I would like to introduce a new periodic feature of this blog, the OPE (Obscure Public Enemy) . This will highlight a little known person whose quiet influence is matched by a dedication to harming the public interest. In this way, we will give due credit to the unsung toilers who make our world just a little bit worse every day.
Possible honorees could be, for example, Jean-Claude Juncker, the EU Commissioner who is relatively little known to my America audience but whose power-crazed idiocy has earned him periodic mention in this blog. (His appointment was vigorously opposed by the UK but this was overridden by the French and the Germans; another way in which Merkel bears much responsibility for Brexit.) Another possibility would be Robert Kagan and Victoria Nuland, the neo-conservative Beltway power couple who have never seen a war they didn’t want to start, join or enhance.
But today we will start with Randi Weingarten, the leader of the American Federation of Teachers (AFT), the second largest national grouping of teachers’ unions. As head of this organization, Weingarten has done her best to defend the criminal incompetence of American K12 public education and its unsustainable pension policies. The Wall Street Journal has just run an article how she is taking this fight to a new level.
Several wealthy hedge fund managers support public policy think tanks. For example, the billionaire Paul Singer supports the Manhattan Institute for Policy Research, which does a lot of very good work, particularly in the field of education policy. These think tanks have taken sensible positions in favor of greater school choice and against defined benefit pension plans. The former injects some desperately needed competition into the public school system. The latter seeks to avoid pension policies which hide the corrupt deals between politicians and politically powerful teachers’ unions, and which have contributed to the financial collapse of places like Detroit and, soon to be, Chicago and Illinois. Both of these changes are in the public interest but contrary to the interests of Weingarten and her tribe, and therefore must be resisted with all weapons at her disposal.
The latest weapon is using her influence over the investment policies of the massive teachers’ pension plans to blackmail these fund managers. Pension plans are large investors in hedge funds. As the article makes clear, Weingarten is pushing to cancel investments by pensions in funds the managers of which support political positions contrary to hers, regardless of the performance of the funds.
Regular readers will know that I am no fan of hedge funds, the structure of which I consider to provide completely perverse incentives. If Weingarten wanted to attack them in her personal capacity, then I would wish her Godspeed. But using her influence over public pension plans in the attack is another thing altogether.
The management of pension plans should be dedicated to one thing and one thing only: investment returns. If Weingarten succeeds in canceling investments in high-performing hedge funds for political reasons, then she is acting directly contrary to the fiduciary duty of the managers of these plans. Even worse, if her interference reduces the investment returns of the plans, then the shortfall will have to be made up by the employers of the teachers. Which is you and me through the taxes we pay. In other words, Weingarten thinks that it is perfectly fine to use taxpayer money to support her political vendettas.
Weingarten’s activities against the public interest do not end here. The article points out that she is a supporter of the Clintons, an anti-social act in itself. The AFT was the first union to endorse Hillary Clinton’s presidential campaign. The AFT has also made donations to the Clinton Foundation, using union dues forcibly collected from teachers who may not share Weingarten’s political agenda. This is the type of donation that was justly targeted in the unsuccessful attempt (in Friedrichs v. California Teachers Association, a case which made it to the Supreme Court but which fell prey to Justice Scalia’s untimely death) to overturn these forced collections on First Amendment grounds.
To summarize the charges against Weingarten: She is fighting hard against school choice, thereby helping to consign future generations of American children, especially minority and low-income ones, to educational mediocrity. She is for defined benefit pension plans, thereby contributing to the financial distress of American cities and states, and making it easier for politicians to buy votes with irresponsible and non-transparent future commitments. She is using her influence over public pension plans to blackmail her political opponents in a way that may result in greater taxpayer burdens. And she is violating the First Amendment rights of teachers by using their forcibly collected union dues to support her pet political causes.
Weingarten richly deserves to be our first OPE.
Puerto Rico and the Perversion of Language
As most of you know, Puerto Rico is teetering on bankruptcy. In fact, Puerto Rico is an excellent case study in what happens when left-wing politicians are given free reign, in this case helped by restrictive, left-wing policies such as the minimum wage law (which has priced Puerto Rican labor out of the market) and the Jones Act (which requires that all goods transported to the island be carried on high-priced, US-chartered ships). Some have described Puerto Rico as the Greece of America. Given its Latin flair, I think that Venezuela is a better analogy.
Since Puerto Rico is a territory and not a state or municipality, there is no part of the US bankruptcy code that covers it. Therefore, Congress is having to come up with bankruptcy procedures on the fly. This is a heavily politicized issue since Puerto Rico has about $70 billion of debt, a lot of which has been bought up by hedge funds at a deep discount. These funds are lobbying hard for a legislative outcome beneficial to them.
This could all be another example of government failure in the field of bankruptcy law, as I have highlighted before. But I prefer to think of it as an example of the perversion of language for special interest gain.
The opponents of the legislation allowing Puerto Rico to enter bankruptcy have succeeded in labelling this with the dreaded “B-word” – bailout. In fact, it is the polar opposite of a bailout. A bailout would be if they did not allow Puerto Rico to go through bankruptcy and restructure its debts, which would be a windfall for its creditors, the only party that can sensibly be said to be bailed out in this scenario.
Let’s hope that Congress will not be deceived by the misappropriation of the term.
Scorpions in a Bottle
Recently, BHS (which used to be known as British Home Stores) has gone bankrupt in the UK. This department store has fallen prey to changing trends in retailing and internet competition, combined with its own monumental English frumpiness. BHS was previously owned by Sir Philip Green, a retailing sharpie and billionaire, who bought it for £200 million in 2000 and sold it for £1 in 2015 to a group headed up by Dominic Chappell, a former race car driver with limited retailing experience and very flimsy financial backing.
