Hedge Fund Transparency?

Mike's alerting me to a huge expansion of the federal bail-out into hedge funds - yes, hedge funds - made me think (for some reason) of Sebastian Mallaby. Although he wrote this a couple of weeks ago, I think it deserves a bit of attention:

Madoff illustrates a problem with investment outfits that claim to have some special sauce that is too valuable to discuss. People who entrusted their money to Madoff thought he had a clever options trading strategy; they were wrong. Worse, people who entrusted their money to respected banks and investment advisers had no idea that their savings were being passed out the back door to Madoff. On Monday, I happened to be visiting one of the most famous traders in Manhattan. He had invested with a hedge fund that had in turn invested with Madoff, hot-potato style.

The good news is that Madoff's fraud was so brazen that any future imitators may be spotted. A newly chastened wealth management industry will be warier of people who hire bucket-shop auditors; the "fund of funds" industry, which gets paid to do due diligence on hedge funds, will feel appropriate pressure to redouble its efforts. Even though hedge fund managers may legitimately refuse to disclose their trading strategies, there are some things they can be open about. Do they trade through a respected external broker? (Madoff apparently didn't.) If their returns clock in at 1 percent per month with eerie consistency, can they explain why? (Madoff could not have.)

I can think of three reasons why hedge fund managers might refuse to disclose their trading strategies:

1. They're "secret sauce" isn't anything special - it would be easily replicated by their competitors;
2. They're engaged in trading strategies that skirt the boundaries of the law, and people would be appalled that their actions are legal (or might conclude, even under present law, that they're not); or
3. Like Madoff, they're criminals and disclosure would reveal their crimes.

Now sure, some hedge fund managers may truly have developed secret trading methods and sophisticated models of predicting markets, that would lose their power if their competitors had even a hint of how they worked. But why am I thinking that the principal reason for the secrecy lies behind door #2, and that the net result is that the industry demands a freedom from regulation and oversight that protects those who, like Madoff, lurk behind door #3?

Although Mallaby is not skeptical of hedge funds - quite the opposite - he is concerned about door #3: As a result of the way the system is structure, he tells us, "the bad news is that less-brazen fraudsters may be impossible to detect" and "this Achilles' heel could eventually kill hedge funds". Nonetheless, "Responding to this scandal with more regulation would be like thrusting more pills on a patient who refuses medication." (Why do I suspect that Mallaby has no problem drowning hedge funds in taxpayer money, even to the likely benefit of hedge fund managers who are continuing to perpetrate their hard-to-detect frauds?) Wouldn't Madoff's fraud have been discovered even with a modestly thorough audit? "No.... Regulation bad...."

This is curious:

Perhaps half of all funds use strategies about which there is no great secret, so disclosure is possible...

If that's truly the case, how do we justify the astronomical compensation taken by hedge fund managers? How can anyone defend taxing their income at the capital gains rate, instead of as... income?

Moving to more current news:

Last month, five hedge-fund managers who each made more than $1 billion a year were called before Congress to discuss the industry's role in the crisis and the case for regulation. Four of the five said they thought that hedge funds could pose a systemic risk to the economy. "Any institution that has a pool of capital at its availability and uses reckless leverage indeed poses a potential systemic risk to the marketplace," said Philip A. Falcone, manager of Harbinger Capital Partners.

When pressed, the hedge-fund gurus agreed that they could probably live with some form of disclosure to a federal banking regulator, as long as the data are not shared with the public.

How... special.

If Kristol, Reich, Mallaby and Krugman Are All Skeptical....

Although you may not get a sense of it from reading this blog, as I focus on the 10% at issue, I don't much care for the brand of debate where people focus exclusively on the 10% of issues that give rise to contentious political debate, rather than the remaining, soft 90% of issues where people are mostly indifferent or are largely in agreement. Despite occasional controversy, it's hard to find someone who gets hot under the collar because our nation "doesn't have the sense" to eliminate the Electoral College. You would have to work pretty darn hard to find somebody who is incensed that we don't have a unicameral legislature, or that Presidents are elected every four years. You may find people who scoff in one direction or the other at notions of an "ownership society", but general concepts of capitalism and private property are uncontroversial.

