Money and Politics – 2016 Edition

Money_and_politicsWe are deep into Presidential primary election time, so I thought I’d share my views of candidates and the system with my green eyeshades on.

I don’t have a ‘unified theory’ of money in politics, but rather a series of thoughts, some connected, the rest not.
For starters, I have a fetish about honesty when it comes to money. Like, if I know an elected official or candidate accepted money illegally or unethically, that candidate is dead to me.

Direct bribes, however aren’t usually our problem (at the federal level). Rather, grey ethical areas as well as the wholly-legal weight of money are our system’s problem.

My goal, as always, is to offend all sides of the political spectrum in roughly equal measure. If I have been too gentle on your preferred political enemy, please let me know in an angry email. (Also, feel free to use ALL CAPS so I know you really mean it.)

The Republicans

Ted Cruz had the cleverness to marry a Goldman Sachs executive (a big plus in my household!). The meanest money-related thing I can think of about him is that he has not once but twice under-reported loans to his campaign from banks, first from Citibank and later from Goldman Sachs. For the moment I’m willing to chalk this up to sloppiness rather than a pattern – but be forewarned, Cruz, I’m watching you.

Ted_Cruz_for_presidentI apply personal financial prejudices when it comes to political candidates.

Marco Rubio’s well-known struggle with personal debt affects my view of him as a potential leader. I know he has presented this weakness is a strength, as it makes him ‘relate-able’ to average Americans. But I don’t want ‘average Americans’ – at least in this sense – winning the Presidency. Frankly I don’t want someone who is financially vulnerable in that way to wield so much power (and maybe to face so much temptation.) And yes, Thomas Jefferson and Winston Churchill were both amazing leaders with out-of-control personal financial situations. Still, I maintain my prejudices.

Jeb!’s anointing as the GOP favorite through mid-2015 followed logically from his ability to quickly raise a $100 million Super-PAC war chest for his candidacy. That same war chest allowed him to hang around as a moderate alternative to the rest of the field long after his less-funded rivals folded, despite his deep unpopularity with actual, you know, voters. This is interesting and troubling.[1]

In the 2012 contest, we learned that a single billionaire – in that case Sheldon Adelson – can keep a candidate afloat – in that case Newt Gingrich – long past his due date or viability with the electorate.

I think the “billionaire primary” conducted throughout 2015 – as ably reported by the New York Times, in which just 158 families contributed half of the total money raised by political campaigns – should scare the heck out of us.

A little history

I understand that the Founding Fathers of the United States went to great lengths to ensure that wealth remained a key criteria for participation in the new democracy, through gender, race, and property-based restrictions on voting. Elites of the time greatly feared “Democracy” – that radical 18th Century notion – because the disenfranchised could theoretically vote their financial interests to the detriment of the aristocratic powers-that-be. The slaughter of The French Revolution seemed to confirm all of these fears, strengthening the resolve of elites to control the political process from start to finish.

Jefferson_and_money
Jefferson had issues with banks. In a related story, he was always broke.

I mention this to acknowledge that we have a long tradition of drastically tipping the scales in favor of the wealthy when it comes to politics, so what I’m talking about with the billionaire primary is not entirely new, but a certain shift on an existing spectrum. I just have this tingly spider-sense that in the 21st Century we’ve gone a bit too far back to the Aristocratic roots of our Founding Fathers.

The Democrats

Speaking of these themes, Bernie Sanders’ appeal – as the underdog who raises $75 million in 2015 at an average campaign contribution of $27 per person – remains powerful. I really admire it. I’m totally annoyed with Sanders’ understanding of Wall Street, however, which remains cartoonish in its sophistication, at best. If you really believe, as Sanders claims, that “The business model of Wall Street is fraud,” then we’re not friends and you’re not coming to my birthday party anymore.

