Bad Investment; D. Murdock

According to Marquette University finance professor John R.Nofsinger, these "economi cally targeted investments" (or ETIs) typical ly reduce average annual yields by 1.5 per centage points below their expected returns. Deroy Murdock is a cofounder of Third Millennium and a member ofthe Cato Institute's Advisory Board on Social Security Privatization. A shorter version of this article appeared in The American Enterprise. 52 Alicia Munnell, a former Clinton Treasury official, discovered that the returns from pen sion investments funneled into home-owner ship programs fell between 1.9 and 2.4 per centage points annually. With compounding, such seemingly small gaps swell into wide gulfs between the retirement incomes of workers who control their assets and those whose futures are left to bureaucrats. Bigger Menace But the menace of government equity own ership goes beyond rates of return. President Clinton's desire for a Social Security portfolio "free from politics" is fanciful at best, anoth er lie at worst. In a January 28 Senate Budget Committee appearance, Federal Reserve Chairman Alan Greenspan hosed down this idea with ice water. Federal investment of FICA funds, Greenspan said, "would arguably put at risk the efficiency of our capital mar kets, and thus our economy." He also was metaphysically skeptical of politically neutral government investment: "Even with Her culean efforts, I doubt if it would be feasible to insulate, over the long run, the trust funds from political pressure-direct and indirect to allocate capital to less than its most pro ductive use."

Social Security's cheerleaders call privatiz ers paranoid for imagining that the Clinton administration might, for instance, liquidate Microsoft and Philip Morris shares to express solidarity with Macintosh users and nonsmokers. But the privatizers reply that politi cally driven public investment is all too com mon in cities and state. These include assets "targeted" at local economic development, as well as politically correct investment deci sions that promote pet causes. Some officials simply have misallocated pension funds. Add to this mix the usual graft and corruption that make government itself such a dreary propo sition. State efforts to steer pension assets into local economic activity have imploded as if they were abandoned public-housing projects. In recent years, according to Heritage Foun dation analyst Daniel Mitchell, the Kansas Public Employees' Retirement System lost $65 million in the Kansas-based Home Sav ings Association, $14 million in Tallgrass Technologies, and about $8 million in a local steel mill. With at least $138 million in loss es, this economic targeting missed the bull's eye by miles.

In 1988 the Missouri State Employees Retirement System launched a venture-capital fund to lure companies to the Show-Me State. Three years and two lawsuits later, the failed fund was shown the door. In 1990, the State of Connecticut Trust Fund spent $25 million for a 47 percent stake in Colt Industries, a local gun maker. In 1993, Colt misfired, and the money vanished. According to the Cato Institute's Michael Tanner, 42 percent of state, county, and local pension fund systems currently practice this kind of cronyism. Such ETIs, Yale law profes sor Roberta Romano reports, generated $28 billion in losses between 1985 and 1989. Politically Correct Investment As if incompetent investment were not enough, public portfolios also are battered by politically correct decisionmaking. Public equity ownership became a white-hot political potato during the divestment movement of the mid-1980s. At least 30 states and many more cities and public universities ditched their shares in companies that conducted business in apartheid-era South Africa. (Perhaps in the name of equal opportunity, 11 states also curbed investments in firms that violated the 53 "MacBride Principles" governing commerce in Northem Ireland.) Tobacco, of course, is a smoldering buga boo for public pension managers. Minnesota lost $2 million last year when its employees' fund dumped its tobacco holdings. Some pub lic managers have done more than simply wash the tobacco stains off their hands. On April 10, 1998, New York State Comptroller Carl McCall said he would withhold his sup port from the boards of Philip Morris, RJR Nabisco, and Loew's at shareholders' meet ings if they did not "reach a prompt settle ment that effectively reduces youth smoking and ends the lingering controversy. . . . It is not in the best interest of the tobacco compa nies to just stop talking to Congress." New York's state pension fund then owned 11 mil lion shares of those firms' equities worth some $450 million.

Conservative activists have joined in the fun, too. The American Family Association of Texas sent the State Board of Education taped highlights of recent films distributed by Mira max, a Walt Disney subsidiary, including the violent hit Pulp Fiction. On July 9, 1998, the board decided to sell the $46.4 million of Dis ney stock in its Permanent School Fund. "It's not Mickey Mouse and Donald Duck any more," board member Richard Neill said at the time. "It's blowing people's heads off." Political pressure needn't be applied to be effective. Like a cocked gun that is never dis charged, the mere threat of a politically inspired investment decision can advance desired outcomes. When politicians snarl, executives dive beneath their desks. On July 2, 1998, Carl McCall and New York City Comptroller Alan Hevesi threat ened to exclude Swiss banks and financial advisers from managing municipal pension funds and other state assets. McCall and Hevesi wanted the Swiss to settle a lawsuit with Jewish groups involved in the Holo caust-era dormant accounts controversy. The Swiss banks caved in like chocolate souffles.

"The first set of measures was supposed to begin September 1," a Swiss source close to the talks told me. "That boycott schedule had an impact on the speed of the negotiations, without a doubt." The final deal was unveiled 54 THE FREEMAN/IDEAS ON LIBERTY • SEPTEMBER 1999 August 12, 1998, just five weeks after McCall and Hevesi huffed and puffed. Squandered Assets While Congress routinely squanders tomorrow's Social Security assets on today's goodies, state and local officials have learned from the big boys. In 1997 California's Supreme Court let stand a lower court ruling that Sacramento had violated public employ ees' rights. Then-Governor Pete Wilson and the state legislature diverted $1.36 billion in pension contributions to balance the state budget in fiscal years 1993 and 1994. New York State similarly siphoned $230 million from its employees' retirement fund in 1995. In the summer of 1998, Chicago authorities used $12.5 million in pension contributions for interest payments on a $175 million infra structure bond issue.

Can anyone trust Congress and the White House not to use a federal pension portfolio to balance future budgets? This $700 billion honey pot also will attract lobbyists and PAC men like grizzly bears. This would be a gold en opportunity for presidents and congress men to sell "access" to Wall Street firms-one banquet table at a time. Free-marketeers should be frightened by those who already are licking their chops over what could become government's biggest chow-down yet. Savoring this potential feder al feast, Representative Jerrold Nadler told The Village Voice: "You're saying the govern ment will have more influence to pressure for more decent, socially responsible corporate behavior. That's terrible?" The AFL-CIO's Gerald Shea predicts federal investment will "have a good effect on how corporate Ameri ca operates." That depends on what your defi nition of "good" is. D We are helping FEE sell books over the Internet May We Help You?

3D RESEARCH http://fee.3dresearch.comweb@3dresearch .com (724)-776-7384 Economics on Trial SEPTEMBER 1999 "They Were Right" by Mark Skousen "Americans need to know the history of American anticommunism if they are to understand the great role they have played in ridding the world of the most murderous of the twentieth century totalitarians." -RICHARD GID POWERS! O n October 16, 1961, thousands of people packed the Hollywood Bowl. The occa sion was not a rock concert or a sporting event but the biggest anticommunist rally in the country. "Hollywood's Answer to Commu nism" was carried on nationwide television. Actor George Murphy was the master of cer emonies and other speakers included Herb Philbrick, Congressman Walter Judd, Dr. Fred Schwarz, Senator Thomas Dodd, and my uncle, W Cleon Skousen, a former special assistant to 1. Edgar Hoover and author of the bestseller The Naked Communist.