But sometimes the stars align in funny ways, and a consensus forms among people on an issue that is controversial despite their political differences, or get incensed on a topic where the mainstream media seems to be largely reacting with a shrug. Perhaps it isn't too surprising that Paul Krugman, economist, and Sebastian Mallaby, defender of the financial industry, both question the Bush Administration's proposed $700 billion financial industry bailout. Given what's known of the plan, I would be surprised to see any economist not demand additional details or question the viability of the plan as proposed. And Mallaby's defense of the financial industry necessarily involves making the industry responsible for its own failings. When you advocate leaving the industry largely unregulated such that financial geniuses can find clever ways to make money without the interference of government, you can't credibly argue that when those geniuses mess up - big time - that the government should bail them out with a blank check.

Krugman's instinct may be toward more regulation and Mallaby's toward less, but their common ground is to try to hold financial institutions responsible. Putting things in very simple terms, with regulation you risk stifling innovation, and you may still the source of an eventual financial crisis. With less regulation (and I'm not aware of anybody who is seriously involved with these issues who advocates none) you risk what we're seeing right now, but you enjoy the fruits of the innovation that might otherwise occur. Under the Mallaby approach, holding financial institutions responsible for their own failures is even more critical, as that's the check that is supposed to keep them responsible in their experimentation and innovation.

Robert Reich is a very smart man, but he also has a clear political affiliation, as does Bill Kristol. Reich offers some proposals that, apparently, would make this bailout acceptable to him. (Contrast that with Mallaby, who proposed alternate plans that might achieve the desired effect without a taxpayer subsidy.) Reich's credulity - this is a plan he seems to believe we can fix - lends credence to Kristol's worry, which is sufficient in magnitude to overwhelm his more typical deference to the latest party memo:

[The plan] would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for - or even promises of - disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.

And I’ve been shocked by the number of (mostly conservative) experts I’ve spoken with who aren’t at all confident that the Bush administration has even the basics right — or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.

But will political leaders dare oppose it?

It depends upon how much cover they get. And despite Kristol's skepticism of the plan as a whole, his proposed fixes for the plan are far less significant than Reich's.

Comments by McCain on Sunday suggest he might propose an amendment along the lines of one I received in an e-mail message from a fellow semi-populist conservative: “Any institution selling securities under this legislation to the Treasury Department shall not be allowed to compensate any officer or employee with a higher salary next year than that paid the president of the United States.” This would punish overpaid Wall Streeters and, more important, limit participation in the bailout to institutions really in trouble.

Reduced salaries for one year? You could drive a semi through the loopholes that idea creates. But to his credit, Kristol ends up more in Mallaby's and Krugman's territory than in Reich's:

While assuring the public and the financial markets that his administration will act forcefully and swiftly to deal with the crisis, [McCain] could decide that he must oppose the bailout as the panicked product of a discredited administration, an irresponsible Congress, and a feckless financial establishment, all of which got us into this fine mess.

Many have observed our society's tendency to cheer on capitalism and private profits, but to socialize losses. This appears to be a grotesque example of the Bush Administration doing exactly that - with the financial industry eagerly demanding an even larger bailout of all of its junk assets. I'll credit Reich, Mallaby and Krugman with far more knowledge of economics and market theory than I, so (dare I say, like Kristol - I guess we're in that area of overlap that's so often hidden in plain sight) I'm operating more on instinct. But my instincts are screaming, "This is an incredibly bad deal for everybody but Bush, Paulson and a handful of financial elites."
__________
Update: Dean Baker observes,

If the bailout were properly structured, firms would not be lining up to get in. It should be a last resort that involves selling most of the firm to the government, as happened with AIG. If banks are lining up to get in, then the people who designed the bailout should be chased out of town.

"Why They Hate Us"

It's a throwaway line in a rather silly editorial, but hasn't this one worn itself out?

The United States went into Iraq because, even if mistakenly, it wanted to rid the world of a menace. For this, the world hated it.

I would challenge Sebastian Mallaby to find me somebody who hates the United States because it toppled Saddam Hussein, except there is a possibility that if he looks hard enough he'll find... one.

