Elizabeth Warren's Misplaced Wrath
The scandal engineered by Elizabeth Warren involving Robert Litan, the Brookings Institution, and regulatory standards for financial advisors, reflects badly on the senator and the think-tank rather than on Litan, the researcher who was obliged to quit. More important, it does nothing to serve the interests of low-income savers, for whom Warren claims to speak.
Litan, a respected economist whose association in senior positions with Brookings goes back decades, wrote a paper on the regulation of financial advice with Hal Singer of the Progressive Policy Institute. He gave testimony based on it to a Senate committee in July. The paper criticizes a Department of Labor proposal to impose a more demanding standard on brokers who advise clients about which savings products to buy.
The paper was funded by the Capital Group, an investment-management firm with a stake in the outcome. The authors conspicuously disclosed this on the first page of their paper and in Litan's testimony. Warren protested that the disclosure was inadequate and said the paper was "editorially compromised." She wrote a letter of complaint to Brookings and Litan was pressured to resign his position as a non-resident senior fellow.
Litan is a former colleague of mine at Bloomberg Government and somebody whose work I've admired and respected for many years. I recently reviewed and recommended his new book, "Trillion Dollar Economists," which is about the ways in which economics has created value for business and consumers. It saddens me to see him treated so shabbily, but bigger issues are at stake.
Ideally, scholars would weigh in on issues of public policy from a position entirely free of bias and real or suspected conflict of interest. That standard of perfection is probably unattainable and in any event is widely flouted. Policy research in universities and think-tanks is supported by governments, wealthy individuals, corporations and unions -- all of them harboring preferences about what the work will show.
The best institutions protect their scholars from pressure to comply with somebody else's agenda, as far as that is possible. And researchers have their reputations to think of. But the growing pressure to raise money from sponsors who may not be purely interested in knowledge for its own sake -- a trend, as it happens, in which Brookings has taken the lead -- pushes the other way. And even if money weren't involved, public-policy scholars bring their own ideological prejudices to their work.
In other words, caveat lector: Be on the lookout for bias. Disclosure of financial support is essential, but beyond that the best defense against tainted findings is scrutiny of the arguments and vigorous debate. Let there be a contest on the merits, and bad work will ultimately be found out. Denouncing uncongenial findings as illegitimate, rather than assaulting them on the substance, spares critics the extra effort, but does nothing for understanding of the issues.
The paper by Litan and Singer raises good questions about the unintended consequence of the proposed fiduciary rule. The commission-based model of financial advice does create a potential conflict of interest, and the fiduciary (or "best interest of client") standard looks plausible. But if the commission model is restricted or shut down -- a question on which the proposed rule seems ambivalent -- then what kind of advice will small savers get instead, and how will they be required to pay for it?
Would no advice be better than the conflicted advice available under the commission system? Not necessarily, if the most valuable advice is, as Litan argues, persuasion to stay invested through downturns and not try to time the market. Or suppose the industry switched to the "wrap fee" model instead, where there's no incentive to push a particular product. Would that leave small savers better off? Not necessarily -- if the cost of advice went up by more than the quality of the advice. Again, Litan argues that this is likely.
It needs to be stressed that Litan did nothing wrong. He lost his affiliation with Brookings not because his research was supported by an interested party -- one wonders how many programs at Brookings and other think-tanks would fold if Warren applied that standard consistently -- but because of a perplexing technicality. Brookings has imposed a new rule that prohibits non-resident fellows from announcing that status when testifying before Congress. The idea, apparently, is to protect the think-tank's independence.
Litan inadvertently broke that rule. Perhaps if he hadn't disclosed too much, Brookings would have come to his defense.
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