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Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: Biden’s BlackRock hires, an “endorsement” of Neera Tanden, Christine Lagarde’s follies, (too much) office space, and measuring inflation.
Pushing the Corporatist Agenda
Yes, yes, I’m a pessimist, but I suspect that those readers of the Wall Street Journal who believe that a company’s primary function is to advance the interest of shareholders ought to be wary about a couple of Biden’s hires, despite backgrounds at least partly in finance.
Wall Street bankers, and in particular those from Goldman Sachs Group Inc., have long held senior positions in the White House. Under President-elect Joe Biden, such roles are going to executives of BlackRock Inc.
A former Goldman executive held the Treasury secretary post in three of the last four administrations, but the firm is absent so far from the White House this time. Instead, two executives who have worked at asset-management giant BlackRock will be the senior Wall Street representatives.
Mr. Biden is expected this week to name BlackRock’s head of sustainable investing, Brian Deese, to run the National Economic Council, said people familiar with the matter. Adewale “Wally” Adeyemo, a former chief of staff to BlackRock’s chief executive, was named Tuesday as the No. 2 at the Treasury Department.
“By picking folks with deep ties to large asset managers, the administration can help assuage financial executives’ concerns. It sends a clear signal to the industry to breathe easier: They can plan for stability without likely facing massive new regulatory or tax risks,” said Tyler Gellasch, executive director of investor trade group Healthy Markets Association.
I’m not so sure, at least when it comes to regulation. A quick glance at this report from Bloomberg indicates why:
Deese, who joined BlackRock in 2017 to oversee the company’s sustainable investment strategies, was a senior adviser to Obama on climate, conservation and energy, and also served as deputy director of the NEC.
In a letter to clients earlier this year, BlackRock wrote (my emphasis added):
Where we have the greatest discretion – in portfolio construction, our active and alternatives platforms, and our approach to risk management – we will employ sustainability across our investment process. Where we serve index clients, we are improving access to sustainable investment options, and we are enhancing our stewardship to make sure that companies in which our clients are invested are managing these risks effectively. We will also work with a broad range of parties – including asset owners, index providers, and regulatory and multilateral institutions – to advance sustainability in finance.
Given Deese’s responsibilities with BlackRock at that time, it is hard to read those words and yet still believe that his appointment is reason for investors to think that they don’t have to worry about significant new regulatory risks.
I note from his BlackRock bio that Deese’s advisory role with Obama included “helping to negotiate the Paris Climate Agreement,” an accord that Biden will ensure that the U.S. rejoins. Throw in other things that Biden has said about making “climate” central to his administration and the idea that companies will be able to dodge the heavy hand of the government seems inconceivable. Somehow, I don’t think that Deese is the man to push back.
Reasonable people can, of course, disagree over whether “sustainable” investing makes much investment sense (spoiler: it doesn’t, although it can be a nice business for the firms that push such products), but Deese’s appointment will almost certainly mean that more state power is thrown behind the enforcement of “socially responsible” investing (SRI), something that BlackRock and others have already been attempting to do through their investment clout.
In a piece back in May, I wrote:
Investors are free not to invest with BlackRock, but because BlackRock is so large, that doesn’t eliminate the problem that [its new emphasis on SRI] could pose. Before the coronavirus crisis began, BlackRock had over $7 trillion under management. If a company doesn’t play by BlackRock’s [SRI] rules, it risks shutting itself off from a potentially substantial source of capital and/or support for its share price. If a company’s management decides that it doesn’t want to run that risk, it may have to adopt policies that damage the business’s long-term prospects. That might help the share price, at least for a while, but it is hardly a desirable outcome.
Even if a company has no interest in having BlackRock as a shareholder, BlackRock may have an interest in it. Once BlackRock takes a stake in a company, the chances are that it will apply pressure on management, as any shareholder has the right to do. Most shareholders only do so to increase their return, but BlackRock, whatever its claims about the connection between “sustainability” and longer-term profitability, has other targets in mind.
Given the groundwork we have already laid and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management when companies have not made sufficient progress.