Is Mallaby trying to get invited to a White House dinner?

Perhaps He's On Wal-Mart's Payroll?

Sebastian Mallaby again leaps to the defense of Wal-Mart, castigating Democrats who he claims are aligned with anti-Wal-Mart movements. I have previously noted that Mallaby's thinking on Wal-Mart is muddled. While he is consistent in his message that it's wrong to oppose Wal-Mart, he hasn't otherwise improved his arguments in favor of Wal-Mart. He's changed his source for his argument that WalMart cuts family food bills to one not available online, but which appears to better support his point in relation to poor families. Yet despite this change, he hasn't altered his speculation that Wal-Mart saves shoppers more than $200 billion per year, nor his absurd economic model by which this is the equivalent of a welfare program larger than the food stamp program.

At the tail end of my prior critique of Mallaby, I noted,

All of that said, my objections to Mallaby's idiocy do not mean that I hate WalMart. WalMart wishes to open a store in an armpit of a small town north of Detroit, where despite its wages it will be one of the better paying employers in town, and will provide jobs in an area of high unemployment. If it opens it will cause some local businesses to close, including a small, dismal, run-down K-Mart, the owner of which is putting a lot more energy into fighting WalMart than into measures which might make his business more viable. It will also probably cause the local grocery store to close, but they sold out to a regional chain a number of years ago, and many locals already travel out of town for the better prices and selection available at larger grocery stores in nearby towns. On the whole the net impact on the town and surrounding community will likely be positive.

That small town is about as politically "red" as a town can be - and it is not liberal activists who seek to block Wal-Mart, but several of the leaders of the local business community. The Wal-Mart in my wife's home town wishes to expand its store and be open 24 hours - with its proposal strongly opposed by that politically "red" community, as was its original construction. But perhaps Mallaby doesn't see the same "betrayal of principles" when Republicans oppose and seek to block Wal-Mart stores, as he does with Democrats. But then, what principles does he ascribe to Republican opponents?

"We'll Just Import Them From China"

Sebastian Mallaby has a "What, Me Worry?"-type editorial in today's Post, complaining that our nation doesn't really have a problem with science education - and if it does, that we still don't have anything to worry about.

The story of Gavriel Salvendy [who has advanced post-graduate science education in China], which some might see as an omen of America's declining status, is in fact more subtle. Salvendy has long recruited star Chinese graduate students to Purdue, where he still does most of his research. Of the 18 Chinese who have completed PhDs under his supervision at the Indiana campus, 15 have stayed on in the United States.

Over five years, that's three Ph.D.'s per year who we have successfully imported from China. Yay, us?

As I see it, the problems of science education in the United States include:

• As a society, we have a general disdain for "book learning" and even moreso for the type of person ("geek" / "nerd" / "egghead") who pursues a career in math or physical science.
• We rely very heavily upon foreign students to round out our university rosters in the physical sciences, particularly at the graduate level.
• We are pursuing immigration policies which make it less attractive for foreign students to pursue graduate degrees within the United States.
• Foreign nations are increasingly able to offer their own math and science graduate students an education equivalent to or superior to that which they might receive at a U.S. college.
• We rely upon a sizeable population of well-educated immigrants to perform scentific and engineering work for our nation's companies.
• Foreign workers with science degrees are increasingly able to find quality work without leaving their nations of origin, or battling with the USCIS.
• U.S. companies are finding it less important to bring foreign workers to the United States, as opposed to taking the work overseas.

Fundamentally, our nation doesn't care about science, is increasingly ignorant of basic science and math, and doesn't see the importance of improving. Given his own history of mediocrity, I guess I shouldn't be surprised that Mr. Mallaby has chosen to be the spokesperson for the status quo.

Mallaby writes,

The science lobby should also stop pretending that countries compete the same way companies do. Firms such as Toyota and Ford really do go head-to-head against each other; if Toyota has superior technology, it will steal Ford's customers -- and Ford may even disappear. But if China produces Nobel-quality science, it won't put the United States out of business; rather, Chinese discoveries will help American scientists discover more, too.

