“Finally Fair” or debt reduction? The Governor’s plan can’t deliver both and likely delivers neither

Two of Springfield’s most trust-worthy politicians

Over the last two weeks I have published a bunch of posts outlining my opposition to the graduated income tax amendment or as our Governor incorrectly calls it” the fair tax amendment.” You can read them here.  What I’ve realized as a result is that its even simpler than I thought. So, channeling Douglas Adams, this is my 5th post in my 4-part series.

In order to understand the Governors proposed tax program, it is important to separate his two very separate proposals. The first is an amendment to the Illinois constitution which grants lawmakers sweeping new powers to change the way Illinois citizens are taxed. The second is a legislative proposal indicating how the amendment will first be used to increase taxes for some and lower taxes for others.

We have all heard the TV ads within which proponents of the “Fair Tax Amendment” talk about increasing the tax rate for the top 3% of earners and reducing it for everyone else. Yet the new wording proposed for the Illinois Constitution doesn’t mention top-3% this or tax-cuts that. These details are not part of the amendment. The Governor’s proposed amendment very simply removes the flat tax requirement and allows the legislature to increase  – or lower – taxes on any group at-will.

The Governor’s second proposal is to use these new legislative powers to immediately increase taxes from 4.95% to 8% for earners making more than $250,000 per year and to decrease everyone else’s tax rate from 4.95% to 4.9%. This, he promises, will 1) ensure that rich people “finally pay their fair share” (his words) and 2) eliminate the State’s deficit, leading ultimately to a reduction in the State’s debt.

We need that first one – the constitutional amendment – before the benefits of the second one – the legislative proposal – are possible. Unfortunately, those two benefits still aren’t possible as currently written. Only one can be true – and the governor knows it.

If you dig in (math shared at end of post), you will see that the numbers associated with the Governor’s program do not come close to eliminating the deficit. That “finally fair tax program” will only increase the State’s revenue by $3 billion – far short of the $6 billion annual deficit. As a result, the State will need to continue borrowing, at higher and higher interest rates, and the debt will continue to grow, and the State’s financial situation will continue to worsen.

OR…on the other hand, with the new legislative powers that the amendment provides, the State could say “to hell with fair and promises,” and legislate increases large enough to reduce the debt. The Governor’s tax rate details are not written in stone. The Legislature could enact them for a year and pick something much more aggressive the following session or just scrap the promises altogether and raise rates across the board now.

So what gives? Is the Governor trying to enact a tax program that is finally fair, or use the amendment to raise taxes to pay-off the State’s debt? The answer is likely neither.

Opponents of the program – and even some supporters – recognize that the Amendment marketing has not been completely honest. The Governor is looking for an additional revenue stream, and this amendment gets him one. It is understood that, the increased revenue will be directed at regular state services (including unchecked inefficiency and graft) and reduce borrowing. Despite promises, it was never intended to fix underfunded pensions or eliminate the deficit. It is a short-term solution to generate cash and in a few years it will be absorbed, Illinois debt will be pushing $80 billion, new sources of revenue will be needed, and that tax amendment will be right there, all warmed up ,and ready to facilitate another round of tax increases, this time much less “fair” and more widely shared.

The amount of money our state needs is big and growing and the three percenter’s pie is just not big enough to solve the problem. Everyone from middle-class on-up will eventually pay a higher rate as a result of this amendment. The usual suspects (Increasing debt service, unfunded pensions, growing entitlements, ballooning – yet ineffective – police departments and school districts) will continue to put pressure on coffers. Tax rates will rise for everyone, additional tax tiers will be introduced each with its own tax details, and 50% or even 100% of retirement income will be taxed at regular income levels. Within three to ten years of this amendment’s passage all Illinoisans will be paying higher state taxes, and some may be paying twice what they pay today.

“So, Jackass,” as my detractors may ask “what is the alternative? We can’t do nothing and isn’t this something?” Nope! The act of creating less than nothing does not make it something! Educated voters need to discern between programs which improve the fiscal health of our State and those that hurt it – regardless of promises. A tax amendment that is sold on the promise of reducing the state’s debt but in fact increases the state’s debt is not a step in the right direction. It is not something.

But, as Crain’s (I think?) pointed out last week, there may be a silver lining here. The failure of this amendment may signal a step forward for the Governor. Prior G, Bruce Rauner’s, message to state legislators was clear, if you can reduce waste, demonstrate commitment to fiscal responsibility, and pass pension reform, Illinoisans will pass a bipartisan tax increase. Before coughing up cash or turning over additional power, Illinoisans deserve proof that our legislators have turned the corner on governmental waste and that buying votes with taxpayer dollars is no longer acceptable.

