Wednesday, December 14, 2022

Tales of Professional Incompetence, and an Effort to Explain Them

by Neil H. Buchanan

A friend of mine once said: "It's amazing that anything works.  Most planes don't crash and most buildings stay up, even though people are pretty much f*ckwits."  In some fields -- most obviously politics -- one can tell a very plausible story as to why the outright idiots (Marjorie Taylor Green, Louie Gohmert, Jim Jordan, et al.) and what we might call the idiot poseurs (Ted Cruz, John Neely Kennedy, Josh Hawley, et al.) begin to dominate a game played on a field defined by gerrymandering and voter suppression and their combined impact on party primaries.

In most fields, however, one need not believe in an all-knowing Invisible Hand to imagine that somehow the more competent people will generally rise to the top.  Yes, there will be nepotism (Trump's kids) and family money buying credentials (Jared Kushner's acceptance into Harvard), but the post-World War II professionalization of the professions (yes, I meant to be redundantly redundant) has created something that ought to bear a not-too-forced resemblance to a meritocracy.  Market forces ought to drive the worst people out of business, one might hope, and maybe some of the merely mediocre people as well, if we are truly lucky.

Even so, I recently noticed that I have unintentionally been collecting a series of anecdotes of professional incompetence in both the legal and financial fields.  Importantly, the guilty parties are not in any danger of going out of business, and indeed are in some cases considered to be the leaders of their packs.

Stipulating that data is not the plural form of anecdote -- but also understanding that anecdotes can point us in interesting directions -- I will share here a few among many examples of what I have recently observed or have heard from trusted sources.  I will then offer my gloss on a theory that my colleague and friend Sarah Lawsky (a professor and associate dean at Northwestern's law school) articulated in a recent conversation.  Bottom line: There are different types of incompetence, and the most interesting type can easily pass for competence most of the time.

One of my friends has been going through a divorce proceeding this year.  (For obvious reasons, I will protect his anonymity.)  This involved, of course, hiring a lawyer -- or in his case, hiring one lawyer as a mediator, a divorce lawyer for personal representation, and a third lawyer to handle the transfer of assets from the payor spouse's financial accounts to the payee spouse.  Because this person lives in the Boston area, and the Boston area is large and well-lawyered, he thought that he would have no problem hiring at least minimally competent lawyers.

Ahem.  The mediating lawyer, who was recommended by a colleague, added months to the proceedings by constantly promising to deliver proposed settlement documents based on negotiations but then failing to produce what was truly a small and simple amount of work product.  The divorce lawyer told my friend that the mediating lawyer is well regarded, but "everyone knows" that she is always late in everything she does.  Should my friend fire her and start over with someone else?  No, because that would restart the clock and require new mediation sessions.  Besides, who is to say that the replacement would be any better?

Then the divorce lawyer himself became the problem.  My friend asked him to do two specific things, one of which involved a strategic waiver of rights that would not have harmed either spouse but that would have clarified the legal terrain significantly, while the second involved a win-win suggestion for structuring the settlement that took account of the divorcing spouses' differing marginal tax brackets.

The divorce lawyer balked on both requests.  Why?  No real explanation on the first matter (the waiver), while the second suggestion was dismissed as "too complicated, and the opposing attorney will never go for it anyway."  When I heard the latter explanation, I decided to help my friend out (because I teach tax law), and I provided a step-by-step explanation of the very simple strategy and explained why it was good for both spouses.  My friend's divorce lawyer rejected the suggestion again, saying that he did not understand it.  Confident in my ability to teach even the dimmest student, I provided a second, even more spoon-fed, explanation.  Still no go.  My friend gave up and ended up losing tens of thousands of dollars, because it was better to do that than to extend an already overly lengthy process.

Relevant to my larger point here, the strategy in question was in no way exotic or even clever.  There was nothing dodgy about it, and it is not even something that might initially seem too good to be true.  Moreover, it was based on the simple fact that the divorcing spouses are in different tax brackets.  This is the simplest form of "tax arbitrage" in the book -- literally, because every casebook in tax law includes this as an example.

Note that the two spouses being in different tax brackets will very, very frequently be the case in divorces, which is why my friend was surprised when he needed me to explain the strategy in a dumbed-down fashion.  This was, in other words, something that should be in the comfort zone of every divorce attorney.  Indeed, I expressed surprise that the divorce lawyer himself had not suggested it.  My friend was not asking, say, a corporate transactional lawyer to include a criminal analysis in a filing.  He was not even doing the equivalent of asking a corporate transactional lawyer to do something that creatively exploited two provisions of corporate law.  Even so, the answer was: "We don't do it that way."

The third lawyer in the story (leaving out the spouse's lawyer) was hired for one purpose only: to facilitate the property settlement.  That is his entire practice.  Even so, when the financial institution at one end of the transaction did not do things in exactly the way that this lawyer was used to doing it, he almost quit the case.  And as an extra kick in the behind to my friend, even after the transaction was approved, his divorce lawyer then failed to complete the process for months.

A final example, this time involving a financial advisor rather than an attorney.  One of my cousins recently hired a financial advisor to help with some simple investing strategies and associated transactions.  When my cousin was visiting me, he had a conversation with his advisor scheduled, and he asked me if I could sit in, given my background as an economist and tax policy scholar.  One does not say no to family, so I soon found myself in a conversation with a person who, by outer appearances, is a successful financial advisor in the Bay Area.