Hillary Clinton, on the other hand, has a sophisticated view of money, to both her advantage as well as grave disadvantage. I have a hard time getting over the idea that large donors to the Clinton Foundation – like members of the Saudi royal family or a Ukrainian oligarch, as previously reported – don’t at least believe they have purchased access and influence over Clinton through their donations. I’m not saying she or her husband have done them direct favors, but I am saying it’s reasonable to assume that’s exactly why certain people donated to the Foundation while she was Secretary of State and a strong prospective presidential candidate. She should have anticipated that clear conflict, and she should have avoided it.

The Trumpians

trump_for_presidentThe Donald, meanwhile, presents an interesting money case. His supporters, I suppose, overlook his misogyny, racism, bullying and demagoguery because he’s a “successful businessman,” who would presumably apply his “negotiating skills” to solving the country’s ills. This admiration from supporters – despite some analysis that shows he would be as wealthy today had he taken his inherited wealth in 1974, bought an all-stock index fund – and amused himself by affixing gold-lettered nameplates to Lego towers he built in his playpen. That analysis is an oversimplification that probably isn’t fair to Trump or the value of his businesses today. Put it this way though: my problems with Trump aren’t money-related.

My choice

Bloomberg_for_presidentSpeaking of billionaires, I enjoyed Mike Bloomberg’s mayoralty of New York City in part because of my belief that he cannot be ‘bought’ for any price. In fact I would vote for him for President over any of the declared candidates, in a New York minute. Sadly, I expect he wont run, and if he did run, he wouldn’t win.

 

[1] Right up until the point when he retired from the campaign Saturday night I thought there was an outsider’s chance that he would suddenly sweep in as everyone’s third choice, kind of like Romney did after outlasting Santorum, Gingrich, Huckabee, etc in 2012. I wasn’t actually disappointed Jeb! dropped out, I was just disappointed that my contrarian bet didn’t earn me “I told you so” credibility for the next year. I would have been insufferable had I been right about Jeb! though, so it’s all probably for the best.

 

A version of this post ran in the San Antonio Express News

 

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JEB!’s Future Tax Policy

Jeb_tax_policy
Happy Jeb

I’m going to start this post with the controversial thing, before moving on to the analytical thing.

Now, I know you. You’re going to want to angrily write to me about the controversial thing, and especially how I’m wrong. I don’t care. What I’m hoping is that we can turn quickly to the analytical thing, which is far more important to discuss.

Controversial thing

Jeb Bush is going to be the Republican nominee for President. I mean to say, Jeb!

I know, I know, he’s nowhere in the polls, lackluster in the debates and the exclamation point on his campaign logo can really only be understood ironically. Doesn’t matter.

I write as a “recovering banker” because I think a financial framework is a useful starting point for viewing the world. Jeb! is the only one in the Republican race with $100 million backing him. He will win. I expect all of you who write in an angry note about my controversial statement will also agree to mail me a dollar in Summer 2016 when I turn out to be correct. Ok? Thanks.

Analytical thing

Having said that, I want to talk about the future Republican nominee’s tax policies. Tax policy matters tremendously. Jeb!’s got a 50-50 shot at the White House (I just mean any D versus any R is a coin flip in any quadrennial) We should know what he stands for.

Tax code overhaul

In the second paragraph of his policy statement on taxes, Jeb! calls for a complete overhaul of the US tax code.

He’s troubled by the ‘thousands of special-interest giveaways, subsidies and other breaks” for Washington insiders.

He correctly points out – as have others before him – that the complexity of an 80,000-page tax code leads to unfairness, cronyism, and the need for a virtual standing army of tax lawyers and accountants. Jeb! cites a study that found the cost of complying with the US tax code reached $168 billion per year in 2010 for individuals and corporations. Which is crazy, and infuriating.

All of which is to say, I love where Jeb! is going on simplifying the tax code.

thoughtful_jeb
Thoughtful Jeb

Lower Taxes

Jeb! proposes reducing the number of income tax rates to three, at 10, 25 and 28 percent respectively. Most controversially, the highest tax rate would drop from the current 39.6 to 28 percent. I don’t make a million dollars per year, but if I did, that drop would save me a cool $100,000 in taxes right there, which sounds pretty, pretty sweet.

