Month: January 2021

A Tale of Caution

Leave a comment

January 31, 2021

by Steve Stofka

The trading in GameStop (GME) has spurred romantic visions; a mob of peasants has stormed the castle and the nobles have fled! Huzzah! This love of the romantic convinced a bunch of peasants to storm the Capitol on January 6th. We are human beings; we love stories. The truth is less appealing or ordinary.

At a press conferences this week, the well-prepared and even-tempered White House Press Secretary, Jen Psaki, was asked if President Biden planned to speak to the issue of the volatile trading in GameStop (GME). She said that it was a new age; the President was not going to speak to issues he had no expertise in. Imagine that. We will miss the enjoyment of watching former President Trump standing in the White House driveway and opining to reporters on every topic under the sun.

Reporter: “Mr. President, what’s your source on that?”

Mr. Trump: “My mind. I have a very smart mind.”

Without the daily source of ridicule that Mr. Trump provided, comedians are having to write new material.

But I digress. GameStop. Twenty-five years ago, internet stocks were taking off. Message boards at AOL, CompuServe and others lit up with stories of “Ten baggers,” the holy grail of stock investing. Buy a stock for a $1 and watch it rise to $10. Those in Bitcoin have experienced the heady feeling.

That romance incentivized peasants to join the Crusades; there was gold in Solomon’s Temple at Jerusalem. Thousands poured into the California gold fields in the hopes of striking it rich. The people who get rich are the ones selling pickaxes and panning tools to the miners. The gold is not in the hills but in the people digging up the hills.

On message boards in the 1990s we learned about options. Instead of buying Microsoft stock, an investor can buy options to buy Microsoft’s stock. If Microsoft’s stock is selling for $25, it costs $2500 to buy a 100 shares, the minimum lot. At that time, buying less than a 100 shares cost a lot more in commissions. If an option were selling for $1, an investor could buy 2500 options! If the price went up $5 you could quintuple your money. Imagine making $10,000 in a few weeks.

People quit their jobs to day trade. The successful ones were cautious, taking profits quickly, not taking too many risks. Someone with a family to feed and rent to pay must be responsible. A modestly successful trader can convince themselves that they have a well-balanced strategy.

About a year before the internet stock bubble blew up, someone posted a rather long post on a message board. Since he was in the options business, a family member had asked him for his advice. Aware for the first time that inexperienced retail traders were taking positions, he offered his advice, which I will paraphrase. A few points stuck with me.

Options are tools. 94% of options trades expire worthless. Professional traders use options like car insurance. Yes, there are some companies who take risks, but most of those in the business use options to mitigate risk.

Understand that multi-national companies pour hundreds of thousands of dollars into news gathering, sophisticated computers and programming by very smart people to develop and deploy options strategies. They are on the other side of the trade.

A retail trader may get lucky. The prospects for Company A improve, the stock goes up and the trader makes money. A company using options aims to make money whether the prospects for Company A improve or deteriorate. A successful racetrack makes money no matter what horse wins.

Gamblers at a racetrack can rush the window in the closing moments before a race begins and cause the track to lose money on that race because the track doesn’t have the time to change the odds to layoff the bets. With the advent of the internet, a group of retail options traders could do the same with a hedge fund, who can’t lay off the bets fast enough. It could be done but it would be difficult.

25 years later, it has become much easier for gamblers to rush the betting window. The success of those traders will no doubt inspire others to try the same strategy. An industry which uses options to mitigate risk on trillions of dollars will not let a few retail traders upset that market for long, so don’t gamble with the rent money.

/////////////

Photo by Kay on Unsplash

Forgiveness

Leave a comment

January 24, 2021

by Steve Stofka

Some members of the Democratic Party have called for a forgiveness of all student debt, which the Federal Reserve estimates at more than $1.7 trillion, which has doubled since the onset of the financial crisis and recession in 2007-8. On the campaign trail, President Biden seemed receptive to a forgiveness of $10,000 as a uniform application of policy (Urban, 2020).

Many of us react instinctually to debt forgiveness, ready to condemn the idea outright because we were taught as children to pay our debts. The ancient Greeks committed individuals and families to slavery for failure to pay their debts (ABI, n.d.). The Romans allowed creditors to dismember debtors. American colonists had debtors flogged, ears cut off and imprisoned.

Our laws have become more forgiving in the past three centuries, but the attitudes of many Americans have not improved as much. In the depths of the 2009 recession, CNBC reporter Rick Santelli criticized a mortgage debt relief program and ignited a storm of passion that contributed to the formation of the Tea Party movement. Will a student debt forgiveness program arouse similar sentiments?

