The Liberal Ironist generally tries to stay away from this kind of post–namely, the “national character” exposition with a generous dash of “We’ve lost our way.” But 2 articles in Tuesday’s Wall Street Journal leave one with very different impressions of the business cultures of Japan and the United States.
1st was the cover article, “Financiers Switch to GOP,” which tracked the abrupt switch from relatively-even campaign spending on Democrats and Republicans through the Aughts to near-exclusive campaign spending on Republicans by hedge fund managers and their employees during the 2010 midterm Congressional elections. This shift towards near-exclusive financing of Republicans was justified by several hedge fund managers as a response to an intolerably anti-business climate ushered in by President Obama and the Democratic Party. What’s interesting (and frustrating) about this claim is simply how little substance there is to it.
Cliff Asness of AQR Capital Management (formerly Advanced Quantitative Research), one of the principal figures in The Quants, Scott Patterson’s fascinating history of the largest American hedge funds and the role that the simplistic assumptions of their economic models played in the 2008 Financial Crash, is a longtime Republican campaign contributor. (Incidentally, I’ve previously reviewed The Quants and even discussed what I thought were interesting facets of its theoretical critique.) But employees of AQR Capital Management had become increasingly-generous Democratic campaign contributors until 2010. Apparently Asness had long characterized President Obama’s way of talking about Wall Street as “bullying,” but this “bullying” hasn’t resulted in higher taxes on hedge funds, nor has it resulted in regulations which weren’t long-expected by the industry or which they weren’t able to moderate through “the 41st Republican vote in the Senate,” Scott Brown (R-MA), as of his election to fill Senator Kennedy’s old Senate seat in January 2010. In sum, Cliff Asness’ volunteered criticism of President Obama for the article was that he said mean things about the hedge fund sector.
The article does go on to identify a contentious debate over tax code changes. In his early months in office, President Obama and the Democrats sought to prevent hedge fund managers from being able to pay the relatively-low 15% capital gains tax rate. (Senator Max Baucus (D-MT), the article reported, objected to the fact that hedge fund managers could be billionaires but pay a lower tax rate when they sell their stake in the hedge fund “than teachers or doctors or firefighters.”) Since most of their assets in the fund wouldn’t qualify as capital gains because of how rapidly it was traded, they accepted this tax increase.
The proposed tax increase that did earn hedge fund managers’ outrage, apparently, was a Democratic proposal that the sale of a hedge fund be taxed as income rather than as long-term capital gains. (Top-bracket marginal income tax rate: 35%. Top long-term capital gains tax rate: 15%.) In short, hedge fund managers objected that the sale of a multi-billion dollar financial institution might be taxed at the income tax rates paid by doctors and successful lawyers.
These hedge fund managers may yet find that the joke’s on them; Standard & Poor’s has given the United States Federal Government a negative bond rating. (A negative bond rating doesn’t mean that the Federal Government’s rating isn’t still AAA–which it is–but rather that Standard & Poor’s may downgrade its bond rating in the near-future.) This is the 1st tangible consequence of all the loose talk, mostly by Republicans, about obstructing the debt limit increase. Officially the Federal Government will hit the authorized national debt limit by mid-May; however, complicated accounting practices can keep the Federal Government fully-funded through the first week of July. Then we have a problem, and if the Federal Government can’t make its debt commitments, not only will this inevitably damage the Federal Government’s credit, it will lead to higher interest rates for everyone, tighten credit in general and dampen the economy by abruptly reducing Federal spending. Hedge fund managers, like other business leaders, were playing with fire when they bankrolled such an ideological trend within the Republican Party; perhaps now prominent members of the US financial industry will recognize that President Obama’s supposedly-intolerable hurtful talk didn’t preclude some of their highest profit margins ever, and during our worst economic crisis since the Great Depression at that.
The 2nd article contained what to me was a more-shocking story: “Tokyo Increases Role in Crisis.” What shocked me so was a seemingly-incidental sentence from the 2nd paragraph: “Amid such criticism, plant operator Tokyo Electric Power Co. pledged to cut the remuneration of its senior executives by half as it deals with the financial impact of the crisis, while its general staff would see 20% cuts in pay…”
The senior executives of TEPCO are taking a 50% pay cut because of their company’s failure to prepare for a natural disaster beyond their honest reckoning. Essentially, they are accepting a halving of their salaries as a penalty for their failure to think the unthinkable. (One of my old college professors was fond of the saying, “Not to think the unthinkable is not to think at all”–and the 2008 Financial Crash particularly highlighted the wisdom in this.)
Interestingly, it’s typical for Japanese corporations to limit executive salaries to around 5 times what an average company worker makes. A recent Nikkei business survey found that Japanese executives earned around 4.8 times their average company worker’s salary from April 2009 to March 2010, while American executives at some corporations earned as much as 350-500 times an average worker’s salary.
So there you have it, folks: On the one hand, the managers of a large and dynamic but volatile component of our financial sector express feelings of betrayal by a President who supported a $750 billion bailout of their parent companies after their reckless accounting mechanisms crashed the World economy because he once proposed that if they sell their multi-billion dollar foundations they should pay the same tax rate that other rich people do…and on the other hand, Japanese executives at a major electric company take a massive pay cut following weeks of dangerous and setback-laden containment and cleanup actions at a large nuclear power plant following the most-debilitating natural disaster in Japan’s history.
The Liberal Ironist doesn’t think hedge fund managers are evil. In my book review of The Quants, I acknowledged that hedge funds, while technically an opportunistic and voltatile way of flipping stocks, are beneficial, keeping corporations well-capitalized, thereby affording them the means to invest in new production and new employment. I disagree with the director of Inside Job, this year’s Academy Award winner for Best Documentary, and Michael Moore, who think hedge fund managers are criminals and should be jailed. I don’t think these hedge fund managers sound like bad guys or that they committed a crime when they innovated their complex accounting schemes. (If they committed fraud when striking contracts with either their creditors or debtors, well, that would be a crime.)
For the most part hedge fund managers simply thought they found a scientifically-valid way to invest, and to hedge their investments, and to stay ahead of broadly-available market information all the while. Plus, they thought that credit-default swaps (basically insurance policies investors offer lenders on other people’s loans, complete with premiums while the loan is outstanding) meant that investment banks had finally manged to arbitrage-out the risk involved in lending to financially-insecure clients. They thought mathematics would allow them to easily beat the market, borrowing money at little or no interest abroad, buying stocks in bulk when they were underpriced and selling them when they became overpriced. They were vindicated in this conceit right up to the point that they led all of us off a cliff.
The Liberal Ironist would accuse hedge fund managers of a sense of entitlement that is truly pathetic. The same men (and a few women) who meekly supplicated while asking for Federal Government assistance to stop the self-created free-fall in the financial sector condemned a President who voted for that bailout for proposing that they should pay as much in taxes on investments that could gross billions of dollars for them as other wealthy professionals. In contrast to the solemn gesture of TEPCO executives, there isn’t the faintest sense that anyone in this industry owes anyone anything, or that the industry has lost its way, or even that its own calamities are its own responsibility.
This is perhaps the central irony of the contrast: With a religious culture that doesn’t believe in a personal God, free will, or a Hell resembling the place in Christian mythology, Japanese civil and political culture actually seems to foster an ethic of taking responsibility; our individualistic but sometimes Christian-themed civil and political culture seems to encourage us to take what we can get, or failing that, to plead victim status.
The Liberal Ironist accepts the need for elites; he simply wonders why ours are so manifestly unworthy of their power.