If a failed graduated tax amendment in 2020 was followed by graduated tax amendment AND a pension reform amendment in 2021, taxpayers would feel a lot safer accepting it.

Note:

Here are the numbers to which I am referring. Illinois typically runs about a $6 billion dollar deficit. With COVID, 2020 will mark about a $7.5 billion shortfall. Illinois’s debt is currently at about $64 billion and growing at $6-7.5 billion per year. Without intervention, it is scheduled to hit $100 billion in 5 years.

The new tax program, proposed by the Governor, and requiring the Amendment to enact, increases the tax rate to 8% from 4.95% for earners making more than $250,000 per year and to decrease everyone else is tax right from 4.95% to 4.9%. This equates to a tax reduction for a family making $100,000/year by $1 per week, and a proposed increase in revenue of $3 billion. The State’s debt will continue to grow under this program by $3-$4.5 billion per year.

The Governor has stated that 8% is the “finally fair” tax rate for rich people even though this is insufficient to make a dent in our debt. In fact, the State’s debt is so big that at a “unfair” tax rate of 15% it would still take one full generation to pay off the debt.

“Fair Tax” impact on IL debt likely to be minimal

while unintended consequences may be severe

NOT Illinois’ new super heroes

Illinois is facing a constitutional amendment to eliminate the flat tax that has been in place for years. our Governor thinks that a change to Illinois’s tax program is the ticket to buy the state out of trouble. Unfortunately the numbers just don’t add up.

I found the following paragraph on the AARP website supporting the “Fair Tax” Amendment.

Illinois was drowning in debt. The pandemic has caused large parts of the economy to shut down and significantly reduced many sources of state revenue, like from income and sales taxes, as well as gaming.  As a result, Illinois now faces a budget shortfall of $6.2 billion.  If the graduated income tax ballot initiative does not pass, this shortfall will climb to $7.4 billion.

The article was called “Facts and Fallacies”, and this was listed as a fact. Unfortunately, it is a fallacy. These numbers are calculated under the assumption that nothing other than the tax formula will change. As I discussed in an earlier segment of this series, the behavior of the State’s greatest tax contributors will change.

Many highly paid Illinoisans will choose to reduce their income or stall its growth. Earlier, I discussed forgoing a promotion to avoid the higher tax rates, but this is not the only strategy Illinoisans will employ. Executive perks such as travel, cars, and luxury offices can be categorized as corporate expenses reducing personal as well as corporate taxation. Additionally, promises of corporate charitable giving can sub in for personal compensation. But most employers and executives will agree to reduce taxable income in favor of retirement income or deferred compensation.

It is important to note that retirement income is not taxed in Illinois – for now (take heed AARP). Following the amendment’s passage, Illinoisans will move to maximize their IRAs, profit sharing plans, and defined benefits plans or pensions. There are limits to all of these, but each removes money from the State’s pool of taxable income.

Deferred compensation such as vested options and stock sharing, will increase as a share of executive compensation. These programs do not generate taxable income until the assets are sold and can be held indefinitely without contributing any State revenue.

There will also be Illinois tax contributors who choose to set up permanent residence in Florida or Texas, where there is no (0%) state Income tax. New York and New Jersey have been suffering from the flight of its most wealthy for decades.

But there is another issue at work here and that is the danger of corporate flight. Illinois – and Chicago in particular – is viewed nationally and internationally as an unsafe environment due to guns, riots and looting, a high murder rate, an ineffective police force, and general, all-around poor, civic management. Meanwhile, the political climate is critical of right-leaning dissent and intolerant of most religion. As an additional 3% state income tax is added on to these issues, corporations considering a move to Chicago may take a pass, but the real fear is that corporations already here will choose to uproot and move to a more hospitable state with a lower tax rate and a friendlier climate to its executives.

With all these things taken into account, what does that $3 billion per year promised income really look like? I haven’t run any numbers, but I can imagine it being $2.5 billion additional in the first year – because behavioral change takes time – but $0 additional by the end of year five or six. The program might in total collect as little as $8-10 billion while offsetting that with a billion or two of additional unchecked spending – all this toward out deficit of $64 billion today and maybe as much as $100 billion at the end of the decade.

Meanwhile, we will have emboldened an already corrupt legislation to purchase more votes with tax payer dollars, witnessed the flight of many of Illinois’ best citizens, and diminished Chicago’s status as an international business center.

