Bond Time

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August 11, 2024

by Stephen Stofka

This week’s letter is about bonds. Many older investors have bond funds in their portfolio because they are told that it adds safety to a portfolio. Like ballast in a ship, bonds reduce volatility when a storm approaches and the water gets choppy. As the Federal Reserve raised rates in the past two years, the bonds in our portfolios acted as a dead weight, producing net negative returns. Why are bond prices so sensitive to changes in interest rates? Why are bonds so weird?

An individual bond is a claim on someone’s debt. A bond fund or ETF is a mixture of individual bonds of various terms to maturity, the length of time to the date when the debt claim ends. These maturities are grouped into three categories: short, medium and long-term. Short-term refers to bonds that mature in less than two years. Bonds with terms of two to ten years are considered intermediate-term and longer than ten years is categorized as long-term.

The length of term is correlated with a bond fund’s sensitivity to interest rate changes. Short-term bonds pay the lowest amount of interest but are the least sensitive to interest rate changes. According to Portfolio Visualizer’s back tester tool, a composite of short-term bonds had an annual return of -0.82% since January 2020. A bond ETF with an intermediate term returned -2.79% annually. Long-term bonds were particularly affected by the rise in interest rates, returning -6.87% annually. I will leave the details in the footnotes.

Why does the price of a debt instrument like a bond react to changes in interest rates? Opportunity cost. If I buy a $1000 mortgage bond paying $50 annually, and shortly after, new mortgage bonds are paying $60 a year, I will have to sell my bond to another buyer for a discount, given the fact that both bonds have the same risk profile and maturity. The income stream on the bond I own cannot compete with the higher income stream from new bonds at the same price.

A bond’s duration is a measure of its price sensitivity to a 1% change in interest rates and is published by financial news outlets like Morningstar, where readers can check the duration of a bond fund or ETF they hold. That number indicates the percentage change in price for each 1% change in interest rates. For readers who want to go deeper into this, Rich Falk-Wallace posted up on X a Bond Math table of forecasted price changes in response to various changes in interest rates.

Using our sailing analogy, the term of a bond is like the height of a mast on a sailboat. A longer-term bond, like a taller mast with more sail exposed to the wind, will get us somewhere faster in calm winds (or pay a higher dividend), but leave us dangerously exposed when wind speed increases. The table mentioned above shows that a 30-year Treasury bond can have suffer a 30% loss in price for a 3% rise in interest rates, a price response of ten times the change in interest rates. Yikes! The leverage effect is even greater when interest rates fall. The table indicates a price rise of 72% for a 30-year Treasury bond when interest rates fall by 3%, an effect that is 24 times the change in rates!

Relative to stocks, price changes in bonds are tame. In 2022, a broad composite of bonds like Vanguard’s BND ETF experienced a 10% decrease in price, and it was historic. A similar decrease in the price of the SP500 stock index is a “correction,” a cause for concern. A 50% decrease in stock prices is historic. The stock market is like riding on a dirt road in a 4×4 jeep. The bond market is like riding in a car on a paved road. We react strongly to any rough patches or potholes.

There is a positive aspect. Depending on your financial situation, it may be prudent for an investor to convert a regular IRA invested in bonds to a Roth IRA. The investor will have to pay income taxes on the capital gains, but those gains have been reduced in the past two years. Once converted to a Roth, any subsequent gains will be tax-free. A Roth IRA has no required annual withdrawal, so an investor has more control over their funds in retirement. Some investors may have what are called unrealized losses in a taxable account that holds bonds, and these could be used to offset gains this year if sold. These are options that some readers may consider and discuss with their financial or tax advisor.

For several decades, interest rates on savings were so low that investors used index funds as a way to earn a higher return on their savings. In the years following the financial crisis, the lack of inflation was more a risk than inflation. In such an environment, investors may have not fully appreciated the difference in risk between bond funds and money market funds. In the decade following the financial crisis, 2008 through 2017, a broad composite of bonds earned 3% or more when savings accounts were paying almost 0% and money market accounts were barely paying 1%. In the last seven years, the return on bond funds has been 1% or so. Investors who piled into longer-term bonds with higher returns were hit hard when the Fed raised interest rates in 2022 and 2023.

A bond’s term to maturity indicates price sensitivity to interest rate changes. An investor’s term to retirement indicates portfolio sensitivity to market conditions and mistakes in judgment. Someone in their thirties can be more aggressive and recover from judgment errors more ably than someone in their sixties. That reality underlies the conventional advice that people should devote a greater portion of their portfolio to bonds when they are older. However, bond investors may have felt like unlucky victims when bond market prices sank in 2022-23. Dramatic market shifts reinforce the rewards of diversification. At the heart of the math on bond duration and risk diversification is an aphorism we learned as kids: don’t put all your eggs in one basket.

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Photo by Christophe Ferron on Unsplash

Bond Notes: Short-term bond ETF: Vanguard’s BSV. Intermediate-term: BIV; long-term: BLV.

Keywords: investing, bonds

Claims to Truth

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August 4, 2024

by Stephen Stofka

In this week’s letter I will clean up my notes on the judiciary before I start a series on investing next week. For several millennia, human societies have struggled to figure out the how and the who of lawmaking. How to construct a rule whose language is clear enough to be understood but flexible enough to apply to varying circumstances? Who will enforce the rules? How will they be enforced?

Let me start with a real story from my childhood. My younger brother and I were only one and a half years apart in age and were quite competitive. Tired of listening to my brother and I argue over the rules of various card games we played, our dad bought us a book called Hoyle’s Official Book of Games. This resolved some of our disputes, but still we argued over the interpretation of the rules. If a rule in Rummy requires a player to play a card once they have touched it, how to interpret the word “touch?” If a gust of wind threatens to toss a few cards from the deck, can a player reach out to prevent that without having to take that card? What if a player grazes the card with their elbow while reaching for a drink?

Former Supreme Court Justice Stephen Breyer (2024) wrote that many cases the court decides can hinge on the interpretation of one or two words in a law. In the Heller decision on the Second Amendment, the majority and dissenting justices wrote 80 pages of argument over the meaning of “bear arms” in the Second Amendment. He quotes the example of a railroad that required passengers to pay full fare for each animal they brought on board. When a biology teacher brought a number of snails on the train for a class, the conductor charged the teacher a fare for the snails. When the teacher complained that the rule was meant for pets, the conductor explained that the rule used the word “animals,” not “pets.” Snails are animals.

If you were a judge, how would you rule? Breyer’s story raises the question: what if the rule said, “domestic animals?” What does the term “domestic” specify regarding animals? An animal related to a person’s home or family. Snails can be kept at home so even this change in the rule could be interpreted to include snails. The most important symbol in mathematics is the equals sign. There are specific rules of valid operations on either side of an equals sign. Plain language has no equals sign. For centuries, French was the language of diplomacy. The language has fewer words, which conveniently left agreements between diplomats open to interpretation.