As the conversation moved along, I noted that the financial advisor repeatedly returned to a touchstone, saying to my cousin: "I don't want to do anything that would move you up into a higher tax bracket."  The third time he said that, I chimed in: "Well, he's actually toward the bottom of his current bracket, and even if he moves into the higher bracket, at most a few dollars would be taxed at the higher rate, which is more than made up for by the other gains from the proposed transaction."  The advisor simply repeated that he did not want to subject my cousin to a higher tax rate.

Most readers of this blog most likely know what a marginal tax rate is and why it matters, but because this is genuinely non-intuitive, I will take a moment here to explain.

Suppose that the first $15,000 of your taxable income is subject to a 10 percent tax rate, and the next $15,000 (from $15,001 to $30,000) is subject to a 20 percent rate.  The two rates, 10 and 20 percent, are marginal tax rates, because they are applied within their brackets, and the higher rate only applies to the "next dollar" of income earned, not to all previous dollars.

This means that a person who has $15,001 of taxable income will pay 10 percent on the first $15,000 ($1500 tax) and 20 percent only on that last dollar ($0.20 tax), for a total of $1500.20.  That is quite different from a situation in which the entire $15,001 is suddenly taxed at a marginal 20 percent rate, which would result in a tax obligation of $3000.20.  If the tax system did not use marginal rates, it would create perverse "cliff effects" that would discourage a person from crossing a bracket barrier.  That would be crazy, and no income tax system (national or sub-national) of which I am aware does such a thing.

Even so, this financial advisor was (without prompting) bringing up tax brackets and giving advice based on a clear misunderstanding of how the tax system works.  He was sure that his job was to prevent my cousin from moving into a higher tax bracket, full stop.  Most importantly, this is very much like my friend's divorce lawyer's mistake, in that the issue involved should be something that is right down the middle of the plate for someone in his field.

Again, it is not as if the financial advisor had been asked to advise my cousin about what would happen if he were to earn some money in, say, the Netherlands.  This is first-day-of-class, agonizingly basic stuff, which suggests that the advisor is giving systematically bad advice -- not because he is deliberately cheating his clients through some kind of skimming arrangement or embezzlement, but because he does not know something simple.  His clients will lose money because of his ignorance.

Even as I have laid out (in admittedly gory detail) the facts of these various professional situations, a theory begins to present itself: professionals have comfort zones, and when they are asked to deviate even a tiny bit from their respective comfort zones, they become at least antsy and at most hostile.  Other than the mediating attorney (who simply gets away with being slow, costing clients time and money), everything else here is about mental rigidity: (1) the divorce lawyer did not want to waive rights, even though it was good for both sides, because "you don't want to give up any rights, ever"; (2) the divorce lawyer did not agree to a win-win tax play, because "the other side won't go for it"; (3) the specialist attorney flipped out when the financial institution deviated in a non-material way from the norm; and (4) the financial advisor "knows" that moving into a higher tax bracket is per se bad, so he tells his client to forgo income in order to reduce taxes.  (Heck, if I reduce my income to zero, I will pay zero taxes.  Why does that not seem like a good idea to me?)

Again, the professionals in all of these cases are not new to their fields, all practice in large and competitive metropolitan areas, all have relatively high-end clients (at least upper-middle class), and some even have received awards from their professional associations.  (I checked.)

Upon hearing these and other stories, and responding with some of her won, Professor Lawsky offered a simple, yet powerful, way to understand two different ways to be "good at your job."  The first is being excellent at the specific thing that you do every day, such that if someone hands you a new case that has no unusual aspects to it, you will facilitate a mistake-free, highly competent outcome.  The second is being able to roll with it when things look unfamiliar, with an excellent professional of this type being able to recognize curveballs and respond to them with at least some creativity.

We in legal academia think of excellence almost exclusively in the latter sense -- intellectual creativity, thinking on one's feet, recognizing opportunities, and so on.  I cannot think of a law school that does not make that kind of professional competence a big part of its mission -- in fact, I cannot imagine a law school even considering doing otherwise.  Yet it appears, not only based on the anecdotes above but also on my observations over the years and conversations with friends and colleagues, that law schools might be lucky if they can create the first kind of Good Lawyer, that is, someone who will not f*ck up if they are given a plain-vanilla assignment.

Note that in my examples above, the divorce attorney and the financial advisor are not even Good in the more limited sense.  No divorce attorney should be unaware of how differing tax rates provide arbitrage, win-win opportunities; and even if they are unaware, they should be able to understand it when it is explained.  No financial advisor should fail to understand what marginal tax rates mean (and do not mean).  Even so, both of these people have both been practicing in their respective fields for years, and there is no evidence that "the market" is punishing them.

My friend is tens of thousands of dollars poorer (but his ex-spouse is no richer because of it), and my cousin is being given bad investment advice.  What now?  Write a bad Yelp review?  It is not as if professional licensing associations are inclined to police this kind of incompetence, especially given that they have their hands full with actual misconduct cases.  And even the first kind of Good lawyering or financial advising (the non-creative kind) can be costly.

Most planes stay aloft, and few buildings collapse.  Yay for us.  Even so, it is worth remembering that intellectual flexibility and creative problem-solving -- as much as we should aspire to teach those skills -- are miles ahead of where most professional activity takes place.  If you hope for competence in even the narrowest sense, you might not be disappointed.

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