Now some naysayers may call me a chicken little. They will argue that there are far too many successful professionals and corporations in Chicago for a little flight to have any overall impact. And those that stay will contribute all the tax revenue the state needs to accomplish the State’s objectives of paying off the debt and increasing government services. But history offers a response t that. Detroit was one of the richest cities in the country in the 1960s and politicians making the same arguments we are hearing today increased taxes on the wealthy and driving them to the suburbs, leaving Detroit with a diminished tax base, ballooning costs of social programs supporting its urban poor, and leading the city into bankruptcy.

We do not want Chicago
to become Detroit

The COVID pandemic has dramatically increased state expenditures and decreased states revenue. This is the single greatest deficit ballooning event in history. There is no instant panacea. Revenues will need to be increased and costs will need to be cut in order to dig out of this hole. To think that regular Illinoisans will be able to get through this unscathed while Scrooge McDuck and the Monopoly Guy foot the bill is absurd. Regardless, which way this constitutional amendment goes, our politicians need to get their heads out of the sand, roll up their sleeves, and reform five decades of terrible governance.

“Fair Tax” Message Unfairly Ignores Contributions of Many Illinoisans

Illinois is facing a constitutional amendment to change the way Illinois citizens are charged taxes. Historically, Illinois has had a flat tax system where everyone pays the same rate. This does not imply that everyone pays the same taxes. A 4% flat tax equates to $40,000 on earned income of $1 million, but only $2,000 on earned income of $50,000.

But Illinois is in bad fiscal condition right now, and our Governor thinks that a change to Illinois’s tax program is the ticket he needs to buy the state out of trouble. In this third installment opposing the State Constitutional edit, and today I challenge the argument on the basis of fairness.

The pro graduated tax lobby has a pretty easy job. Their message, intended to appeal to the solipsistic masses, is that if all the regular joes vote together to approve the constitutional edit there won’t be enough votes on the other side to counter it. In other words, stick it to them, or the state will stick it to you.

It is an age-old argument that the rich should be taxed because they can afford it. These sentiments are fueled by occasional stories of some wealthy douche-hat that gets caught cheating on his taxes or some group of politicians that creates a loophole in the tax law that allows rich constituents to avoid paying taxes on certain earnings.

But these anecdotes ignore the primary fact that most wealthy Americans already pay the lion’s share of all taxes without complaint. At the federal level, a proxy for graduated tax distribution, the top 1% pays 40% of all income tax. The top 10% pays 70%, and the bottom 90% pays 30%.

In flat-tax Illinois, the distribution for income tax is a little more balanced, with the top 15% contributing 60% of the tax revenue collected, but when we consider property and sales taxes, the percentage contributed by wealthy Illinoisans increases due to expensive homes, and higher expenditures on consumer goods. Under a graduated tax program, the biggest contributors would see their taxes nearly double.

At what point are the rich paying their fair share? Imagine in your own life, one particularly good year followed by checks written to the government worth $1,000,000 on April 15. That money is not going to your family’s stability, your children’s education, your grandchildren’s independence, or the charitable causes you support. You don’t get a thank you note from the government, or the citizens it supports. Instead, you hear the ongoing call, that you should be paying even more. And if you argue the contrary you will be badged as greedy and probably evil too.

Stick it to them or
the State will stick it to you.

Our wealthy Governor has stood up, a presumptive poster child for rich Illinoisans, and said that he feels he should pay higher tax rate. But let us be honest, as a member of the richest family in the state, his lifestyle and legacy would not be diminished at any tax rate. The challenges facing a guy that owns private jets are not the same as those faced by the fellow successful enough to fly business class occasionally.

The flat tax is fair.  A graduated tax program could be fair and must be if it is successful.  But we must reject that idea that just because someone has been successful is evidence – in itself – that they did not deserve to be. If Illinois cannot create a tax system that feels fair to those contributing the greatest amount already, those taxpayers will change their behavior, reducing their productivity and taxes paid before ultimately relocating to another state.

The “Fair Tax” – One More Weapon in the Arsenal of Corrupt IL Politicians

Image sourced from illinoisfamily.org

Illinois is facing a constitutional amendment to change the way Illinois citizens are charged taxes. Historically, Illinois has had a flat tax system where everyone pays the same rate. This does not imply that everyone pays the same taxes. A 4% flat tax equates to $40,000 on earned income of $1 million, but only $2,000 on earned income of $50,000.

