Friday, August 14, 2015

The Law of Second Chances Takes Effect in Spain

One of the drags on the ability of Spain's economy to recover from the financial crisis of 2007-2009 was the lack of a mechanism for consumers to obtain relief from the debts they ran up in the years leading up to the crisis, debts that were mainly incurred in the form of residential mortgages incurred in the housing boom that paralleled the trajectory of the US's housing boom in those years.
As Spain had no meaningful procedure for individuals to obtain debt relief, it had no method to free up post-crisis wages and salaries from the legacy debt of pre-crisis mortgage debt.  This not only dampened overall demand but had the secondary effect of weighing down the Spanish financial system, in a manner very similar to the Japanese banking system a generation earlier, with "zombie" loans, that were neither collectible in accordance with their terms, nor dischargeable, and not susceptible to robust valuation as they lingered on financial institution's balance sheets, given the uncertainty surrounding the prospects for ultimate recovery.

Slowly, Spain's government, led by the center-right Partido Popular that replaced the Socialist coalition that governed into the crisis era, has instituted measures to facilitate consumer debt relief for the first time.   There have also been business insolvency reforms, which I am not going to touch on here (for those interested, here are links to some rather spirited memos by Latham and Dentons on those reforms; with regard to the Dentons memo, please be forewarned that there is an egregious mis-translation -- the word "quitas" in Spanish means "discharge," not "pay-off" (you see why I used the word "egregious?)).  It's unlikely that there will be very many English-language explanations of Spain's consumer bankruptcy law, which took effect at the end of July, so this seems like an area I can add some value with a post.

Spain's new consumer bankruptcy law -- which is generally referred to as "la ley de segunda oportunidad", or "the law of a second chance" and also applies to small businesses (less than  five million euros of debt) -- bears a number of rough resemblances to the US consumer bankruptcy regime, for better or worse.  For example, among the eligibility requirements, there is a stringent "good faith" requirement as well as a requirement not to have availed oneself of the procedure within a prescribed period of years.

In general, as one firm of lawyers explains here, the consumer insolvency procedure is basically erected on top of the pre-existing procedural structure for insolvent businesses in Spain to consumers.  As with larger business reorganizations, the individual or small business debtor is encouraged to commence a "concurso" outside of court, which, that firm indicates, can last a long time and requires the debtor to "wait patiently".   An administrator is appointed and s/he prepares a report.  There are negotiations.  If there are disputes over how the debtor is conducting his, her or its affairs, there can be resort to a judge. And, as the firm says there are "large etceteras" in that process.  If, when all is said and done, there is debt remaining after reaching the requisite threshold of agreement with the creditors, the debtor can ask the court to discharge it.

Or, the individual / small business debtor can take a slightly different path, submitting his or her affairs to a notary (individual debtor) or insolvency mediator (small business) who then is expected to facilitate a similar accord among the creditors.

But, if these corporate insolvency analogues fail, there are two other paths to a discharge for the individual or small business.  First, a debtor who, through a judicial proceeding a) liquidates his or her assets, (b) pays in full all of what we would call administrative and statutory priority claims and secured creditors, and c) delivers immediately at least a 25% dividend to unsecured creditors, is entitled to a discharge at that point and need not make further payments out of future income.  Second, a debtor who cannot obtain an agreement with creditors and also cannot meet the necessary payment thresholds for immediate discharge, can get a discharge at the end of, and subject to either full compliance or a "strong effort" to comply with, an approved 5-year payment plan (note also that, should the debtor experience a material, favorable change in circumstances during the term of the payment plan, the creditors may ask for more payments).  It was not clear to me whether the debtor in the latter case must liquidate assets.  The preface to the statute makes a very big deal about the fundamental importance of requiring the debtor to liquidate assets.  But, in the case of a small business debtor, liquidating assets seems quite at odds with the goal of servicing a debt repayment plan over 5 years.  But, in any case, these two options are roughly similar to our chapters 7 and 13, although stricter in, among other respects, the sense that Spain effectively reverses the US "means test" choosing to route debtors of lesser means into their version of chapter 13.  This blogger asserts that the law is still too creditor-friendly, pointing particularly to the ability of creditors to extract more from the debtor during the payment period if circumstances improve materially.

