According to all the experts, the United States has become a deeply divided nation. Perhaps I’m just a romantic but I believe the divides are not nearly as great as they seem. I say that in part because of you. We have been blessed to have a wonderful and very diverse set of clients with very different life experiences and perspectives. 

I recently had a wonderful conversation with one of those clients. He told me that he loved reading my Perspectives. He went on to explain that he usually disagrees with me, but he loved getting a glimpse of how I think. What I appreciated most about that conversation was the fact that two adults are able to disagree and still work together, and more than that, be friends. 

I am often accused of having very strong opinions, which I actually find humorous. While I will concede that I am often perceived that way, the truth is my opinions change often. I am extremely open to being persuaded. Most of the time when I get this feedback it is due to a symptom of our modern dialog, where opinions and facts get confused. I hold on loosely to my opinions but I do insist on being factual, and nine times out of ten when someone tells me they agree or disagree with me, it is after I have stated a fact, not an opinion. We have grown accustomed to accepting or dismissing facts based on our perspectives. 

One of the greatest compliments I ever received came from a co-worker and friend. He met my father at my wedding and told him that I was the most honest person he had ever met. I attribute that in part to going to a school with an honor code, where lying would get you expelled. The other part came from my father, who repeatedly told me that, “The truth hurts.” It would usually come after someone had said something mean that hurt my feelings and be accompanied by “only,” as in, “It only hurts if it’s true. Is it?” Most of the time it wasn’t, and he would utter the old adage, “Sticks and stones can break my bones, but words will never hurt me.” If it was true, then maybe I had work to do. 

When I was young my honesty was often too blunt. I needed to learn that given the choice of being right and being kind, I should choose kind. One can be loyal to facts without being rude. I sincerely try to do that and hope I am successful. 

In the last few Perspectives I have been bluntly honest about the current state of our nation’s universities, which have been taken over by the post-modernist idea that facts don’t really exist. That is neither an opinion or a perspective, it is simply a fact. It is my opinion and perspective that this is extremely dangerous and is a root cause of our seeming division, which brings us back to our theme for this year: If you care about people, then you have to care about the results of policies. This requires an acceptance of facts, even if we don’t like them. 

Both political parties have abused the economic realities of taxation. I wrote about this in a 2010 issue of The Quarterly Report, “A Taxing Debate,” which I encourage you to read. The Biden administration has proposed raising the capital gains tax to more than 40 percent. They have also proposed taxing unrealized gains. 

The first question we get is, what impact will this have on the stock market? The answer is, not much in the long term. The news of it will likely scare people, but the reality of the market is that the vast majority of stocks are bought and sold inside tax shelters. That is simply a fact; the market is dominated by institutional endowments, foundations, and retirement plans. Even individual accounts are largely in retirement vehicles that do not pay capital gains tax. 

For those who are subject to capital gains tax, it is largely a voluntary tax. It occurs only when one decides to sell an asset and actually pocket the money.  If the government makes the cost of doing so outrageous, then history tells us people simply won’t do it. Tax revenues from capital gains will decrease. This isn’t an opinion, it is an empirical fact; which is why they now propose taxing unrealized gains. 

That thought is frightening. For most people, their largest asset is their home. So, what happens when one’s home is appraised for twice what she paid for it? Under the current rules, nothing, because this isn’t income. The house being worth more does not put money in her pocket. However, if we now must pay up to 40 percent tax on that unrealized gain, where is that money actually going to come from? Most people don’t have it. 

The examples used by the proponents of such policy are people like Jeff Bezos, CEO of Amazon, but the Bezoses of the world are what statisticians call outliers. The fact is, all tax increases ultimately hit the middle class, because the Jeff Bezoses of the world have teams of lawyers and accountants playing the game. History tells us the rich find loopholes or pay for them in the form of political contributions. Tax increases like these ultimately hit the middle class because it is only the middle class that has the combination of enough money to tax but not enough to play the game and avoid taxation. That is a fact, whether one wants it to be or not. 

We can have different perspectives on what the tax system should look like. However, we need to accept the facts of what history tells us works versus what doesn’t work. Raising the capital gains tax is one of the least effective ways to raise revenue, and changing the rules to include unrealized gains is going to cause a great deal of unintended pain to middle class Americans. 