But Illinois is in bad fiscal condition right now, and our Governor thinks that a change to Illinois’s tax program is the ticket he needs to buy the state out of trouble. This is the second installment in a series of why a graduated tax rate is bad for Illinois.

I don’t know if you have been paying attention, but machine politicians in Illinois have figured out how to corrupt just about everything. For years, they promised higher pay to public unions in return for organizational support. When wages could not rise any higher, they sweetening pensions, and when those benefits got too sweet, they eliminated employee contributions.

Recently, with union pensions under public scrutiny the Machine managed to negotiate a COMED contract “on our behalf” which funneled millions of dollars into Democratic slush funds that then supported compliant candidates around the state. All of these are examples of buying votes with taxpayer dollars.

Until now, Illinois’ constitutionally mandated flat tax, has been the one thing that the politicians could not put their hands into and muck up. But this constitutional edit eliminating the flat tax requirement will change that. Sure, the Governor and other proponents promise that regular Joe’s taxes will go down this year (about $25 a year), and both Scrooge McDuck’s and the Monopoly Guy’s will go up, but next year, all bets are off. This constitutional amendment allows the Machine to change the gradient of the tax code anyway they want. There is now nothing preventing them from cutting sweetheart deals with special interest groups to reduce taxes at one level and sticking it to adversaries in return for support of machine candidates. 

The pro-graduated tax group points out that most states have done away with flat taxes and it might work in a well-run state, but Illinois is the worst run state in the nation.  The legislature in Illinois has a terrible track record of avoiding corruption when opportunities for buying votes with taxpayer dollars are available. Arming them with the ability to graduate taxes willy-nilly will ultimately increase corruption, further the State’s economic woes, and ultimately reduce tax revenue.

To loosely quote Grandmaster Melle-Mel, “Now I’m broke and it’s no joke.
Don’ t buy it!”

An Inefficient Graduated Tax Program will hurt Illinois

Illinois is facing a constitutional amendment to change the way its citizens are charged taxes. Historically, Illinois has had a flat tax system where everyone pays the same rate. This does not imply that everyone pays the same taxes. A 4% flat tax equates to $40,000 on earned income of $1 million, but only $2,000 on earned income of $50,000.

But Illinois is in bad fiscal condition right now, and our Governor, apparently having forgotten his Econ101, thinks that a change to Illinois’ tax program which allows him to increase the rate of high earners is the ticket he needs to buy the state out of trouble.

Economists across the state and country know this is a bad idea. A flat tax which we have currently is the most efficient form of tax because it creates the smallest amount of social waste. Social waste is an economic term for the inefficiency caused by behavior changes that reduce productivity in an effort to maximize how much income folks get to keep.

All taxes create an incentive for people to change their behavior so that they keep more money. But flat taxes, create the smallest incentives. They are the most efficient.

Understand, I am not referring to fraud, hiding assets, or anything illegal. I am talking about the calculated decision to reduce professional productivity or to position assets in less productive places to offset the higher tax burden.

A common example of reducing productivity to maximize kept income comes about when a worker turns down a promotion that puts him or her in a higher tax bracket. A 5% increase in salary corresponding to relocation in the higher tax bracket, would nearly wipe out the monetary raise without affecting the greater work and pressure of the promotion. We will see wealthy Illinoisans repositioning assets into nontaxable and retirement accounts and deferring compensation through stock sharing and vested option.

Another concern is the flight of taxpayers to lower tax states. New York and New Jersey have been suffering at the hands of Florida for years, while Illinois has been largely immune, but this could all change now.

These behavior changes involve personal sacrifice and put downward pressure on collected tax revenue. Downward pressure is another economic term that means kind of what it sounds like. These changes will work toward reducing overall tax efficiency in the long run even if the amendment causes an uptick immediately.

The best way to increase tax revenue is with a low tax rate that taxpayers feel is fair – one for which they do not feel a need to change behavior and do have enough to invest and spend which expands the tax base.

You might ask what history has to say about this. Well, Reagan cut taxes in the 80s and tax revenue doubled in five years. Not a fan of Reagan? How about JFK? He dropped the tax rate from over 90% to 50%. The tax base soared, unemployment fell, and the economy took off.

Flat taxes work because everyone pays the same rate. It is understood, there are no (or very few) exemptions or loopholes. People continue to maximize their income, and the government maximizes tax revenue.

Graduated tax rates, like our Governor is requesting, incent those at the top – the biggest payers – to change their behavior. They might write big checks next year, but in time they will change their behavior to keep the largest amount of earned income even if that means making personal sacrifices. In the long run, a graduated tax system in Illinois will not increase the state’s ability to pay off its debt, but will reduce the State’s ability to collect tax revenue.