Here's a neat new word for Mr. Mallaby to learn: Patent. Mallaby continues,

Equally, Toyota doesn't sell cars to Ford workers, so there's no benefit to Ford's people if Toyota's quality advances. But China does sell to Americans, so whatever makes it more productive has some upside for the United States as well.

Mallaby is mixing his metaphors. Taking a lead in science and technology provides a significant benefit not only to corporations, but also to countries. Even if Mallaby cannot grasp how the producer of the world's best software or electronic goods can provide an economic boon to the nation in which it is headquartered, perhaps he should also consider the desire of the U.S. to maintain a lead in military technology, which is an area where we can't expect nations like China to sell us their secrets. You can't count on being able to perpetually import other nation's brain power in order to remain competitive.

High Taxes Are Good

Or, at least, that's the message I infer from Sebastian Mallaby. You see, high taxes - preferably focused on the working poor - creat a significant pool of revenue which can be used to subsidize products for all of society, and which can be used to devise programs to help the poor. Sure, it would lower income for the working poor, but between the new social welfare programs and lower prices they may well end up better off. And the rest of us would enjoy lower prices!

Well, perhaps he had something else in mind, but that is more or less his argument as to why WalMart should be deemed a "progressive" company. It's just that instead of having the government tax the wages of WalMart employees, Walmart offers them a lower wage, shares the wealth with the rest of society (like a Robin Hood who rejects "class warfare"), and sponsors its own programs to help the needy. (These new programs could be less targeted at the needy than existing programs - after all, why should only the needy benefit from such programs?)

Mallaby presents a former economic advisor to John Kerry, whose analysis is claimed to show that WalMart saves shoppers (not poor shoppers - all shoppers) $50 billion per year on groceries. (That figure is apparently extrapolated from the savings across all retailers the economist attributes to WalMart's prices and their downward pressure on the competition.) Mallaby then variably speculates that this means that WalMart shoppers save between $200 and $250 billion annually on all of their purchases (despite presenting no evidence that WalMart's effect on prices is the same for non-food items as it is for food). Yet if you recognize WalMart's market share of about 15%, give them a generous bonus of 1/3 to reflect their remaining geographic limitations, their direct share of that speculative savings figure is $40-$50 billion, with the rest coming from lowered prices at other retailers, many of which pay better, offer better benefits, and some of which are even unionized.

Mallaby then speaks of the depression in worker wages caused by WalMart, but unlike his prior, wacky and wild attribution of all retail savings directly to WalMart and fabrication of a multiplier to "represent" all WalMart products, he gets cautious - "Arindrajit Dube of the University of California at Berkeley, a leading Wal-Mart critic, has calculated that the firm has caused a $4.7 billion annual loss of wages for workers in the retail sector. This number is disputed...." Mallaby then contends that other retailers also pay employees poorly. By this point in the column, most readers looking for actual data have probably given up in disgust, saving themselves from this additional disappointment. Mallaby presents no data to back up his notion that WalMart doesn't depress wages, nor does he speak to how WalMart's measured effect of causing its competitors to lower prices might depress wages at other stores. (But then, you didn't really think that Mallaby read, let alone understood, the economic paper he cited earlier, did you?)

And, Mallaby assures us, even if workers are down $5 billion at WalMart, that's "dwarfed" by the $50 billion that everybody saves buying food at all food retailers... well, no, he's still not acknowledging that WalMart doesn't sell all of the nation's food. And despite his excess of caution on wage deflation, Mallaby speculates that even lower wages are still a greater good, because low-wage workers can shop at WalMart and may even be better off due to the low prices which result in part from their low wages. Seriously.

Indeed, Furman points out that the wage suppression is so small that even its "victims" may be better off. Retail workers may take home less pay, but their purchasing power probably still grows thanks to Wal-Mart's low prices.

But let's not think Mallaby is "unfair" - while ignoring the effect WalMart has on its competitors' wages, he is willing to look at the wages offered by suppliers:

To be fair, the $4.7 billion of wage suppression in the retail sector excludes Wal-Mart's efforts to drive down wages at its suppliers. "Wal-Mart: The High Cost of Low Price," the new anti-Wal-Mart movie that's circulating among activist groups, has the requisite passage about Chinese workers getting pennies per day, sweating to keep Wal-Mart's shelves stocked with cheap clothing. But no study has shown whether Wal-Mart's tactics actually do suppress wages in China or elsewhere, and suppression seems unlikely in poor countries. The Chinese garment workers are mainly migrants from farms, where earnings are even worse than at Wal-Mart's subcontractors and where the labor is still more grueling.

