Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

The Cost of Mixing Culture Wars With Public Finance

As with pension fund divestment policies, it’s tempting for states and local governments to blacklist companies over their public policy stances. But it’s the taxpayers who are likely to be the collateral damage losers.

shutterstock_571447402 (1).jpg
Given the nation’s deep political divisions nowadays, it should come as no surprise that some state and local politicians from both sides of the aisle would seek to leverage their governments’ purchasing power to send messages to corporate America and play to their base by doing so. After all, it’s not their own money — it’s the public’s — so why not exploit political power to advance one’s partisan posturing?

The most common manifestations of these impulses to make political statements through public funds have historically been public pensions’ divestment campaigns, starting with South Africa in the 1960s, then with Sudan in the early 2000s and continuing up to this year’s Russia divestment wave. Critics would say that pension policies focused on corporations’ environmental, social and governance (ESG) profiles are liberals’ playbook strategy to pressure companies into bending to their political will. The same might be said about pension funds that avoid investing in firearms manufacturers.

The complaint — and it’s a valid one in my view — has always been that these political statements rarely work to the benefit of the pension funds and that the employers’ taxpayers are ultimately obligated to foot the bill for investment underperformance. That grievance is now popular with 19 Republican attorneys general. However, many ESG advocates would counterclaim that more-sustainable and farsighted corporate policies will produce better investment returns over the long term. That debate in pension-land doesn’t look likely to end any time soon; we really can’t properly evaluate investment efficacy in less than a decade or even two.

What’s notable in recent years, however, is the trend for some states and localities to apply the same strategy with general government funds, not their pension assets. A prime example of this is the Texas law that blacklists municipal bond underwriters who support ESG principles, which arguably run counter to the “drill-baby-drill” politics of the oil-rich state and its petroleum-dependent revenue structure. Whether one regards this as a purely partisan exercise of power or an economically self-interested action by a state government that knows where its bread is buttered, the result is the same: By excluding some muni bond dealers from the bidding for state bond issues and thereby limiting competition, it is a free-market economist’s axiomatic viewpoint that the result will ultimately be higher borrowing costs for Texas taxpayers.

West Virginia’s legislature has followed suit with similar legislation. Kentucky, Oklahoma and Tennessee have enacted similar laws, all focused on ESG and fossil-fuel extraction. Notably, Kentucky ranks 21st and Tennessee 27th among the states in oil production, so one must conclude that their blackball actions are largely political and not budgetary.

The magnitude of any fiscal impact on Texans’ debt service costs is a matter for empirical research, which has already begun at Wharton. The topic will probably make for a great doctoral dissertation someday, but we won’t know hard numbers any time soon. With multiple states now involved, a fertile field for research has arisen.

Placating the Base

Clearly the tables have turned from advancing liberals’ pet policies to those of social conservatives who just a decade ago would have chastised their opponents for meddling in corporate policies and free-market efficiency. It’s enough to make my head spin some days. Apparently all’s fair in love, war and politics these days — as long as the partisan base is placated and campaign contributions keep rolling in.

In Florida, we have the now-notorious meddling in public finance by state politicians who decided to punish Walt Disney World for the company’s public opposition to the state’s so-called “Don’t Say Gay” law (in support of its employees) by stripping the financial powers of five special districts to rebuke America’s most-beloved family theme park.

Even local governments are getting into the act, including from the left side of the political spectrum. In Pennsylvania, Lehigh County may become the first entity to divest its assets and business from Wells Fargo because of the bank’s reported support of political candidates opposing abortion rights.

Some of these retaliatory measures may eventually run into First Amendment lawsuits, especially given that the Supreme Court’s Citizens United decision equated companies’ free-speech rights to those of individuals. But given the deepening divisions in the American body politic these days, it doesn’t require much imagination to expect that similar political blacklists and financial boycotts will continue to proliferate.

I’m sure, for example, that we’ll see a few local governments sympathetic to abortion rights adopt policies prohibiting travel reimbursement for attendance at professional conferences and training events in states that prohibit or severely restrict the procedure. Meanwhile, other governments may ban employee travel to conferences in states that provide sanctuary for abortion-seekers. What’s to stop similar internal policies from popping up with regard to visiting states with open-carry gun laws? At least in the case of conference attendance, most government workers can find alternative professional development opportunities elsewhere, and some of these events now include virtual attendance options in this pandemic era. But for financial services firms serving the public sector, and the efficient market competition they engender, there is no such workaround.

Pandering at Public Expense

The retributive impulse to punish one’s enemies is hardly new. But doing so at the expense of one’s own constituents is new to most modern pluralist democracies. It’s petty, polarizing, punitive and, moreover, wasteful to vilify policy opponents as enemies of the body politic at public expense.

I don’t pretend to have all the answers or a universal solution to the dilemmas that these examples present. But I’m pretty sure that taxpayers will ultimately be ill-served when public-sector investments and financial transactions are subjected to political favoritism, which is what these “back-in-your-face” policies really are. The problem, of course, is that in the short run there is very little political downside for these interventions, and the financial costs will be diffuse and initially imperceptible. But that doesn’t make it right — or smart.

The Big Seven state and local government policy associations and their financial affiliates can do us all a favor by standing up to such partisan grandstanding with policy advisories that emphasize just how ill-advised and ultimately costly these culture war reprisals are likely to be — and perhaps already have become.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
Girard Miller is the finance columnist for Governing. He can be reached at
From Our Partners