Regardless of party or perspective, we should all agree that the tax system’s goal is to fund the government in the fairest and most efficient way possible. We may differ on what the government should or shouldn’t do, and therefore how much funding is required, but the actual collection of taxes should be based on what is fair and effective. Fairness may be in the eye of the beholder, but effectiveness is a cold hard fact. Raising the capital gains tax is not effective, and that is not my perspective, it is simply a fact. 

Warm regards,

Chuck Osborne, CFA 
Managing Director

~These Are Taxing Times

Fraud noun: a) deceit, trickery; specifically: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right  ~Merriam-Webster Dictionary

My son learned about the Russian Revolution in school this semester. He was fascinated by the story, as was his father many years before him. I explained to him that I had the good fortune of being a college economics student during the time of the collapse of the Soviet Union. As I studied the two great economic theories of capitalism and socialism, I was able to watch in the real world in real time as the greatest socialist experiment of all time completely collapsed. 

Once into my major, every class I took was related either to capital markets or Marxist ideology. I took a modern Russian history class entitled “The History of Communism,” which was taught by a visiting Russian professor. I was so fascinated by it that I unintentionally ended up with a minor in international studies. The last semester of my senior year I wrote a paper for an independent study on how the Baltic states should transition from socialism to a free-market economy. I argued that they should follow the Poland model, which, simply put, was the rip-the-Band-Aid-off theory. 

My professor was horrified. A full-blooded Keynesian, and perhaps a closet socialist, he told me how disappointed he was and asked how low of a grade he could give me and still allow me to graduate. I told him he could flunk me and I would still graduate. He gave me a C, the lowest grade I ever got in my major. Fast forward almost a decade and Wake Forest got email, so we could write our old professors. In that time, Poland had proved itself to be the most successful former communist state by far; in other words, I had been correct. I emailed my professor to ask if he would consider changing my grade. “Touché” was his response. 

I learned something very important through that experience: The difference between practicing economics or a related field in the real world versus doing it as a college professor is that in college, one must be politically correct, while in the real world, he has to be actually correct. If I am wrong, my clients lose money and I lose my clients and therefore my job. In the academy, as long as one voices the popular opinion of the day it seems not to matter when that turns out to be wrong. 

The collapse of the Soviet Union was, in my opinion, a pivotal event for higher education. Colleges had long been a refuge for Marxists, even if they were in the closet. It is an appealing ideology for the academic as it plays to the ego. It argues that they should be in charge; what is not to like? Its total collapse had to be earth shaking, and I do not believe that it is a coincidence that the collapse of Marxist ideology and the rise of postmodernism within the academy happened at roughly the same time. 

Intellectuals are human beings, with the same psychological weaknesses as the rest of us; they are just better at masking their cognitive dissonance in fancy mumbo-jumbo. An ideology where Truth doesn’t exist was exactly what was needed to avoid the harsh reality that what they believed was wrong. 

Where has this led us? This week The Wall Street Journal reported that California is adopting a new math, because, “white supremacy culture in the mathematics classroom” includes a focus on “getting the right answer.” This past summer as rioters tore down statues of Ulysses S. Grant, among others, we were told repeatedly that this was the cancel culture that began on college campuses. We read about so-called “safe spaces” where students can go to escape from being taught difficult facts. Courses have to have “trigger warnings” so students know ahead of time that what they believe will be challenged. 

These ideas – a cancel culture, safe spaces, and trigger warnings – are antithetical to education. A truly educated person is an open-minded person who is not afraid of being challenged, and perhaps most importantly is capable of changing her mind and willing to do so in light of facts and reason. An educated person doesn’t burn books or tear down statues; in fact, they do the very opposite. 

An educated person does not erase names off of buildings or the university itself, because an educated person realizes that even great people can do terrible things. Neither of those attributes erases the other. Even King David, the greatest of all the Kings in ancient Israel, had a man sent to his death so that he could sleep with the man’s wife. His flawed sinful nature does not negate his greatness; it simply proves that he was human. Educated people understand that human beings are complicated and that history is nuanced. Further, they know that those who are ignorant enough to erase history are doomed to repeat it. 

