Stupid and Smart Money

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March 22, 2020

by Steve Stofka

When I took some money out of the ATM this week, I was surprised to see a note scrawled on one of the bills. “Stupid money 2002,” it read. I hadn’t thought about that money in a while and here it was paying me a visit. In those years, my accountant had me on a program of investing regularly every month. The stock market was down 20% from the highs of the dot-com boom that ended in 2000. I didn’t know it at the time, but the market would lose another 30% before hitting bottom. I certainly didn’t like putting money in the market only to see it disappear down a black hole.

“You’re not investing in money,” she advised. “You’re buying shares in profit machines, the top companies in the country. Dollar cost averaging buys more shares when stock prices are low, fewer shares when prices are high.” Ok, fine, I said. I kept shoveling money into a black hole. Two years later, that stupid money had turned into smart money. An Invesco analysis found that investors more than doubled their money even when they invested at the middle point of a stock market downturn (Watts, 2020).

When we withdraw money for retirement income, a child’s education, or to start a business, the money is not separated into stupid and smart. Money is fungible. It can’t be separated. Let’s say I give my child $100 to buy some books for school. The next day he is wearing a new set of headphones and I’m angry. “I didn’t use the $100 you gave me,” he says. “I used my birthday money.” I can’t tell the difference.

That’s a problem for the Senate and House as they draft bills to bail out large companies. Most of the windfall from the 2017 reduction in corporate taxes went to stock buybacks. Now companies complain that they don’t have enough reserves to weather the current crisis.

After receiving bailout funds during the last crisis a decade ago, large companies paid hundreds of millions of dollars to their executives while they laid off millions of workers. Richard Trumka, the President of the AFL-CIO, voices the concerns of many lawmakers when he calls for provisions against the companies using this year’s bailout money for stock buybacks and executive bonuses (C-Span, 2020). In response to a question from reporters at Saturday’s COVID-19 press conference, President Trump agreed that he wants to see a provision against using funds for stock buybacks in any proposed legislation. Will Washington politicians do the right thing? An army of corporate lobbyists and lawyers work tirelessly to suck as much money out of Washington as they can.

How will voters judge Mr. Trump’s response to this crisis? Is this his Katrina? Will there be an election this November? The political viewpoints in this country are so disjointed that voters from each side see the facts through their own ideological filter.

While our leaders call for unity, let’s be on guard against our own pack instincts. Many years ago in New York City during the gas embargo, I watched a man get beat up over one gallon of gas. He didn’t wait his turn.

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Notes: C-Span. (2020, March 19). Newsmakers with Richard Trumka. [Audio, transcript]. Retrieved from https://www.c-span.org/video/?470456-1/newsmakers-richard-trumka

Photo by Colin Watts at Unsplash.com

Watts, W. (2020, March 21). As Dow wipes out over 3 years of stock-market gains, here’s a warning about calling the bottom. [Web page]. Retrieved from https://www.marketwatch.com/story/as-dow-wipes-out-over-3-years-of-stock-market-gains-heres-a-warning-about-calling-the-bottom-2020-03-21?siteid=yhoof2&yptr=yahoo

Event and Response

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March 15, 2020

by Steve Stofka

The response to an event is part of the event. While driving on the highway this week, I listened to an NPR report on the relatively few deaths from the COVID-19 virus. I passed under a sign telling me that almost 600 people died in my state last year in auto accidents. The number of deaths nationally was almost 39,000. In 2019, we had almost 20% fewer fatalities than 2002 even though we drove 20% more miles during the year (CDOT, 2020). Cars are safer now because the government set safety standards for car manufacturers. Our institutions are strong. We tackle thorny problems and fix them. Was the reaction to this virus a bit too strong?

On Friday, the death toll from the virus climbed to 50. During the winter flu season of 2017-18, the CDC estimated 70,000 deaths (CDC,2020). That’s over 1300 per week. 50 didn’t seem so bad. One person on Twitter thought this panic buying of toilet paper was all silly. Then he went into his grocery store and the shelves were empty of Twix, his comfort chocolate. A bit of black humor. We may need more humor in the weeks to come.

Despite the mortality from flu each season, the world community has built a collective herd immunity to the disease over the past two thousand years. What’s herd immunity? If I have antibodies against a virus, I won’t be a carrier of the virus to someone else. This reduces transmission of the disease. COVID-19 is a new type of coronavirus. No one has built an immunity, so it travels fast.

Six months ago a friend asked me what I thought about the stock market. I told him I thought it was overpriced. Should I sell some of the stocks in my 401K, he asked? I shrugged. What if stocks went down 50% like in 2001 and 2008, I asked? Would you panic? He didn’t really need the money for five years, so probably not, he said. I’d be anxious, he said. Would you be anxious if you had no money in the stock market, I asked? Yeah, he said. I hear about the stock market on the radio, get news about it on my phone. I’d worry there was another crisis like the financial crisis coming. Do you think stocks are going to go down 50%, he asked? I said I have no idea. If I knew the future, I would have to hide away in a cave somewhere because people would want to kidnap me and make me tell them what the future was going to be. The past has already happened and very often we don’t understand what happened. Even if we knew what the future was, we would have trouble understanding it.

The long bull market in stocks ended this week and the SP500 index officially entered a bear market 20% below its recent high. The bull market almost ended in 2018 when the index fell 19% from a recent high but that didn’t count. 19% is not 20%. What about 2011 when the 20% decline occurred during a trading day but recovered enough by the end of the day to be a decline of less than 20%? That didn’t count either because the “official” declaration of a bear market is based on the day’s closing price. If the 20% decline benchmark were based on the yearly closing of the SP500, we still are not in a bear market (only 16.1% down) and didn’t come close in 2018 or 2011.  But that’s not newsworthy, is it?