A week before Congress passed the CARES act on March 27, 2020, Education Secretary Betsy DeVos suspended payments on federal student loans payments (DOE, 2021). The CARES act formalized that suspension but only for six months. President Trump then directed her to continue the suspension of payments and waiver of interest. President Biden has continued that policy until September 2021.

Who got the loan money? Some of it went to for-profit institutions. Students at for-profit institutions total two million, less than 5% of the 42 million students enrolled in higher education (Bennett et al., 2010). During the financial crisis, for-profits received a lot of criticism for abusive recruitment practices, low graduation rates, high default rates and poor student outcomes. Under tightened regulations during the Obama administration, several lost eligibility for federal student loans and subsequently shut down.

Ok, goes the argument, some students got a bad deal. Shouldn’t they still have to honor their contracts? What if the government forgave all debts involving a product or service which did not perform as promised? The buyer would no longer have to be diligent about quality. Eventually the quality of goods and services would decrease. Those who use this argument see debt forgiveness of any kind as a slippery slope to the downfall of the entire economy and the impoverishment of society.

The bulk of the $1.7 trillion of outstanding debt was paid to public educational institutions, who have raised tuition far above the general rate of inflation. Since 1985, inflation adjusted tuition has doubled (NCES, 2021). Over the past two decades, states have cut back their funding for higher education, throwing the extra burden onto students. In analyzing the shift, Douglas Webber found that the student burden had tripled since 2000 (2017).

Where did the money go? To state institutions. Imagine each student wearing a backpack loaded with 10 pounds of debt. State governments took 20 pounds of weight off their books and put it in the backpacks of the students, those least able to bear that burden. A forgiveness of debt, total or partial, would take some or all that weight out of the backpacks of each student and put it on the Federal balance sheet.

At its core, debt is about justice, a subject that we struggle to discuss rationally because we are social animals who process the subject of fairness with our monkey brains. In 18th century England, the punishment for crimes, including debt, was in proportion to the outrage of society at the criminal. In a more rational approach, the philosopher and legislator Jeremy Bentham introduced a “felicity calculus” that would guide legislators and judges to enact punishments that were proportional to the consequences of a crime and the profit of the crime to the criminal.

Our laws no longer treat debtors as criminals, but in the case of a student’s debt, how is society to judge the profit that a student will earn over a lifetime from their education? On average they will make a higher income and pay higher taxes. If all student debt is forgiven, one student will receive a benefit of $100,000 while another will receive a $30,000 benefit. Is that just? I personally think a $10,000 uniform forgiveness is more just. A debt forgiven cannot be unforgiven; moderation is the key.

We can never agree on issues of distribution of benefits. Small children argue whether they got the same amount of chocolate milk if the glasses are shaped differently. In the parable of the workers in the vineyard, workers who only worked one hour received the same amount of money as those who had worked all day. Is that fair? The landowner insisted that it was his money to do whatever he wanted.

In a democracy, we have an instinctual sense that the Federal government’s money does not belong to the government. Some of us claim an equal say in how that money is spent, whether we pay a small amount or a large amount of federal tax. Some of us decide the justice of debt forgiveness as though the debt was owed to us personally. Some of us don’t see this as a personal issue; the federal debt is as remote as the Andromeda galaxy. Those two groups cannot agree.

In a democracy, we argue about the rules. We compete to elect the people who make the rules. Half of us like the rules; half don’t. A democracy survives only as long as each half can forgive the other half for their tyranny while they were in the majority. As long as each half feels that they are getting a turn at making the rules, there is a grudging tolerance, if not forgiveness, and a democracy survives. When one half of the people feel as though they are shut out of the rule making process, the fighting starts. If we can’t practice some forgiveness we don’t deserve a democracy. Tyranny and aristocracy are the political choices of those who don’t forgive. I’ll take democracy.