We all know that the cost of college today is absurd, and if that were the only issue it would be bad enough. Cost, however, is not the only issue or even the biggest issue. Students are going to college, paying outrageous amounts, and leaving with minds that are closed, not opened. If this was any other industry they would be charged with fraud. People are paying for an education and they are not getting it. 

That is right: the university as we know it today is a fraud, and it will remain that way until we demand that political correctness is replaced with actual correctness; when postmodernism is replaced with an honest pursuit of Truth; and when the goal is once again to open minds instead of closing them. Until that day, parents will have to better prepare their children, as college degrees will likely still be necessary for a job, but an education is something they will have to gain elsewhere. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Academic Fraud

A few years ago, I went to the doctor to see what could be done about a pain I was having in my upper back near my shoulder blade. He sent me to physical therapy; the therapist did message and even dry needling for the overly tight muscles. It helped, but within a year I was back in the same boat. This time I got another therapist, who began by working on my neck. I corrected him saying, “No, the pain is down here.” He said, “I know, but the cause is up here. I’m going to fix the cause.”

Sure enough, he was right. I have not had the pain since, and every time I start to feel something in my upper back, I do the neck stretches he showed me, and all is well. Aspirin can make a headache go away, but it won’t cure a sinus infection, let alone a brain tumor. 

Politicians are good at identifying symptoms that bother us – these are the building blocks of campaigns. Schools need improving and taxes are too high…symptoms are easy to identify. It is also easy to identify ways of masking those symptoms, and it is a lot easier to mask them than it is to truly fix a problem. 

The student loan crisis is a great example. Too many young people are starting out their adult lives buried in debt due to the high cost of education. The political solution is to forgive the debt. This is also known as masking a symptom – the problem is not the debt; the problem is the cost of education. I hate to say it, but the truth is the higher education and private secondary education industries have become criminal enterprises. 

The cost of education over the past 30 years has increased at a rate 2.5 times the rate of inflation. I have mentioned this before, but I was privileged to receive a wonderful education, which my father paid for in total. I went to one of the top boarding schools in the country, Culver Military Academy, and to the best (in my opinion) academic institution in the Southeastern U.S., Wake Forest University. It was not just difficult to get into Wake, lots of schools can say that; it was difficult to graduate. Years later I was told that high school students were warned that it is really “Work Forest.” 

Today the cost of attending those institutions is approximately seven times what it was when my father wrote those checks. They did for me exactly what my father had hoped: they provided me an education which, first and foremost, made me think bigger when it came to life goals. They gave me the tools to survive and thrive in a business where one must be smart to begin with and had better be willing to work hard and think his way through problems. Trust me, there were no courses in financial crisis investing, and there certainly was not a class in pandemic financial advice. Education isn’t job training, it is about learning to think, and if one can do that, then she can do anything. 

So, I was asked just the other day if Wake Forest is worth its current cost, and my answer was unfortunately, but honestly, “No.” The same could be said of almost every college and private school in the country. If any other industry had continually raised its cost over this long of a period, their CEOs would be paraded through Congress to answer to their price-gouging ways. 

I want to be clear: I am not suggesting that this was done purposely by criminally minded people. The issue is that it has happened without thought. Schools set their tuition based on cost and competition. So, if one school charges more, the next says we can charge more. Once they charge more, they must justify it. They build new buildings and start new programs, which raises costs, so tuition goes up. Tuition going up one place makes tuition go up at another as schools constantly compare themselves to one another. Then they need more new buildings and more new programs. It is a constant feedback loop that causes costs to spiral out of control. 

On the consumer side, people now borrow money to go to school which allows them to pay more. Schools figure out how to price their spots like airlines price seats, only better. The first thing one fills out for most colleges today is a financial disclosure. They call this financial aid, when really it is a way to maximize the tuition of every student based on what they could possibly pay. I have heard, from well-meaning people, that this is a justification for the outrageous cost. Really? 

What if your doctor charged that way? Would you consider it ethical for her to say, “You make more money, so you have to pay more for your office visit?” Would it be okay is Starbucks demanded a personal financial statement to price their coffee? “She pays $1 and you pay $4…oh no, wait, our records indicate you just got a raise, that will be $10 for your coffee.” Of course not. They would be accused of price gouging. 