If the truth were an island, it would be stained with the blood of millions. Throughout history, kings, philosophers and countries have laid claim to and fought over the truth. In 17th century Britain, a civil war erupted between monarchists, those loyal to the king and the power of the king, and Parliamentarians, those loyal to the Parliament as representatives of the people’s will. Robert Filmer, a noted monarchist, argued that the right to property comes from God through the King. John Locke argued that the right to property comes directly from God. When God drove Adam and Eve out of the garden, He told the couple they would have to work the land for their survival. Therefore, those who cultivate the land add value to the land and “thereby makes it his property” (PDF link, p. 116). The state merely recognizes that title. In later centuries, the American colonists would use this reasoning to deny that Indians had any right to the land because they did not cultivate it.

Journalists often make claims on the truth. Matthew Yglesias wrote on his Substack “this is journalism, and we owe a duty of truth to our audience.” He referred to “journalists’ obligations of candor,” but truth and candor, or honesty, are different. In its 1964 decision New York Times v. Sullivan, the Supreme Court ruled that statements about public officials were not subject to claims of libel unless they were shown to be made with “actual malice” and a disregard for the truth. That is a standard of candor, not truth.

The American Bar Association states that lawyers “must be honest, but they don’t have to be truthful.” They distinguish between being honest and being truthful. “A defense lawyer has no obligation to actively present the truth.” Being honest requires only that “Counsel may not deliberately mislead the court.” A lawyer who serves their client’s interest by making a false representation to the court risks disbarment. Rudy Guiliani was recently disbarred for making deliberate misrepresentations to further Trump’s claims of a stolen election.

A witness, on the other hand, must vow to “tell the whole truth” to the court. Politicians take no such vow, nor do they pledge a vow of candor, to be honest with the public. They take an oath of office to “support and defend the Constitution against all enemies,” a vague statement open to wide interpretation. It is up to the public to judge their lies, and to assess the importance of those lies. Abraham Lincoln supposedly claimed that all the people could not be fooled all the time, but a politician does not have to meet that high bar. They only need to fool enough of their constituents to get re-elected.

Should Congress set minimum years of service as a judge for Supreme Court nominees? Chief Justice John Roberts, and Justices Kagan and Thomas had the fewest years on the bench before joining the Court. I will leave the details and links in the footnotes. I have many more notes after reading Breyer’s recent book, but I will close this for now. Next week, I hope to present some perspective on investing in plain language without equations.

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Photo by John Cameron on Unsplash

Keywords: rules, honesty

Breyer, S. G. (2024). Reading the constitution: Why I chose pragmatism, not textualism. Simon & Schuster.

The link to the justices’ bios is here. Chief Justice John Roberts served as an Appeals Court judge for only 2 years before becoming Chief Justice. Justice Clarence Thomas – one year. Justice Samuel Alito – 16 years. Justice Elena Kagan had no prior judge experience. Justice Sonia Sotomayor – 16 years. Justice Neil Gorsuch – 10 years on an appeals court.. Justice Brett Kavanaugh – 12 years. Justice Amy Coney Barrett – 3 years. Justice Ketanji Brown Jackson – 9 years.

The Black Robes

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July 28, 2024

by Stephen Stofka

This week’s letter continues my look at a method of judicial interpretation called textualism. For fifteen years, I have been writing regularly, trying to understand systems of power and thought that are bigger than my readers or myself. We are often unaware how much our daily lives are shaped by some ethical philosophy that guides the institutions that determine the rules we live by. Over the past two decades, the Roberts’ Court has increasingly used textualist interpretation to upend decades of precedent. The Court has overturned Roe, and several justices have same sex marriage protections in their sights as the next precedent to fall. They have redefined the Second Amendment as an individual right and set severe restrictions on affirmative action considerations used in college admissions.

The economist John Maynard Keynes once commented that we were slaves to the ideas of some defunct economist. The same can be said about judicial interpretation. Justice Scalia, the leading proponent of textualism on the Supreme Court, died several months before the 2016 election. Fellow Justice Alito indicated the reverence that conservative justices had for Scalia’s reasoning when he commented that they would ask “What would Scalia do?”

Stephen Breyer, another Associate Justice on the Court who retired in 2022, often held public debates with Scalia. In his book Reading the Constitution: Why I Chose Pragmatism, Not Textualism, Breyer recalls the irresolvable issues between the two justices. Breyer placed greater weight on the purpose of a law. Scalia emphasized the statutory text of a law and the “text’s original public meaning” (p. 28), a sub-branch of textualism called originalism. Sometimes a strict textualist approach conflicts with or contradicts an originalist approach. Richard Epstein (2014, p. 54) cautioned, “it is a dangerous mistake to conflate any form of originalism which asks how texts were understood when written, with strict textualism, which ignores those necessary but implied exceptions.”

Breyer (p. 25) writes that Scalia thought the textualist approach would create what Scalia himself called a “science of statutory interpretation.” In the 19th century, Jeremy Bentham, a founder of an influential philosophy called utilitarianism, wanted to become the “Newton of morals.” Bentham invented a “felicific calculus” to bring scientific and objective analysis to moral and ethical controversies. The calculus focused on the effect of an action, not its nature or the parties involved. Bentham’s goal was to design a system of moral reasoning that would make judicial sentences proportionate to the effect of a crime. A stolen chicken was a stolen chicken. It didn’t matter who was the owner of the chicken. Novel in its approach at the time, it has become the foundation of law, ethics and economics but the calculus itself seems rather quaint to students who are introduced to it in an ethics class. Like Bentham, Scalia wanted to develop a set of rules of judicial interpretation that would guide the drafting of statutes in Congress. Unfortunately, the Court’s textualist reasoning has created confusion in the lower courts.

Some of the confusion arises from the inconsistent application of textualist methods by the conservative justices. In the District of Columbia v Heller majority opinion authored by Scalia, he disregarded the first half of the text of the Second Amendment. The Amendment had been written to assure the state legislatures that the new federal government could not call up state militias, then collect their muskets and disband the militia, leaving states powerless against an autocratic federal government. In his majority opinion, Scalia dismissed the first half of the text as a prefatory clause imposing no limit on the meaning of the second half of the amendment’s text. That decision highlights the difficulty, if not impossibility, of being objective in legal or moral reasoning.

Ethicists have long grappled with a grounding problem, establishing a moral foundation for ethical evaluation. The folks at Crash Course Philosophy have an informative video. (I set the  playback speed to .75 to digest all the points they present). In ancient Greece, Socrates asked Euthyphro if the gods loved the pious because it was pious, or was something pious simply because the gods loved it. Twenty-five hundred years later, ethicists and jurists have not resolved this question, known as the Euthyphro dilemma. Is something inherently just or right, or do we simply make it so? Neither Scalia nor Bentham could escape the inherent self-centeredness of our perceptions. In Einstein’s terms of space-time, we are like the sun that bends the space around it. We bend the information that we receive so that it is difficult to find any objective agreement among human beings that will persist across time and culture.