The financial crisis came about because of a contagion in our financial markets. That led to a contagion of distrust in our institutions in this country and around the world. The current crisis started with a contagion between people that is spreading to our financial markets. This week the Federal Reserve stepped in to stabilize the bond market (Cox, 2020).

U.S. Treasuries are the benchmark for safety around the world. Companies around the world with long term obligations – banks, insurance companies and pension funds – hold U.S. government debt. The key word in that last sentence is “hold.” As fear gripped the market in Monday’s open this week, long term Treasuries surged 10% in price. A lot of buyers wanted safety. In response, companies that would normally hold their Treasury bonds wanted to take advantage of the price increase, so they put some of their bonds on the market. The bond dealers were not equipped to handle this much previously issued long term debt coming to the market. They are accustomed to trading newly issued Treasury debt. They had trouble matching buyers and sellers. Even as the stock market fell 10% on Thursday, the price of long-term Treasury bonds fell 4% in the last few hours of that afternoon. They are supposed to move in opposite directions. Something was wrong. If there were problems in the U.S. Treasury market, it could spread another kind of contagion throughout the bond market. The stock market is like a toy boat floating on the big pond of the bond market. On Friday morning, the Fed announced that they would start buying Treasuries, starting with long-term bonds.

The financial crisis of a decade ago demonstrated that the response to a crisis becomes part of the crisis – for good or bad. A crisis creates a bottleneck which causes unexpected consequences which may need unexpected policy responses. I tell myself that our institutions are strong, that we fix problems. I’m starting to worry more about the people who stock up on a year’s supply of toilet paper. It will not save them from the zombie apocalypse. The zombies eat people, not toilet paper. I thought everyone knew that by now.

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Notes:

CDC. (2020, January 10). Disease Burden of Influenza. Retrieved from https://www.cdc.gov/flu/about/burden/index.html

Colorado Department of Transportation (CDOT). (2020, February 25). Colorado Fatalities since 2002. [PDF]. Retrieved from https://www.codot.gov/library/traffic/safety-crash-data/fatal-crash-data-city-county/Colorado_Historical_Fatalities_Graphs.pdf/view

Cox, J. (2020, March 14). The Fed to start buying Treasuries Friday across all durations, starting with 30-year bond. CNBC. Retrieved from https://www.cnbc.com/2020/03/13/the-fed-details-moves-to-buy-treasurys-across-all-durations-starting-with-30-year-bond.html

Photo by Jay Heike on Unsplash

Revival

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March 8, 2020

by Steve Stofka

A heartfelt endorsement by veteran S. Carolina Congressman Jim Clyburn ignited a outpouring of voter support for Joe Biden in that state’s primary a week ago. Mr. Biden rode that momentum into Super Tuesday a few days later and the campaign that was on life support became the leading candidate in the Democratic race.

The following day the stock market rallied a whopping 4%. Big investors know that Mr. Biden will not make life difficult for them. He is old school. He knows that there are two sets of rules and the rich write the rules. Mr. Sanders makes Wall St. uncomfortable because he also knows that there are two sets of rules. He wants to write a new rule book where the rich don’t write the rules. That’s bad for rich people. Here’s why.

Bernie Sanders is often branded as a socialist. He brands himself with the qualifier Democratic Socialist. As the Wall St. Journal’s Richard Rubin pointed out this week, Mr. Sanders is not proposing a European model of socialism (Rubin, 2020). Those progressive systems are funded by a regressive sales tax called a VAT (Wallop, 2010). This tax burden falls mostly on middle class and working families. Mr. Sander’s plan funds progressive programs with progressive taxes falling mostly on the wealthy. That ain’t socialism. We need a naming contest for a system where the wealthy do extra to help the community. Four syllables or less. I’d suggest Neighborism based on the movie “It’s a Wonderful Life,” with Jimmy Stewart. What’s your suggestion?

Last month President Trump launched a political tweet missile at the Supreme Court (Baker, 2020). This past week Senate Minority Leader Chuck Schumer hand carried his warning to the steps of the Supreme Court. He was part of a protest regarding a current course case that tests the court’s earlier decisions beginning with Roe v. Wade almost fifty years ago. Chief Justice John Roberts has admonished President Trump, Mr. Schumer and others that they should not threaten the Supreme Court. Mr. Schumer says he regrets his remarks (Pecorin, 2020). President Trump last apologized for his remarks when he was in the first grade.

The high court’s Bush v. Gore decision chose the outcome of the 2000 Presidential election and tarnished the court’s reputation as an objective body. Since the beginning of his tenure as Chief Justice in 2005, Mr. Roberts has tried to resuscitate the court’s reputation. In this age, tarnished reputations stay tarnished.

Was the court ever impartial? Over a hundred years ago, Albert Einstein sparked a revolution in physics with a set of mathematical equations which showed that impartiality was impossible. Our observations and conclusions are based on our frame of reference. In the past century an overwhelming body of evidence has substantiated Einstein’s claims.

A central proposition in physics has spread to the humanities. Is this a “hey man, everything is relative” moment? No. Understanding an argument’s frame of reference takes time and research. Most of us are too pressed for time and tend to discard arguments that we don’t instinctively like. Chief Justice Roberts maintains that the members of the high court are not prone to this common human fallibility. Do they cast aside the ideological framing they have formed during their life and career and reach a deliberative decision that fully balances all the considerations of a case before the court? No, of course not. Mr. Roberts is still living in a Newtonian world of imagined impartial justice. Perhaps he should remove his robe while shaving and see the man reflected in his mirror.

A long time ago, my sales manager said to me, “Either you believe in your own b.s. or someone else’s b.s. Wouldn’t you rather own it?” This week Mr. Biden looked like a man who owns someone else’s b.s. – that of Jim Clyburn and the folks in S. Carolina who gave Mr. Biden a sense of confidence. His walk up the stairs to a stage platform has grown more vigorous since Super Tuesday. His voice projects with a confidence and assuredness that I didn’t hear just two weeks ago. He no longer sounds like a frail man. I’m still not convinced he owns his b.s., but he may get there in the next few months.