Mortgages are handled in one of three ways.  First, the mortgagor can, of course, keep servicing the mortgage.  Second, the mortgagor can cede the property to the lender and then any deficiency runs through the process above (except, as I read the commentary on the law, the deficiency cannot be discharged nonconsensually through the 5-year payment plan method).  Third, depending on a large number of eligibility criteria, the value of the house, the amount of the annual mortgage payments and the proportion of the mortgagor's annual income that those payments represent, and several "special vulnerability" criteria, the mortgagor is eligible for a procedure that is formally outside of the insolvency laws, known as the "Code of Good Practice" a mortgage restructuring protocol that Spanish banks have adopted "voluntarily" (in the sense of, it's always better to settle with the regulators than to find out what they will do if you don't). There is a hierarchy of debt relief steps that the lenders are supposed to afford the mortgagor under the Code, beginning with lowering the interest rate and stretching out the amortization, and for more difficult debt burdens, write-offs of various magnitudes.  Overall, this strikes me as reasonably similar on the big-picture level, to the US approach, with the Code of Good Practices being analogous to HAMP and similar out-of-court protocols in the US.  One thing I could not tell was whether the 10% haircut that Spain now imposes on secured claims in corporate insolvencies exists in this consumer context as well.

I couldn't find anything in over half a dozen sources I read regarding exemptions. Most references to liquidation of the debtor's assets described it in plenary terms suggesting to me that exemptions are insubstantial.  Certainly there does not appear to be any "homestead exemption".

Although not quite as debtor-friendly as the US consumer bankruptcy regime, and probably too encrusted, even at birth, with substantive complexities and procedural inefficiencies, the "Law of Second Chances" is a big step forward conceptually for Spain and likely to have some positive effect on its economy, which, for unrelated reasons, has finally begun to grow at a normal pace.

Friday, August 7, 2015

Overstating "White Privilege"

The phrase "white privilege" has become a standard buzzword among social justice warriors in the United States and creeps from time to time into more mainstream fora, such as the (poorly argued) debate between Bill O'Reilly and Jon Stewart on The Daily Show last October. 

In the New York Times a couple weeks ago, I read a Michiko Kakutani review of a new book by Ta-Nehisi Coates, a writer at The Atlantic whose column I used to read occasionally.   The review summarizes Coates' book as "a searing meditation [sic (I have no idea how a meditation can  "sear" anything)] on what it means to be black in America today. It takes the form of a letter from Mr. Coates to his 14-year-old son, Samori, and speaks of the perils of living in a country where unarmed black men and boys ...  are dying at the hands of police officers, an America where just last month nine black worshipers were shot and killed in a Charleston, S.C., church by a young white man with apparent links to white supremacist groups online."

Other MSM participants and, of course, the left wing echo chamber have dwelt on Coates' book at length too.  Like Kakutani's review, David Brooks of the Times calls it a "searing contribution to ... education for white people" before excerpting several hateful passages (example: "‘White America’ is a syndicate arrayed to protect its exclusive power to dominate and control our bodies." Or the passage in which he calls the first responders who died in the 9/11 attacks "menaces of nature")(Parenthetically, I can actually understand someone black feeling that way in the flash of a given moment, but I can't understand anyone retaining that feeling and publishing it after any sort of minimal reflection on the facts of 9/11). 