The subjectivity of our perceptions can defeat any methodology in search of an unambiguous objectivity. I will pick a case from the Court’s current term to illustrate how textualist analysis can reach very different conclusions. Snyder v United States was a case testing the distinction between bribery and gratuity. James Snyder was a former mayor of Portage, Indiana who was charged and convicted of violating a federal law for a payment he received following the award of a contract for the purchase of some garbage trucks. Snyder was charged under §666 (the curlicue symbol denotes “paragraph”) of Title 18 of the U.S. Code:

“corruptly solicits or demands for the benefit of any person, or accepts or agrees to accept, anything of value from any person, intending to be influenced or rewarded in connection with any business, transaction, or series of transactions of such organization, government, or agency involving any thing of value of $5,000or more.” §666(a)(1)(B).

Snyder argued that he did agree to any payment before the transaction and that   §666 applied only to bribes. Writing for the majority opinion of six conservative justices, Justice Kavanaugh distinguished between bribery, a payment before an act, and a gratuity, a payment after an act:

either (i) a reward given after the act with no agreement beforehand (gratuity)

or (ii) a reward given after the act pursuant to an agreement beforehand (bribe).

Although Kavanaugh distinguishes the two, why did Congress expand the scope of the law by including “or rewarded?” If they meant that §666 of the statute to apply only to bribery, they could have left the text unmodified. The addition to the text indicated to the dissenting three justices that Congress intended the amended text to apply to payments before and after the fact. However, a strict textualist approach ignores legislative history. Kavanaugh justified his reasoning because of the placement of an adverb “corruptly” in the statute. Kavanaugh looked to §201(b) covering bribery and §201(c) of the statute governing gratuities and found that only §201(b) used the word. Therefore, Kavanaugh reasoned, the use of “corruptly” in  §666 limits its application only to bribery.

The bribery statute for federal officials, §201(b), uses

the term “corruptly.” But the gratuities statute for federal

officials, §201(c), does not. The term “corruptly” therefore

signals that [18 U.S.C.] §666 is a bribery statute. And statutory

history, statutory structure, statutory punishments,

federalism, and fair notice strongly reinforce that textual

signal and together establish that §666 is a bribery statute.

Writing the dissenting opinion, Justice Jackson wrote, “To reach the right conclusion we need not march through various auxiliary analyses: We can begin—and end—with only the text.” Justice Jackson referred to a separate §215 that targeted bank employees who accepted bribes and gratuities. That  section of the text was used as a model for the language in §666, according to the House Reports of Congress at the time, and §666 duplicates the wording of §215. The majority opinion disregarded that salient fact.

At the heart of this controversy and others is the conservative dislike of federal interference in state affairs, a breach of federalism, mentioned twelve times in Kavanaugh’s opinion. Here is one example: “Interpreting §666 as a gratuities statute would significantly infringe on bedrock federalism principles.”

Congress awards federal money to states for various purposes, but local officials complete the transactions with national and local companies. It is perfectly understandable that Congress did not want local officials to profit from the disbursement of federal funds. However, Congress effectively made all jurisdictions subject to the law, expanding the scope of federal regulatory power. The federalism principle is nowhere in either the Constitution or the relevant statute but captures the idea of boundaries and separation of powers implied in the Constitution. Given that aversion to an expansion of power, a skilled jurist can use textualist analysis to serve whatever purpose they want.

A recurring theme in former Justice Breyer’s book is that textual analysis is as arbitrary as the traditional analysis it was meant to replace, an analysis guided by the purpose of a piece of legislation. Scalia thought that textualist interpretation would produce a set of rules that would guide legislators as they wrote the law. Out of all the justices on the Court, only Stephen Breyer had worked for a time in a legislative function, serving as counsel on Senator Edward Kennedy’s staff. Scalia knew little of the negotiations and deliberate obfuscations that legislators employ to build a consensus to pass a law. The ambiguity in statutory text is deliberate in some cases. Just as with the executive and legislative branches, justices have points of view, and they use their talents and experience to reinforce their perspective. Don’t be fooled by the black robes. There are human beings beneath the cloth.

These past weeks I have explored some aspects of the law as they relate to expectations. Because I am not a lawyer or a constitutional scholar, the research for these topics requires more time. I hope that readers have learned a bit as I expanded my own knowledge of these topics. I apologize in advance for any faults or omissions. Next week, I intend to turn to several topics on investment, the tradeoff between our current self and our future self when we delay consumption and save money.

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Photo by Gene Gallin on Unsplash

Keywords: ethics, utilitarianism, bribery, gratuity, textualism, originalism

Breyer, S. G. (2024). Reading the constitution: Why I chose pragmatism, not textualism. Simon & Schuster.

Epstein, Richard Allen. (2014). The classical liberal constitution: The uncertain quest for limited government. Harvard University Press.

The Reins of Judicial Power

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July 21, 2024

by Stephen Stofka

This week’s letter is about an alliance of business interests and libertarians alarmed by the growing power of the federal government that emerged during the 1930s Depression and enabled by a shift in judicial interpretation on the Supreme Court. In the following decades, executive agencies expanded their authority by assuming powers held by each of the three branches (Epstein, 2014). The agencies wrote rules like a legislature, administered the rules with or without the assent of the President, and resolved controversies in legal interpretation like the judiciary. When the Court’s decisions challenged the traditions of religious groups, social conservatives joined the coalition.

Social unrest in the 1960s followed by political turmoil and economic stress in the 1970s accompanied a generational shift in power in the Congress. A coalition of civil rights advocates  and environmental activists helped pass legislation in both areas. In the southern states where resistance to federal control was still active a century after the Civil War, voter sentiment began to shift from the Democrat Party to the Republican Party. Extractive industry groups increased their lobbying efforts to check environmental laws that increased their costs or delayed their projects (Kraft, 2022). In the 1970s, environmental activist groups turned to the courts to block industrial developments (Smith, 2022). Many of these controversies occurred in federal district courts where 860 justices with life tenure decided the application of the rules. Business groups recognized the need for judges sympathetic to any judicial philosophy that promoted a diffusion of government power to the states and individual business interests. Large corporations, enjoying many of the legal rights of individual persons since the 19th century, had revenues greater than those of many state governments, allowing big businesses the power to steer state and local policy toward maximizing profits.

A hybrid form of judicial interpretation called textualism/originalism was an effort to develop objective rules of jurisprudence to guide decisions in the lower courts. Textualism focuses on the legislative text while originalism focuses on the history of statutes and the Constitution (Eyer, 2022). Together the rules encourage justices to stay faithful to the text, history and tradition of the law. Six justices on today’s current Supreme Court hold the reins of this team of horses, which sometimes pull in opposite directions. Four decades in development, textualism and originalism have not brought the sought after clarity. Lower courts have sometimes responded with contradictory decisions to recent Supreme Court precedents, resulting in a judicial recycling of controversies in which the Court clarifies an earlier precedent.

As executive agency power expanded in the decades following World War 2, the Supreme Court expanded individual rights in its interpretation of the 14th Amendment. Richard Epstein (2014, p. 121) voices the conservative sentiment when he called this period a “veritable explosion of new rights.” The 1973 Roe v. Wade decision overruled state laws that prohibited abortions at various stages in a pregnancy, determining a right to privacy in the 14th Amendment. Social conservatives, business interests and libertarians formed an alliance of think tanks to limit the expansion of judicial and executive power.