Ah yes - the "sweatshops are good, because it is better than starving in the country" argument. Mallaby's next column, I expect, will call for a return to the labor policies of the industrial revolution and praise the positive economic effect of companies like Triangle Shirtwaist. No, wait, it will be about communism as a boon to capitalist markets - how great it is that there are still hundreds of millions of people living in totalitarian communist regimes, where they will continue to provide us with a pool of cheap, invisible sweatshop labor for the indefinite future. And how we can plead innocent to our role in perpetuating that regime by retorting that the Communist Party, not the market, sets the value of labor.

And then there's WalMart's high percentage of workers on Medicare. Mallaby presents yet another astounding claim - progressive and capitalist thinkers alike should applaud the fact that its workers are government-subsidized:

Wal-Mart's critics also paint the company as a parasite on taxpayers, because 5 percent of its workers are on Medicaid. Actually that's a typical level for large retail firms, and the national average for all firms is 4 percent. Moreover, it's ironic that Wal-Mart's enemies, who are mainly progressives, should even raise this issue. In the 1990s progressives argued loudly for the reform that allowed poor Americans to keep Medicaid benefits even if they had a job. Now that this policy is helping workers at Wal-Mart, progressives shouldn't blame the company. Besides, many progressives favor a national health system. In other words, they attack Wal-Mart for having 5 percent of its workers receive health care courtesy of taxpayers when the policy that they support would increase that share to 100 percent.

Is Mallaby the world's dumbest man? No, more likely he is regurgitating a set of speaking points he received from WalMart. (One wonders at time if he is paid to produce nonsense like this, or if it is just so easy to regurgitate a memo or press release somebody hands to him that this is typical of his output.)

Companies like Wal-Mart are not run by saints. They can treat workers and competitors roughly. They may be poor stewards of the environment. When they break the law they must be punished.

Let's be blunt. Companies like WalMart do as companies are wont to do. They seek to maximize market share and profits. In the absense of regulation, we see the industrial revolution, we see Union Carbide's plant explosion in Bhopal, we see children and other workers working six or seven long days per week in sweatshops throughout the developing world, we get mercury poisoning in Minamata bay, we see a fifty-mile long benzene slick flowing downstream from a 100 ton benzene spill.... And, as Enron, WorldCom, Tyco, and similar companies have demonstrated, some companies will actively defraud their customers, clients and shareholders, and will permit management to treat the corporations assets as a personal piggy bank to support excess that even the Shah of Iran and Imelda Marcos might have denounced as debauchery. Now I recognize that some people will look at all of that and say "It's still better than having government regulate business," which is a point where we will have to agree to disagree.

All of that said, my objections to Mallaby's idiocy do not mean that I hate WalMart. WalMart wishes to open a store in an armpit of a small town north of Detroit, where despite its wages it will be one of the better paying employers in town, and will provide jobs in an area of high unemployment. If it opens it will cause some local businesses to close, including a small, dismal, run-down K-Mart, the owner of which is putting a lot more energy into fighting WalMart than into measures which might make his business more viable. It will also probably cause the local grocery store to close, but they sold out to a regional chain a number of years ago, and many locals already travel out of town for the better prices and selection available at larger grocery stores in nearby towns. On the whole the net impact on the town and surrounding community will likely be positive.

But that doesn't mean I have to buy into Mallaby's "with friends like these" defense of WalMart.

Okay, so what is he trying to get at?

In an editorial entitled Do Seniors Need Saving? Sebastian Mallaby carries on at length on the question, "Can we expect citizens to weather the challenge from India and China without some new form of government help, especially when the baby bust is threatening to shred traditional welfare programs?". Which begs the question, exactly who is proposing that we enact "some new form of government help" for seniors? (Is this what happens when he writes a column without the aid of a press release from an advocacy group, or is there actually something behind this?)

