Money and morals don’t mix

BENJAMIN ZYCHER is the president of Benjamin Zycher Economics Associates.

BACK IN THE old days, when Republicans, led by Ronald Reagan, actually stood for a set of principles, efforts by Democrats to make political statements with other people’s money were roundly criticized.

One of the most prominent examples was the campaign during the 1980s for disinvestment by public pension funds in the South African economy.

It was a misguided idea from the outset. Professor Walter Williams (and others) predicted during the national debate on the subject that disinvestment, along with such other steps as economic sanctions, would have the counterintuitive effect of strengthening apartheid and delaying its inevitable collapse; he then showed, in a subsequent 1989 book, that that was the actual outcome.

But a narrower issue was important too. However abhorrent the system of apartheid, was it appropriate for government officials to use public pension funds to make political statements?

For principled Republicans, the clear answer was no. Elected officials and pension administrators had (and have) an unambiguous fiduciary responsibility to current and future retirees and to taxpayers to manage the funds so as to achieve the best possible financial returns for beneficiaries. In plain English: Those pursuing specific political goals, however worthy in moral terms, ought to do so with their own dollars rather than those belonging to others; and to the extent that public policy goals are involved, it is the taxpayers or the population generally -- rather than, say, retired government workers -- who should bear the cost.


That was then. Now it is the Islamic regime in Iran that is front-page news, with its ongoing efforts to build nuclear weapons and its bankrolling of terror throughout the Middle East. In response, the California Legislature is considering legislation mandating that the large state public pension funds -- the California Public Employees’ Retirement System and the California State Teachers’ Retirement System -- sell off the billions of dollars of shares they hold in firms doing business with Iran.

This legislation appears likely to receive heavy Republican support; after all, it is easy to claim that disinvestment would “de-fund terrorism.” But that assertion is highly dubious -- and Republicans would be just as wrong to support disinvestment today as Democrats were to support it in the 1980s.

For one thing, research suggests there is little correlation between economic conditions in terror-supporting states and the likelihood that they will go on financing terror. So threatening to weaken Iran’s economy with sanctions or disinvestment seems likely to fail.

Financial support for terrorist activities is primarily ideological, and regimes are loath to sacrifice ideological goals just because economic conditions are declining. Saudi financing of the Wahhabi madrasas, for instance, both official and unofficial, continued during the 1990s when oil revenues were low. Similarly, during the 1990s, various terrorist groups received much of their support from Afghanistan, Pakistan and Sudan -- nations not noted for strong economic performance.

The notion that we can “de-fund” terrorism by withholding our investment is particularly weak. The reality is that terrorism is relatively cheap; the 9/11 commission computed the cost of the 9/11 attacks at less than $500,000, an estimate likely to be too low, but not by enough to change this central conclusion. Oil export revenues for Iran are about $150 million a day, a figure far greater than the likely annual cost of the weaponry delivered by the Iranians to be used against U.S. personnel in Iraq.

Moreover, the disinvestment policy will prove ineffective because the international capital market is vast; disinvestment by California’s pension funds will be replaced by investment from others. And adverse effects will result. The American Israel Public Affairs Committee, for example, which supports this legislation, will find it more difficult to oppose future efforts to force public pension funds to disinvest in firms doing business in Israel.

The Islamic regime in Tehran has been at odds with the U.S. for decades, and one administration after another has made excuses for inaction. Even as U.S. troops in Iraq are being killed by Iranian weapons, the position of the Bush administration is that the materiel comes from the Revolutionary Guard and that there is no hard evidence that the Iranian government has authorized this activity.

This is laughable. The Revolutionary Guard is an official arm of the Iranian government, and it simply is impossible that such policies could be implemented without the approval of Ayatollah Ali Khamenei.

The administration’s failure to act against the Iranian regime has led to pressure to do something, creating an opening for old-fashioned political posturing by elected officials across the country. Thus the disinvestment campaign is less a policy than a substitute for policy. And that is why it ultimately will prove self-defeating.