Conservatives decried the Court’s Roe v. Wade decision upon its publication. In an interview late in her life, liberal Justice Ginsburg faulted the reasoning the court gave in that decision. She explained that the decision should have been based on a principle of gender equality clearly stated in the 14th Amendment. The Court’s ruling, based on a presumption of privacy, left the decision vulnerable to repeated attacks by groups of social conservatives. A coalition of religious groups, still angry over the Court’s 1962 decisions banning prayer in schools, now found common cause with business interests angry about the expansion of executive agency power.

For some foundational understanding of this revolution in judicial interpretation, readers will remember that the Bill of Rights was a package of ten amendments submitted to the states for ratification in conjunction with the Constitution. They applied to the federal government and were meant to assuage any concerns that this newly created federal government would impinge on the rights and power of state legislatures and the small number of individual citizens allowed to vote in each colony (Klarman, 2016). The enumerated powers stated in the Constitution was designed to define and contain the powers of the federal government but left unsettled or undefined powers to the states. In the century following ratification, the Court’s rulings gave preferential treatment to state autonomy in controversies over Bill of Rights protections. The Supremacy Clause of the Constitution gave the federal government priority if a federal law contradicted state law, but if there was no federal law resolving a controversy, state law took precedence. Separation of powers included the three branches within the federal government and between the federal government and the states.

For an evolving history of jurisprudence, I will turn to the National Constitution Center, a bipartisan independent organization authorized by Congress to educate the public on the history, text and meaning of the Constitution. They offer a free curriculum of classes on the Constitution for readers who want to expand their knowledge of the controversies related to the Constitution and its Amendments. What follows is a synthesis of a class section on selective incorporation, the Court’s application of protections for individuals to the states law.

Following the passage of the 14th Amendment, several Supreme Court decisions limited its protections against state abuses. In the 1925 Gitlow v. New York decision, the Court held that a state could not violate an individual’s First Amendment rights. In the 1960s the Supreme Court, headed by Chief Justice Earl Warren, further expanded individual rights, reasoning that the due process and equal protections guaranteed by the 14th Amendment made Bill of Rights protections applicable to the states as well as the federal government.

Before the rulings of the Warren Court, individuals had few protections against abuses by state governments. States routinely violated protections against search and seizure contained in the Fourth Amendment, the right to counsel stated in the Sixth Amendment, the protection against self-incrimination in the Fifth Amendment, and the right to free speech in the First Amendment. As I noted last week, a minority of rural voters in some states controlled the legislature through clever districting rules that magnified their representation and interests in the state legislature.

As the court has applied combinations of textualist and originalist interpretation, it has satisfied the wishes of the coalition of social conservatives, business interests and libertarians. Its Dobbs decision overruled the 50-year-old precedent set by Roe v. Wade, pleasing social conservatives. It overruled previous precedent set by the Bakke decision in 1978 that established affirmative action, pleasing business interests and libertarians. In 2008, its Heller decision established an individual right to own a gun, satisfying libertarians. It 2010 Citizens United decision overrules McCain-Feingold limits on corporate political contributions, giving business interests a greater opportunity to influence policy. Social conservatives are hoping that the court’s next term will overturn a right to same sex marriage established by the 2015 Obergefell decision.

Next week I will look at the conflicting priorities in textualist/originalist analysis and how its methodology differs from the more traditional analysis that focuses on the purpose of a law.

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Photo by Jim Strasma on Unsplash

Keywords: civil rights, environmentalism, amendments, Bill of Rights, Supreme Court, textualism, originalism

Epstein, Richard Allen. (2014). The classical liberal constitution: The uncertain quest for limited government. Harvard University Press.

Eyer, K. R. (2022). Disentangling textualism and originalism. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4090893

Klarman, M. J. (2016). The Framers’ Coup: The Making of the United States Constitution. Oxford University Press.

Kraft, Michael E. 2022. Environmental Policy and Politics. New York: Routledge, Taylor & Francis Group.

Smith, Kimberly. 2022. “Environmental Policy In the Courts.” In Environmental Policy: New Directions for the Twenty-First Century, eds. Norman J. Vig, Michael E. Kraft, and Barry George Rabe. Thousand Oaks, CA: SAGE. essay, 137–54.

Alliances of Reasoning

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July 14, 2024

by Stephen Stofka

This week’s letter is about expectations and alliances of judicial reasoning and power. I will begin with some background on the judiciary, then follow up next week with a closer look at the rationales that various schools of judicial reasoning employ to reach their desired conclusion.

The legislature has 535 individual opinions of what is fair and just, as many interpretations of statutory and Constitutional text, and many prescriptions of what should be done to address a problem. Party leaders must collapse those many dimensions into a singularity, a sheet of paper that becomes law. As laws emerge from the halls of Congress, they become a multi-faceted work of collaborative reasoning. Businesses hire lawyers to reinterpret a piece of legislation in their favor, or to defend against regulatory action. The executive agency responsible for administering or enforcing the law has its own opinions of what the law says and how it should be executed. Judges in federal district courts weigh in with their opinions as they rule on cases and controversies brought before them.

Those opinions may be challenged in federal appellate courts then submitted to the Supreme Court asking them to take the case for review, a petition  called a “writ of certiorari.” Of the many cases submitted, the Court accepts only a small number – 62 in the 2023-24 session, according to Ballotpedia. Lawyers for the plaintiff and respondent argue their opinions to the Court, which reviews those arguments as well as amicus briefs submitted by advocate groups on either side of an issue. Again, many opinions collapse into a judgment won by a majority of the Court’s justices. In some cases, they simply refer the case back to a lower court with a clarifying interpretation of a legal area that the lower court should include in its consideration of the case.

The Constitution contains three articles that establish the Legislature, Executive and Judiciary. Article 3 authorizing the Judiciary is only 373 words, less than the word count required of a fourth-grade essay. Article 2 establishing the Executive branch is three times longer. Article 1 instituted the Legislative branch and is almost eight times as long. The principle of judicial review, that the courts can decide whether portions of laws passed by the legislature conflict with the Constitution, is not cited in Article 3. How did the Judiciary assume that plenary power?

The ruling in an 1803 case titled Marbury v. Madison decided that Marbury, the plaintiff, did not have standing to sue Madison, the Secretary of State under Thomas Jefferson. The decision was less noteworthy than the reasoning supporting the decision. The Court, headed by Chief Justice John Marshall, ruled that a portion of the Judicial Act passed in 1789 conflicted with Article 3, Section 2 of the Constitution. In that decision, Marshall assumed the right of the Court to have the final word on the meaning of statute and Constitutional text. A strict textualist interpretation of the Constitution would argue that the Marshall court had found a clever way to amend the Constitution. In recent decades textualist interpretations of the law have gained popularity among conservative justices. This branch of analysis emerged as a reaction to the purpose-oriented jurisprudence typical of the Court’s opinions in the sixties and seventies.