Kakutani's review excerpts a brief passage in which Coates makes  typical assertions about the benefit of being white in America, which even the review - in the Times! - characterizes as "cliched".  Notwithstanding that judgment, I want to go beyond epithets into a deeper analysis of the illogic and inaccuracies in assertions like Coates' about "white privilege", as I did earlier this year in reaction to a fallacious editorial by Nicholas Kristof about modern bias experiments.  Here is the excerpt from Kakutani's review:

"Mr. Coates contrasts [the] world of the streets with the 'other world' of suburbia, 'organized around pot roasts, blueberry pies, fireworks, ice cream sundaes, immaculate bathrooms, and small toy trucks that were loosed in wooded backyards with streams and glens.' He associates this clich├ęd suburban idyll with ... an exclusionary white dream rooted in a history of subjugation and privilege.  [White people] he contends, 'have forgotten the scale of theft that enriched them in slavery; the terror that allowed them, for a century, to pilfer the vote; the segregationist policy that gave them their suburbs.'"

It's obvious to any reader that white people in suburbs have no monopoly on pot roasts, blueberry pies, fireworks, ice cream sundaes, clean bathrooms or small toy trucks.  So, obviously overstated, but that is not my paramount concern, since any reader can make that judgment for herself or himself.  More significant are the examples of "subjugation and privilege": slavery; vote deprivation; and segregation.  What I want to unpack here is the confusion between "subjugation" and "privilege", which the author, and evidently the reviewer, seem to think of as two sides of the same coin.

I think that is fallacious; that is, probably because discussion of racial bias tends to proceed in terms of  dualities:  white/black; slave/free, etc., which, unquantified, sound equal, reciprocal, zero-sum, the frame obscures a simple quantitative fact, that the percentage of blacks in America at relevant times to the discussion has been consistently 10 - 11%, so small that blacks could indeed be "subjugated" by what Coates identifies, without that subjugation playing a substantial role in causing the status of very many white people today.  Put another way, as I shall illustrate below, there have been so many more white people in America than black at all relevant times, that the current economic status of white people is largely independent of the causes of the current economic status of black people.  Therefore, the concept of "white privilege" is grossly overstated; it would be more accurate to speak about "disparate impact" of policies on black people than to falsely inflate the benefit of "white privilege".  

An easy demonstration of this is the "segregationist policies that gave [white people] the suburbs" according to Coates.  In the period of most rapid suburban expansion, 1950 - 1970, there were three censuses and, in each of them, whites never made up less than 88% of the population:

Net Population Growth
source:  Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Bicentennial Edition, Part I), Series A73-81; all numbers in millions and rounded to first decimal

Before I delve more deeply into the demographic profile of suburban presence in this period, I will offer a simple example of what these overall demographics mean for "white privilege".
Imagine that every neighborhood in the nation at these points in time had been a microcosm of the national demographics, perfectly mirroring the nation's demographics, with no racial disparity whatsoever.  If, for example, there was a suburban development built in 1950 with 50 homes, the ownership of those homes would have been allocated 45 to whites and 5 to blacks.  By 1970, ownership would have shifted 44:6 (7.9/8.9 * 50). 

If we contrast that with the worst-case segregation scenario, with all the suburbs being populated in the year of highest black population and yet complete exclusion of the black minority, we see that 6 blacks would have been excluded, and 6 whites would have benefited disproportionately.  But, 88% of whites would have been there anyway

This is the simple point that needs to be understood about "white privilege".  The vast majority of whites would have been in suburbia under any scenario from the worst case to the most utopian, enjoying all the benefits of the "cliched suburban idyll" Coates depicts.  They would have seen the same home appreciation; paid the same mortgage and property taxes; the vast majority of their kids would have gone to the same public school funded by those taxes, gotten the same grades, and gone to the same colleges; they would have shopped in the same places, joined the same country club, had much the same social interactions, etc. Whatever specific example of the "white privilege" argument one wants to offer, the odds are very high that, as to any given white person, the identified benefit has not been received at the expense of a black person.  Some white people will have benefited disproportionately but, by definition, even in the worst case I've just posited, they cannot amount to more that the black minority's on-average 11% share of the total population -- and  when one  delves into the demographics of residence during the period of suburban expansion more closely, it's really even smaller than that, more like 3% of white people in the relevant period, 

When you get into the demographics of suburban expansion, you may be surprised to find that  the black population in every category classifiable as suburban grew slightly faster than the similarly classifiable white population in this time;