Mr. Sanders, on the other hand, is a man who has owned what he says for decades. As an Independent, he has played a minor role in the Democratic political hierarchy despite his many years in the Senate. Will voters choose the man of measured manner, Mr. Biden, or put their money on the impassioned and principled Mr. Sanders?

I wish my teachers had told me that I needed to be 70+ to run for President. We have too many old people in Congress. I thought so when I was young. I think so today. Yes, old people have experience, sagacity and some have a more measured temperament. The age of the people we send to represent us in Washington does not reflect us.

The Congressional Research Service recently computed the average age of the House at nearly 58 years; of the Senate, 62 years (Manning, 2018). According to the Census Bureau, the U.S. population – including children – has a median age of 38 (2019). If we take out the 25% of the population under 18, a reasonable estimate of the median age of adults might be an age of 50, ten years younger than the current average age of the members of Congress.

Patrick Leahy, the other Senator from Vermont, has held his seat for almost half a century. They come to Washington and die in Washington. They believe that they have earned an objective wisdom through their long service in their seats. To paraphrase Socrates, the man who thinks he is wise is a danger to himself and others. Step aside. Let the young blood walk the halls and make a different set of mistakes than the ones you once made. Let go. Our country will be better for it.

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Baker, P. (2020, February 25). Trump, in India, Demands Two Liberal Justices Recuse Themselves From His Cases. Retrieved from https://www.nytimes.com/2020/02/25/us/politics/trump-supreme-court.html

Manning, J. (CRS). (2018, December 20). Membership of the 115th Congress: A Profile. Congressional Research Service. Retrieved from https://www.senate.gov/CRSpubs/b8f6293e-c235-40fd-b895-6474d0f8e809.pdf

Pecorin, A., et al. (2020, March 5). Schumer says he regrets comments Chief Justice Roberts called ‘dangerous’ threats. ABC News. Retrieved from https://abcnews.go.com/Politics/chief-justice-john-roberts-calls-sen-chuck-schumer/story?id=69396928

Photo by Louis Velazquez on Unsplash

Rubin, R. (2020, March 6). Bernie Sanders’s Tax Plan Would Be Biggest Expansion of Taxation Since World War II. Wall St. Journal. Retrieved from https://www.wsj.com/articles/sanders-plan-would-hoist-taxes-11583449105 (paywall).

U.S. Census Bureau. (2019, July 16). Median Age Doesn’t Tell the Whole Story. Retrieved from https://www.census.gov/library/stories/2019/06/median-age-does-not-tell-the-whole-story.html

Wallop, H. (2010, April 13). General Election 2010: a brief history of the Value Added Tax. The Telegraph. Retrieved from https://www.telegraph.co.uk/news/election-2010/7582869/VAT-a-brief-history.html

President Mayor?

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March 1st, 2020

by Steve Stofka

Among the Democratic candidates for President are two mayors. Mike Bloomberg was mayor of New York City for the twelve years following 9-11. Pete Buttigieg just completed an eight year stint as mayor of South Bend, Indiana. Americans have never elected a recent mayor to the presidency (Badger, 2019). Will this year be different?

Mayors are responsible for everything that happens in their city – from policing practices to snow removal. John Lindsay, a former mayor of New York City, almost lost his job because of a snowstorm (Marton, 2019). Too many homeless people in Los Angeles? Mayor Eric Garcetti takes full responsibility (City News Service, 2019). Few residents write to the mayor to say that they are so happy that their streetlights are working. The lack of complaints tells a mayor that he or she is doing a good job. Mayors are a tough bunch with strong shoulders.

Do we take the same responsibility for our savings portfolios? If interest rates are too low, do we keep all the money in a savings account and blame the system? When the market goes down, do we rethink our risk appetite, or do we blame those invisible market forces?

 At nearly 11 years, this bull market is the longest running in the past one hundred years. The 400% gain since the March 2009 low beats both the gains of the 1920s and 1990s bull markets. Just a month ago, the investment firm Goldman Sachs estimated that there was still room for more price appreciation this year (Winck, 2020).

This week’s downturn was made sharper by several practical factors. In any abrupt downturn that last a few days or longer, margin calls prompt more selling. What is a margin call? Let’s say I borrow $50 from my broker to buy a $100 stock. If the price goes down to $90, my broker wants me to pony up another $5. If I don’t have the cash, the broker will sell some of my holdings to raise the cash.

The Coronavirus prompted investors to reassess projected earnings for this year and to assign a greater risk to their stock exposure. A lot of investors bought bonds with the proceeds from their stock sales. Worst time to buy long term bonds? Probably. An ETF of 30-year Treasury bonds (TLT) hit its highest price ever this week.

President Trump regards stock market performance as an important indicator of his success. What will he do if market prices decline another 10%? Will he attack Fed chairman Jerome Powell as he did in 2018? Has Mr. Trump become the most wearisome President in modern history?

Joe Biden took almost half the votes in the S. Carolina primary this week, but Bernie Sanders is still leading the roster of candidates with 54 delegates (Leatherby and Almukhtar, 2020). It’s a long road to the goal of 1991 delegates to secure the nomination. The delegates captured in the first four primaries are dwarfed by the 1344 delegates in play this week on Super Tuesday. 643 of those delegates are in California and Texas. It’s a reminder of the power of a few states in the selection of a President.

What about the mayors in the race? Pete Buttigieg is 3rd in delegate count. Because Mike Bloomberg entered the race late, he set his sights on Super Tuesday and currently has 0 delegates. Elizabeth Warren and Amy Klobuchar have both worked long and hard, have enthusiastic supporters but have earned few delegates. Running for the top office is a hard job.

Will this week bring more downturns in the market? There was a big surge of investors willing to buy late Friday afternoon. It’s a good sign when large investors are willing to take a position before the weekend.  

