Luigi Zingales: Orphan Ideas

CHICAGO – Since the United States Supreme Court’s “Citizens United” decision, which prohibited the government from restricting independent political expenditures by corporations and unions, concern about business interests’ influence over US elections has been growing. But political contributions are only one reason why business interests have so much power. When it comes to lobbying, money is not everything: ideas play a big role, too. Unfortunately, rather than leveling the playing field, the battle of ideas may skew US politics even further in favor of big business.

The importance of ideas can be seen from the simplest things. Congressional bills aimed at benefiting powerful constituencies are generally given appealing (and misleading) names. For example, a tax holiday to repatriate foreign earnings was called the “American Job Creation Act.” It is easier to sell a bill that (allegedly) benefits everyone in society, not just a small group of its most privileged members.

More importantly, the lobbying of the quasi-governmental mortgage lenders Fannie Mae and Freddie Mac would not have been so successful without the idea of the “ownership society.” How could anyone oppose turning every American into an owner? It is precisely the appeal of such ideas that can make them so dangerous politically.

If ideas are like weapons in lobbying, it is important to appreciate the possible distortions in the market for their creation and diffusion. New ideas are like new drugs. While some pharmacologists dedicate their lives to searching for the cure for cancer, regardless of any monetary incentives, many are driven by the hope of securing a lucrative patent.

Even if researchers themselves are motivated by only the noblest of goals, their need for funding forces them to take into account profitability. That is why we have so-called “orphan drugs,” from which not enough money can be made because they cure rare diseases or diseases (like malaria) that affect people who cannot afford to pay for them.

The process of creating new economic ideas (or new evidence about old ideas) is not that different. Researchers do not get patents, but they get citations, recognition, and promotions. While some researchers dedicate their lives to the search for truth, regardless of any personal gain, many are driven by the hope of academic stardom and the money that comes with it.
Even if researchers themselves are motivated by only the noblest of goals, their need for funding forces them to take into account the demand for ideas. And, if funding is not a major issue, the mechanism of amplification of an idea (and thus its ultimate diffusion) nonetheless depends upon how appealing it is to some lobbying effort.

Consider a great researcher in my field, Michael Jensen. In 1990, he co-wrote a paper about executive pay, arguing that it was not sufficiently linked to performance. Although the authors used an untenable benchmark to determine that the sensitivity of pay to performance was too low, the article was published in a top economic journal, prominently discussed in the Harvard Business Review, and is one of the most cited papers in economics. Fifteen years later, Jensen wrote a paper about the costs of excessive sensitivity of pay to performance. The paper was published in a minor journal and is not very well cited. Why?

Business loved the first paper, because it shifted the conversation from how much executives were paid (a very controversial topic) to how they should be paid (a more technical and less contentious issue). And, since companies cannot make executives pay out of their pockets for bad performance, the shift in focus ended up justifying an increase in pay. There was no similar love for the second paper, which languishes almost unknown, despite its important insights. Jensen, a researcher of the highest integrity and fame, is free to write on both sides of this issue. But the two papers’ asymmetric citation payoff is a warning for young scholars: if they want to get ahead professionally, the position that they should take is clear.

From venture capital to telecommunications, from the construction industry to teachers’ unions, there is plenty of demand for evidence that celebrates the benefits of these industries and justifies (implicitly or explicitly) government subsidies to them. There is no equally organized and active demand for evidence that all of these subsidies are distortionary, waste money, and make companies less rather than more competitive.

Here is perhaps the biggest orphan idea: pro-market does not necessarily mean pro-business. A pro-business agenda aims at maximizing the profits of existing firms; a pro-market agenda, by contrast, seeks to encourage the best business conditions for everyone. Who benefits from evidence that an industry is too concentrated, its profit margins are too high, and consumers are being ripped off?

As with malaria drugs, millions of people would benefit from such an idea, but their ability to pay is limited. And, sure enough, in most of what we economists write – and, more important, in what we teach in business schools – it is hard to tell the difference between being pro-market and being pro-business. The battle against crony capitalism starts in the classroom, and we professors are inevitably implicated. If we are not part of the solution, we are part of the problem.


Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago’s Booth School of Business, and serves on the Committee on Capital Markets Regulation. He is also a faculty research fellow at the National Bureau of Economic Research, a research fellow at the Center for Economic Policy Research, and a fellow of the European Governance Institute. He is the author of A Capitalism for the People: Recapturing the Lost Genius of American Prosperity.

Luigi Zingales: The Greek Tragedy, Act II

CHICAGO – A Greek tragedy is typically composed of three acts. The first sets the scene. It is only with the second that the plot reaches its climax. For current-day Greece, the imposition of “voluntary” losses on the country’s private creditors represents just the end of the beginning. The real tragedy has still to unfold.

On the face of it, the “voluntary” arrangement with creditors might appear to have been a big success. The volume of Greece’s foreign debt has been reduced by more than €100 billion ($130 billion). Greece’s European partners have provided €130 billion in new loans. As a result, Greece has avoided generalized bank failures, and it has been able to continue paying its public employees.

But, despite these trumpeted results, the reality is much harsher. Even with the latest deal, Greece’s debt ratio remains at 120% of last year’s GDP. With a projected drop in GDP of 7% this year and a sustained deficit, the debt ratio would exceed 130% before stabilizing at 120% in 2020.

But even this reduced level is not sustainable. With its population set to contract by 0.5% annually over the next 30 years, even if per capita income in Greece were to rise at the German rate of 1.5% per year, the debt would be difficult to service. Assuming that Greece could borrow at a real interest rate of only 3% (the current level is 17%), the government would need to run an annual 2.6%-of-GDP primary budget surplus (the fiscal balance minus debt-service costs) for the next 30 years just to keep the debt burden stable.

To put that task in perspective, in the last 25 years, Greece ran an average primary deficit of 2% per year. To reduce the debt-to-GDP ratio to 70%, Greece would have to maintain an average primary surplus of 4% for the next 30 years, a level that it has temporarily achieved in only four of the last 25 years.  

If the situation is so dramatic, why are the European Union and the International Monetary Fund celebrating the recent agreement? Simply put, these institutions’ primary objective was to minimize the repercussions that a Greek default would have on the international financial system. Greece, frankly, was not their priority.

Given the reaction in financial markets, they have succeeded. The delay in reaching an agreement enabled most private creditors to escape the consequences of their reckless lending to Greece. Roughly half of Greece’s external debt migrated from the private sector to official institutions.

But the group of lenders that the EU and the IMF wanted to help the most – the banks – only partly reduced their exposure. Between May 2010 and September 2011, the value of Greek sovereign debt held by French banks dropped by €4.6 billion (39%), while German banks reduced their holdings by €2.9 billion (31%) and Italian banks by €530 million (30%). In part, this drop reflects the reduction in market value of the existing liabilities. Thus, on average, banks have sold very little.

But, while private-sector losses have been minimized, at what price? Had Greece defaulted on its debt in 2010, imposing the same “haircut” on private creditors as it has imposed now, it would have reduced the debt-to-GDP ratio to a more manageable 80%. That would have been painful, but it could have spared the Greeks from a 7% decline in GDP and a rise in unemployment to 22% (including an increase in youth unemployment to a whopping 48%).

More importantly, a default in 2010 would have left some room for adjustments. Under the current plan, there is none: if the economy does not turn around quickly, Greece will need more help. But where can it go now to find it? Most of the sovereign debt is now held by the official sector, which traditionally does not allow any haircut. The remainder has been reissued under English, not Greek, law, putting it outside of the control of the Greek government and its new collective-action clause, which facilities partial defaults.

In other words, Greece has exhausted its ability to share part of the burden with the private sector. Next time, Europe’s taxpayers will be on the hook.

The second act of the Greek tragedy will cast desperate Greeks against angry and disenchanted Europeans elsewhere. Only at the climax will we know whether the effort to delay the inevitable contributed to undermining the idea of Europe for the current generation.  

Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago’s Booth School of Business, and serves on the Committee on Capital Markets Regulation.