White Urban Fringe
Black Urban Fringe
White Rural Nonfarm
Black Rural Nonfarm
White Other Urban
Black Other Urban
source:   same document, Series A73-90; all numbers in millions

However, given that the total black population grew 60% faster than the total white population in those decades, as the first table showed, these slight differences cover less than half of the black population growth (3.3 million out of 7.6 million) in those decades.  The real change in black population location was that black rural families moved disproportionately into the central cities, as documented in, among other things, "The Warmth of Other Suns", a 2010 history of that migration by Isabel Wilkerson that won the Pulitzer Prize (such a rural - > urban migration is, by the way, not an uncommon demographic movement in nations worldwide, regardless of race; it happened in the Industrial Revolution in England; it has been the source of urbanization in China and India, for example; it goes on today in Brazil and it is a substantial part of the Hispanic migration into the US as well).

Rural Farm
Rural Farm
White Central Cities
Black Central Cities
- 60%
 - 86%
source: same as above

If I recompute the suburban population of 1970 to mirror the total national population of that year, the racial distribution would look like this (all numbers in millions):

White non-farm, non-central-city (unadjusted)
White non-farm, non-central-city (adjusted)
Black non-farm, non-central-city (unadjusted)
Black non-farm, non-central-city (adjusted)

So, roughly 5.5 million whites would have been replaced in the suburbs (loosely defined  --I know that this national level of analysis is an over-generalization but it is the level Coates argues at, so I think it is where the response should be couched) by blacks, out of a total white suburban population of 120.1 million, or roughly 5%.   That same small shift in the white population would, however, have increased the black suburban population by roughly 60%.  Measured against the total population of each race in 1970, if you want to measure the total impact on each race, the numbers are 3.1% and 24%.  So that was -- roughly speaking, given the 50,000 foot level of national census data -- the racial disparity in housing:  96.9% of whites and 76% of blacks would have landed in the same categories in a racially unaltered allocation of housing. The point, I hope, is well taken: there is virtually no "white privilege" in housing (or much of anything else) because whites are such a large portion of the population, and thus they are inherently a large portion of all of the outcomes of the population.  It's in fact a ludicrously inaccurate form of stereotyping, as much a stereotype as claiming that all black men are criminals.  Yet, even if white privilege is in fact negligible, the black population can experience a disparate negative impact from exclusion.  For this reason, it would be more intelligent to speak in terms of "disparate impact" on blacks than in terms of the insubstantial "white privilege".

The same proposition holds true when one looks at income and affluence, instead of housing dispersion.  It is of course the case that, on all statistical fronts, black income is lower than white income.  For example, the Census Bureau calculates the following median incomes for the several main demographic categories in the US in 2012 as follows (h/t Business Insider):

"Among the race groups, Asian households had the highest median income in 2012 ($68,636). The median income for non-Hispanic White households was $57,009, and it was $33,321 for Black households. For Hispanic households the median income was $39,005,"

It seems clear that the same principle holds true, that, owing to the much larger proportion of white earners in the earning population, substantially all white people would be in approximately the same position, if black earners were distributed in perfect proportions throughout the overall income distribution instead of being over-represented in the lower half of that distribution and under-represented in the upper half of it.  For example, I selected this quote from the Wikipedia page "Affluence in the United States" (which, at least as of this date, has a very progressive perspective):

"in 2005, 81.8% of all 114 million households were White (including White Hispanics), 12.2% were African American, 10.9% were Hispanic and 3.7% were Asian American. While White households are always near the national median due to Whites being the by far most prevalent racial demographic, the percentages of minority households with incomes exceeding $100,000 strayed considerably from their percentage of the overall population. Asian Americans, who represent the smallest surveyed racial demographic in the overall population, were found to be the prevalent minority among six figure income households. Among the nearly twenty million households with six figure incomes, 86.9% were White, 5.9% were Asian American, 5.6% were Hispanic; and 5.5% were African American.  Among the general individual population with earnings, 82.1% were White, 12.7% were Hispanic, 11.0% were African American and 4.6% were Asian American."