Mallaby on DDT

Today, Sebastian Mallably argues that the E.U. needs to give Uganda room to implement a DDT program.

DDT also helped to eliminate malaria in Europe and parts of Asia, and in 1970 the National Academy of Sciences estimated that the chemical had prevented 500 million deaths. And yet, despite that astounding number, DDT has all but disappeared from the malaria arsenal. Some 500 million people still get the disease annually, and at least 1 million die, but the World Health Organization refuses to recommend DDT spraying. The U.S. government's development programs don't purchase any of the chemical. In June President Bush made a great show of announcing a new five-year push against malaria; DDT appears to play no part in his plans.

But the worst culprit is the European Union. It not only refuses to fund DDT spraying: In the case of at least one country, it has also threatened to punish DDT use with import restrictions.

My initial reaction to this editorial was to be, well, skeptical. Four years ago when I was in Thailand not only was the country full of tourists from E.U. nations, many of the buildings in which I stayed were clearly marked with the last date they had been sprayed with DDT. What makes Uganda different, such that Thailand can spray residential structures but Uganda supposedly cannot - given that Mallaby purports this debate to be over "the limited spraying of houses" and not widespread agricultural spraying? It didn't take much Googling to find first that this is something of an old story, breaking in February, and second that the issue is not about DDT spraying of itself, but of residue on food exports:

Unless proper safety measures are put in place, the spraying of DDT to kill malaria-carrying mosquitos could severely hurt Ugandan exports of fruit, produce and other flora to EU countries, officials said.

"If Uganda is to use DDT for malaria control, it is advisable to do so under strictly controlled circumstances and in consultation with other countries in the region which may be affected," the EU said in statement released here.

It said that if Kampala began DDT spraying, it would be forced to set up a monitoring system to test for the presence of the pesticide in exports.

The chief of the EU mission in Uganda, Sigurd Illing, said there could be dire consequences for outgoing trade with Europe -- which accounts for more than 30 percent of Uganda's total exports -- if DDT was detected in such goods.

So the E.U. has warned Uganda not that it faces a ban on imports if it implements DDT, but that it should coordinate its spraying with neighboring countries, and that if its spraying raised DDT levels above certain limits its produce would not be permitted into E.U. markets. Now Mallaby may well believe that concerns about DDT in the food supply are overblown, but there's a world of difference between threatening a country with trade sanctions if it uses DDT and applying the same standards to that country's exports as presently apply to every other nation which chooses to use DDT. The U.S. has limits on DDT residue on food imports - what's the difference, other than the fact that we don't import appreciable quantities of Ugandan produce?

The vehemence of Mallaby's position would seem to suggest that DDT is a miracle cure for Malaria, and that no alternative is available. DDT is, to put it simply, a pesticide. There are many alternative pesticides available and, even accepting that many concerns about DDT are overblown, many of those present significantly lower environmental concerns than those acknowledged to result from widespread DDT use. But DDT is cheap - and as long as cost is an option it will remain the only viable pesticide in parts of the developing world. Mallaby does not claim that the E.U. doesn't subsidize spraying programs involving alternative insecticides, despite the relevance of that question to his overall claim. Personally, Idon't think he bothered to look into the issue in sufficient depth to either know that there are alternatives or what the E.U.'s policies are toward mosquito spraying programs that don't involve DDT.

As for Mallaby's notion that it is unfair for western "food-safety paranoia" to get in the way of the developing world's ability to export what the west deems to be contaminated food? I think if he pressed that issue he would find that food safety isn't just a "liberal" or "environmentalist" issue, but crosses the political spectrum. We regulate a lot of chemicals, and arguably many of the limits we impose are arbitrarily low - but it's either naive or dishonest (perhaps in Mallaby's case, a little of both) to confuse "erring on the side of safety" with "paranoia". (A "libertarian" solution might be to have DDT content labels on fruit, such that consumers can make their own decision - but Mallaby presumably would insist that consumers be kept in the dark on the basis that their concerns are "paranoid" and thus need not be respected.)

Class Mobility

Uh oh - Sebastian Mallaby is engaging in class warfare.