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Notes:

Badger, E. (2019, November 18). Pete Buttigieg Tests 230 Years of History: Why Can’t a Mayor Be President? N.Y. Times. Retrieved from https://www.nytimes.com/2019/11/18/upshot/Buttigieg-2020-race-mayors.html

City News Service. (2019, August 26). Mayor of LA Promises More Help to Solve Homelessness Problem. Retrieved from https://www.nbclosangeles.com/news/local/streets-of-shame/mayor-garcetti-homeless-los-angeles-crisis-response/129407/

Leatherby, L., & Almukhtar, S. (2020, February 3). Democratic Primary Election Results 2020. Retrieved from https://www.nytimes.com/interactive/2020/us/elections/delegate-count-primary-results.html

Marton, J. (2019, January 28). Today in NYC History: John Lindsay’s No Good, Very Bad Snowstorm of 1969. Retrieved from https://untappedcities.com/2015/02/09/today-in-nyc-history-john-lindsays-no-good-very-bad-snowstorm-of-1969/

Photo by Mateus Campos Felipe on Unsplash

Winck, B. (2020, January 23). GOLDMAN SACHS: Lagging fund inflows can drive the stock market even higher | Markets Insider. Retrieved from https://markets.businessinsider.com/news/stocks/stock-market-higher-forecast-inflows-safe-asset-crowding-goldman-sachs-2020-1-1028840905

Branders vs Builders

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February 23, 2020

by Steve Stofka

At the National Press Club this week, Army secretary Ryan McCarthy spoke about people resisting change “because they focus on what they are going to lose instead of what they are going to gain” (C-Span, 2020). True? Not true?

In 2016, almost half of voters voted for change. In 2008, former President Obama ran on a platform of change. In his candidacy for the 2020 Democratic Presidential nomination, Bernie Sanders is touting big policy changes. He is leading in early caucus primaries and early caucus results place him as this weekend’s winner in Nevada.

Americans have been able to embrace change because our political institutions resist change. Unlike Britain, we have a written Constitution that proscribes or sets boundaries for change. In the U.S., minority interests are given more power to play an obstructionist role and this is particularly true in the Senate. When Harry Reid was the Democratic Majority Leader, he accused Republicans of obstructionism (C-Span, 2011). When the Republican Minority Leader, Mitch McConnell, became the Majority Leader in 2015, he made the same accusations against Democrats (C-Span, 2017). The parties trade scripts.

Tired of listening to the same script, a lot of voters chose an off-script candidate, Donald Trump, in 2016. For most of his term, the White House has been run on an informal basis, changing policy with the political weather in Washington. President Trump is a brander, not a builder.

Presidents who want to enact a large part of their agenda must be both branders and builders. It is an unusual combination of traits. In the 20th century, only FDR and Ronald Reagan were both. Perhaps Teddy Roosevelt. This is a subjective call. What are your candidates for the title of both brander and builder?

When a President is capable of both roles, the other party reacts strongly to what they build and their brand. This is certainly true of both FDR and Reagan. Republicans continue to tear away at the federal bureaucracy first erected by FDR. President Reagan was and is the champion of that movement among mainstream Republicans.

Responding to the worst recession since the Great Depression, Democrats elected a leader they hoped could emulate the substantial change in direction that FDR brought about. President Obama was neither a brander nor a builder. His “no drama” demeanor could not build coalitions in an age when people wanted a “fire in the belly” leader like Mr. Trump.

Bernie Sanders is such a “fire in the belly” candidate, but can he build the coalitions needed to pass direction changing legislation? He has not done so during his thirty years in the House and Senate, according to NYU historian Timothy Naftali (Stein, 2020). His campaign slogan is “Not me, us!” He is asking voters to play a vital role in melding political coalitions.

Mr. Bloomberg’s anemic first performance on the debate stage this week was hardly encouraging. Yet, Mr. Bloomberg appeals to practical Democratic and Independent voters, as well as establishment Republicans like Clint Eastwood who have tired of watching President Trump playing in his White House sandbox. This weekend Mr. Eastwood gave Mr. Bloomberg a thumbs up (Berley, 2020). Why would Republicans vote for a Democratic candidate? If the Senate remains in Republican hands, they will act as a check on a Democratic President and House. If other notable Republicans signal an approval of Mr. Bloomberg, that might persuade pragmatic Democratic voters to choose him as well. The road to the White House is a maze of planning, circumstance, and shifting voter and donor alliances.

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Notes:

Berley, M. (2020, February 22). Clint Eastwood Endorses Bloomberg, Citing ‘Ornery’ Politics. [Web page]. Retrieved from https://www.bloomberg.com/news/articles/2020-02-22/clint-eastwood-endorses-bloomberg-citing-ornery-politics

C-Span. (2011, September 6). Opening Remarks from Senators Reid and McConnell. [Video, Web page]. Retrieved from https://www.c-span.org/video/?301374-4/opening-remarks-senators-reid-mcconnell (01:11).

C-Span. (2017, July 11). Senators McConnell and Thune on Health Care. [Video, Web page]. Retrieved from https://www.c-span.org/video/?431157-2/senators-mcconnell-thune-health-care (13:24).

C-Span. (2020, February 14). Army Secretary Ryan McCarthy at the National Press Club. [Video, Web page]. Retrieved from https://www.c-span.org/video/?469279-1/army-secretary-ryan-mccarthy-national-press-club. (8:14)

Photo by Alfred Kenneally on Unsplash

Stein, J. (2020, February 12). As Bernie Sanders ascends, his potential White House approach to the economy comes into focus. Washington Post. [Web page]. Retrieved from https://www.washingtonpost.com/business/2020/02/12/bernie-sanders-ascends-potential-white-house-approach-obstacles-come-into-focus/

The Billionaire Ballot

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February 16, 2020

by Steve Stofka

“Dad, can I get a new bike?”

“What do you think money grows on trees?”

