Why Warren’s Witch-Hunt Won’t Work
The “blood” and “scalp” are those of Robert Litan, distinguished center-left economist and former high-level official of the Clinton administration Justice Department and Office of Management and Budget, who until recently was non-resident senior fellow at the liberal Brookings Institution. Litan, a friend of mine with whom I have engaged in conversations and civil disagreements, committed the “sin” in Warren’s eyes of going against the gospel of neverending regulation. He and coauthor Hal Singer, an economist and senior fellow at the Progressive Policy Institute, authored a report that questions whether the costs exceed the benefits of the Department of Labor’s proposed “fiduciary rule” for IRAs, a regulation that I and others have called “Obamacare for Your IRA.”
Even though Litan disclosed on the front page of the paper and prominently in his testimony before Congress that the study was funded by the Capital Group, a provider of investment management services, Warren complained to Brookings that Litan wasn’t specific enough in his disclosures. Never mind that, as Fund points out, “it was Senate candidate Elizabeth Warren who, in 2012, played hide-and-seek with reporters for months when they asked for the names of her corporate legal clients.” Brookings, home to many former Democratic officeholders, caved and, according to press accounts, sought Litan’s resignation and received it.
Yet it’s not just Litan’s scalp that Warren and her allies are really going for. They want the scalps of the vast majority of American consumers and investors, because they’re afraid of letting Americans use the brains under their scalps to make financial decisions. Though much of the coverage of DOL’s rule has characterized it as more mandated disclosure, in fact it is Litan who makes the case for better disclosure to improve options for consumers. Warren and the DOL bureaucrats, by contrast, argue that disclosure has reached its limits due to what they regard as Americans’ inherent intellectual limitations.
As Warren wrote in 2008 when she was a professor at Harvard Law School, “cognitive limitations of consumers … put consumers’ economic security at risk.” Warren and her co-author Oren Bar-Gill penned some other choice passages about consumers and their “cognitive limitations” — as apparently opposed to the lack of those limitations by Warren, Bar-Gill, and the bureaucrats they have anointed — in their 2008 University of Pennsylvania Law Review article “Making Credit Safer.” Warren and Bar-Gill proclaimed that not only are “many consumers  uninformed and irrational,” they are also uneducable. The authors refer frequently to the “limits of learning” and “why getting smarter collectively does not work.”
As described by journalist Michael Patrick Leahy, Warren and Bar-Gill “argued that American consumers are, in essence, too simple-minded to understand credit and therefore must be protected by the federal government.”
This 2008 article premised on the supposed stupidity of consumers, and the need for a government intellectual elite to limit their decision-making, outlined what would become the Consumer Financial Protection Bureau, which was created when the Dodd-Frank “financial reform” law was rammed through Congress two years later. In addition to its lack of accountability to Congress through the appropriations process — lest it become subject to the elected representatives of voters with “cognitive limitations” — the CFPB also has the power to ban not just “unfair” and “deceptive” lending practices, but loans or credit terms it deems “abusive” to cognitively-impaired consumers. (Because CEI believes consumers can think for themselves, and because we believe that the structure of the CFPB is abusive to constitutional guarantees of accountability in government, we are suing to overturn the CFPB for structural violations of the Constitution.)
And now with the fiduciary rule, the DOL has put forth a rationale similar to that of Warren for the CFPB, explicitly premised on what bureaucrats deem to be the stupidity of American retirement savers. As I have written previously, the DOL proposed rule comes right out and says in its first few pages that most Americans “can’t prudently manage retirement assets on their own” and that improved disclosure won’t help that much. So the DOL rule would massively increase liability and fines for financial professionals who handle 401(k)s and IRAs, unless they choose assets and an investing strategies from an approved DOL list.
“Disclosure alone has proven ineffective,” proclaims the rule. “Most consumers generally cannot distinguish good advice, or even good investment results, from bad.” In fact, proclaims the DOL, “recent research suggests that even if disclosure about conflicts could be made simple and clear, it would be ineffective — or even harmful.”
In their paper, Litan and Singer challenge these points and stand up for American savers’ intelligence and right to make investment choices. “At a minimum, before undertaking a major overhaul of the retirement savings market, wouldn’t prudence call for at least trying a better disclosure standard first, before abandoning enhanced disclosure entirely?” they ask.
To address the DOL’s main complaint of investors not knowing that brokers can receive additional payments from firms that manage mutual funds and annuities, Litan and Singer propose written statements to be given to investors of the exact amount brokers will be compensated by these firms when investors buy these products. I’m not sure I would agree the costs of the regulation they propose would justify the benefits. But it would certainly be better than the current proposed DOL regulation that would likely result in a massive reduction in personalized investment guidance, and that Litan and Singer estimate credibly could cost savers $80 billion over the next decade.
More importantly for our system of self-government, a disclosure approach would respect consumers and investors as rational adults capable of making decisions for themselves. What Warren’s feud with Litan really exposes is a dispute among progressives — as to whether choice and competition can be improved by regulation or if choice and competition represent market failures themselves. Throughout his career, Litan has always fought for the ideal of competitive markets and sovereign consumers even if — as in his role in pursuing the Microsoft antitrust case as a Clinton DOJ official — he championed interventionist approaches that libertarians would oppose.
Fortunately, Litan’s brand of left-liberalism that respects consumers’ intelligence still shows signs of life. Ninety-six House Democrats, including some like Rep. Gwen Moore (D-Wis.) who are decidedly in the progressive camp, recently wrote the DOL arguing that “It is vital that the proposal doesn’t limit consumer choice and access to advice, have a disproportionate impact on lower or middle-income communities, or raise the costs of saving for retirement.” These members should join their Republican colleagues in freezing funding for implementation of the rule until it is rewritten to address these vital transpartisan concerns.
Competitive Enterprise Institute Research Associate Rahul Gangan contributed to this post.