After WW2, voters gave Democrats an average 81 seat advantage in the House (Kraft & Furlong, 2021, p. 345), an effective mandate. In the current House, Republicans have only a 7-seat advantage. Many House members were World War 2 veterans, determined that the sacrifice of their military brothers in the fight for freedom would not be subjugated to racial practices that suppressed the freedoms of Black people, including those soldiers who had fought in the war. In 1962, Rachel Carson’s book Silent Spring focused popular attention on the sewage and dangerous chemicals that contaminated the nation’s air and water. As veterans gained seniority in Congress, they were able to pass civil and environmental reforms. In a surge of anti-Republican sentiment following the Watergate scandal, voters in the 1976 election handed Democrats a 150-seat advantage in the House.

A Constitution should thwart the human inclination to shape laws to suit to one’s advantage. The Supreme Court, headed by Chief Justice Earl Warren, established, or re-established depending on one’s perspective, several Constitutional principles of equality that upset relationships of power at the state and local levels. Shortly after President Eisenhower appointed Warren to head the Court, it issued its Brown v. Board of Education decision that established the principle that segregated schools in southern states were not equal. George Wallace, the Governor of Alabama, defied federal efforts to desegregate the state’s schools. In his campaign for President a decade later, he rallied his followers with the cry “segregation today…segregation tomorrow…segregation forever.”

The Court’s reliance on the equal protections of the 14th Amendment provided the rationale for other reforms, including Reynolds v. Sims (164), the “one person, one vote” decision. In several states, a dwindling population of rural voters maintained control of the state legislature through imaginative schemes. In Kentucky, districts were apportioned according to the mileage of the roads in the county, not the number of voters. In Tennessee, the legislature had not changed district apportionment since 1901, a move that disadvantaged the growing urban population of that state. In Vermont, 49 people in one district had equal representation with 33,000 in another state district. Other individual protections included the Miranda warning upon arrest, the protection from search and seizure by state and local officials without a warrant,  and the freedom to buy contraceptives in the Griswold ruling.

Some considered these rulings an intrusion on state and local autonomy and antithetical to the conservative principle of limited government. In the final year of the Warren Court and the close of the 1960s decade, Nixon encouraged a “silent majority” of traditionalists to reject the reforms and societal upheavals of the past decade. Nixon sought to wake the sense of grievance in a coalition of conservative minorities. In 1973, a volatile combination of events – the Watergate hearings, an oil embargo touched off by America’s role in the Arab-Israeli war, an 8.8% inflation rate, and the Court’s Roe v Wade decision – stirred up a backlash of traditionalist fervor that would gain momentum over the next two decades. Next week I will examine those alliances of power.

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Photo by Wesley Tingey on Unsplash

Keywords: silent majority, Watergate, Roe v. Wade, segregation, Supreme Court

Kraft, Michael E., and Scott R. Furlong. 2021. Public Policy: Politics, Analysis, and Alternatives. Thousand Oaks, CA: CQ Press.

Alliances in Political Parties

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July 7, 2024

by Stephen Stofka

This week’s letter continues my look at expectations and alliances, focusing on several junior elected Representatives as foot soldiers in an ideological and egotistical battle for political control. Congressional candidates who successfully challenge an incumbent in their own party attract the most attention. Running for office requires as much perspiration as aspiration and upsetting an incumbent requires both in large doses. Challengers are often funded by special interest or advocacy groups outside a district who are more concerned with defeating an incumbent than in promoting a new agenda. Seniority is power in Washington. A newly elected Congressperson with no seniority has less influence and bargaining power. They must work harder to help their constituents with problems in the Washington bureaucracy.

A newly elected Representative must learn to understand and navigate a complex web of seniority rights, relationships and personalities within the party. In Washington, the party leaders manage their party’s representatives as political assets in a game to control policymaking and promote their own power. Leaders use committee assignments as tools of control and inducement. Each Representative has a distinct style and demeanor that appeals to some groups of voters more than others. Party leaders hope to use that to broaden the party’s appeal.

Every three to four years, the Pew Research Center produces a typology of nine voting groups (PDF) in this country. These include Committed Conservatives and Faith and Flag Conservatives on the political right, and Democratic Mainstays and Progressive Left on the other side of the aisle.
Establishing a sympathetic tie with one or more of these groups helps each Representative meet fundraising goals set by the party. The report highlights the divisions within each party as well as those between the parties.

Despite the divisions within each party, allegiance to party is stronger than it has been in 54 years, according to a Pew Research analysis of the 2020 election. Only six states have split representation in the Senate – one Republican and one Democrat Senator. In most states, voters choose their Senators and President from the same party. Ninety percent of voters chose the same party in 2016 and 2020, leaving just a small fraction of uncommitted voters that each party hopes to woo.

Strong party allegiance makes it difficult for a Senator to compromise with their colleagues across the aisle. Special interest groups can fund a challenger, portraying a Senator’s compromise to reach consensus on legislation as a cop-out, a betrayal of principles. Our Constitution emerged as the result of many fractious debates. The convention was closed to public view to allow bargaining by the delegates without them having to worry about protecting their reputations during those debates. Secrecy certainly comes with caveats, but bargains are best brokered in back rooms, out of public view.

In each party the senior members do much of the bargaining while the junior members are expected to rally sentiment and bring in their allotted share of contributions from special interest groups and top donors. Representatives Lauren Boebert and Marjorie Taylor Greene rode MAGA sentiment to win Republican primaries in 2020. Greene represents Georgia’s 14th district, rated a strongly Republican R+22 district in the Cook Partisan Voting Index. Like Trump, Greene is a rule breaker, tossing aside customs of decent behavior for a Representative. Examples include using personal insults in a committee hearing, screaming at Democrats outside the Capitol building,  and attacking fellow Republican Lauren Boebert in a committee hearing. Her forceful and strident approach has been an effective strategy in her district.

In a district with a more moderate political voting record, an incumbent may have to temper their political posture. Like Greene, Lauren Boebert has portrayed herself as a disruptor and a combative Christian but her distinctively un-Christian behavior led many Republicans to abandon her in the 2022 election against a moderate Democrat. Her Colorado 3rd district is rated only R+7 in the Cook Partisan Voting Index. To avoid defeat in the upcoming 2024 election, Boebert moved to the 4th district which leans more heavily Republican. Both have low effectiveness scores but they bark loudly, and each party needs both barkers and bargainers.

In 2018, Alexandria Ocasio-Cortez, dubbed “AOC”, upset a long-time Democratic incumbent of New York’s 14th district (D+28). The heavily Democratic district allows her the latitude to further a progressive platform with less concern about a challenge from a moderate Democratic candidate. Just north of AOC’s district is Yonkers, a suburban county north of New York City. In 2020, Jamaal Bowman rode a progressive wave to unseat a 32-year incumbent Democrat. This 16th district is a strongly Democratic D+20 as ranked by the Cook Partisan Voting Index. Both AOC and Bowman have higher legislative effectiveness scores than Boebert and Greene, and are adept at attracting media attention without the histrionics that Boebert and Greene employ. Having sponsored two bills that became law, Bowman has the best record of all four yet lost his primary re-election this summer because of remarks he made about Israel’s conduct of the war against Hamas in Gaza.