///////////////////

Notes:

Photo by Pang Yuhao on Unsplash

American Bankruptcy Institute (ABI). (n.d.). A (Very) Brief History of Bankruptcy and Debt in the West. Retrieved January 23, 2021, from https://www.abi.org/feed-item/a-very-brief-history-of-bankruptcy-and-debt-in-the-west

Bennett, D., Lucchesi, A., & Vedder, R. (2010, June 30). For-Profit Higher Education: Growth, Innovation and Regulation. Retrieved January 23, 2021, from https://eric.ed.gov/?id=ED536282

NCES. (2021). The NCES Fast Facts Tool provides quick answers to many education questions (National Center for Education Statistics). Retrieved January 23, 2021, from https://nces.ed.gov/fastfacts/display.asp?id=76

Urban Institute & Brookings Institute, Tax Policy Center (Urban). (2020, October 15). An Updated Analysis of Former Vic President Biden’s Tax Proposals. [PDF]. Retrieved from https://www.urban.org/sites/default/files/publication/103075/an_updated_analysis_of_former_vice_president_bidens_tax_proposals_1.pdf

U.S. Dept. of Education (DOE). (2021). Coronavirus and Forbearance Info for Students, Borrowers, and Parents. Retrieved January 23, 2021, from https://studentaid.gov/announcements-events/coronavirus

Webber, D. A. (2017). State divestment and tuition at public institutions. Economics of Education Review, 60, 1-4. doi:10.1016/j.econedurev.2017.07.007

The Lion’s Roar

Leave a comment

January 17, 2021

by Steve Stofka

After encouraging a rush on the Capitol building, the man whom the Russians helped get elected in 2016 is stepping down. 25,000 troops have been deployed to protect the area around the seat of power during Inauguration week, turning Washington, D.C. into a green zone like that of Baghdad in the aftermath of the Iraq invasion in 2003.

Around the country, governors have deployed troops to protect state capitols against threats of violence. At a news conference this week, Ohio’s governor was asked how many groups had applied for permits to peacefully demonstrate. His answer – none.  He promised an aggressive response from troops stationed around the capitol in Columbus.

On the C-Span call-in show Washington Journal some callers made an equivalence between BLM protestors defacing statues and breaking into stores with the assault on Congress. Fox News posted a graphic comparing the summation of hundreds of summer protests with one event on January 6th, pointing out that Jan. 6th wasn’t so bad. Hundreds equals one.

The Russians had a small influence in Mr. Trump’s 2016 election. The media – mainstream and not so mainstream – gave him the megaphone, the broadcast time and let him roar. Anderson Cooper of CNN explained that he was available when other presidential candidates were not. Media channels need to fill airtime and retain viewers. That’s the way it is.

Mr. Trump’s entire presidency has been a media feast. He likens himself to a lion, paying particular attention to his mane. He spent four years roaring his thoughts and emotions on social media, then watched them echoed on Fox News an hour later. He surrounded himself with sycophants seduced by the chance to pull the strings of the nation’s dancing puppets. He gloried in his power to dominate but lamented the fact that his pride of supporters were so low class. A great lion deserves a good pride.

By his own account, he was the greatest president. He was certainly a president without precedent. Being impeached twice in one term earns him a place in the history books. He inherited a low unemployment rate of 4.6% from the previous administration and, before the Covid crisis, helped lower it to 3.6%. Presidents have far less influence over the broad economy, but they are the ones that wear the crown of roses when the economy is good, and the dunce cap when it is not so good.

During the four years of the Trump administration, the country will likely come close to the $6.8T deficits that it accumulated under eight years of President Obama. Mr. Trump inherited a healthy economy from his predecessor but wanted robust growth, besting some of the growth during the Reagan years. He gambled that big tax cuts for the wealthy would induce them to invest in more domestic manufacturing, that the economic growth would compensate for the loss of tax revenue. It didn’t.  

Christian Nationalists applauded him for moving the capital of Israel to Jerusalem and appointing a roster of right-wing judges to the courts. Their project is to turn the U.S. into a theocracy like Israel, Iran, and Iraq, ruled by leaders of one religious sect. Mr. Trump was a warrior king, like David, and like that ancient Biblical figure, was driven by his character flaws. Instead of white KKK bedsheets, his followers donned horns and capes and grabbed pitchforks as they stormed the castle of Congress, determined to turn the Capitol into the cathedral of a white Christian nation, the New Jerusalem.

Mr. Trump certainly got our attention. Americans are a hard-working bunch, yet we found time to jab him with rancor or praise his pitchfork rhetoric. He was either a menace or mensch. His was not a neighborly disposition; he shoveled coal into the flames that power the engine of American politics.

After touching the snarling beast that hides within our body politic, we now turn to a more measured man, Mr. Biden, in the hopes that there is some sense of cooperation left in our soul.  We see our Capitol surrounded by barriers and remember the words that Mr. Rogers sang, “Won’t you be my neighbor?”