So why do it? Tune in tomorrow.

A Judgy Nun Walks into a Bar…

I want to have a drink with these two!

Sister Florence has a problem with her nephew. She has sworn a vow of poverty, and her nephew is a banker who makes north of a million dollars a year. He helps some companies buy and sell other companies while his company takes a slice of the proceeds in return. Sister Florence sees little if any social good coming from her nephew’s efforts and all those wasted profits..

What Sister Florence misunderstands, is that her nephew doesn’t make profit for his employer, he makes revenue. There is a huge difference. Revenue is the fuel that allows a company to run. It is the fuel that is put into the tank, powers the organization, and pays the employees, rent, and taxes. It is what pays for the airline tickets as well as the staples.

Profit on the other hand, is what is left after all those costs and bills have been paid. Many companies do not make any profit some years. Those that do find that number is often very small – typically less than 10% of revenue. So for every revenue dollar that comes in, maybe one nickel or dime ends up being what  the company makes – the profit.

Corporate profits are used to help a company grow – through acquisition or paid in bonuses and perks to the employees who help increase the revenue. Most companies also donate a proceed of their profits to civic causes that make better places to live and work.

Should be post be renamed, “Sister Florence Goes to UofC and gets an ECON Degree“?
Nah. I really like that image up there.

Sister Florence may have mixed emotions about what the company does with its profit, but she should understand that its revenue is almost completely directed at the public good. That revenue allows the Company to employ people. And not just high paid bankers like her nephew, but also the executive assistants, the financial analysts fresh out of college, and the fellow in the mailroom.

These people pay taxes, support their local schools, and tithe their churches. The Company pays rent to the building owners who support her community. All of these people buy things from the local stores which employ local people. Every penny the Company spends – even that which some may considered wasted – benefits a person somewhere who has the capacity to use it for good.

Meanwhile, the Company pays taxes which allow for the existence of the social programs that Sister Florence supports. 

Still, Sister Florence may question why the bank needs to pay her nephew so much. But certainly she would prefer that he receive it rather than have his employee keep it. It was already noted that she is ambivalent with what the company does with its profit, but she certainly cares what her nephew does with his earnings.

Rather than being critical of her nephew for making so much money, she should be gracious of a system that allows him to do so well. Rather than passive-aggressively shunning him, her energies would be better spent cheerfully pressing him to increase his annual giving.

Before AGILE there was, well, agile

November 2019 marked the publication of a memoir by Ameritrade CEO and Founder, Joe Ricketts, The Harder You Work, The Luckier You Get. I led the internet initiative at Ameritrade to the internet and spent many hours being interviewed for this book. Chapter 10 (page 245) highlights some of that story. Following is some more detail.

Like many software development teams in the 90s, we were struggling to keep up, as the internet – rather than floppy disks – became the data delivery method of choice and previously successful development models began to break down. This new paradigm was powerful because we could just update all our clients’ software at the flip of a switch. But it was also fraught with danger as it became very inexpensive and easy to launch new code without appropriate quality control. 

The Egyptians were not Agile

 In the olden days, almost all projects were delivered following a waterfall project management process. Even the pyramids likely started with some sort of primitive blueprint which included every thought and idea that the hoping-to-be-immortalized king might have in his head. As challenges to designing crept-up during construction, they were dealt with via design compromises. As a result, end projects were almost always something less than they were initially intended – even if nonetheless cool.

As people got better at building skyscrapers, ships, and bridges, they got better at estimating the time a project would take. Estimates were created based on the average of past projects scaled up or down to match the one at hand. We can imagine the thinking of an engineer in 1890:

That last bridge took 2 years and was a mile long. This new one is 20% longer so it should take about 29 months.

As our society of builders approached the middle of the 20th century, waterfall project management was very nearly perfected for capital projects. Engineers were aware of the details, pitfalls, and requirements of their projects. They were good enough that we were able to put a man on the moon!

Old practices didn’t fit new products

But around the time of Apollo 11, a new generation was coming of age who would challenge the time-tested results of waterfall concerning software development. Capital projects had been physical-resource-based. Metal, factory space, rivets, steel, and labor had gone into building the monuments of the previous two millennia. The new monuments were to be made of information, communication protocol, mental horsepower, and electricity. They deserved a new method of project management that matched their intangible materials.