“No. If it grew on trees, I wouldn’t ask you for a new bike. I’d ask for a ladder so I could pick my own money.” A great comeback that I never said. No new bike. I could still dream of being President someday.

My dad was born before the Great Depression, a time when money lived in the ground. In 1849, people went crazy when they learned that there was gold in the dirt of California (PBS, n.d.). It’s God’s will, some said. In 1876, eight years after the Federal government signed a treaty with the Sioux Indians, gold was discovered in the Black Hills of North Dakota. Sorry, Sioux Indians, but you’ll have to move (NPS, n.d.). 

It took labor and money to dig up money when it lived in the ground. Now it lives in the digital “cloud.” Are we inherently distrustful of money that can be created with the push of a finger on a computer terminal? Seems too easy. We are 50 years into a system that is untethered from any practical restraint. The Federal Reserve guides their monetary policy according to goals set by a law passed at the height of inflation in the 1970s. They do not have to dig up dirt to get more money. They don’t have to keep gold or silver reserves. It seems like the same magical thinking of a kid who dreams about becoming President.

Presidential candidates must work hard to generate enthusiasm and donations of time and money to fuel their campaigns. A successful candidate for the Presidency usually finds a phrase that resonates with supporters.  In 2008, former President Obama used “Yes, we can” and various combinations of “Change” (List of U.S. presidential campaign slogans, 2020). President Trump used “Make America Great Again” during his 2016 campaign. His current slogan is “Keep America Great.” I heard Presidential candidate Sen. Elizabeth Warren sound out “Fighting Back” at a Virginia rally this past Thursday (C-Span, 2020). Mike Bloomberg has blanketed media with the phrase “Mike will get it done” (Mike Bloomberg, 2020).

In 2016, Marco Rubio and other Republican candidates complained that the inexperienced Donald Trump could buy the party’s nomination with his vast resources. Mr. Trump had promised to spend $100 million of his own money and spent $65 million in the final accounting (Peters & Storey, 2016). This was only half of the $121 million in inflation adjusted dollars that Ross Perot spent on his Presidential campaign in 1992 (Boaz, 2019).

Enter Mike Bloomberg. In the few months since he announced his candidacy, his campaign has spent $400 million (Burns & Kulish, 2020). His political spending is dwarfed by his charitable giving. In 2019, Mr. Bloomberg’s foundation donated more than $3 billion to charity. Unlike President Trump, Mr. Bloomberg has demonstrated his business acumen and has past political experience in the mud pit of New York City politics. He is used to the tough bargaining and political alliances that consume Washington. Mr. Trump knows only intimidation, not bargaining. He is the Twitter version of Venezuela’s former President, Hugo Chavez, who used radio to attack his political enemies.

What entices these billionaires to want a high stress job in Washington? What lies in the ground in Washington is not gold, but great power and reputation. Under FDR in 1932, the Democrats first began to consolidate political power in Washington. World War 2 and the Cold War helped grow that power base. So did the Federal programs of social support – Social Security, Medicare, Medicaid and countless others. Beginning in the 1960s, Congress began to grant the President more executive power to conduct war and administer the growing array of Federal agencies.

As the power of the Presidency grew, each Presidential campaign attracted more money. Through a series of campaign reform bills, Congress attempted to regulate the flow of money into politics. In the past decade, two recent Supreme Court decisions have undone many campaign regulations (Ballotpedia, n.d).

The discovery of gold in California and South Dakota attracted many prospectors who worked hard to grab the prize. Like today’s Presidential candidates, many miners did not have the resources necessary to capitalize on the opportunity. Well-funded companies like Homestake Mining proved successful. This is the era we are in now. Little Johnny or Mary can put away their dreams of being President. Is that good for the country?

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Notes:

Ballotpedia. (n.d.). Bipartisan Campaign Reform Act. Retrieved from https://ballotpedia.org/Bipartisan_Campaign_Reform_Act

Boaz, D. (2019, July 9). RIP Ross Perot, the Billionaire Who Ran for President. Retrieved from https://www.cato.org/blog/rip-ross-perot-billionaire-who-ran-president. Mr. Perot spent $65 million, or about $121 million in current dollars.

Burns, A., & Kulish, N. (2020, February 15). Bloomberg’s Billions: How the Candidate Built an Empire of Influence. Retrieved from https://www.nytimes.com/interactive/2020/02/15/us/politics/michael-bloomberg-spending.html

C-Span. (2020, February 14). Senator Elizabeth Warren Campaigns in Arlington, Virginia. Retrieved from https://www.c-span.org/video/?469313-1/senator-elizabeth-warren-campaigns-arlington-virginia (43:08).

List of U.S. presidential campaign slogans. (2020, February 14). Retrieved from https://en.wikipedia.org/wiki/List_of_U.S._presidential_campaign_slogans

Mike Bloomberg 2020. (2020). Mike Bloomberg for President: Official 2020 Campaign Website. Retrieved February 14, 2020, from https://www.mikebloomberg.com/

Peters, J. W., & Shorey, R. (2016, December 9). Trump Spent Far Less Than Clinton, but Paid His Companies Well. Retrieved from https://www.nytimes.com/2016/12/09/us/politics/campaign-spending-donald-trump-hillary-clinton.html

Photo by annie bolin on Unsplash

Remove Impeachment?

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February 9, 2020

By Steve Stofka

Despite a strong labor market and a rising stock market, last year’s deficit was the largest in seven years (Tankersly, 2020). The tax cut package of 2017 has not delivered the promised economic growth. The first estimate of 2019 GDP annual growth was 2.3% (FRED, n.d.), the average during the past four years of the Obama administration. According to Mr. Trump, that growth rate was a “disaster” under Obama. Now it is a good growth rate. In his State of the Union address this week, President Trump said that “our economy is the best it has ever been” (CPR, 2020).

