take a seemingly small example—occupational licensing. In North Carolina, teeth-whiteners without expensive dental degrees would like to be allowed to sell their services but are opposed by the state’s dentists, as Eduardo Porter noted in a recent New York Times column. Are the good dentists of North Carolina fighting the teeth-whiteners because they fear for the dental health of North Carolinians? It doesn’t look like it. A more plausible story is that dentists don’t want to compete with cut-rate practitioners, because restricting entry into the field allows them to charge higher prices. We often hear about how awesome it is that Uber is making taxi service cheaper and more accessible for ordinary consumers but how sad it is that they are making life harder for working-class drivers who drive traditional cabs. Notice that upper-middle-class credentialed professionals like dentists, lawyers, and doctors rarely get Uber’d to the same degree. Even when innovative services try to do things like, say, offer a free alternative to expensive insurance brokers, state and local governments will often step in to say, “Oh, no you don’t.” Want to offer a low-cost, high-quality education by, say, replacing expensive professors with Filipino instructors who teach calculus over streaming video? Sorry, pal, you first have to get approved by an accreditation body controlled … by the existing schools you’re trying to out-compete, which employ upper-middle-class people who don’t take any crap.

What can we do to break the stranglehold of the upper middle class? I have no idea. Having spent so much time around upper-middle-class Americans, and having entered their ranks in my own ambivalent way, I’ve come to understand their power. The upper middle class controls the media we consume. They run our big bureaucracies, our universities, and our hospitals. Their voices drown out those of other people at almost every turn.

As a person who has moved into upper middle class from middle middle class, I strongly disagree with this.

For an example, who is funding the Keystone XL fight?  Rich people?  Upper middle class people?  No, it’s corporations.

And corporations, which are the big bureaucracies and hospitals, are run by the ultra rich, not by upper middle class.  As evidenced by CEO pay.  How can anyone say with a straight face that the upper middle class controls the media?  Rupert Murdoch?  Mark Zuckerberg?  No; the media, including social media, control the upper middle class.

This article defines the upper middle class as 12% of the population.  Unless they are voting at 100% participation rates, they are not the group that is making decisions with their votes.

The Uber example is particularly interesting.  This impacts not only the drivers, but those that license them, which is the really telling part of the whole professional licensing scam.  Cities and other municipalities are now fighting back, not because they care about the cab drivers, but because they want their cut.  It’s the political class making this distinction.  How do licenses for massage therapists or flower arrangers or hair stylists help the upper middle class?  They don’t.  But they do help the government bureaucracy.

The ones that we need to focus on are the ultra rich in conspiracy with the political class (who are trying to get a golden ticket directly from their office into the ultra rich).


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Crony Capitalism

By , posted on David Stockman’s site.

This is kind of a tough read, but I think there are two main points:

  • Research shows that strong rule of law and institutions, with a lower level of interference and regulation (essentially a smaller government), leads to better market outcomes than governments that influence the markets more, leading to economic rents and inefficient use of capital.

”The paper shows how “institutions that constrain the discretionary authority of government incentivize productive entrepreneurship and facilitate free market capitalism, giving rise to a natural or market determined income distribution and opportunity for economic mobility.” In other words, markets do work, when markets are allowed to work. On the other hand, “institutions that do not sufficiently constrain the authority of government incentivize unproductive entrepreneurship and facilitate the development of crony capitalism, resulting in structural inequality and little opportunity for economic mobility.” In other words, markets don’t work when they are prevented from working.

  • Undergrad economics courses do not adequately teach the difference between free market capitalism, with smaller and less influential government forces, and crony capitalism, with larger government incentives and interference in the market.

The economics profession must do a better job of educating students and the public about the nuanced but vital distinction between the varieties of capitalism, and the important role of institutions in constraining the Hobbesian propensity of man to “rape, pillage, and plunder” and enabling the Smithian proclivity of man to “truck, barter, and exchange”
(Boettke, 2013).”

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