In my opinion something does need to be done for the victims of today’s modern education system. However, simply forgiving loans is not the answer. There are too many unintentional problems – what happens to one’s credit? – but more importantly, it does not solve the problem. The proposal for two years of “free” community college gets closer, but it also has the problem of “free” simply meaning the government (aka taxpayers) pay the bill. A better solution would be to go back to tuition costs in 1990, then index those costs by inflation as measured by the Consumer Price Index (CPI). Then, for every college that has taken government money (which is just about all of them), refund every dime paid above inflation and cap future increases to CPI. 

That proposal would require enormous structural changes in most schools – too much to discuss today, but these changes are far overdue in my opinion. My cousin paid for his college by working a summer job. That needs to be where the cost of education is today. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Don’t Mask the Symptom, Fix the Problem

I have lived in Georgia since 1992, and I had no idea how popular we are. I’m sure everyone is aware by now that we have some new voting laws in Georgia. This “conversation” is a great example of everything wrong with our political discourse today. Let me state up front, that I have no position on this bill either way. For me, the larger issue is our level of discourse. 

I Googled “what is in the GA election bill” and the first response that showed up was from a group called the Brennan Center for Justice. It referred to the bill as an election suppression bill and went on and on about how horrible the bill was, yet did not make one mention of anything in the bill. 

Next up: CNN, which referred to it as imposing “new voting restrictions,” claiming multiple times that this is all about the 2020 election and the fact that Joe Biden won in GA. They did at least quote some supporters of the bill, although they did so in such a way as to make them seem disingenuous. Big bonus if one actually read through the repetitious accusations of voter suppression – CNN did finally mention two elements of the actual bill in the last paragraph. 

This article was followed by several more from news outlets like The New York Times, whose headline is, “Georgia GOP Passes Major Law to Limit Voting.” I’ll admit to not even reading that article. All the while, CNBC is interviewing CEOs of big corporations who were all damning Georgia for its horrible new law – once again doing so without any specific discussion about provisions in the bill that make it so horrible. 

Three altered Google searches later, I finally found the actual bill. According to the bill itself, this is not just about the 2020 election in Georgia, but also the 2018 election. Some who are politically minded may be aware that Stacey Abrams, who ran for governor in 2018 and lost, has been touring the country ever since claiming that she is the rightful governor of Georgia and the 2018 election was fraudulently stolen. Does that claim sound familiar? 

The 2020 election was the second in a row in Georgia in which one side claimed the election was not fair. It seems reasonable that something should be done about that. The bill goes on to give the State more oversight authority over the localities that actually run elections. I can see where that could be a problem, but it does seem reasonable to me that one should have some higher authority for recourse if she believes local officials are corrupt. 

The bill goes on and on about treating every local jurisdiction equally in terms of funding and resources. That may or may not be wise, but it doesn’t seem evil. 

It requires people requesting absentee ballots to give their driver’s license (or state issued ID card) number. We have had to show identification in order to vote in Georgia as long as I have lived here, so I don’t understand this being a big deal, but evidently this is one of the “suppression” tactics. Of course, there is no explanation for why this is some kind of hardship. I frankly can’t think of anything of importance where an ID is not required. That is why we never leave home without it. 

The bill provides for absentee ballot drop-off boxes. This is one aspect that was completely misrepresented in every media story I read; there have never been drop-off boxes in Georgia until 2020. They came about in this past election because of pandemic emergency measures. Those measures expired after the election, therefore, under existing Georgia law there would be no drop-off boxes. I know nothing of the wisdom of drop-off boxes, but this is an expansion of access, not a limitation.

The last controversial element, as far as I can tell, is that there is now a requirement to request an absentee ballot at least 11 days before the next election. This comes from a recommendation by the United States Postal Service, which says to ensure ballot integrity and on-time delivery, such requests should be made 15 days in advance. It is unclear why Georgia shaved four days off of the actual USPS recommendation, but it is more unclear to me where the suppression resides in all of this? There has to be some deadline; if not, should all the Republican voters who did not show up in January (because Trump told them Georgia elections are rigged) get to vote now? 

I am no expert in election laws, and perhaps this is the worst piece of state legislation ever passed in the 245 year history of our nation. However, if this is the case, why is there zero substance in the rebuttals? Why resort to name-calling and accusations? Why do some mention no actual provisions of the bill at all and others hide them in the last paragraph of articles? Maybe the Devil has come to Georgia looking for a soul to steal and this election reform is his work, I don’t know. I wasted my whole morning researching it and I still don’t know, and that is the problem. 

