The cost of mixing culture wars with public finances

Given the nation’s deep political divisions these days, it’s no surprise that some state and local politicians on both sides of the aisle are looking to leverage the buying power of their governments to send messages to businesses. Americans and play their base while doing so. After all, it’s not their own money — it’s the public’s — so why not harness political power to advance his partisan posture?

The most common manifestations of these impulses to make political statements through public funds have historically been campaigns to divest public pensions, beginning with South Africa in the 1960s and then with Sudan in the early 1960s. 2000s and continuing through the wave of Russian divestment this year. Critics would say that pension policies focused on companies’ environmental, social and governance (ESG) profiles are the Liberals’ strategy to pressure companies to bend to their political will. The same could be said of pension funds that avoid investing in gun manufacturers.

The complaint — and it is valid in my opinion — has always been that these political statements rarely benefit pension funds and that the taxpayers of employers are ultimately left to foot the bill for investment underperformance. This grievance is now popular with 19 Republican attorneys general. However, many ESG advocates would counter that more sustainable and forward-looking corporate policies will produce better long-term returns on investment. This retirement land debate doesn’t seem likely to end anytime soon; we really cannot properly assess the effectiveness of investments in less than a decade or even two.


What’s notable in recent years, however, is the tendency of some states and localities to pursue the same strategy with government funds, not their retirement assets. A great example of this is the Texas law that blacklists municipal bond underwriters who support ESG principles, which arguably goes against the state’s drill-baby-drill policy. rich in oil and its income structure dependent on oil. Whether viewed as a purely partisan exercise of power or as an economically self-serving action by a state government that knows where its bread is buttered, the result is the same: by excluding certain municipal bond dealers from appeals bidding for government bond issues and thereby limiting competition, it is the axiomatic view of a free market economist that the result will ultimately be higher borrowing costs for Texas taxpayers.

The West Virginia Legislature followed suit with similar legislation. Kentucky, Oklahoma, and Tennessee have enacted similar laws, all focused on ESG and fossil fuel extraction. Notably, Kentucky ranks 21st and Tennessee 27th among oil-producing states, so one must conclude that their blackball actions are largely political, not fiscal.

The extent of any fiscal impact on Texans’ debt servicing costs is a matter of empirical research, which has already begun at Wharton. The subject will probably be the subject of an excellent doctoral thesis one day, but we will not know the precise figures anytime soon. With several states now involved, a fertile field for research has emerged.

Laying the base

It is clear that the tables have shifted from promoting policies favored by liberals to those of social conservatives who, just a decade ago, would have chastised their opponents for meddling in corporate policies and the efficiency of the free market. . It’s enough to make my head spin some days. Seemingly, all is fair in love, war and politics these days – as long as the partisan base is appeased and campaign contributions keep pouring in.

In Florida, we have the now notorious interference in public finances by state politicians who decided to punish Walt Disney World for the company’s public opposition to the so-called “Don’t Say Gay” law. of the state (in favor of its employees) by stripping the financial powers of five special districts to reprimand America’s most beloved family theme park.

Even local governments are getting involved, including on the left side of the political spectrum. In Pennsylvania, Lehigh County may become the first entity to divest its assets and operations to Wells Fargo due to the bank’s reported support for political candidates opposed to abortion rights.

Some of these retaliatory actions could potentially result in First Amendment lawsuits, especially since the Supreme Court’s decision United Citizens decision equated the right to freedom of expression of businesses with that of individuals. But given the growing divisions in the American body politic these days, it doesn’t take much imagination to expect political blacklists and similar financial boycotts to continue to proliferate.

I’m sure, for example, that we’ll see a few pro-abortion rights local governments adopt policies prohibiting reimbursement of travel expenses for attendance at professional conferences and training events in states that prohibit or restrict the procedure severely. Meanwhile, other governments may bar employees from traveling to conferences in states that provide safe haven for abortion seekers. What will prevent the emergence of similar internal policies regarding visiting states with open-carry gun laws? At least in the case of conference attendance, most government employees can find other professional development opportunities elsewhere, and some of those events now include virtual attendance options in this pandemic era. But for financial services firms serving the public sector, and the effective market competition they engender, there is no such workaround.

Proximity at state expense

The vengeful impulse to punish one’s enemies is not new. But doing so at the expense of one’s own constituents is a novelty in most modern pluralist democracies. It is petty, polarizing, punitive and, moreover, pointless to vilify political opponents as enemies of the body politic at state expense.

I do not claim to have all the answers or a universal solution to the dilemmas these examples present. But I’m pretty sure taxpayers will ultimately be ill-served when public sector investments and financial transactions are subject to political patronage, which is what these “rollback” policies really are. The problem, of course, is that in the short term there are very few political downsides to these interventions, and the financial costs will be diffuse and initially imperceptible. But that doesn’t make it fair – or smart.

The Big Seven state and local government political associations and their financial affiliates can all do us a favor by resisting such partisan demagoguery with policy advisories that highlight how misguided and ultimately costly such culture war retaliation is likely to be – and perhaps have already become.


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