Update On State Pushback to Politicized Capitalism — Can Red States beat “Woke Capitalism”?
Politicized (sometimes called “woke”) capitalism is all the rage these days. I of course mean “rage” both in the sense of “popular” and in…
Politicized (sometimes called “woke”) capitalism is all the rage these days. I of course mean “rage” both in the sense of “popular” and in the sense of “infuriating.” In the latter camp is the state of West Virginia and Florida Governor Ron DeSantis, both of whom announced steps aimed at reining in the power of large financial institutions who are seen as improperly limiting access to financial services for political purposes. What the effect of these moves will be, both politically and economically, remains to be seen, but it does appear that policy responses to corporate politicization are gaining steam.
To start with West Virginia — West Virginia State Treasurer Riley Moore has announced that five large financial institutions are barred from obtaining banking contracts with the state because they are viewed as “boycotting fossil fuel companies.” Moore is able to do this pursuant to a law passed this year that authorized the state Treasurer’s office to restrict eligibility for banking services contracts with the Treasurer to those firms not found to be “boycotting” fossil fuel firms. The law defines “boycotting” as refusing to do business for reasons not directly related to promoting financial success, mitigating risk, complying with legal and regulatory requirements, or limiting liability. It also does not cover the West Virginia Management Board, which manages the state’s investments.
Six institutions were originally targeted, but U.S. Bankcorp was able to show it no longer met the criteria. Unsurprisingly, many of the firms on the list object to their being targeted with many arguing they do not meet the criteria and some citing criticism they receive from environmentalists as evidence they don’t boycott fossil fuels.
Turning to Florida, Governor DeSantis, no stranger to pushing back on politicized corporate activity, has announced he intends to pursue a legislative and administrative agenda to fight “the leveraging of corporate power to impose an ideological agenda on society…” While the exact scope of the agenda has not been fleshed out DeSantis has said it will include prohibiting banks, credit cards, and money transmitters from discriminating on the basis of “religious, political, or social beliefs;” prohibiting fund managers who manage funds for the Florida State Board of Administration, which oversees state investment plans, most notably the state pension and retirement plans, from considering ESG factors, and requiring those same managers to be solely motivated by maximizing returns when making decisions.
According to the announcement the legislation will use Florida’s Unfair and Deceptive Trade Practices statute as the vehicle to prohibit “discriminatory practices by large financial institutions based on ESG social credit score metrics.” It is unclear exactly what this will look like. It is worth noting that the OCC has taken the position that state anti-discrimination laws generally do apply to national banks, though whether the OCC would say this applies to a law that is styled as regulating trade practices rather than civil rights, remains to be seen.
It also remains to be seen what the enforcement mechanism will be. Some similar laws rely on an administrative agency to enforce the law. Others, such as Wyoming’s anti-discrimination law allow for a private right of action for a party who is denied services in addition to enforcement by a government official. The private right of action option does have the advantage that it is not dependent on having sympathetic government officials to have it enforced. Such a private right of action would make sense to prevent discrimination against a specific customer but would likely make less sense to enforce restrictions on managers of the State’s investments.
Of course, nothing is free. By refusing to do business with certain financial institutions states may risk higher prices for services and poorer execution. A recent study looking at the effect of Texas’ laws that prohibited municipalities from using banks with certain policies viewed as boycotting certain energy or firearms businesses found that the exclusion of several large banks from the municipal debt market would likely result in Texas municipalities paying significantly higher prices for debt issuance.
The mechanisms discussed in the paper make sense. The search and negotiation costs imposed on municipalities that can no longer use the bank they had a relationship with, the diminished competition because several major players are excluded, and the thinner market for debt would all be expected to raise prices. It is unclear however whether this poorer performance will be durable or transitory. It is possible, though by no means guaranteed, that the market for “Texas compliant” underwriters will expand as new firms enter, and that existing compliant firms will develop greater capacity.
Where does it go from here?
So how does this end? Can states pressure firms to stop being ”woke?” Or are the economics too compelling? I could see a few possible outcomes, which are not mutually exclusive or exhaustive:
1. The States Back Down: Freedom isn’t free, and neither is placing public debt or obtaining banking services. If state policies that limit the states’ options drive up the cost too much, voters may decide it isn’t worth it and change the laws. A stealthier version of the state backing down would be the relevant state office deeming a bank in compliance even though they actually aren’t, hoping that the constituency that pushed for the bill won’t notice or be able to mount sufficient political pressure to reverse the decision.
2. The Banks Back Down: It isn’t just the states that suffer economic costs from these policies. The banks are losing out on business and the more states that adopt similar policies the more business the banks will lose out on. At some point the costs to the banks of lost business may outweigh the perceived benefits of the banks’ policies the states find objectionable, and they may decide, or be forced to, reverse or modify those policies.
3. Parallel Economies: We may also just see the rise of “red banks” and “blue banks” as banks sort themselves into catering to specific political markets. This is obviously undesirable as it could hamper economies of scale and efficiency in the banking system and encourage greater politicization of financial services and the regulation , but whether this would be less desirable than politicized finance becoming a means of de facto regulation is not at all clear.
4. Federal Control: A fourth option is that something happens at the federal level that forces either the banks or the states to back down. A federal anti-discrimination provision akin to what the OCC tried to do at the end of the Trump administration could force the banks to avoid “political” (broadly defined) considerations when deciding who to serve. Conversely, laws or regulation (or more problematically “guidance”) could force banks to exclude (either directly or indirectly) certain industries. If such decisions were done pursuant to enforceable federal law it would be hard if not impossible for states to find banks that would meet their requirements. Of course, any effort by federal regulators to force banks to drop disfavored industries absent explicit statutory authorization would be highly controversial and would assuredly result in litigation.
It is unlikely that this issue will go away anytime soon. While the actions of officials like DeSantis and Moore are controversial, and are seen by some as an intrusion on the “free market” (how free the market is for financial services, especially banking, is debatable), it also reflects the reality that financial services providers are being used as tools to fight political battles. It shouldn’t be surprising, and may well be appropriate, for officials to take note and seek to address that problem. Ideally, we would naturally become less polarized and fractious as a country, but until that happens the thrust and parry of politicized finance is likely to continue.