Taking cues from Japanese manufacturing, their own experiences, and the changing relationship between programmers and users, computer engineers began to advocate for smaller production cycles that were more flexible. They sought to replace the heavy process of waterfall with something lighter. They promised to increase their accountability and transparency in return for a seat at the planning table and the opportunity to honestly manage executive expectations. Enter Agile.

There is a romantic notion within the software development community that in 2001, a group of 17 computer scientists got together in Utah and invented Agile software development. But that is really not what happened. In truth, engineers all over the world had been wrestling with the problems of building software in executive-driven environments and by the 1990s were coming up with similar solutions. The birth of the internet, and the explosion of users demands, really kicked the discussion into high gear.

Ameritrade

I was in Omaha Nebraska in the 1990s. Omaha might not have much of a silicon reputation, but due to its central proximity and favorable demographics, it was an early hub for military, communications, and technology providers. My company was Ameritrade even though it was called TransTerra at the time. Our technology team was part of the greater Omaha tech community. We knew each other, met regularly to discuss issues and share a beer and traveled to the same conferences. You can always spot a traveler from Nebraska because invariably they will be wearing red or have the state name emblazoned across their chest. It helps when they get lost.

 As TransTerra changed its name to Ameritrade and its number of clients grew from thousands to millions, we were under unprecedented pressure to revamp the way we built software. At the time Amazon first bragged about $1 million days, we were already seeing $100 million days. Our development cycles were built around exploding demand, for which our capacity increasing releases were regularly inadequate. And every day we were learning how better to present our interfaces. Clearly, long, waterfall development cycles were not going to work anymore.

In the spring of 1998, following the crush of a few 80-hour/week development cycles, we put a stop to the treadmill and took a step backward. For nearly three weeks, the development team and I locked the doors, sat together, and wrote what was to be Ameritrade’s new software development process. We called it the Cooperative Software Design Process.

I wish I still had a copy of that original document, but it is long gone. What I do have is a PowerPoint simplification, dated a year later (1999), that was presented to executives and new management as part of an initiative I worked on with my buddy, Ronny Gal from Boston Consulting Group (BCG). It is interesting to review and note how many similarities there are to what we now all know as Agile.

I have attached one particularly interesting slide from that deck. Much of it will feel familiar.

  • Cooperative acknowledges that the stakeholders were part of the process.
  • Concurrent iterations allowed us to deliver features more quickly.
  • The overlapping snail-shell arrow that has come to define Agile diagrams
  • That spinning idea generator up front was our version of ongoing backlog tasks
  • The little note in the bottom of the call-out box “smaller is better”

No alt text provided for this image

We missed a lot of important Agile components too. We didn’t think of time boxing, completed software instead of status reports, or daily stand-ups, but those things probably weren’t appropriate to Ameritrade at the time. We were creating a process that allowed our business units – and subsequently the end-users – to understand that they were in control of what we were doing. In retrospect, it was quite appropriate.

The emergence of the internet changed a lot of things in the mid-90s. Companies that didn’t embrace it went away and those that did were forced to re-evaluate the way they did business. Few companies were as shaken and shaped as much as Ameritrade. Every element of the company was put into flux – but nowhere greater than what became the internet development team. We were pioneers out of necessity and lucky that the pre-Agile discussion was one of which we could be a part. These concepts helped our team progress to maturity and paved the road for Ameritrade’s growth and eventual position as one of the largest brokerages in the country.

Additional posts in this series:

Perspective.

The S&P has been rocked over the last week with value off nearly 20% as of this morning. But how far has this put the market back? The answer may surprise you.

August 26th last year.

That’s it. We have only given up the gains of the last six months. How much better or worse off were you at the end of August? I’m guessing that your answer is “pretty much the same.” Keep that in mind.

The Corona Virus is very dangerous, but not because dozens of people will die from it. Thousands of people die from the regular old flu each year. The danger is that fear of the Corona Virus will make people stay home from work, provide an excuse to skip that conference they kind of didn’t want to go to anyway, postpone starting a new deal, etc. All these seemingly one-off, innocuous, changes in behavior will add up until people start losing their jobs, their retirement savings, and their homes.

So if you want to protect yourself and your community from the real dangers of the Corona Virus, do your job, pursue opportunities, walk to Starbucks – do everything exactly like you were doing last August.

#coronavirus #markets #perspective #fear #flu 

The harder you work, the luckier you get!

Click for more info

Today marks the drop of Joe Ricketts’ memoir, The Harder You Work, The Luckier You Get, a book to which I contributed and within which I am portrayed.