Growth during the three years of the Trump administration has averaged 2.5%, slightly above the tepid rate of growth under Obama. The growth standard is 3.0%, the average during the last fifty years of the 20th century.

How to make a tired nag of an economy look like a racehorse? The White House Council of Economic Advisors compared GDP growth during the Trump administration to growth projections of 2.0% made before the 2016 election (CEA, 2020). That comparison makes the growth rate look ½% higher than expectations. A component of GDP growth is government spending, whether that spending is borrowed or not. That additional growth has come at the expense of the Federal debt (CBO, 2020).

Like the Obama administration before, the Trump administration has bought itself GDP growth by borrowing money from the rest of the world and spending it. Without those annual deficits, GDP growth would have been negative for the past 15 years. The stock market has climbed 33% since the 2016 election because the money is flowing freely from Washington and the Federal Reserve. The amount of borrowed and printed money that the Federal government pumps into the economy creates additional profits for companies.

As predicted, President Trump was found not guilty by the Senate. Since the founding of the country, three Presidents have been tried for impeachment but not convicted. Let’s look at the Presidents who were not impeached even though they committed arguably impeachable offenses.

 President Franklin Delano Roosevelt was not impeached by a Democratic House for lying to Congress about the lend lease program to Britain in 1940. President Lyndon Johnson was not impeached by a Democratic House for lying to Congress about the Gulf of Tonkin attack in Vietnam in 1964 (Moise, 2019). President Ronald Reagan was not impeached by a Democratic House for his complicity in selling arms to Iran (Brown U., n.d.).

All of these were matters were of grave national importance to the American people. President Clinton was impeached by a Republican House for lying to them about his affair with a White House aide. Tawdry, yes. National importance? No.

Since no president has been convicted of impeachment, should we enact a Constitutional amendment to nullify impeachment? The arguments we have today about impeachment reflect the same arguments made by delegates at the Constitutional Convention in 1787 (Klarman, 2016). Some thought that state legislatures should initiate impeachment proceedings. The “New Jersey” plan proposed that a majority of state governors could remove a president. Some wanted to give the Congress power to remove a president at will, but others thought that would make the president subservient to Congress. Thinking that Congress might threaten impeachment as retribution for a presidential veto, some advocated against impeachment at all. Shouldn’t the voters decide, they argued? If the president were elected every two years, the voters could vote a president out of office at the next election. A Presidential term should last longer than two years was the counterargument. Most of the delegates agreed that impeachment was a check on a president and decided to include it in the Constitution.

What offenses should be subject to impeachment? The delegates disagreed on that as well. Some thought it should be for “malpractice or neglect of duty” but others thought the offenses needed to be more serious. “Treason, bribery, and corruption” was suggested, but “corruption” was not specific enough. “Maladministration” was proposed but was rejected. How about “other high crimes and misdemeanors against the State?” Well, that was more specific than “corruption” and “maladministration,” but not too specific as to straitjacket Congress. The final language inserted in the Constitution was “Treason, Bribery, or other high Crimes and Misdemeanors” (Article II, Section 4). Today, we argue about that wording. Go figure.

When the Constitution was written, the delegates did not contemplate a political system with two parties. Within two decades, they realized their mistake and initiated the 12th Amendment to have the president and vice-president elected together from the same party.

Some Constitutional delegates worried that the impeachment process would become politicized. History has shown that they were right. Should we admit that a conviction of impeachment is practically impossible? We must either lower the threshold for conviction in the Senate from a super-majority of 67 Senators to a majority vote, or remove the idea of impeachment from the Constitution entirely. What do you think?

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Notes:

Brown U. Research. (n.d.) Understanding the Iran-Contra Affairs: The Beginning of the Affair. [Web page]. Retrieved from https://www.brown.edu/Research/Understanding_the_Iran_Contra_Affair/i-thebeginning.php

Colorado Public Radio (CPR). Transcript & Video: President Donald Trump’s 2020 State Of The Union. [Web page]. Retrieved from https://www.cpr.org/2020/02/04/transcript-video-president-trumps-2020-state-of-the-union/

Congressional Budget Office (CBO). (2020, January). Budget and Economic Data. Retrieved from https://www.cbo.gov/about/products/budget-economic-data#2 Note: 2019’s Federal deficit was 4.7% of GDP, 40% higher than the 3.3% deficit in 2016, the last year of the Obama administration.

Council of Economic Advisors (CEA). (2020, January 30). United States GDP Growth Continues Exceeding Expectations. Retrieved from https://www.whitehouse.gov/articles/united-states-gdp-growth-continues-exceeding-expectations/

Federal Reserve (FRED). (2020, January 30).  Real Gross Domestic Product (GDPC1). [Web page]. Retrieved from https://fred.stlouisfed.org/series/GDP

Klarman, M. J. (2016). The framers coup: the making of the United States Constitution. New York, NY: Oxford University Press. (pp 235-237).

Moïse Edwin E. (2019). Tonkin Gulf and the escalation of the Vietnam War. Annapolis, MD: Naval Institute Press, (Preface). Sample retrieved from https://books.google.com/books?hl=en&lr=&id=0UEnAnvQ978C&oi=fnd&pg=PR11&dq=gulf+of+tonkin+vietnam+war

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Tankersley, J. (2020, January 13). Budget Deficit Topped $1 Trillion in 2019. NY Times. [Web page]. Retrieved from https://www.nytimes.com/2020/01/13/business/budget-deficit-1-trillion-trump.html

A Normal Week

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February 2, 2020

by Steve Stofka

Tuesday was the first day of President Trump’s impeachment trial. Mr. Trump borrowed former President Clinton’s impeachment playbook and got busy. He flew to Davos, Switzerland to give a speech at the World Economic Forum.

The speech was constructed of many truth stretchers. Instead of boasting about the economy’s strong employment, Mr. Trump had to say that the numbers are the best. They are not. Doesn’t matter. While Mr. Trump’s political opponents are spending time and energy disputing his boasts and lies, he is on to the next speech, the next carefully arranged event.