Luigi Zingales: Central Bankers in the Line of Fire / 被瞄准的央行行長

CHICAGO – Central bankers should not only be above suspicion of wrongdoing, but also appear to be above it. So the decision in January by Philipp Hildebrand, Chairman of the Board of the Swiss National Bank (SNB), to resign over allegations relating to a suspicious currency trade made by his wife, is to be welcomed. But, while Hildebrand’s resignation should serve as a precedent to be followed by central bankers – indeed, all public officials – everywhere, the circumstances surrounding his departure smell much worse than what caused it.

On August 15, 2011, Hildebrand’s wife, Kashya, exchanged 400,000 Swiss francs into dollars. On September 6, Hildebrand announced that the SNB would cap the value of the franc against the euro, thus de facto forcing a depreciation of the franc vis-à-vis all other major currencies. As a result, the value of his wife’s investment soared by almost 20%. While Hildebrand claims to have had no knowledge of the transaction that day, he resigned because it was “not possible to provide conclusive and final evidence” that his wife, a former hedge-fund manager, traded without his knowledge.

A central banker should put his and his spouse’s money in a blind trust. Even if he did not know about the trade, Hildebrand committed an error of judgment in not reversing the transaction immediately. His resignation was warranted – as is enhanced disclosure of central bankers’ personal finances around the world.

Nonetheless, the circumstances of Hildebrand’s departure might be more worrisome than his lapse of judgment. Hildebrand was not just any central banker: he stood out for his independence, not only from political authority, but also from the banking sector. He spoke very early and strongly in favor of higher capital requirements for big banks, which also opposed his heterodox intervention in the foreign-exchange market.

Most importantly, together with the Swiss finance minister, Hildebrand introduced the “Swiss approach” to bank regulation. This approach demands much higher capital buffers for banks. Rather than going along with the new 8% reserve requirement adopted elsewhere, the SNB now demands equity capital equal to 19% of risk-weighted assets, of which 9% can be held in convertible capital, while 10% must be held in common equity.

Any economist would consider these policies wise, but they won him few friends in the business world. In an unprecedented attack, Switzerland’s major business magazine Bilanz accused him of having an “unsteady hand” on the central bank’s rudder. He was also attacked by a leader of the right-wing Swiss People’s Party (SVP).

I was born in the country of Machiavelli, and yet I still find it remarkable that, after all these attacks on Hildebrand, the stolen private record of his family’s bank account was leaked to a vice president of the SVP, who made it public. Would the record not have been stolen, or would the SVP vice president have refused to use it, given its illegal origin, had Hildebrand been more accommodating toward special interests?

More importantly, I wonder whether his successor at the SNB – and all other central bankers – is asking the same question. After all, this is one way in which regulatory capture happens. When the regulated do not like the regulation, they jeopardize the regulator’s career. More often, they influence regulation by dangling before the regulator the promise of lucrative future employment. Since Hildebrand was independently wealthy, this approach would not have easily worked with him. So did he receive the stick instead of the carrot?

Fortunately, we have a good independent test. The head of the European Banking Authority, Andrea Enria, has issued new regulations that are not bank-friendly. While one can debate the appropriateness of tightening accounting standards in the middle of a crisis, his order that banks increase their capital is entirely justified, especially at a time when the European Central Bank is subsidizing them with a wall of three-year liquidity at almost zero cost.
The banking industry was not sparing in its criticism. The head of the Italian Banking Association even threatened to sue Enria personally.

If Enria were to resign or – God forbid – be forced out by a scandal in the near future, bank regulators everywhere would get the message: “Nice job you have there – it would be a shame if anything happened to it.”

Luigi Zingales is Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business and author of the forthcoming book A Capitalism for the People.