What I do know is that a democracy cannot function for long with this level of discourse. There is no substance. If there is a problem with a bill, then point it out. Reference the actual bill specifically and explain why it is wrong. If we cannot have substantive conversations, then we will not survive. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~The Devil Went Down to Georgia

“One of the great mistakes is to judge policies and programs by their intentions rather than their results.” – Milton Friedman

This is possibly the most important sentence ever spoken by an economist. If one actually cares about people, then she must care about results. So, what would the result of a nationwide $15 minimum wage actually be? 

I believe that 99 percent of the people who support the national $15 minimum wage do so out of true concern for people in minimum wage jobs, but in truth have given very little thought to what that means. The mantra is that everyone deserves a “living wage.”  The problem with that comment is that it is not factual; every single worker does not need to be paid a living wage. 

My 13-year-old son has an entrepreneurial streak (the apple does not fall far after all). This summer he took responsibility for our yard care and he also mowed lawns for some neighbors. My 13-year-old son is a worker who does not need to make any money at all. His parents provide for every “need” he has. Some of our friends’ sons have started a business taking garbage cans to and from the curb on garbage day. These workers do not need a living wage. 

Minimum wage is meant for workers such as these. Young people, with no employable skill or experience, in need of a first job. My first official job for an established company (I had a similar entrepreneurial streak and cleaned pools as a kid) was making sandwiches at Subway for minimum wage. After a few months I took my food service experience down the street to Bennigan’s and started waiting tables. It represented a big raise. I did that until I turned 21 and then got promoted to bar tender. I made more in one night tending bar than I made in a week making sandwiches, but would have never gotten that chance if I didn’t have that minimum-wage job. 

The result of a national $15 minimum wage is that these early life opportunities will be gone. That is not an opinion, it is economic reality, and it happens everywhere in the world when higher minimums have been set. So that is one result of the $15 minimum wage: fewer jobs for younger and inexperienced workers. 

Having said that, there are grown adults in our country who actually are trying to make a living and are stuck in minimum-wage jobs. There is disagreement among economists as to the percentage of minimum-wage earners who are in this category, which is unfortunately typical of our national dialog – we no longer even agree on facts. For me it does not matter the percentage; if a single grown adult in the United States of America is stuck in a minimum-wage job, it is a moral outrage. That simply shouldn’t happen, and unfortunately it does. 

This is where academic economists completely miss the point, in my opinion. They are so preoccupied with the mathematical models, they forget we are talking about human beings. When one sees articles stating that economists disagree on the impact of a $15 minimum wage, what that means is that they argue over the nuance of one mathematical model versus another. They argue about the number of jobs lost and one model says X while another says Y. That entire argument is a side show. 

Grown adults stuck in minimum wage jobs need better jobs. I apologize if I offend, but the truth is that suggesting a slight raise as a solution to that problem is the moral equivalent of saying the solution to slavery was better rations. Wrong! The only moral solution to slavery was to abolish it, and the only moral solution to grown adults working for minimum wage is to create an economy with better opportunities – to do everything in our power to abolish that reality. Unfortunately, that takes more thought than can be written in the 280 characters Twitter allows. 

Of course, there is another issue here, and this is of growing concern. Many people seem to forget that we are a country made up of 50 independent states. Many of the most avid supporters of the national $15 minimum wage live in places like New York, Chicago, and San Francisco. In their world, $15 is nothing. One could easily argue that in those locations the minimum should be much higher and that might not even have a negative impact on those young workers. However, Biloxi, Mississippi is a very different place than San Francisco. The national minimum, if we even have one, must be based on the lowest common denominator and that is Mississippi, because they have the lowest cost of living in the United States. 

If one cares about people, one has to care about results. The result of a nationwide $15 minimum wage are fewer opportunities for young people trying to get a foot in the employment door, and some number of lost jobs – the exact measure of which economists debate, but there will be some who lose their job. The remaining adults stuck in minimum-wage jobs get a few more dollars and remain stuck in minimum-wage jobs. Those are not the results that caring people should want. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA 
Managing Director

~What Should Be the Minimum?