A bad deal by Sir Philip? Did I forget to mention that, during his 15-year ownership of BHS, Green paid himself £580 million in dividends, rental payments and interest on loans? And did I also fail to mention that BHS went bankrupt owing £571 million to an underfunded pension scheme for its 20,000 ex-employees, a deficit that will now fall to the Pension Protection Fund, a government-supported entity? Hauled before Parliament, Green promised to do something about the deficit, but so far he has been pretty light on details. And the check is still in the mail.
It is pretty obvious what went on here and it stinks so badly that the odor has wafted all the way to the lower Manhattan headquarters of Goldman Sachs. Since 2004, Green has been a business associate of Michael Sherwood, who runs GS’ office in London. Except I think that this relationship may be a little frayed these days after Green described GS as his “gatekeeper” on whom he had relied to vet Chappell prior to the £1 sale.
As I have said before, in our perverted financial markets, investment banking has largely become an exercise in wealth transfers. GS is a past master at this, but it does occasionally require dealing with some pretty nasty characters who also know a thing or two about the law of the jungle. This is not the first time, nor will it be the last, that GS finds itself trapped in a bottle with an equally venomous scorpion.
China: At it Again
I have commented before about China’s ability to be very creative when it comes to lying with statistics. We have some more examples.
Bloomberg has recently run an article that points out that, once you take into account off-budget financing through three government owned “policy banks,” the actual fiscal deficit of China is over 10% according to both UBS and JP Morgan. In the words of UBS’ analyst:
Why would the private sector be willing to borrow? They are already heavily in debt….To stabilize growth, the government needs to boost infrastructure construction. Only the state will invest [sic] when there’s no money to be made.
The Bloomberg article also hints at another way that the Chinese government is trying to pump up short-term GDP figures, through its favorite channel, real estate investment. By radically loosening mortgage financing, China has managed to create another bubble within the bubble. This has produced an increase in land sales, which is a key way that local governments fund themselves: the rate of land sales has recently turned positive after a string of negatives since the beginning of 2015.
But even this is not enough for the Red Falsifiers. There is a manipulation within the manipulation. The Wall Street Journal reports that the big buyers of land have been state-owned companies, sometimes paying prices that are, shall we say, a bit hard to fathom. For example, the state-owned developer Poly Real Estate has recently paid 5.5 billion yuan ($835.5 million) for some suburban Shanghai dirt. This price translates to roughly 44,000 yuan per square meter of the housing you can build on it. Houses go for about 40,000 yuan per square meter in this location, which means that Poly plans to lose 4,000 yuan per square meter even before considering construction costs.
But as the man said, only the state will “invest” when there’s no money to be made.
There is another lesson here. Economic statistics like GDP are fraught with difficulties even in the best of circumstances. However, when you are talking about a government controlled economy, as Austrian economist Ludwig von Mises demonstrated a long time ago in the so-called “socialist calculation debate,” all economic numbers are totally meaningless.
When Tarantino’s latest film, The Hateful Eight, came out, I swore that I would not see it. After being suckered into viewing the uniformly unwatchable Inglorious Basterds and the occasionally good but mostly very bad, and certainly vastly over-long, Django Unchained, I wrote Tarantino off. But then a friend offered me the DVD of the latest film and swore it was a good one….
Since Reservoir Dogs and Pulp Fiction, Tarantino has produced nothing but crap. The part that is particularly bad is that, since Hollywood has anointed him a genius, no one has dared edit his films. He therefore routinely pukes up nearly three-hour films with stories and dialogues that would barely suffice for something half as long.
Tarantino is the most overrated director/writer on the planet. Never again.
Weybridge, United Kingdom
I Wish That I Had Said That…
“Bureaucracy is a giant mechanism operated by pygmies,” by Honoré de Balzac, the French author
“Wayne State University is dropping math as a graduation requirement…while considering adding a ‘diversity’ course requirement…to increase the number of students majoring in ‘unemployment’,” by Mallard Fillmore, a cartoon sent by my mother. MF forgot to mention that, if we get Hillary Clinton as our next POTUS, then we will have the privilege of paying for this education with our tax dollars…not that we aren’t already doing this through student loans that will never be repaid
 Modelled on the Order of the British Empire (OBE), a less desirable distinction awarded by the king or queen of England.
 There are two types of pension plans. One is called a “defined benefit” plan where the employer commits to pay a certain amount (often adjusted by inflation) to the employee upon retirement. This promise is typically funded by employer pension contributions which are designed, on the basis of actuarial assumptions about retirement patterns, longevity and investment returns, to meet these future obligations. If these assumptions prove to be wrong and the pension plan is insufficiently funded, then the employer must make up the difference. The second is called a “defined contribution” plan where the employer makes a contribution to the plan, which is then invested for the benefit, and often at the direction, of the employee. This is like a 401 (k) or IRA, where the risks and rewards of the investment are borne by the employee. The two types of plans differ in the allocation of investment risk between the employer and the employee: it rests with the employer in the defined benefit plan and with the employee in the defined contribution plan. But the plans also differ in that the defined benefit plans are less transparent to the public, since the link between the future promised benefits and the money needed to fund them is easily obscured by, for example, manipulating the assumed investment returns, as I have discussed in my post on “Pensions and Other Things.”
 I have no opinion on whether these hedge funds are actually good investments or not. I am talking about the principle of judging investments on the basis of the political positions of their managers, as opposed to their pure investment performance.
 The Agricultural Bank of China, the Industrial and Commercial Bank of China, and the China Construction Bank.