I don’t have a calculator powerful enough to tell me whether lowering and simplifying income tax rates will leave us closer or further from balancing the federal budget – which remains an important fiscal goal – but I expect some finance nerd in the campaign to fire up their spreadsheets to examine that one. Hopefully before enacting legislation.

Mortgage Interest Deduction

Jeb! would cap that at 2 percent of Adjusted Gross Income (AGI). Yay! While I benefit personally from it, I kind of hate the mortgage interest tax deduction.

Corporate Taxes

The current top corporate rate is 35 percent.

Jeb! would “lower our corporate tax rate to 20 percent  – below China’s – to bring jobs and manufacturing back to the United States.”

Ok, stop. I have to call foul on that one. Maybe the lower corporate rates are cool, I don’t know. But that’s going to bring manufacturing back to the United States? From China? No. Labor-intensive manufacturing (the kind that creates those new jobs) is not coming back that way. I’m sorry, but it’s gone. Perhaps if you lowered labor costs in the US to – I don’t know – $2 dollars an hour?

World-wide Taxation

Jeb! proposes eliminating US taxation of corporate income earned overseas. This issue comes up periodically when we read about Apple, for example, holding a $181 billion cash hoard or Microsoft amassing a $93 Billion cash pile overseas (for an estimated $2 Trillion cash-pile overseas among all US corporations) to avoid paying relatively high US tax rates on foreign earnings.

In my deep-dive into this issue (yes, ten minutes = deep dive), I’ve learned that the US is one of only six developed countries that maintains this tax on foreign earnings, down from twenty-five countries, thirty years ago.

A wave of corporate reverse mergers is currently under way in which companies like US-based Pfizer sell themselves to companies like Ireland-based Allergen in order to avoid this tax on foreign earnings.

You can choose to blame greedy companies for acting in their shareholders’ interest. Or you can choose to blame tax policy. Not that other countries are always right, but most of them have eliminated this tax and I can imagine the complicated and inefficient incentives this taxation causes. On balance I’m willing to give Jeb! the benefit of the doubt on this issue about which I’ve just now read a few articles.

This proposal by Jeb! seems reasonable to me, but I could be wrong. You can sort of see why some US multinational corporations might find a Jeb! presidency particularly to their advantage. Not that there’s anything wrong with that.

Estate/Death Tax

Jeb! would eliminate this entirely. Boo! The estate tax is the best of all taxes.

I’ve already written about that and gotten plenty of hate mail on the issue (so feel free to restrain yourselves) but the estate tax is progressive, democratic (with a small D), and distorts consumption far less than other taxes.

Jeb so much looks like W in this photo
Jeb so much looks like W in this photo

Carried Interest Tax

I saw nothing on the campaign website about carried interest tax policy – a favorite pet topic of mine – but I remain interested to learn Jeb!’s views.

Still skeptical that Jeb! will capture this nomination? Just remember, nobody actually liked Mitt Romney either as the Republican nominee in 2012. So, you know, follow the money.

A version of this post ran in the San Antonio Express News.

Next week: The Clinton campaign’s tax proposals.

 

See related posts:

Hillary Clinton 2016 Campaign Tax Policy

Interview on Mitt Romney and the Death of The American Dream

Adult Conversation about Income Tax Policy

 

 

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A Leader for San Antonio: Mike Villarreal

mike_villarreal_best_candidate_for_mayor
Mike Villarreal studies the data

I have something to say about the San Antonio Mayor’s race. My friend Mike Villarreal is running and he is by far the best candidate. He supports data-driven financial policies (rather than platitudes and rhetoric), he listens and acts across party lines and for the good of the whole (not just one constituency), and he’s an SAISD dad who know how important educating the next generation is to ensure long term financial future of the city. Please bear with me a bit for a meandering story about my friend, New York City, and the movie Jerry McGuire.

san_antonio_mayoral_candidates
Unflattering picture of everyone. But you want the guy on the right

Fun with data analysis

Mike called me up one Saturday, about two years ago.