 

Luigi Zingales: 被瞄准的央行行長

芝加哥—央行行長應該是這樣的：他們不能受到犯錯的懷疑，而且也不能犯錯。因此，今年1月，瑞士國家銀行（SNB）董事會主席菲利普·希爾德布蘭德（Philipp Hildebrand）因被控與其妻的一筆可以貨幣交易有染而辭職，此舉受到了大家的贊賞。但是，盡管希爾德布蘭德的辭職之舉應該被所有央行行長——事實上，應該是所有公職人員——所效仿，但其離職的背景要比造成其離職的原因更加惡劣。

2011年8月15日，希爾德布蘭德之妻卡什亞（Kashya）將40萬瑞士法郎兌換為美元。9月6日，希爾德布蘭德宣布SNB將限制瑞郎對歐元的匯率上限，此舉無異於強迫瑞郎對所有其他主要貨幣貶值。結果，其妻的投資因此增值20%。盡管希爾德布蘭德宣稱對其妻的交易一無所知，但還是因“無法提供令人信服的最終証據”証明其曾經當過對沖基金經理的妻子是在沒有從他那裡獲得內幕的情況下做的交易而辭職。

央行行長應該把他及其配偶的錢交給保密信托打理。即便希爾德布蘭德並不知情妻子的交易，但他還是承認，他沒有立刻對這筆交易進行反向操作是一個判斷失誤。他的辭職是值得的，因為此舉增加了全世界央行行長個人財務狀況的透明度。

盡管如此，希爾德布蘭德辭職的背景也許要比其判斷失誤更令人擔憂。希爾德布蘭德並不僅僅是央行行長：他必須堅持獨立性——不但要相對政治當局獨立，也要相對銀行部門獨立。他很早就堅決地支持對大銀行施以更嚴格的資本要求，這與他採取一反常態的外匯市場干預的舉動背道而馳。

更重要的是，希爾德布蘭德和瑞士財政部長共同引入了銀行監管的“瑞士方法”。這一方法要求銀行拿出更多的資本緩沖。SNB現在要求銀行為風險加權資產拿出19%的股本金，而不是其他國家採取的新版8%儲備金要求，在這19%股本金中，有9%可以以可轉換資本形式持有，其余10%必須是普通股。

經濟學家無不認為這一政策是明智的，但在商界，此舉令希爾德布蘭德眾叛親離。瑞士主要商業雜志《Bilanz》對希爾德布蘭德發動了前所未有的抨擊，指責他“把不穩”SNB的方向。右翼的瑞士人民黨（Swiss People’s Party，SVP）的一位領導人也對希爾德布蘭德展開了抨擊。

作為馬基雅弗利的同胞，我仍然發現，希爾德布蘭德受到了諸多攻訐算不上什麼，真正令人矚目的是，他的家庭銀行賬戶的隱私記錄被盜取並泄露給了SVP的一位副主席，並由后者公之於眾。如果其銀行賬戶記錄沒有被盜，或SVP的這位副主席拒絕使用這一信息（因為信息來源是非法的），那麼希爾德布蘭德還會被指存在特殊利益嗎？

更重要的是，我懷疑其SNB的繼任者——以及其他所有央行行長——是否也在問同樣的問題。說到底，希爾德布蘭德事件是一種“監管綁架”（regulatory capture）。當被監管者不喜歡監管規則時，他們就設法破壞監管者的職業生涯。更普遍的情形是他們會在監管者面前活動，許以未來要職的有人承諾，以此來影響監管規則。希爾德布蘭德並不缺錢，因此這一招對他沒什麼用。這大概就是他拒了胡蘿卜迎來大棒的原因吧？

幸運的是，此事對我們來說是一次難得的獨立性測試。歐洲銀行局（European Banking Authority）局長恩瑞亞（Andrea Enria）也頒布了對銀行不利的新監管規則。你可以對在危機中收緊會計規則的做法的合適性表示異議，但其銀行必須增加資本金的指令斷無可質疑之處，特別是考慮到如今歐洲央行為他們正在為它們提供為期三年的幾乎無成本的流動性。

銀行業對此沒有少抨擊。意大利銀行業協會主席就威脅要以個人名義起訴恩瑞亞。

如果在不久的將來恩瑞亞也辭職了，或者——上帝保佑，千萬不要——因丑聞而被迫下台，這不啻給其他地方的銀行監管者這樣的信息：“你的工作不錯，小心吃不了兜著走。”

Luigi Zingales是芝加哥大學布斯商學院創業和金融教授，新著《資本主義為人民》即將出版。