Note that the percentages add up to > 100% because of double counting of "white hispanics".  Still the order of magnitude of the white/black ratio is such that the double counting doesn't meaningfully alter the main point.  Even if all "white hispanics" are subtracted from the "white" population, the excess percentage of white earners "among the nearly twenty million households with six figure incomes" is 17% ((.869 - .056) / (.821 - .127)), meaning that 5 of every 6 whites in that top earning bracket would be there if its constituents were a perfect mirror of the demographics of all earners.  That would be the most one could say about "white privilege" in the modern income distribution (although one might, I think, fairly question, in an analysis of an asserted birth-based privilege within the polity of the United States, whether new immigrants, who (a) were born outside the US and (b) came here voluntarily, should be weighted; that they dwell in a white majority polity and compete against a white majority workforce and have to sell to majority white consumers are not accidents of birth, but the results of their conscious choices. (In fact, one might fairly call it a "privilege" for a person to be able to live and work in a wealthier polity than the one he or she was born into). Having been born outside the polity, they are not on an apples-to-apples basis with the vast majority of the population set being scrutinized; were they to be subtracted, the white proportion of the population set would skew higher and the percentage of "excess" white membership in the top earning bracket  would shrink materially). 

A subsidiary point I want to draw out circles back to my comment at the outset that the Jon Stewart / Bill O'Reilly "debate" over "white privilege" was poorly argued.   As I think I've shown, in a nation that is mostly white, most of the successful people will likely be white, even in a perfectly racially distributed set of outcomes.  So any white person, if challenged to defend his success against contentions of white privilege, can quite rationally and legitimately respond by saying, "no, I am confident I would have been in this position even in a world of perfectly racially distributed outcomes."  Obviously some small number of white people would be wrong in making that statement, but they would be a small minority.  So that is one relevant point O'Reilly should logically have said in response. 

But there is actually a stronger point that the most successful people like O'Reilly and Stewart can make. When a white person,  like each of those men, succeeds in generating a very high income, he has outcompeted, not just the people of color in his demographic cohort, but the whites in it as well.  If he's in the top 99%, or 99.9%, he's outperformed at least 98% of the other holders of "white privilege".  So mere "whiteness" can't explain very much of his income, or median white income would be up at his level.  A "white privilege" attack on the most successful seems to me to be remarkably sophomoric and truly superficial, even though they are the most visible targets of such attacks.  .

Rather, where the effects of "white privilege" would be highest would be the lower one goes in the income distribution. Think of this in terms of displacement.  In the very top percentile, let's say, for argument's sake, 1/6 of the whites are there by virtue of "white privilege".  If you extract them from the top percentile, they have still outcompeted all the whites below them.  They don't drop to the bottom, they just drop to the next level of measurement, the 98th percentile; meanwhile, the people of color from the 98th percentile and lower would hypothetically move up to the 99th to replace them.  But this process repeats at each percentile, and when it does, the proportion of whites that have to be moved down grows.  When you examine the 98th percentile, because you've just moved whites in from the 99th percentile, while moving people of color out, it has become even more lopsidedly white, and therefore, the "1/6 of all whites" in that cohort is an even larger raw number than in the 99th percentile, so to make it perfectly racially representative, even more whites within it have to move down to the 97th percentile, from which even more people of color get moved up again, and the process snowballs all the way down the income rankings. 

What this confirms is that, at the very top of the income distribution, the whiteness of anyone in that cohort is least meaningful in terms of its contribution to his or her income, compared to other positions in the income distribution.  Which is really why I thought the O'Reilly / Stewart "debate" missed the point and was poorly argued. 

But, conversely, the lower one goes in the income rankings, the more likely it becomes that at least some of the disparity between a white person's income and that of blacks below them in the rankings can be attributed to the status of being white, because that white person has outperformed less white people than those above him in the rankings.  
Maybe this explains in part why "limousine liberals" and other white elites have been historically more progressive on race, while opposition has tended to be strongest at the working class level, that intuitively, the former perceive - I would argue largely correctly - race to have been essentially irrelevant to their success and therefore they are not really sacrificing any of their status to support minority progress, while the latter may intuitively sense their status is more at risk.  Certainly the numbers bear this out.