“Hey, can we meet for coffee?”

“Sure.” (Duh. I’m easy – a coffee addict.)

“I want to show you a project I’ve been working on with my laptop.”

We ordered coffee at Halcyon in the Blue Star Arts Complex. He proudly toured me through the statistical regression model he’d spent the week programming on his computer. He excitedly pointed to the results of his model, indicating pockets of properties where property taxes were higher or lower than average – statistical outliers. What if we could apply these techniques at the city, county, or state level?

When we get together with our families for lunch or dinner, my wife and Mike get into intense conversations about statistical techniques. I can follow the conversation for a short while. I get a teensy bit lost when their statistics chat turns to the z-score, chi-squareds, or p-value.

Prove your ideas

Personally, I prefer making sweeping declarations based on a few pieces of partial evidence. I’m good at that. I guess that’s why I enjoy this column-writing gig.

My wife – more of a scientist-type – accuses me of grandiose pontificating based on little data. My response to her critique (only when she’s out of earshot): “Whatever.”

But my data-oriented friend Mike also frequently (though more politely) challenges my sweeping declarations.

“I liked what you wrote in the paper, but couldn’t you get some actual data or evidence to see if you’re right or not?” he asks me.

Or, “So, how would you go about proving that?”

A mayor I admired

Speaking of public policy, I think fondly of a favorite mayor of my lifetime, Mike Bloomberg, who led New York City for eight years when my wife and I lived there.

Mike_Bloomberg_data_driven
I liked Mike Bloomberg’s disregard of political parties alot

Bloomberg was a Republican in a Democratic-dominated city. What mattered to me, however, was that he led New York for twelve years practically without reference to either party. Which is how a city should be run.

Bloomberg famously relied on data analysis and best business practices. He didn’t need to act out of ideology or loyalty to one party or another. Rather, when making decisions, he considered what worked best for the city.

Bloomberg showed that while Washington, DC stagnates with tired ideological gridlock, cities can innovate.

Why am I thinking of Bloomberg?

Mike Villarreal approaches policy as Bloomberg did. From the beginning of his campaign, Mike’s been fired up about the chance to lead the city in a non-partisan manner. “We don’t need a Democratic Party or Republican Party here, we need the Party of San Antonio” he told me last summer, when he focused one hundred percent of his efforts on running for this office.

To lead a diverse, growing, dynamic city, we need a leader who looks at all the evidence, weighs the choices, and makes the best decisions accordingly. We really don’t need a mayor who represents a limited party view, or a limited geographic base, or a limited identity.

Many talents

Beyond data-analysis, Mike has a number of talents that I admire.

I’ve watched him listen to people of all ideological stripes. He convenes alternate sides of an issue at the same table to listen to each other in search of common ground.

He takes political risks that more careful politicians would avoid, standing up to powerful forces – particularly in his own party – when it was in the public interest.

He understands first-hand the struggle of families pouring everything they have into raising children in this city. He grew here, his family did this for him, and he’s doing it for his own kids.

He’s a passionate competitor at board games, and a fired-up soccer dad.

But I guess what I admire most is his constant return to real, data-based evidence to back up policy ideas and ideals.

Antidote to cynicism

The worst thing about politics these days is our cynical belief – often borne out by experience – that our leaders make decisions based on campaign contributions, a perpetual “Show me the money!” mantra on their lips.

show_me_the_data
Mike is like the Cuba Gooding or Tom Cruise character: Show Me The Data

In a goofy way, I picture Mike in future policy meetings as a better version of the Cuba Gooding Jr. character in the movie Jerry Maguire. I picture him shouting in response to city lobbyists:

“Hey Mike, can I talk to you about my group’s housing agenda?”

“SHOW! ME! THE! DATA!”

“Excuse me, what San Antonio really needs for economic development…”

“SHOW! ME! THE! DATA!”

“Mr Mayor, the school district would like to request…”

“SHOW! ME! THE! DATA!”