Facts are musical notes in a score designed to showcase his greatness. Mr. Trump is the bandleader. In politics, performance is key and he is a good performer. He is the boss of facts. Disagreeable facts are out of tune and “fake.” Sit down fake news media. Stop playing.

President Trump cites a statistic that there are more women than men in the workforce for the first time in history. They are not. That happened in 2009 under former President Obama’s watch. This is not a good statistic. It means that men in traditional male jobs are losing their jobs. In 2009, it was the massive unemployment in construction after the housing crisis. Until a year ago, job openings in manufacturing had climbed steadily (BLS, n.d.). In 2019, Mr. Trump’s trade war with China led to thousands of factory job losses and a sharp decline in job openings.

Those who do follow economic numbers know these are truth stretchers or truth wreckers as soon as the words leave Mr. Trump’s lips. That’s a small percentage of the general population. In an age of ready access to information, there is too much information. We struggle to separate the wheat – reliable information from a reputable source – from the chaff – those who shade or hide the truth to push a point of view.

To a casual ear, Mr. Trump sounds like he knows what he is talking about when he says 150 billion of this and 200 million of that. He pulls numbers out of the air just as a magician pulls a quarter from behind a child’s ear. When questioned by reporters, members of his own party answer that they can’t speak to what Mr. Trump says or tweets. They are afraid of retribution. He is the Teflon President. No accountability and no shame. 

A president must perform. A good performer tells enough of the truth to tell a convincing story. Lying is a part of any president’s job. They must lie to foreign leaders as they play the international game of political poker. Presidents lie to hide uncomfortable truths from the American people. They lie to protect themselves, members of their cabinet and party. Until a presidential candidate takes the oath of office, they may not realize the full extent of the lies they must tell. It’s one of the stresses that make the job so difficult.

There is important and unimportant stuff to lie about. Mr. Trump lies about silly stuff that matter only to him. Who cares whether some people think he has small hands? He does. Whether he had a smaller inauguration crowd than Mr. Obama? Mr. Trump cares. Whether he understands the dictator of N. Korea better than everyone else? He does. He insists that he is a better president than George Washington or Abraham Lincoln. Braggadocio?

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Notes:

Bureau of Labor Statistics (BLS). (n.d.). Job Openings: Manufacturing JTS3000JOL. [Web page]. Retrieved from https://fred.stlouisfed.org/series/JTS3000JOL

Photo by Mark Fletcher-Brown on Unsplash

California Landed Gentry

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January 26, 2020

by Steve Stofka

What is a fair share of taxes? As I noted last week, different households pay a varying share of sales tax to the city but consume the same amount of public services. Income taxes and property taxes vary as well. In California’s booming real estate market, younger homeowners are furious that they must shoulder an inequitable share of a community’s property tax.

In the 1970s, the population of California swelled and created a large increase in demand for housing. The higher demand and runaway inflation during the period led to rapidly escalating home prices. Proposition 13, an amendment to the California constitution, was sold as a remedy for older homeowners on fixed incomes who could no longer afford the property taxes on the homes they had owned for years. Commercial properties were included in the amendment as a way to protect small businesses and the stability they brought to communities.

In 1978, California voters passed Prop 13, as it was called. Annual increases in residential and commercial property taxes were limited to 2% for existing property owners. These were years of high inflation. In 1979, the inflation rate was 14%, far higher than the current 2% rate (BLS, n.d.). In the two years following passage of the amendment, property tax collections collapsed by 50%. The resulting loss of revenue and high inflation caused a financial crisis in cities and counties throughout the state (BOE, 2018). Because taxes are based on acquisition cost, not current appraised value, the law has created large disparities in tax liability between neighbors in similar housing. In addition, the law has created inequalities between homeowners of different ages. The purchase of a home would normally step up the appraised value of the property to a current value but new homeowners over 55 were exempted. Older homeowners could also transfer their house to their children without triggering a step up in appraised value. Many homes are never sold. The homeowners and their heirs rent out the homes at current rental prices and pocket the profits. The law has created a class of landed gentry in the state (Dillon, Poston, 2018).

In 1992, the Supreme Court ruled that the law did not violate the 14th Amendment (Nordlinger v. Hahn, n.d.). In the past forty years, the law has severely reduced funding for California schools and helped to create notorious budget shortfalls. In the 1970s, California ranked in the top ten states in the quality of public education. This past year, Wallet Hub ranked the state #38 (McCann, 2019).

The fixing of one problem often creates a much larger inequity in the end and that requires an endless stream of fixes to the solutions to the problem. It’s good business for lawmakers. Adam Smith, the father of economics, documented the process in his book Wealth of Nations (Smith, 1776). Labor guilds and business interests often proposed regulations which gave them an advantage in a market. The public good was often compromised by laws that favored these interest groups. Smith proposed a free market approach as the only way to protect the public from the corruption and favoritism that inevitably marks a political state. California is a living example of the same problems that Smith described in 18th century England. Human nature has changed little in the past 200 years.

In 2020, California voters may have a chance to undo that part of the law that applies equally to commercial property, but homeowners will continue to enjoy incremental changes to their property taxes (Levin, 2018). The dream of homeownership will elude many families in the state. Taxes are inherently unfair but Californians have created their own brand of unfair taxes.

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Notes:

Bureau of Labor Statistics. (n.d.). Inflation Calculator. [Web page]. Retrieved from https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1&year1=197901&year2=198001.