Coates's passage itemizes other wrongs as well - slavery and voting discrimination in particular. I am not going to write a tome on racial issues and civil rights, but I would analyze them with the same theme, that the black population may suffer a disparate impact from any given policy, but the outcomes of the white population may not be meaningfully affected by that policy, and "white privilege" is a terribly inaccurate frame for the debate.  This is pretty obvious regarding voting, where a 10-11% share of the electorate is not going to, in and of itself, win any elections, especially were it to be dispersed proportionally among all neighborhoods (in fact, I wonder whether the Obama Administration's recently announced plan to push for more racially distributed housing patterns might ironically wind up diluting black representation in legislatures over a few decades).  Claims of black vote suppression in the 21st century strike me as a strategic overstatement made for political purposes; the Democratic party has a huge incentive to maximize black voter presence and decades of electoral results indicate they have been by and large successful, so I doubt there remain significant impediments to black votes mattering.  In the 2 most recent Presidential elections, black turnout percentage has surpassed white turnout percentage, which doesn't plausibly reconcile with a claim of black voter suppression; maybe the candidate matters at the margin (Gore, Kerry, ...  Obama).

Slavery has been covered extensively and I have little to add: all the slaves and slave owners and children thereof and 99%+ of the grandchildren are dead; the vast majority of the white population did not own slaves and were so poor they derived negligible benefit from slavery; there were white slaves and indentured servants throughout the 17th century and substantial albeit non-slave-level discrimination against certain white ethnic groups in the 18th and 19th centuries (in my mother's hometown, when her Irish ancestors arrived, the town experienced "German flight"); slavery was endemic in Caribbean nations, yet black immigrants from those nations often outperform African-Americans in the modern US economy; the Union Army that freed the slaves at staggering human cost to themselves and their families was almost entirely white; the vast majority of the current population had no ancestors who profited, even indirectly, from American slavery, and even among those people who do have such a connection, it represents a small fraction of their ancestry and personal heritage, so it's myopic and distorting to focus on that to the exclusion of the rest of their identity.  

Most of the wealth created in the era of slavery, directly or indirectly, has been destroyed and dissipated, not just by the Civil War but by the several financial crises and panics since then, as well as the creative destruction of capitalism at work, not just here but abroad.  Most of the wealth existing today in the US comes from services provided, goods manufactured and inventions invented in the post-Jim-Crow era, sure, maybe you can find in some institution, like a bank or university, that has been around for two hundred plus years, some record of making money from the slave trade hundreds of years ago, but that has to be measured against all the money it made from other sources in its history to gauge the impact of slavery on the status of that institution today. And a truly full accounting of value transfers between whites and blacks would need to add in the billions of dollars of transfers, through progressive taxation and welfare state mechanisms like Medicaid and food stamps, from the predominantly white upper class to the lowest classes, in which blacks are disproportionately represented, and the value of the urban infrastructure that "white flight" left behind when the suburban exodus occurred -- the water pipes and reservoirs, electric power plants and wires, sewers, paved roads, and so on -- that the new black arrivals did not have to create from scratch.

I can imagine a number of rejoinders to this argument.  Most of them would, I think, from having read hundreds of arguments along these lines, be totally ad hominem and therefore of no intellectual merit; the rejoinders to Brooks's column that popped up when I googled to find the column, for example, all fall into this camp.  A number would consist of rage and epithets and personal insults and claims to possess a higher truth by dint of birth that are again of no intellectual merit. 

Some would sophomorically make the "if Bill Gates were black, he wouldn't have become the  richest person in America" argument, which is (a) fallacious (ecological fallacy), because a statistical analysis, by definition, does not purport to be true of each and every member of the population studied (if it were, you wouldn't need a statistical analysis; and in fact you couldn't do one, as there would be only one statistic); (b) intellectually dishonest, because it materially changes the data set being studied, and (c) even if the sentence in quotes were true, the odds are very high that the person who replaces him as "the richest person in America" would be as white as he is, given the proportion of whites in the population. 

