Tuesday, July 13, 2010
Brooks' Blooper With Grinds and Princes
Greetings from beautiful Breckenridge. As some of you already know, I like David Brooks as much as most other liberals reading the NYT. Today's column, though, didn't work entirely. In it, Brooks divides the world between charming princes who siphon off resources from the public fisc on the one hand and the boorish grinds, on the other hand, ie., those awkward introverted nerds who are responsible for the new businesses or techniques that lead to surges in growth and productivity. The blooper in the piece is that Brooks lumps hedge fund managers into the category of grinds who eschew rent-seeking activity at the corrupted crossroads of markets and politics. He writes:"The princes can thrive while the government intervenes in the private sector. They’ve got the lobbyists and the connections. The grinds, needless to say, don’t. Over the past decade, professionals — lawyers, regulators and legislators — have inserted themselves into more and more economic realms. The princes are perfectly at home amid these tax breaks, low-interest loans and public-private partnerships. They went to the same schools as the professionals and speak the same language. The grinds try to stay far away and regard the interlocking network of corporate-government schmoozing with undisguised contempt."
If this were true, it wouldn't explain the success of the 2 and 20 crowd in lining their pockets.
A few months ago there was a piece in the New Yorker by James Surowiecki that clearly explains the way in which hedge fund managers have managed (ie., lobbied) to ensure that billions of dollars of their income are treated instead as capital gains (and thus taxed at the lower rate). Most folks seem to think this is an asinine policy. If you're a lawyer or investment banker, your income from your occupation is taxed at the regular rates. But if you're a hedge fund manager, much of your income is instead treated as capital gains. Now, I'm plainly not a finance maven but if the characterization of the cushy relationship between hedge funds and the politicians in DC is correct, then it doesn't make sense for Brooks to valorize the hedge fund managers for their lack of politesse, let alone a contempt for well-distributed largesse in the form of political donations.
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I think it's fair to say that most people don't know what they're talking about, and not just on this issue.
Posted by: Thomas | Jul 13, 2010 10:47:34 PM
thanks for the gentle but pointed intervention.
FWIW, Surowiecki's article says repealing the tax break "has been endorsed by many figures on Wall Street and by both conservative and liberal economists. At a congressional hearing on the subject, Warren Buffett said, “If you believe in taxing people who earn income on their occupation, I think you should tax people on carried interest.”
If all these folks are wrong, then it still means that Brooks is wrong to think the hedge fund managers don't have a hand in what's going on in DC. They just might have better arguments too, in addition to lobbyists.
Posted by: Dan Markel | Jul 13, 2010 11:05:44 PM
I hope you didn't read that as directed at you in particular--it really was about most people.
I think the cynical but well informed view is that Congress has considered changing this tax law provision as a shakedown--pony up or we'll take (ill-considered) action to harm you.
Posted by: Thomas | Jul 13, 2010 11:12:03 PM
No offense taken, I promise!
Posted by: Dan Markel | Jul 13, 2010 11:17:15 PM
The "reverse class warfare" angle of Thomas's comments here is striking. Congress contemplates requiring wealthy investors to pay a fair rate of tax, and it's a "shakedown." I guess Joe Barton's take on the BP trust fund has legs.
Thomas, have you systematically compared Weisbach's and Victor Fleischer's views on the matter? Does Weisbach trump every argument that Fleischer makes? If you think that's the case, then maybe, just maybe, it's your own bias here that's paramount, not the "objective case" (whatever that might be) for the status quo.
As for the Brooks piece--it's pretty laughable. If anyone doesn't know what they're talking about, it's Brooks. The very wealthy, in general, have changed the tax system to help themselves to an ever larger share of national income over the past few decades. (David Cay Johnston (see, e.g., Free Lunch), Susan Pace Hamill, Larry Bartels, Sam Pizzigatti, and many others have chronicled these changes exhaustively.) Both "princes" and "grinds" have benefited.
Finally, the prince/grind distinction is pretty meaningless--does Brooks have any objective evidence that the "grinds" of the shadow banking system work harder than the "princes" of TBTF institutions? Or that the "grinds" are more intelligent? He lionizes a few grinds who bet against the housing market, but I'm sure there were many others who bet on it. The real distinction is between "minders, grinders, and finders" in both law, finance, and FIRE industries generally. The well-connected "finders" are the big winners in today's economy.
Posted by: Frank | Jul 14, 2010 8:44:29 AM
The carry earned by typical hedge fund managers is mostly short-term capital gains, because hedge funds tend to hold their positions for less than one year. Short-term capital gains are taxed at the same rate as ordinary income. So the current treatment of carried interest is not all that beneficial to hedge fund managers (they do get to avoid about 3% in employment tax and they may recognize some long-term capital gains). The huge winners from current law treatment are the private equity guys--they're the ones who are getting long-term capital gain treatment (because PE funds buy and hold for more than one year).
The big hedge fund tax loophole was with respect to deferred compensation paid by off-shore funds. That loophole was closed years ago in 2008. This suggests to me that PE guys are more politically connected than hedge fund guys.
Posted by: Gregg Polsky | Jul 15, 2010 9:56:36 PM
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