/////////////////

Photo by Catherine Merlin on Unsplash

The Conservative Project

Leave a comment

January 10, 2021

by Steve Stofka

In response to the storming of the Capitol building on Wednesday, a Republican Congressman attacked the actions of the rioters as the opposite of conservative values. In his mind, those values were respect for law and order, a strong military, personal responsibility and freedom, fiscal responsibility, limited government, free markets, and respect for traditional institutions. As I will show, these principles form a wish list of unattainable ideals because one principle subverts another. Without a cohesive supporting structure, conservatism suffers from the same ills as utopian philosophies.

I’ll cover two of these principles: responsibility and freedom. Responsibility can’t incorporate freedom without limiting it in some way. Responsibility is a social covenant – the limiting principle of freedom. All too often, we protect our own freedom and restrict the freedom of others. Some conservatives who believe in personal freedom reject a responsibility for others. The wearing of masks has highlighted this issue. Freedom without responsibility is anarchy.

Too often we reach for solutions that restrict the freedoms of those who are not “us.” Conservatives who advocate for individual freedom reject liberty for those who believe differently than they do. They define human life as the joining of two microscopic cells at conception, then admit no freedom to those who define human life differently. In their support of a progressive income tax, liberals favor the institutional freedom of government over the individual freedom to reap the rewards of one’s labor. Each of us points to the mote in our neighbor’s eye, oblivious to the faults of our own arguments, principles, and perceptions.

At its heart democracy is a contest to control the rule making process. It is prone to mob rule, the changing of the rules to advantage a particular group of people. The conservative Pennsylvania state legislature changed the rules shortly before the election so that mail-in ballots could not be counted until after the polling station ballots were counted. They encouraged Republican voters in the state, most of them rural and with shorter lines at polling stations, to vote in person. On election night, they presented results that excluded most Democratic mail in ballots and later claimed that only ballots cast in person were legitimate. Was this motived by some conservative principle? No, it was prompted by political survival.

Mitch McConnell, the Republican Senate Leader, is a political strategist above all else. He has pointed out that Republicans have not held a filibuster proof majority in the Senate for more than a hundred years. The shift of the population from rural to urban areas has led Republicans to adopt street fighting legal and political tactics to command a voice in state and federal politics. For decades, some states resisted redrawing their voting districts so that rural communities would have far more power than their dwindling population.  Freedom is power. The first principle of a political party is to survive, and to do that conservatives have had to curtail the freedom of others so that they can maintain their own freedom and power.

Both the conservative and liberal projects exclude inconvenient aspects of current events because reality is complex and inconvenient for partisan purposes. Like a scientist who makes simplifying assumptions to model a process, political factions distort events to justify their perceptions and beliefs – if facts don’t fit their political narrative, change the facts.

The master fact-shaper is Rupert Murdoch. Over the first five years of building the news bubble called Fox News, he lost almost a half-billion dollars. The network’s audience is less than a fifth of just one major network, but its controversial hosts leverage their impact by taking controversial positions.

Seeing the success of the Fox model, One America Network has presented an even more polarized version of events, hoping to pull viewers away from Fox. Politicians are wary of a challenge from a small cadre on the extreme wing of each side, so they embrace the extreme to avoid “getting primaried.” In the fractured media landscape, some are imitating that polarizing process, rushing to the extremes to gain an audience.

The Republican Party was the champion of anti-slavery during the Civil War. Members of that party now want to preserve the statues of Confederate generals who fought to protect slavery. Why? After the Civil War, the cause of the Confederacy was repackaged by Southern elites as a cultural and historical institution; conservatives defend some cultural institutions while rejecting others as invalid. They champion the family and the institution of marriage but get divorced as much as the rest of the population. They support the Constitution’s protection of religious institutions if they are Christian, but barely tolerate its protection of other religions.

Unlike the liberal philosophy, the conservative project must ever be a reactionary ideology, a cadre of self-proclaimed elitists who resist the normal and healthy change of human institutions. Like utopian philosophies, its goal is stasis.

Although conservatism espouses freedom, it cannot incorporate the liberty of the human will into its philosophy. Without that freedom, personal responsibility is but a set of behavioral rules, conventions imposed on the majority by a minority. It is a strategy, not a philosophy. Because it cannot absorb change, it is a lifeless shell that other ideologies inhabit for a time, then discard, like the hermit crab.

In the 19th century, Republicans first found and inhabited the shell. In the past forty years Libertarian groups, Christian groups, the Tea Party, and conspiracy theorists have donned the empty shells of conservatism, only to be frustrated by the very rigidity of the ideology. Those who are comfortable in the shell are the political strategists like Mitch McConnell who use it quite ably as a shield from political attack.