Joe Ricketts is the founder of Ameritrade, and he was my boss. I was initially hired to run marketing but was quickly moved to the more historically interesting job of leading the company to the Internet (with a capital I, because back then it was spelled that way). During the creation of this book, I was interviewed several times and it’s hard to remember everything I said, but I do think the following story will be new.

In the fall of 1995, we launched the world’s first internet trading site under the brand, Aufhauser. Aufhauser was a scrappy New York based brokerage which we had recently purchased – I think largely to provide us some NY street cred which as Omaha “bumpkins”, we were in desperate need. Aufhauser had been uniquely using the internet as a platform for messaging between clients and brokers.

Understand that at this time, no one had ever traded stocks on the internet. In fact, No one had ever paid a bill on the internet, transferred money on the internet, or even viewed a statement on the internet. We were the absolute first financial services company to have a functioning website! We may have been the first to have any website, but I am not certain of that.

From a technical perspective, it wasn’t that difficult. We already had a call-and-response system (an API) created for our touch-tone phone application so we could get the information to the client’s web page. The real challenge was navigating the unexpected objections of just about everyone!

One of my favorite brouhahas from the period involved the exchanges (The New York Stock Exchange and NASDAQ), the regulators, and our compliance team. They all hated me, and I like to think Arthur Levitt, Chairman of the SEC at the time, may have even known my name (but he probably did not). The issue, which has been thoroughly eliminated since, was real-time verses delayed stock quotes.

Randolph and Mortimer Duke. Old-timey Brokers.

You see, the exchanges did not want regular-guy investors to have access to real-time stock quotes. Old-timey stockbrokers (think: Randolph and Mortimer Duke, left) were big clients of the exchanges and access to real-time quotes was one of the reasons people had brokers. Every time that phone rang, the broker had a chance to push another transaction and trade commissions were hundreds or even thousands of dollars per trade. As a result, financial service companies who wanted to share stock prices electronically did so by delaying the quotes by 20 minutes.

But the regulators – the people from the executive branch of the government who enforce laws – required that every trade be preceded by the presentation of a real-time quote. Even if an investor wanted to buy a stock and hold it for 20 years, he had to see the actual price at the time of purchase.

Previous electronic systems such as Ameritrade’s touch-tone trading and clunky Accutrade for Windows had located a compromise wherein real-time prices would be delivered at trade-time and delayed prices would be used everywhere else. This was the model we were following when we launched. Business was slow at first, but within a few months people started to take notice, and I got a call from compliance.

Um, yeah…

I don’t remember who worked in compliance or who called me, but over the years I have inserted Bill Lumbergh into my recounting of the story. “Um, yeah”, drawing out that second word as long as possible, “we are going to need you to stop using real-time quotes on the internet.”

Compliance was the organization in our company – any company – that ensures that laws are being followed down to the letter but also that contracts are being adhered to. They watched our every move and scrutinized every application we built. The internet was untested territory and, although I am speculating, our recent success had been noted by brokers who were pressuring the exchanges to keep professional tools out of the hands of retail investors. The exchanges were very clear that this violation put our service with them in jeopardy. In no uncertain terms: to continue would risk our access to real-time quotes altogether and threatened our ability to stay in business.

Adhering to their request required choosing between two untenable options. We could provide delayed quotes at trade time – and be in violation of the law, or we could stop allowing trades over the internet all together. I thought hard about this before going to Joe Ricketts with my thoughts. Joe and I had a great relationship at the time. I had shown him I was capable, I had made a positive impact, and he gave me more than enough rope to hang myself and the whole company.

I returned to my team with the news. “Fuck it, we are moving forward as is.” I expect that, at the same time, Joe was on the phone warning compliance to buckle up because the next week was a bull ride worthy of a rodeo. Compliance was fighting with exchanges, exchanges were fighting with regulators, and regulators were trying to figure out how they had gotten stuck in the middle of this. I took calls from all sides, received an earful, and was called an upstart (maybe more than once). But at my core I knew that efficiency always prevails over the objections of those profiting from that efficiency. Our business depended on exactly one outcome, and I was confident it would come.

And it did. The law won out, and the exchanges agreed to allow real-time quotes in certain situations and in return for a hefty sum every time one was presented.

I remember a year following this event, Amazon announced that for the first time, they had surpassed $1 million dollars in a single day. No one called us for that story, but we had been doing 100 times that for months. According to a recent story on NBC, TD Ameritrade now processes nearly 1 million trades (and an estimated total value of $1 billion) per day.