National special interest groups as well as those in each Congressional district can make or break a candidate. They supply a candidate, or their challenger, with resources and funding, as well as a “banner” issue that can incentivize voter turnout in a primary election with typically low voter participation. In Bowman’s case, the Zionist lobbying group AIPAC led a historic fundraising campaign that supported Bowman’s challenger, according to Politico.

The political struggle is within each party as much as it is between the two parties. One party champions family and a political system called liberalism that prioritizes individual freedom, and advocates restraints on state power to protect those freedoms (O’Neil, 2021, p. 113). The other party promotes social democracy, a hybrid political-economic system founded on liberalist principles of private property and free markets but with an emphasis on community beyond the nuclear family and the well-being of individuals within community. Next week I will look at the role of the judiciary in this ideological struggle.

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Photo by Kelly Sikkema on Unsplash

Keywords: political-economic system, legislative effectiveness, special interests, primary election, political typology

O’Neil, Patrick H. 2021. Essentials of Comparative Politics. New York, NY: W.W. Norton & Company.

Legislative Effectiveness Scores: For each legislator, the Center for Effective Lawmaking produces an effectiveness score that includes the introduction of legislation, whether a bill made it through committee, was moved to the general chamber for a floor vote and whether the bill became law. A legislator’s score is compared to a benchmark score based on whether the party was in the majority or minority. Party leaders typically have scores in a range of 2 to 8.

 In the House session ending in January 2023, Lauren Boebert had an effectiveness score of .292. Marjorie Taylor Greene has a score of .117. AOC had a score of .739 and Bowman was .801.

The Party Swamp

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June 30, 2024

by Stephen Stofka

This week’s letter is on expectations and alliances. After separating voters into two parties, alliances within each of the parties coalesce to form intra-party squabbles. These alliances can form despite radically different approaches to managing problems: analytical and instinctual. Voting for the same candidate might be a person with an instinctive dislike of government and a business owner who estimates the impact of that candidate’s policy preferences on a company’s bottom line. These two different approaches also produce conflict.

In past weeks I have distinguished between expectations and anticipations, the first being more analytical and the second more imaginative or instinctual. The two work symbiotically in our individual lives but that symbiosis becomes outright conflict in a group. Some prefer a more analytical approach to discussing and solving problems while others rely on their gut, their moral compass. Individuals participating in that debate want to convince others to adopt their perspective and values. Perspective evolves over our adult lifetime and its purpose is to protect our values which have evolved since childhood. Attacking a person’s perspective can be perceived as an attack on their values, so we are resistant to persuasion. A variation of a 17th century quote goes, “A man convinced against his will is of the same opinion still.” The trick to persuasion is to insert your argument into another person’s perspective like a key and let them turn the key.  

In the Democrat Party, the center left contends with the radical left who weaponize shame. Advocates of DEI funding and mandates within all public institutions honestly believe that such training will moderate or eliminate racist attitudes. The majority of U.S. colleges and universities require students to take these non-credit classes to graduate. For students with a heavy academic schedule and work commitments, the burden of that mandate multiplies a student’s stress. Those within and without the academic community debate the conflict between these mandates and academic freedom.

Those favoring more spending on affordable housing disagree with voters in the party who prefer the personal space buffer that R-1 Single Family Home zoning gives residents. Proponents of free needle exchange must overcome fears that such tolerance will introduce a moral hazard that promotes more rather than less drug use. Supporters of more resources for  immigrant housing, job and medical services encounter principled opposition from those who are mindful of the resources and money that must be diverted from other programs. Should the needs of newcomers take higher priority than those of long- time residents, particularly the descendants of those African-Americans brought to this country centuries ago? Party leaders struggle to manage these ideological conflicts because these issues permeate the leadership ranks as well.

The Republican Party is more dominant in the ex-urban and rural parts of each state. Party leaders and candidates express strong support for religious faith as a cornerstone of American society. According  to Pew Research, Republicans attend church more often than Democrats or Independents but the majority of Republican voters do not attend church weekly. Like Democrats and Independents, a third of Republicans rarely step inside of a church. Those who believe that public institutions should be secular confront those who think religious principles and doctrine offer the only sound foundation to good governance. A person supporting their argument with Bible verses may truly believe that they are taking an analytical approach. In their belief framework, the Bible is history, recorded by various authors or sources but inspired by God himself. To those devotees, the Bible is fact, not an arbitrary assembling of oral traditions and myths. Two Republican voters, each with very different religious beliefs, practices and priorities still vote for the same candidates and issues. Leaders within the party must negotiate a compromise between Christian compassion and checkbook constraints.

Immigration is a key issue on ideological lines even though most immigrants initially settle down in urban areas where political sentiments skew Democratic. When the labor market is strong in the U.S. relative to other countries, that acts as a draw to legal and illegal immigration. The emphasis is on the “relative to other countries” part. A mismatch in labor market demand between the U.S. and neighboring countries is an important contributor to immigration flows. The strong economy in the late 1990s and early 2000s attracted a surge of immigrants, far more than today’s levels when adjusted for population.

 A recent analysis by the Federal Reserve estimated that restrictive immigration policies from 2017 to 2020 made it moderately more difficult for employers to fill job vacancies.  Farmers and ranchers, a strong Republican cohort, have long lobbied for changes to the H-2A “guest worker” program that would help them meet seasonal worker demand. The number of slots for foreign workers is not enough to meet demand and the application process is burdensome. Employers have similar complaints about the H-2B program for non-agricultural workers, and are heavily used by janitorial and landscaping services. Regardless of the impact of restrictive immigration policies on their businesses, owners may still vote for a candidate who promotes an immigration crackdown.

Jobs and sustainable wages are the cornerstones of family support, individual self-respect and autonomy. Those in rural areas are keenly aware that urban areas offer a more developed communications and transportation network that attracts companies, jobs and talent. For the past several decades, small to medium-sized manufacturing has migrated to foreign markets which offer lower labor costs. The influx of immigrants is yet another potential threat to community stability and resources. Long established immigrants who came to the U.S. through a legal process may not feel welcoming to those who have jumped ahead in the immigration line.   For decades, rural areas have fought to retain businesses and develop more jobs at a sustainable wage. Those who advocate more government spending on infrastructure to attract businesses clash with those having an ideological preference for laissez-faire markets.

Candidates within each party search for and exploit the shifting alliances within their party’s voters. Challenges to incumbents emerge not from the other party but from a primary election by a candidate in their own party. Primary elections attract only a small percent of party faithful whose political passion gives their small numbers a lot of leverage within the party. Fringe candidates with less funding can appeal to special interest groups to further an agenda with a dedicated party base. A candidate can appeal to a single-issue like abortion, immigration, or project a no-nonsense, get-tough persona and attack an incumbent who compromised on a piece of legislation. A Representative must learn to manage different sets of alliances: those in their district and state, and those in Washington. Next week, I will look at several Representatives and how they have navigated relationships of political power within their party.