OK, OK, Mike is not a yeller, so the analogy is not a perfect fit.

But if Mike Villarreal is the Cuba Gooding character for public policy, I guess that makes me the Renee Zellweger-character of financial columnists:

“Shut up. Just shut up. You had me at data-driven financial analysis.”

I know Mike will be a great Mayor for San Antonio.

Early voting begins April 27th. Please vote.

 

Please see related post from blogger, Concerned Citizen:

There’s a better choice for mayor of San Antonio – Mike Villarreal

A version of this post ran in the San Antonio Express News

 

 

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Political Markets: Democrats’ Chances Of Holding The Senate Just Doubled

I generally trust markets when it comes to political forecasting, which is why I dabbled in trading contracts on the Iowa Political Markets in both 2008 and 2012.

iowa political marketsI’d rather trust in people’s actual money-on-the-line to indicate an aggregated belief in who will win an election, rather than your average poll – or worse – a political commentator. Markets are great at collecting and reflecting back prices that reflect expectations of future results. Markets can be wrong, and markets can be irrational, but generally and in the long run they tend to be right.

This is a sort of restatement of the efficient market hypothesis, which you can read more about either from Nate Silver or Burton Malkiel in A Random Walk Down Wall Street.

At the very least, you should know what the markets say about the future before you go leaping in a different direction.

Anyway…I checked back in the Iowa Political Markets Senate race today, and its totally different today – than it has been any time in the last few months.

Conventional wisdom, and the Iowa political markets, had only given Dems a 20% chance or less of holding the Senate after next week’s election.

Suddenly, today, the ‘market’ has jumped to a 40% chance of Democrats retaining the Senate, on the Iowa Political Markets.

The interesting, quirky, thing about the Iowa Political Markets is that they operate on tiny amounts of money in the system – by design – as individuals may only seed their account with a maximum of $500 total. In addition, the markets don’t see much volume much of the time, except in the hottest moments of a Presidential race, which we’re not in now. That has always meant that the Iowa markets could be temporarily manipulated – presumably for political reasons – without a tremendous amount of effort.

And yet…I don’t know.

Nate Silver’s 538.com says that the probability of Republicans taking over the Senate has stayed consistently around 63% for the past month, presumably leaving Dems with a 37% chance of retaining control.

iowa political market senate race
The “DS.hold14” (The price of a “Democrats hold the Senate” contract) price doubled since yesterday

Yet the Iowa market ‘price’ (roughly, the chance of Democrats retaining control) has bounced around well below 20% for the past month. Until today…now it’s at 40%.

Why did the Democrats’ chance of retaining the Senate just double from yesterday to today?

 

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Follow the Money, then Act with Love

lawrence-lessig-at-ted2013Such an important and powerful Ted talk by Lawrence Lessig.

Lessig rightly points out the perfectly legal, sanctioned, and structural corruption at the heart of American Democracy.  Only 0.05% of us really fund elections, which really means its only 0.05% of us who select and vet candidates and have access to them once they’re in office.  If you’re wondering why YOUR particular big issue isn’t getting solved, he argues that the structural problem of political funding needs to be solved first, and the rest will follow.  I agree.

Lessig then challenges us to respond to this situation with love, which I didn’t expect to hear but I do endorse.

I highly recommend investing the 18 minutes to watch this.

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Four Reactions to the Election

Four quick thoughts now that the elections are over, from a recovering banker.

1. The equity indexes fell immediately at the open today, and remain down over 2% on the day.  Do not let any talking head from the financial-industrial-infotainment industry try to suggest that this is in response to Obama’s election.  Every trader on the planet knew that Obama had a 60% chance of winning as of last month, a 75% chance of winning as of last week, and a 90% chance of winning as of the final 48 hours.[1]  Nobody who manages capital for a living was caught off-guard by the Obama victory, so nobody suddenly had to reposition their portfolio as a result this morning.  Markets and the people with real capital who participate in them are forward-looking and probabilistic; equity markets  already reflected widespread expectations of an Obama victory.

