Elizabeth Warren’s Wednesday-night speech to the Democratic National Convention was, no doubt, meant to be an excoriation of the flaws of our financial system. Instead, it turned out to be an apt demonstration of the flaws in her understanding of that system. The Democratic party’s ostensible expert on all issues financial demonstrated either an appalling level of ignorance about a range of topics, or a shameless eagerness to dive into the class-warfare trenches. But one passage was particularly pathetic:
I talked to small-business owners all across Massachusetts, and not one of them, not one, made big bucks from the risky bets that brought down our economy. I talked to nurses and programmers, salespeople and firefighters, people who bust their tails every day, and not one of them, not one, stashes their money in the Cayman Islands to avoid paying their fair share of taxes.
This argument is characteristic of Warren’s Manichean view of America’s financial system. Like many liberals, she castigates the malefactors of great wealth, but she also worships members of the great middle class as victims, on the grounds that they have suffered at the hands of financiers and never benefited one drachma from their behavior. But even Massachusetts’s small-business owners, nurses, programmers, and firefighters have benefited, and they still do.
Take Professor Warren’s assertion that of Massachusetts’s small-business owners, “not one of them, not one, made big bucks from the risky bets that brought down our economy.” On the face of it, this is clearly false: I’m sure many small-business owners in Massachusetts are successful enough to have savings in their stock portfolios or some home equity, and they thus profited from the run-up in asset prices. Those gains were either tantamount to or resultant from the “risky bets” that Warren rues.
But there are plenty of other ways that small-business owners benefited from the culture of “risky bets” and unregulated finance. For one, banking deregulation in the 1990s and 2000s freed up commercial banking as much as it did investment banking, making it easier for small businesses to find financing. Dodd-Frank dramatically reverses this trend, placing undue burdens on the smaller banks that extend many small-business loans.
Further, easy credit and low interest rates benefited any business owners who needed access to credit (i.e., almost all of them). Rising home prices and the shockingly ready availability of home-equity loans gave many of them capital to start or expand small businesses; indeed, in doing so, they were making “risky bets” of their own, and good for them. And what about the small-business owners who sell wooden boats, artisanal vodka, or $400-an-hour SAT courses? I’m pretty sure they were happy to see the 1 percent’s explosion of wealth; indeed, without it, those businesses could never have succeeded.
But her next line is even more mendacious: Of all the nurses, programmers, salespeople, and firefighters she’s met, “not one of them, not one,” she blusters, “stashes their money in the Cayman Islands to avoid paying their fair share of taxes.” Of course she’s technically right that none of them does that personally — but people in all these professions benefit from the profits of high finance, tax-evasion schemes, and more.
Take the most laughably obvious one: Those firefighters? Their pension funds are in large part managed by the evil financiers Warren despises, located offshore in order to reduce their tax liability, and oftentimes engaged in highly risky investments — all to the great benefit of firefighters who will enjoy pensions far exceeding those of most other workers, because money is invested on their behalf with companies such as Bain Capital and Goldman Sachs. Take this news item from Pensions & Investments, in the fall of 2007:
Georgia Firefighters’ Pension Fund, Conyers, added $10 million to a distressed mortgage portfolio run by Hyperion Brookfield for a total investment of $42 million, and $15 million to an active domestic large-cap equity portfolio managed by Sector Capital Management, for a total of $29 million, Jim Meynard, executive director for the $650 million fund, said in an e-mail.
Fund officials added to the mortgage securities investment to take advantage of the recent subprime mortgage situation, and added to Sector Capital’s portfolio because of good performance, Mr. Meynard said.
Just as the subprime-mortgage market was burning to the ground (in Warren’s mind, thanks to Wall Street’s “risky bets”), the firefighters profited handsomely.
But programmers and nurses don’t have defined-benefit pensions, so they rarely get to directly benefit from alternative investments such as the ones Mitt Romney managed, which provide public-sector employees with pensions no one could otherwise afford. How are private-sector workers benefiting, then, from the strategies Warren deplores?
Well, let’s say that programmer works for Google. Google, like many other technology companies that have significant amounts of intellectual property, is a world-beater at tax avoidance. Using strategies such as the “Dutch Sandwich” and the “Double Irish,” Google pays just a 2.4 percent tax rate, despite having most of its operations located in high-tax locales like California. The Double Irish involves the use of two corporations located in an actual country with a low corporate tax rate (12.5 percent), and, as the delicious filling, an offshore corporation in a tax haven like, say, the Cayman Islands (Google uses Bermuda). So yes, that programmer certainly benefits from his employer’s not paying its “fair share of taxes” — indirectly, because he’s better off working for a company with higher profits, or, quite likely, directly, because his equity stake in the company is significantly more valuable if its after-tax profits are higher.
What about those nurses? Well, maybe they work for Partners HealthCare, Massachusetts’s largest medical conglomerate. One major philanthropic supporter of Partners is the Dana Foundation (as in the Dana-Farber Cancer Institute). In 2010, the foundation had about $240 million in investments — of that, $46 million were in hedge funds, $5.8 million in venture capital, $26 million with private-equity firms, and $58 million in other absolute-return alternative investments. Takes a lot of risky bets to pay all those RNs.
Take another example — actually, Massachusetts’s next-largest hospital group: Maybe those nurses worked for Caritas Christi, a Catholic chain in Massachusetts that has recently run into financial trouble. Caritas was purchased by Cerberus Capital Management, a private-equity firm, in 2010. Although many Catholics and those in the medical profession had concerns about the deal, so far it seems to have rescued the hospitals financially while preserving their access-to-care philosophy and beginning to improve the quality of care in innovative ways (as documented in Atul Gawande’s New Yorker piece about hospital chains a few weeks ago). So again, it hardly seems as if the workers Warren alludes to derive no benefit from Wall Street. Even when the financial company in question is named after the three-headed dog that guards the underworld, it provides real benefits for ordinary people.
Of course, not all of them have been net beneficiaries. But Warren’s belief that Wall Street’s success comes solely at the expense of the middle class makes no more sense than it would make to claim that every time a few traders colluded to manipulate a worldwide interest rate, all the big banks and financiers won, and any middle-class American with a mortgage or a savings account lost. Oh, wait — she did that, too.
— Patrick Brennan is a William F. Buckley Fellow at the National Review Institute.