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Photo by Ryan Noeker on Unsplash

Expectations and Elections

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June 23, 2024

by Stephen Stofka

This week’s letter begins a series on the shaping of Americans’ expectations by the election system. The structure of U.S. political institutions and election rules favor a two-party system that channels voter choice and identification. In this system there are unlikely alliances as voters are corralled into one of two political pens. Voters may feel like the patrons of the Olympia Restaurant, whose meal preferences were bluntly diverted by John Belushi to the only meal choice the restaurant served – cheeseburgers, chips and Pepsi (1978 SNL YouTube clip).  Despite an election cycle that is far longer than those in Parliamentary democracies, voters have less choice, and it is no surprise that average turnout in a U.S. Presidential election is only 60%. In a 2001 election in the U.K. that same percentage of turnout was a hundred year low for the Brits (Clark 2021). In America, party platforms and policy aims are as immaterial as the menu items at the Olympia Restaurant.

The U.S. was set up as a republic of thirteen colonies for their mutual benefit as stated in the Preamble to the Constitution. It is those colonies, now numbering fifty states, who elect the President through the Electoral College. The College was an arcane compromise between those who favored a popular vote and those who wanted the state legislatures to elect the President. The Federalists at the Constitutional Convention hoped that the Electoral College would act as buffer between public passion and the power of the Presidency. At the Constitutional Convention, the Antifederalists objected to the Electoral College but could not offer a more acceptable alternative (Klarman, 2016, p. 367). They argued that a majority of electors was unlikely in a nation of such diverse interests and most Presidential elections would be decided in the House, effectively sidelining the public voice. Their fears were confirmed in the 1800 and 1824 elections.

In each state, the two parties choose a slate of electors for their Presidential candidate. A vote for a candidate is a vote for that candidate’s electors, not the President. In most states, the candidate that gets the most votes in that state gets awarded all of that state’s electors, a winner-take-all system. A Presidential election is a composite of fifty elections that rewards each party for incremental gains as a path to national power. Each party tries to control a state legislature, which constructs the districts within the state and writes some election rules that exclude certain people from voting. Many voting districts are gerrymandered to ensure victory for the party who draws the electoral map (O’Neil et al., 2018, 114). The party in power partitions the voters to maintain the party’s power in the state. Thus, the two parties curb any but the most incremental changes in political power.

Control of a state legislature gives a party greater power in choosing a President. The Constitution gives each state a lot of discretion in the conduct of their elections for national office. Article 1, Section 4 states:

The Times, Places and Manner of holding Elections for Senators and Representatives, shall be prescribed in each State by the Legislature thereof; but the Congress may at any time by Law make or alter such Regulations, except as to the Places of chusing [sic] Senators.

However, the Constitution makes a special provision for a Presidential election. Article II, Section 1 states:

The Congress may determine the Time of chusing[sic] the Electors, and the Day on which they shall give their Votes; which Day shall be the same throughout the United States.

The word “may” indicates an optional power for Congress, not the specific duty conveyed by the word “shall.” May appears only 33 times in the Constitution while shall appears 192 times. This careful wording acknowledged a certain degree of state autonomy even in Presidential elections.

The contentious 2000 Presidential election first introduced the terminology red states and blue states to refer to those states which were reliably Republican or Democrat, respectively. The phrase has become so popular and often used that it seems decades if not centuries old. There are twenty reliably red states, twenty reliably blue states and ten states that lean toward one of the parties or are toss ups. The concerns, interests and perspective of a Democrat voter in a red state are effectively silenced. The same for a Republican voter in a blue state. Voters are like the crowd at a football game. They do not control each team’s strategies or the rules of the game. The framers constructed a system that separates political power and fosters incremental policymaking. There are no “Holy Mary” passes, only a grinding ground game to further the progress of one’s policy goals. Only special interest groups have the ear of the leaders on each political team and are able to achieve their objectives (O’Neil et al., 2018, 125). Marginalized by the two parties, many voters become disinterested, and the control of power becomes increasingly consolidated in a small number of political party operatives and special interests.

That undemocratic result is by design. In a long election cycle, a smaller pool of dependable voters makes the marketing of candidates and ideas less expensive. There simply is not enough money to fund many closely contested state elections so the parties try to construct voting districts that minimize those types of elections. In a two-party system that limits choice, each party appeals to alliances of socioeconomic status, alliances of regional interests, alliances by tradition and those by race, or at least a shared history of grievance. The different expectations and anticipations of the voters within those alliances can make those connections fragile. More on that next week.

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Photo by Erik Mclean on Unsplash

Keywords: Constitution, Electoral College, election, red states, blue states

Clark, D. 2021. “Voter Turnout in the UK 1918-2019.” Statista. https://www.statista.com/statistics/1050929/voter-turnout-in-the-uk/ (July 9, 2021).

Klarman, Michael J. 2018. The Framers’ Coup: The Making of the United States Constitution. New York, NY: Oxford University Press.

O’Neil, Patrick H., Karl J. Fields, and Donald Share. 2018. Cases in Comparative Politics. 6th ed. New York: W.W. Norton & Company.

Expectations and Anticipations

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June 16, 2024

This week’s letter continues my study of expectations, focusing on the political aspect. While some economists have treated expectation and anticipation as synonyms (the Stockholm school, for one), I want to distinguish between the two. Expectation is planning for or projecting into the future from an observation point in the present. Anticipation is visionary, an imaginative leap into the future in which some event or state has already happened. Anticipation is intuitive; expectation is calculating.

Anticipation invokes our identity and biases as well as our imagination. Political campaigns often target our sense of anticipation with negative advertising that impugns the candidate, then implies that a vote for such a character is an association with that candidate. Imagine how bad things would be if such a person were elected. Do we really want to be associated with someone like that? At a 2008 Presidential debate between Republican candidate John McCain and Democratic candidate Barack Obama, McCain defended Obama’s character against the innuendo spread by right wing TV and talk radio personalities. Much as we deplore negative political advertising, it is effective.

In the game of chess, each player strategizes to take the other’s king. Getting to the other side of the board first does not win the game. One achieves victory by the opponent’s loss. Elections like those in the U.S. are similar to baseball or football. Preventing the opposing team from scoring will not win the game. The victorious team must also make a score. The winner must get more points than the loser, a typical characteristic of a race, which is why our type of elections are called first past the post voting. What makes an election different than a 100-yard dash are the battle tactics employed to weaken an opponent’s efforts to score votes. Successful campaigns strive to get there first while persuading voters to vote NO on their opponent. Campaigns target two separate processes we use to make choices.

One axiom of rational choice theory in economics is a completeness of preferences – that people are able to weigh the costs and benefits of two options and choose the option that maximizes their self interest. We choose an option that provides what we think will give us the most utility. Yes, we make mistakes, but the errors are random. Behavioral economists have challenged the assumption that our choices are rational, pointing out biases that introduce systemic, not random, error in our choices. Losses have a greater impact on our senses than equal gains. Options may be too complex to evaluate fully before making a choice, so we rely on instinct.