2. The next Treasury Secretary matters tremendously for the biggest financial-regulatory issue of the day – the unaddressed problem of Too Big To Fail banks.  Secretary Geithner pre-announced that he would not serve in a second Obama administration[2] so the hunt for a new Treasury Secretary is now underway.  Geithner’s utterly failed to address the TBTF problem and pushed the Obama administration into a business-as-usual, same-guys-in-charge approach to Wall Street reform.  Secretary Paulson’s background as the former Goldman chief who grew up professionally with the rest of Wall Street’s heads played an inordinate role in selecting the winners and losers of the Credit Crunch of 2008, along with in providing the ultimate government backstop for the country’s biggest financial firms.  Had Paulson come from any other industry – instead of finance – he would have seen what the rest of us saw: It’s unconscionable to allow firms to pay executive bonuses[3] in the same year that the firms were bailed out by taxpayers.  Geithner continued Paulson’s protective approach to Wall Street banks, rather than seizing the opportunity to extract real concessions or reform when the industry needed the government to survive.

I’m not suggesting we put someone like Elizabeth Warren[4] in charge, but we need someone who can independently evaluate what parts of Wall Street need supporting and which parts need curbing.  Somebody, in other words, who didn’t spend his or her entire life working on the Street.

3. The “Fiscal Cliff” and fiscal responsibility.

Obviously the FC now becomes the next hot topic for overheated punditry, at least until we pass the January deadline.

I’m not optimistic about the tone of the discussion nor about the possible results of fiscal compromise, but I do have my wishes.

I wish that, with elections for Congress now two years away, can we have less complete bullshit when it comes to fiscal policy positions?  Would that be too much to ask?

One party’s leader says the solution lies in tax cuts.  The other party’s leader says the solution lies in more generous social spending.  One party’s leader says military spending is untouchable.  The other party’s leader says transfer payments and social safety net spending is untouchable.  All those proposals leave us in a worse fiscal position as a nation.

Hey guys?  Can you treat us like grown-ups?  We can handle a bit more truth than you’re giving us credit for.  We know budget deficits have a terrible trajectory and only a combination of tax hikes and spending cuts will correct the course.

Say what you will about the 2016 Republican nominee, Gov. Chris Christie, he’s proved that refreshingly blunt and seemingly unpopular – but honest talk – can appeal to both sides of the political aisle.  Let’s have some more of that as we drive, full throttle, toward the Fiscal Cliff.

4. Tax policy

I’ll have more to write about this shortly, but one of interesting lessons of Mitt Romney’s candidacy is how little the US electorate understands, or cares to understand, about our income tax policies.

By releasing only his 2010 and 2011 income tax returns, Romney effectively obfuscated his financial background.  He signaled (albeit quietly) that his tax-planning strategies were so aggressive that their release would explode his electoral chances.  And yet, I don’t think this cost him anything real in the end in terms of votes.  He calculated – correctly! – that the electorate’s ignorance of current tax policies, and popular tax-planning strategies of the wealthy would protect him.

Despite heightened resentment toward the wealthy, I observe the “99%,” for the most part, has no idea what they don’t know.  They can’t even conceive of the many ways someone like Romney avoids paying his proportionate share of taxes.  Romney knew that, and he was not about to wake that ignorant, sleeping giant by revealing his methods in the unreleased tax returns.



[1] Because professional traders pay attention to data and evidence, not pundits trying to hype a competitive race.  Which is why Nate Silver is a the mutherflipping P.I.M.P. of the moment.

[3] Bonuses are for success.  Bonuses are optional.  Bonuses should reflect private profit and should never be paid by borrowing from taxpayers.  Only a deeply embedded executive like Paulson could have missed the implications of this.

[4] I know I may sound strident when it comes to Wall Street reform, but I actually admire the industry very much and I want it to thrive.  Warren, by contrast, strikes me as overly ideological when it comes to Wall Street, incapable of seeing the positive.

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