Now, you want to hear something really bad? The poorest fifth of Americans has experienced a rise in incomes of just 3 percent over the past three decades. The real problem in America is not about the middle class. It's about the underclass; about Americans who lack the skills and habits to advance at all.

Hey - wait a second. Aren't we supposed to pretend that we're a "classless society", that everybody is "middle class", and that the richest of the rich aren't really any different from the rest of us? Perhaps I should consult Ann Coulter to see if Mallaby should be indicted for treason.

This comes on the heels of an observation by Mallaby which I deem, at best, banal:

This is more than merely heartwarming. It takes the ugliest monster in American society and smacks it on the head. Inequality in the United States is sharpening, and income increasingly reflects parental status. And while this may be linked to bad Republican tax policy, it has a lot more to do with bad education policy, defended for the most part by interest groups connected to the Democrats.

As you might expect from such a statement, Mallaby essentially argues that the real problem in our society is inequity in our K-12 schools, apparently best overcome by bashing teachers unions and public school boards. (Never mind that performance in charter schools and in private or parochial schools accepting vouchers is on the whole no better, and in some cases is worse, than that of their public counterparts). But the root of why kids end up with similar earnings as their parents has very little to do with the policies of either major political party and far more to do with modeling - kids pick up a lot from their parents. Does Mallaby think it is a mere coincidence that the children of college graduates are more likely to attend college, the children of teachers are more likely to become teachers, the children of doctors are more likely to enter the medical professions.... Even within "bad" school districts, you will find trends of that sort.

And no amount of improvement in the Los Angeles Public Schools, directly or through charter schools, is going to magically provide the same type of opportunity that wealthy kids in our society are born into. At the extremes, the hardest working kid at one of Kushner's schools isn't going to be admitted as a legacy into Harvard or Yale on middling grades, and he isn't going to be able to follow his father's footsteps into government. She's not going to be able to hire a publicist and a plastic surgeon, repeatedly create a public spectacle of herself, and end up starring on a pseudo-reality TV show on the basis of her manufactured fame. And, in more mundane terms, he is not likely to be welcomed into the "CEO Class", even if he finished college and attends a good business school.

News Flash: Children learn a great deal from their parents, however good or bad their public schools. You can't expect a child's school to magically cure a lousy, unsupportive home environment. Nor can you expect a public school (or private school, or charter school) to create limitless opportunity for every student, entirely divorced from what their parents do (or do not do) for a living.

Mallaby concludes,

Education is the last, lumbering public monopoly, and it is not performing: Only 23 percent of blacks and a fifth of Hispanics graduate from high school prepared for a four-year college; a quarter of all college freshmen require some sort of remedial course. So long as this is so, the alarming wealth gap in this country will remain unbridgeable, no matter whether tax policy is designed by Republicans or Democrats

But where is his evidence that public schools are not performing at least as well as the alternatives? Citations to exceptional examples do not prove the case, and the statistical evidence to date suggests the opposite - that on the whole charter schools underperform public schools. The most strident supporters of vouchers, particularly where parochial schools qualify to receive them, typically oppose requiring the schools which accept vouchers to administer the same standardized tests which are supposedly essential to measure performance in public schools. That suggests first that their goals are something other than improvement in education, and second that they don't expect objective measures of performance to lend support to voucher programs.

I'm no fan of public schools. But I'm even less a fan of proposed "magic answers" to persistent problems which are based on knee-jerk politics and guesswork. In my opinion, Mallaby's editorials often read like reworked press releases from lobbying groups seeking to advance a political agenda, presenting broad generalizations which seem to be backed with little thought or evidence, and this doesn't seem to be an exception.

More on "Private" Social Security Accounts

Today, Sebastian Mallaby adds to the debate on "private" Social Security accounts, noting,

The contributions will be mandatory; the investment options will be restricted; and retiring account holders may be required to spend their savings on annuities.

If they truly are going to force retirees to buy annuities, it sounds like a disastrous idea. After extracting year after year of "management fees" for handling the account, the companies approved to manage these "privatized" retirement accounts will also be permitted to extract the huge commissions typically associated with annuities? If retirees are going to be forced to purchase annunities, why not have them purchase them from the outset? The system Mallably describes sounds like a recipe for legalized churning.