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Cost-Benefit analysis and Voldemort

Until quite recently, Robert Litan was a nonresident senior fellow in the Economic Studies Program at the Brookings Institution, a bipartisan Washington think tank with a sterling reputation. The Institution’s website describes him thus: ”a widely recognized expert in regulation, antitrust, finance, among other policy subjects.”

But he is no longer a fellow there, because he had the misfortune to disagree with Senator Elizabeth Warren.

No Proper Risk Assessment

The subject of the criticism, as it happens, was financial regulation, specifically new rules proposed by the Department of Labor (and supported by Senator Warren) that would impose fiduciary obligations on brokers and financial advisors who provide advice for IRAs.  A fiduciary obligation, of course, would be a big step up from the present level of obligation under SEC authority. The latter holds merely that those recommendations must be “suitable” for investors, judging suitability by income, assets, and expressed risk preference. 

Litan, first in a paper co-written with Hal Singer and later in Congressional testimony restating the gist of that paper, maintained that the Department of Labor has not done a proper cost-benefit assessment of the fiduciary obligation rule.

Apparently, just as Voldemort is the he-who-must-not-be-named of the Harry Potter world, the balance of costs and benefits is now a that-which-must-not-be-discussed of the world of financial regulations.  Because Litan did discuss it, he has lost his position with Brookings, due to the intercession of Senator Warren combined with the fecklessness of the leadership of that famous institution.

Attacks Instead of Substance

Warren’s response to Litan’s argument didn’t meet it on its substance at all. She didn’t say, “yes, the Department of Labor already considered all these points and reasonably decided that the benefits of the rule still outweigh the negatives.” Nor did she say, “he’s right on the procedural issue, but if the Department had done a better cost-benefit assessment, it would nonetheless have shown a positive balance, and here is why….” Nor again did she say, “risk-benefit analyses aren’t all they’re cracked up to be, and in such a situation as this we should ignore them.”

Instead of saying anything like that, she employed a standard response of someone with a very weak case on the merits: she attacked the person on the other side of the debate.

Likewise, in the closing days of 2013 The New York Times ran an article criticizing two prominent scholars on the theory that they had sold out to “Wall Street” (as the headline writer put it), or to the “energy companies and traders,” as the author of the article, David Kocieniewski, put it.  The story/analysis focused on these scholars, Craig Pirrong and Scott Irwin, because they had taken public positions at odds with a then-fashionable bit of scare mongering about the consequences of speculation in the energy markets.  They were, so to speak, tranquil about speculation. And that tranquility was not to be allowed. 

But Kocieniewski’s article didn’t contend that they were wrong on the facts they cited, or wrong on the inferences they drew from those facts. No, he argued that their views shouldn’t be heard, because they were hired hands – the hirelings of those evil speculators.  He attacked the men, not the ideas. For Kocieniewski to do this was a sign of intellectual weakness, a failure to make a proper case on the merits – just as it is when a sitting Senator does it.

Final Thoughts

Of course it is more dangerous when a sitting Senator does it. 

This looks very much like a civil war on the left side of the political aisle. The Brookings Institution itself has a lot of connections with a certain politically prominent family that one thinks of as center-left. Laura Tyson, once a key economic advisor to President Clinton, is nowadays a member of the board of Brookings.  The president of the organization is Strobe Talbott, who was a Deputy Secretary of State in that distant era.  Litan himself was the deputy assistant attorney general who supervised the first Microsoft litigation, during Clinton’s first term – the one that resulted in a consent decree.

This is the sort of person whom Warren considers it necessary to silence?  

Yes. It is a fair inference that Warren is carrying water for Bernie Sanders, and that Litan as a target is serving as a surrogate for a quite recent Secretary of State. 


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