“Sustainability,” of course, is central to today’s notion of socially responsible investing. It is a key element in the “E” (environmental) of ESG, the most popular SRI yardstick (the “S” stands for social, the “G” for the infinitely less controversial governance). ESG investing in turn is inextricable from the notion of “stakeholder capitalism.” Stakeholder capitalism — an increasingly popular notion among business “leaders” as well as activists, NGOs, and the like — is the idea that a company owes its primary obligation not to its shareholders (or, to put it more bluntly, its owners) but to hazily defined “stakeholders” who are defined by, well, it’s not quite clear whom. Ambiguity — and the discretionary power that comes with it — is part of the game.
Biden himself has made his views on shareholder primacy all too clear: He has called for “an end to the era of shareholder capitalism” and dismissed the argument that a company’s primary responsibility is to generate returns for shareholders as “untrue and a farce.”
Stakeholder capitalism itself is, in turn, as I have argued before, an expression of corporatism, a hydra-headed ideology with origins in the premodern, and a very mixed past — sometimes benign (it influenced the formation of West Germany’s social market economy) and sometimes not (it was an important element in pre-war fascist theory). The different forms corporatism has taken make it tricky to define with precision, but they share a common core: the conviction that society should be organized by and for its principal interest groups — let’s get back to that word “stakeholders” — intermediated by, and ultimately subordinate to, the state.
The degree of that subordination is rarely made clear. Part of the essence of corporatism is the importance attached to at least the illusion of cooperation. Its underlying structure can be compared with an orchestral performance, a concert. But every concert needs a conductor. The only question is how domineering that conductor will be. Deese may be subtler than some, but investors should be under no illusion: An era of climate-driven regulation is coming. Some of it will be “voluntary,” some of it will be determined by regulators or parastatal institutions such as central banks, and some of it will come from the state, whether by legislation or, more likely under current circumstances, administrative fiat.
And Deese is not the only BlackRock-connected individual likely to be included in Biden’s team.
Adewale “Wally” Adeyemo, a former chief of staff to BlackRock’s chief executive, was named Tuesday to be the No. 2 at the Treasury Department . . .
Tom Donilon, chairman of BlackRock think tank arm BlackRock Investment Institute — and brother of Mr. Biden’s chief political strategist on the campaign trail, Mike Donilon — had been in the running for the position as Central Intelligence Agency director, people familiar with the matter said. But the BlackRock executive recently said he wanted to stay in the private sector, according to other people familiar with the matter.
The same is true of Fink.
Mr. Fink was on the shortlist to be Treasury secretary on Hillary Clinton’s cabinet, said people familiar with the matter. He has told board members and senior executives this year that he wasn’t going to Washington and was committed to staying at the firm for years.
Nevertheless to believe that Fink’s ability to bring companies into line will not be enhanced by his connections with the new administration is not only to be remarkably naïve, but also to misunderstand how corporatism — where there are no clear boundaries between the private and public sectors — works.
All that said, the recruitment of former BlackRock staffers is reassuring in the sense that, at an extraordinarily difficult time for the economy, Biden will be able to benefit from their technical expertise. Nevertheless, given the centrality of climate and, I suspect, broader “stakeholder” issues, to the incoming administration, those who are expecting a light regulatory touch, will be disappointed.
As for taxes, that’s going to depend more on voters in Georgia than anyone else, I reckon, at least for now.
Around the Web
For Neera Tanden, an “endorsement” of sorts from Luke Thompson, writing in The Spectator US:
[T]anden’s temperament really sets her apart as the GOP idyll of a Biden OMB. Designed originally to provide Congress with budget estimates, since the Nixon administration OMB has played a central role in advancing the policy objectives of each administration. It is the place in the Executive Office of the President where proposed regulations from the cabinet departments get checked and cleared for conformity with the president’s vision.
As a practical matter, that means the OMB head has two jobs: making policy tradeoffs that keep the president’s coalition happy, and protecting the president from any embarrassing consequences of regulations. To do that job well, an OMB head needs to have a comprehensive sense of his or her party’s coalition, the ability to set priorities between competing claims, and a close attention to detail.
Lacking these traits, Tanden will fail spectacularly. A media creature and a fundraiser, Tanden is easily distracted. She habitually rage-tweets, often at all hours of the night, selecting her targets with the precision of a blindfolded drunk throwing darts. She routinely antagonizes the left wing of the Democratic party, attacks the character of the Republican senators whose votes she will need to be confirmed, and chases momentary fixations as a matter of course . . .