Some would nitpick (e.g.,, blacks are systematically undercounted in censuses - even so, but not to the extent that the white / black proportions would change materially, and I know from ancestral research that whites have been  repeatedly undercounted as well -- among my 8 great-grandparents, for instance, I can come up with 4 omissions off the top of my head from the censuses of 1910, 1920 and 1930, which is a 16.6% undercounting). 

Some would point out, intelligently, that the census data is insufficiently granular to capture the full extent of housing segregation -- there are suburbs and then there are suburbs, and even within suburbs. there was educational segregation (which in my opinion was the largest factor), and everywhere there were job opportunity barriers, often erected by labor unions and politicians responding to their demands (Google "Davis Bacon Act racist" and learn about its racist origins, for instance; why aren't there reparations lawsuits against unions for damages?)  True, I agree with all those points.  In fact, I would say the root of black economic underperformance lies in the fact that they arrived in urban economies, not only with just rural skills (technical and social), but also, unfortunately, at just the time when the economy was changing over to one that required much more sophisticated skills than even the white working class possessed so their gap was larger and has never closed.   But I must also point out that Coates has couched his argument in a simplistic black-urban / white-suburban duality and I am merely responding apples-to-apples.  Were he to write a more nuanced essay, it would be of greater intellectual merit, but likely not garner him the same publicity, so he sort of picked his poison and I decline to be judged by a higher standard than he set for himself.  I also note that Coates sharply criticizes education as an answer to black economic status, and is himself a dropout, so again, I am just responding to the man's particular argument, and I think in respect of education he is seriously wrong.  As well, education funding has been mainly locally raised and therefore, if a white community has higher education spending, they're not taking the excess out of black people's wallets, in some kind of "theft", to use Coates's word; they're funding it themselves by taxing their own white selves.  The progressive argument in this sector is really the opposite of what Coates is arguing, not that whites are taking from blacks, but that white income should be taken and spent in majority-minority school districts by replacing the local property tax method of funding with statewide tax and transfer mechanisms.   

Some would miss the point of this post and assert that this post whitewashes the harm done to black people from various laws, which in fact this post recognizes at multiple points; the point of the post is that contemporary white outcomes are almost entirely independent of contemporary black status and of policies and actions that harmed black people in the past.  Yes, there was segregation, discrimination and racism, and all of that was harmful and wrong, but the demographics are such that the vast majority of white outcomes would have been the same or very close to the same, even if there had been none.  That is just a quantitative fact when one population constitutes 88-90% of the total.

The "white privilege" rubric is just a tactical attempt to advance "social justice"  by de-legitimizing the success any given white person may have had, and thereby legitimizing the transfer from that person of some of his or her economic gains to minority populations, because, even though the most successful white people are the ones whose success is least attributable to race, they, as Willie Sutton once explained about robbing banks, are where the money is.  But it is an intellectually false dogma and deserves to be rebutted by anyone in the "reality-based community" where I've always prided myself on dwelling.

Monday, August 3, 2015

Hillary Clinton's Proposal to Combat "Short Term Capitalism" by Raising Capital Gains Tax Rates is Crazy Stupid.

I am stunned at the stupidity of Hillary Clinton's policy proposal to combat purported "short-term capitalism".  I say this as someone who contributed to her campaign in 2008 and wishes she, not Barack Obama, had been elected President that year.  And my objection does not go to whether the goal is a good one, which I have views on, but will set to one side for now.  Rather, my objection is, if you wanted to correct "short-term capitalism", increasing the capital gains tax  based on duration of holdings is so obviously ineffective, I call into question whether anyone with any grasp of stock market dynamics was involved in formulating the proposal.