 In Chapter 8 of his book, Optimally Irrational, Lionel Page (2023) discusses the debate and presents several examples that test the axiom. Given two grocery lists, could you pick the best option? Consider there might be twenty or more items on the list and a grocery store carries thousands of items. How could any person decide the best option? This past week, after checking out my groceries, I picked up what I thought was the receipt that had fallen out of my pocket. With a glance, I knew it was not mine because there were a few items on the list that I would never buy. I realized then that I could choose between two random grocery lists in less than a minute. I would scan the list for things that I definitely did not like or want. The list that had the fewest of those would be my choice.

When we do have difficulty making choices, it is because we are trying to choose the best, not the worst, option. Page cited (p. 101) an episode of the Big Bang Theory where Sheldon had difficulty choosing between two computer game consoles. He had approached the problem in a very analytical manner typical of Sheldon and was unable to choose. The shortcut, or heuristic, of decision-making that we use in our daily lives is not finding the best, but establishing the worst of two options. We know our dislikes more than our likes because our dislikes amplify the cost of our decisions, helping us choose the cheaper option with less deliberation. Secondly, identifying the worst alternative makes it more probable that we can live with our decision.

A successful political campaign structures its rhetoric to take advantage of this shortcut in decision making. Just before the 1980 election, candidate Ronald Reagan posed a question to President Carter at an October debate: Are you better off than you were four years ago? Despite the word “better” in the question, this was an “identify and reject the worst” choice using both rational expectations and more imaginative anticipations. On the one hand were the empirical realities of high inflation and unemployment, and the energy shortages that voters had experienced during Carter’s term. Voters could form expectations based on that data. Reagan’s term as Governor of California during the 1960s gave voters some basis to form a rational expectation of a Reagan term. However, much was left to voters’ imaginations to construct a post-hoc, or after the fact vision of a Reagan term. This was the anticipation instinct at work. The question helped turn a  close race into a landslide victory for Reagan.

Some voters may not have a clearly defined worst or judge two candidates to be equally worse. Each may have one or two repulsive personal characteristics, political alliances or policy stances. To appeal to those voters, a political campaign offers hope that their candidate will maximize a voter’s income, personal freedom, autonomy or other circumstance like the health of the community a voter lives in. The negative approach targets the cost calculation that voters make. The positive approach appeals to the benefit calculation, but the negative approach is the more powerful. The disadvantage of the negative approach is that it can persuade voters to abstain from voting. In a national campaign for President, a voter’s abstention is neutral, but a lack of turnout can be a decisive factor in local races where a small number of voters can be the tipping point of a political victory.

I hope I have made a clear distinction between expectations and anticipations. When a person stands in the present and plans ahead for some state or event, she is expecting. When a person stands in an imagined future and looks back at an event, she is anticipating. I will take a closer look at the unintentional political alliances between voters as a result of the symbiosis between expectations and anticipations.

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Photo by Ahmed Almakhzanji on Unsplash

Keywords: campaign, election, choice, anticipation, expectation

Page, L. (2023). Optimally irrational: The good reasons we behave the way we do. Cambridge University Press.

Key Expectations

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June 9, 2024

by Stephen Stofka

This week’s letter continues my exploration of the role of expectations. They coordinate the supply, demand and price relationships that form the web of our economic and financial lives. They shape our voting patterns, and alter our behavior in interactions with others. If we expect a police officer to be hostile, we are defensive. That reaction will affect the behavior of the officer, increasing the chance that the encounter will be hostile. Expectations cause us to behave in ways that confirm and amplify our expectations, aggravating undesirable circumstances.

Expectations and yearnings act symbiotically within us but there is a distinction between the two. Expectations are a calculation; yearnings are a desire. “I think that” is an expectation. “I hope that” is a yearning. A woman may yearn to have a child, but she expects to have a child within a period of time. A yearning knows no time or logic. We expect a certain range of compensation for the type of work we do, our skill level and experience. Business coaches encourage people to visualize and enhance their good attributes to raise those expectations. Business owners expect their capital to earn a certain percentage of profit as compensation for the risk, planning and skill that a successful business requires.

Consumers expect a certain range of prices for many frequently bought goods and services. The price of meat may be more or less than average in a week, but the price will not be $100 a pound for ground beef. We may have no price anchor for infrequent purchases like replacing a hot water heater. A few hundred dollars or a few thousand? A search in a browser can help with an average price of approximately $2100 to help a homeowner evaluate quotes from a plumbing contractor.

In the U.S., the pricing of medical care is treated as a catastrophic event like a house fire. The connection between price and medical care has been cut so that patients may not know beforehand the price of a procedure. A browser search for the cost of a colonoscopy indicates an average cost of $2200, close to that of a hot water heater, coincidentally, but medical providers do not quote a price. Prices are negotiated between health insurance companies and a network of medical providers. The negotiated price may be a fifth of the stated list price. If patients have health insurance, the only price visible to them is a co-pay. The prospect of higher medical costs next year does not incentivize us to seek care now at a lower price. Colonoscopy prices going up soon? Let me book one now! However, as costs increase, workers negotiate for better benefit packages that cover the anticipated higher costs.

In our economy, workers play a dual role of producer and consumer. The monthly labor report and retail sales report captures the importance of these roles, and the release of these reports move markets. In the core labor force age range of 25 to 54, four out of five people are working or looking for work, according to the latest labor report. The largest generation in this demographic are the Millennials, born between 1981 and 1996. They produce the most and buy the most so their expectations steer the economy. Job openings as a percent of total employment indicate a historically robust labor market. Recent reports indicate that openings are returning to pre-pandemic levels.

Job openings as a percent of total non-farm employment

Despite the strong demand for labor, post-pandemic inflation has taken a bite out of gains in median earnings. Biden assumed office as earnings gains turned negative. Despite legislation meant to promote investment and support the labor market – the Inflation Reduction Act – the decline in real earnings did not turn positive until 2023.

Real earnings equals real purchasing power. Late Millennials reaching their early thirties expected to be able to settle down and buy a house. Older Millennials in their forties who expected to trade up to a different home are frustrated by high home prices and interest rates. Political power in our system is captured by the interests of older voters, particularly the Boomers. Less than one out of four in this generation is working (FRED series here). They want to reduce their tax costs, and preserve or enhance the government benefits they feel they have earned after a lifetime of working.

This week, David Leonhardt, editor of the N.Y. Times Morning Newsletter, pointed out a poll indicating strong support for many policies initiated by the Biden administration. Most of the public’s attention is directed to controversial issues like immigration, the war in Gaza and American support for Ukraine in their continuing war against Russia’s invasion. The pandemic focused the public’s attention on Trump’s chaotic governing style. His behavior defied expectations and his supporters became accustomed to excusing or rationalizing his actions. A majority voted for Biden as a return to normalcy in the recovery from the pandemic.

People vote their expectations, and those expectations strongly influence voters’ assessments of the economy even before a candidate has taken office. A candidate needs to offer a clear set of new expectations that manifest the yearnings of a majority of voters. Has either candidate made the connection between voter expectations and yearnings? Next week I will look more closely at the political aspect of expectations.

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Photo by Jan Tinneberg on Unsplash

Keywords: prices, growth, earnings, inflation