California State Board of Equalization (BOE). (2018, December). California Property Tax: An Overview. [PDF]. Retrieved from https://www.boe.ca.gov/proptaxes/pdf/pub29.pdf#page=5

Dillon, L., Poston, B. (2018, August 17). Must Reads: California homeowners get to pass low property taxes to their kids. It’s proved highly profitable to an elite group. Los Angeles Times. [Web page]. Retrieved from https://www.latimes.com/politics/la-pol-ca-california-property-taxes-elites-201808-htmlstory.html

Levin, M. (2018, August 4). Prop. 13 could be partly undone in 2020—here’s what you should know. [Web page]. Retrieved from https://calmatters.org/economy/2018/08/prop-13-could-be-party-undone-in-2020-heres-what-you-should-know/

McCann, A. (2019, July 29). States with the Best & Worst School Systems. Wallet Hub. [Web page]. Retrieved from https://wallethub.com/edu/e/states-with-the-best-schools/5335/

Nordlinger v. Hahn. (n.d.). Oyez. [Web page]. Retrieved from https://www.oyez.org/cases/1991/90-1912

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Smith, Adam. (1776). The Wealth of Nations (Kindle Edition). Digireads.com Publishing (2019). Available at https://www.amazon.com/Wealth-Nations-Adam-Smith-ebook-dp-B000FC1CVE/dp/B000FC1CVE/ref=mt_kindle?_encoding=UTF8&me=&qid=

Our Fair Share

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January 19, 2020

by Steve Stofka

The holidays are over. This week our city picked up Christmas trees set by the curb. The sun set after 5 PM, the first time since the time change in the first week of November. The sun is returning to the Northern Hemisphere. Despite the variations in the amount of sunshine throughout the year, we all get the same amount of sunshine over the course of a year. Not so with our tax bills.

Estimated taxes were due this week. The self-employed, retired people and others who earn income with no taxes withheld must pay estimated taxes every quarter. This past year the IRS audited less than ½% of returns, a lifetime low. That sounds great because none of us wants to endure an audit. The very word strikes fear in the hearts of many taxpayers, but most of us have a small chance of being audited regardless. We don’t pay enough in taxes for the IRS to do much more than a paper audit, a request for supporting documentation.

The IRS is not a popular agency and became less popular when the agency discriminated against Tea Party and progressive groups during the 2010 election (Farhi, 2017). House Republicans repeatedly cut the agency’s budget, but that retribution has had serious budget consequences. The National Bureau of Economic Research estimated that the government could raise an additional $1 trillion in tax revenue – that’s about 20% of total revenue – with stricter enforcement of existing law (Heeb, 2019). In 2019, the Federal deficit, or budget shortfall, was $1.1 trillion (BPC, 2020). Stricter enforcement would have effectively erased that deficit.

The race for the Democratic Party’s nomination for President promises to center around several themes. The first is the horse race against President Trump, whose incumbency gives him a distinct advantage when running for re-election. The press often seems more concerned with the contest than the underlying issues of a campaign. Taxation is a recurring discussion in each election. More or less? What is a fair share? More, more, more social programs, taxation and regulation, or less, less, less social programs and taxation and more defense spending and power for large corporations?

What is fair? As children we have a keen sense of fairness – our “monkey brain.” We are social creatures who feel scorned at what we perceive as unequal treatment. Equal and fair are not the same thing. A fair share is not the same as an equal share. If I can afford to buy $50,000 worth of goods in a year, why should I have to pay more sales tax than someone who only buys $30,000? We make equal use of a city’s public services. Why should we be treated unequally? Well, we have become accustomed to paying an equal percentage of what we buy in the stores as a sales tax.

Why don’t we follow that same approach for income taxes? States like Colorado do charge the same rate of state income tax regardless of income. Is that fair? Some cities like Denver charge a head tax, a flat fee income tax for anyone who works within the district. Should we follow the same approach throughout the nation? Warren Buffett and I would pay the same amount in income taxes. Is that fair?

Should prices for public utilities be adjusted based on income? If my neighbor makes twice what I do, should they pay twice for the same amount of water? Currently, we are charged the same rate. The income and property taxes of those over 65 are often given a discount. In some districts, a person who reaches 65 finds that they can lower their property tax by 50%. Is that fair?

Elizabeth Warren, a candidate for the Democratic Party’s presidential nomination, proposed that all student debt be eliminated. Should students who went to more expensive private schools be rewarded more than students who borrowed less because they went to a state college? Should students who borrowed less because they worked part time while going to school be penalized? Is that fair?

In Matthew 20:1–16, Jesus tells a parable of the workers in the vineyard. Workers who came to work in the morning agreed to an amount of money for a day’s work. Workers who came to work later in the day were also promised the same amount of money for working the rest of the day. Jesus was making a point that each person will be rewarded equally in the kingdom of heaven no matter when in their lifetime they come to God’s love. No matter what your religious orientation, is that fair?

Each election we get to vote on what’s fair. Some people don’t vote because they say that their opinion doesn’t matter. It certainly doesn’t if they don’t vote so they have proved their case. If I vote and my neighbor doesn’t, my vote effectively counts double. In a few weeks, the Democratic primaries will start. The first two are in Iowa and New Hampshire, states with small populations and an even smaller number of people who participate in the caucus system. The votes of a few thousand people can make or break a candidate’s campaign. In a democratic nation of 320 million people, is that fair?

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Notes:

Bipartisan Policy Center (BPC). (2020, January 9). Deficit Tracker. [Web page]. Retrieved from https://bipartisanpolicy.org/report/deficit-tracker/

Farhi, P. (2017, October 5). Four years later, the IRS tea party scandal looks very different. It may not even be a scandal. Washington Post. [Web page]. https://www.washingtonpost.com/lifestyle/style/four-years-later-the-irs-tea-party-scandal-looks-very-different-it-may-not-even-be-a-scandal/2017/10/05/4e90c7ec-a9f7-11e7-850e-2bdd1236be5d_story.html

Heeb, G. (2019, November 19). The US could raise $1 trillion more in taxes through stricter IRS enforcement, according to a new study. Markets Insider. [Web page]. Retrieved from https://markets.businessinsider.com/news/stocks/us-could-raise-1-trillion-more-tighter-irs-enforcement-study-2019-11-1028700145

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