1.           The Little Guy is Not The Problem.   Investors who pay long-term capital gains taxes are not responsible for most stock trades.   The vast bulk of trading is done by either (a) tax-exempt institutional investors, like pension funds, mutual funds, hedge funds, charitable and university endowments, etc.  or (b) financial institutions which, while taxable, change their portfolio daily and already have their profits and losses taxed as ordinary income, so will not be affected by changes in capital gains rates.  Just a small fraction of volume comes from people who pay long-term capital gains taxes.  I don't even know if there are any stocks in the S&P 500 as to which non-management, non-institutional holders hold a majority of the outstanding shares.

2.           Compensation Formulas Drive Short-Term Focus.  Even when an asset manager is subject to long-term capital gains taxes on his or her individual holdings or share of the fund s/he manages, any tax incentive to hold a position is likely to be offset by the terms of pre-tax compensation, which are generally a function of (a) assets under management (AUM) and (b) performance (alpha).  As well, being able to show the other investors in the fund a record of above-market performance enables the manager to retain or attract more funds or reduce any concessions given in pricing initially.  Just to give a simple example, imagine a $1B fund whose manager owns a rather large 10% of the capital in the fund; assume it is unleveraged, to simplify things; and has the standard "2% of AUM & 20% of profit" fee structure.  If the manager produces a 20% gain, even if his or her own share of that gain is taxed at 50%, costing $10 million, that tax hike is dwarfed by the incremental income received for generating the gain (2% of the additional $200MM under management is $4MM, while 20% of the $200 million profit is $40 MM, so the manager is up $44 million).  Even after you deduct taxes on that income, say at the same 50% rate, the manager is still way richer for having focused on short-term performance.

3.           Losses?   Short-term trading  is not limited to selling quickly just to book a capital gain that gets taxed.  Every month, there are stocks that plunge right after an earnings report or change in guidance.  And a good number of the persons selling are taking a net loss on a position they built up in anticipation of a previously favorable trend continuing into the future (a/k/a the long term). Think of the people who bought fracking companies just a year ago because U.S. energy independence was a solid long-term trend.  A capital gains tax hike has absolutely no effect on those trades because they produce no gains, only losses.  It may even encourage them, because the losses they produce can be used to offset short-term gains in other positions.  Or, the flip side of the same coin, since the tax code limits the deductibility of net capital losses, the existence of a capital loss in one's portfolio can actually cause one to sell another position that carries a matching gain, so as to soak up the tax benefit of the loss.

4.           M&A?  To illustrate this, here is an anecdote: I bought shares in a biotech company earlier this year.  Its drugs in trials had amazing long-term prospects if the trials proved successful, and I had no monetization event in mind when I bought in.   Two months later, a larger company apparently agreed with my assessment and swooped in and struck an all-cash deal to acquire the company at about a 50% premium to my purchase price.   There was nothing short-term in any buyer's mind, mine or the acquiror's.  Yet the Clinton proposal would characterize my gain as if it were part of a supposedly evil short-term investing philosophy.

I would analogize Clinton's proposal to a school that has a small population of bullies and announces that, to combat their bullying, they will raise tuition.  Or a proposal to curb gasoline usage by raising the luxury tax on purchasing sports cars.  The mismatch between (1) the actors and actions that precipitate the supposed problem and (2) those who pay the increased tax is so great, it verges on the absurd. 

If you wanted to curb short-term trading, among the many better devices would be an excise tax on the aggregate number of trades of less than the desired duration, or on the aggregate dollar amount of such trades or on portfolio turnover above a certain level, possibly graduated the further the taxpayer went from the desired norm.   That would pick up the institutional holders who do most of the trading, regardless of their exemption from income taxes, and it would also capture short-term trades to cut losses.  It would also exempt sales in M&A situations, because those aren't considered trades generally in brokerage reports.  In other words, it would avoid all of the idiotic pitfalls of the Clinton proposal.

That said, there is a whole roster of macro-level objections to the proposition that "short-term  capitalism" should be curbed at all, either because it's a net-positive, or net-neutral, or just not net-very-bad and there are more significant things to devote political capital to,  all of which I will leave for another day or voice to develop further.