Christine Lagarde has enjoyed a remarkable career. She held a number of senior ministerial roles in her native France, culminating in a period as finance minister during the euro zone crisis, when she distinguished herself with the cheery admission that the early bailouts were a breach of the EU treaty, not, in a sense, her only brush with the law. She then became managing director of the IMF. Among the highlights of her term was her praise for the way that the (just deceased) King Abdullah of Saudi Arabia had supported women’s rights in the kingdom. Who knew? After the IMF, came the presidency of the European Central Bank (ECB) despite a complete absence of any central banking experience.
Sometimes that shows.
The European Central Bank’s chief economist made dozens of private calls to banks and investors after policy meetings this year, an unusual attempt to buttress the central bank’s sometimes-puzzling public communications, according to three people with whom he spoke and a review of his schedule.
The calls began in March, after ECB President Christine Lagarde flummoxed traders by suggesting at a news conference that the central bank wouldn’t prop up Italy’s bond market. Italian stocks and bonds slumped. Hours later, Philip Lane, the chief economist, placed separate calls to 11 banks and investors in which he sought to clarify the message.
Former central bank officials said the calls risked privileging big investors with sensitive information. Typically, central bankers carefully control their utterances and try to make sure all market participants get information at the same time. Public diaries show that neither Ms. Lagarde’s predecessor, Mario Draghi, nor his chief economist, Peter Praet, made similar calls during their last two years in office.
Office Space (not in a good way).
Manhattan hasn’t had this much available office space since 2003, according to a report by Colliers International.
The availability rate rose to 13.5% in November, with more companies looking to sublease their offices, Colliers said.
The pandemic has emptied out Manhattan offices and prompted companies to reconsider how much space they need as they try to trim costs. That’s weighed on the shares of prominent New York building owners SL Green Realy Corp. and Vornado Realty Trust.
The conventional wisdom (for now) is that we are living in an age where inflation is nothing to worry about, or, indeed, that the absence of inflation is much more of a problem.
And yet, check out this Financial Times headline:
Eurozone consumers hit by rising goods costs despite negative inflation
Here’s an extract from the FT’s story:
The cost of many goods and services which have become popular with eurozone consumers during the coronavirus pandemic is rising far faster than the bloc’s overall depressed level of inflation, according to an analysis of official data by the Financial Times.
The single currency area entered deflation territory in August according to its headline measure of price change, and European Central Bank president Christine Lagarde has warned that she does not expect to see it return to expansion in the early months of next year. . . .
But this downward trend in prices is partly driven by a drop in the cost of goods and services, of which consumers are either buying less or have stopped purchasing altogether, because of changes in lifestyle due to the pandemic, FT analysis suggests.
For example, the price of car fuel fell 12 per cent year on year in October, air tickets were down 15 per cent and train fares dropped 4.5 per cent. Hotel rooms and international package holidays also became cheaper than last year. But people stuck at home because of restrictions and social distancing measures cannot take advantage of these savings.
Meanwhile the prices of significant regular budget items such as food are increasing by around the ECB target inflation rate of just below 2 per cent. The prices of education, medical services, bicycles and care home services are all also rising on an annual basis.
The analysis suggests that the overall figure which policymakers use to shape their decisions does not fully reflect the way in which many people are experiencing price changes in the real economy….
In a bid to take into account the shift in spending patterns, the ECB has calculated an experimental inflation index. It has recorded a reading of at least 0.2 percentage points higher than the headline figure in every month since April. In August, the latest month available, this would have prevented eurozone inflation from falling into negative territory . . .
The experimental measure “by design . . . comes closer to the rate of change in the prices of items actually purchased by consumers during this period”, the ECB said. The alternative inflation measure “intuitively reflects consumers switching from lower-than-average inflation categories, such as fuel for transport, to higher-than-average inflation categories, such as food items”.
To sum up: Wage growth in the euro zone is unimpressive, the savings yield is less than nothing (sometimes in nominal as well as real terms) and some essentials, at least, are going up in price. I’m not convinced that this is going to end terribly well. But as I wrote at the beginning, I’m a pessimist.
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