//////////////////

Photo by Jan Zikán on Unsplash

A Public Sense of Duty

Leave a comment

Each New Year we renew our hope in the future, but have we lost our sense of duty to the future? Following World War 2, the U.S. and Russia engaged in a protracted Cold War of competing ideologies. We fought proxy wars in Vietnam and Indochina, South and Central America. Instrumental to the battle against Communism, America invested in our children’s education.

In 1978, the homeowners of California revolted against the rising property taxes that funded public schools. Since then, our per capita spending on children and young adults has steadily declined.

China’s spending on education has risen dramatically in the past two decades but it still lags the U.S. in spending as a percent of GDP. For how long? Do Americans have the “fire in the belly,” that focused desire to best the enemy, that we did seventy years ago?

In our technological society, the level of education of one’s parents has become a class distinction. The National Center for Children in Poverty (NCCP) reports that 80% of low-income families are headed by parents without a high school diploma. With a high school diploma, kids still have a 60% probability of being born into a low-income family (NCCP, 2021).

A child born in a middle-class suburb will receive a better education than one born in a poor neighborhood, where many residents are renters. Property taxes fund public schools, but landlords don’t live in those neighborhoods and want low property taxes. They have an influential voice in local politics.

Two years ago, I wrote about the post-war surge in college degrees (Stofka, 2018). Before WW2, only 5% of children earned college degrees; more than a third of children now earn college degrees (NCES, 1993). Is our society paying for that learning and experience? Despite their educational skills, teachers in charter schools make the same $53K average as all employees in private industry (NCES, 2020, Table 5). The pay in charter schools is 15% less than public schools (Table 5); that may explain the much higher ratio of black and Hispanic teachers in charter schools (Table 1).

An NCES survey in 2003-4 showed a national student teacher ratio of almost 15. The ratio in a 2018 survey was 21 students per teacher (NCES, 2020). Our educational system is asking our teachers to do more, to have a bigger and more expensive skill set, but does not pay them for their talent and hard work.

Construction workers average $63K per year, higher than public school teachers (BLS Series CES2000000011). 50% of teachers in traditional public schools have a master’s degree, in charter schools it is 39% (Table 4). Do half of all construction workers have a master’s degree? No, of course not. Why does our society value a painter or a carpenter more than a public-school teacher?

Construction workers provide mostly private goods, where private parties benefit from their work. Teachers provide public goods; the immediate benefit is only to the parents of the children in school. The provisioning of public goods and the caretaking of natural resources are only possible when a community has a sense of public duty. Has it declined in the past few decades?

Americans once built a sense of community in opposition to the common enemy of Communism. Covid-19 might have been that common enemy; it has highlighted just how fractured our society is. The common enemy is us, our neighbors, our professionals, and institutions.

The erosion of trust began in the 1960s but culminated in the financial crisis a decade ago. We learned that our institutions were run by pirates, whose duty was chiefly to other pirates, the elites who knew how to work the system. Under President Obama, Attorney-General Eric Holder did not want to waste public money on prosecuting financial crimes when there was a small chance of conviction. Neither he nor Mr. Obama understood the damage of that policy. The American people watched as the pirates were let off with a slap on the hand. Washington was awash with scoundrels.

In 2016, Americans elected an outsider, a pirate in the real estate industry who pledged to rid Washington of pirates. The Trump administration proved to be little more than a carousel of pirates. The Senate, in a shambles under the leadership of Mitch McConnell, held few confirmation hearings for department chiefs. Why bother? Most had temporary titles as acting heads of departments and agencies for a few months before another Twitter outrage from the pirate in chief tossed them overboard.

President-elect Joe Biden can avoid the policies of the Trump administration that so undermined the trust of the American people, but can he avoid those policies of the Obama administration which caused many Americans to abandon any hope for fairness in Federal policy? When public trust and public duty are so greatly diminished, the country declines – its spirit, its institutions and its infrastructure. Will we – can we – recapture that sense of public duty?

////////

Photo by Dan Russo on Unsplash

NCCP. (2021). United States Demographics of Low-Income Children. Retrieved January 02, 2021, from https://www.nccp.org/demographic/?state=US

NCES. (1993, January). 120 Years of American Education: A Statistical Portrait. Retrieved January 02, 2021, from https://nces.ed.gov/pubs93/93442.pdf#page=17

NCES. (2020, September). Characteristics of Public and Private Elementary and Secondary School Teachers in the United States. Retrieved January 02, 2021, from https://nces.ed.gov/pubs2020/2020142rev.pdf

Stofka, S. (2018, June 12). Study Dollars. Retrieved January 02, 2021, from https://innocentinvestor.com/2018/06/10/study-dollars/