This story started off as a classical example of the exchanges’ channel conflict – one company profiting from two clients who had competing business models. In retrospect, the resolution was the moment when the new disrupted the old, the tipping point was reached, and the paradigm shifted. When that happened, every obstacle to internet trading had been eliminated, the industry was allowed to rush forward, and it did. I am proud to have been there.

Yup, I’m entitled.

I am a white male who was raised in a middle-class subdivision and a nice house. We had a sledding hill in our front yard with a wide oak tree at the bottom that – as legend has it – was standing there when Ulysses S. Grant traveled the Stagecoach Trail on his way to Galena in the 1860s. The town was Rockford Illinois, a place where no one visits, and no one leaves. We had a train station there once, but it closed. Then we lost our bus station too. Rockford in the seventies was a town where residents grew up thinking that the big city – even one as close as Chicago – wasn’t for us. Where people thought airplanes were for fancier types, and international travel was, well, not even invited into our imagination.

I was entitled to be raised by a single mother. My father had never been one long for employment, and so when he left, my mother was left with no prospects, no alimony, and no child support. Still, she was entitled to the “American Dream” and she vowed to keep that house. It was the foundation of what was left of our small family. Towards that goal she worked multiple jobs while going to school in pursuit of a teaching certificate.

My mother and I. The early days.

I was entitled to have a mother who turned out to be a great public-school teacher. She was loved by her students and her parents. Yet, every fall she suffered through strikes or pink slips. Once at the end of a RPS strike, she inadvertently crossed a picket line to get her classroom ready for her returning students. That afternoon she found her tires slashed in the school parking-lot. The cruelties and challenges she suffered on my behalf are almost too much to consider.

In junior high school I was entitled to receive free lunches from taxpayers. Free-lunch kids had a special line that snaked through the lunchroom at the busiest time of the day. Those better off heckled from their seats and threw uneaten food at us – alms that not even the poor wanted. Cheers went up for face shots and extra points were given for making one of us cry. I stopped eating lunches and was entitled to have a school library where I could pass that 45 minutes for the next two years.

When I was in high school, I was entitled to become a hoodlum like my peers or get a job. My mother helped me with that decision. Now, this was Rockford Illinois, the most depressed city in the country. Minimum wage was $3.35 but with unemployment over 20%, minimum wage was a king’s salary. I took a job washing dishes for $2 an hour working weekend nights from 8:00pm until 4:00am. I was 14. I would go home at the end of the shift with $16-cash in my pocket. On school nights I could go home at midnight.

I am grateful to have been entitled to leave Rockford – alive. My first friend to die was my childhood best friend, Paul Ogilvy, who died of cancer at age 21. Jim Roberts who lived across the street from him followed soon after with a shotgun in his mouth.  My dear friend Debby Warden was a drunk driving casualty as was Renee Ring and Glen Nichols.  There were a couple others too. Oh, and we should not forget poor Tammy Tracy, sister to my first-grade bestie, Darren. Her teenage body was found in a cornfield. All this before I was 21.

I was accepted to the University of Chicago where I was entitled to get my ass kicked and make the best friends a fella can make. My mother couldn’t pay for it, so I got through by “beg, borrow, or steal” – which really means borrowing and working hard. School was difficult, and I joked, I was fired from more restaurants than my classmates had eaten in. It took me an extra year, but I made it through.

After college. I was entitled to find a job, quit, and find a better one. Then I was fired from that job and found a better one anyways. But then, I quit that one and finally found an opportunity in which I believed. I was offered the opportunity to invest, and I was entitled to risk everything I had (and everything I could borrow). I took a speculator leap knowing that if it failed, that burden was no one’s but mine.

But it didn’t fail. And with financial success came a generous life with my wife, my family, and my community. I was entitled to enter semi-retirement, get involved with charities, help in a meaningful way, and make gifts larger than I ever would have thought possible. I take great pride in knowing that I have made a positive difference in the people’s lives.

As my children aged and needed me less, I found myself desiring to return to the corporate world. I missed the camaraderie and shared goals of working as part of a team. But finding a job did not come easily, and I readily saw how dispassionate hiring managers can be. As a male in my late 40s who had not worked in more than a decade, I suffered intentional bias, unintentional bias, ageism, and sexism – all the while reminding myself that every obstacle was surmountable. After many years of learning how to get around those people, I finally landed a great job where I am using all my entitlement to make a positive impact on culture, efficiency, and revenue. It is from there that I write this post today.

Like many who succeed, I have been entitled my whole life. I have been entitled keep a positive attitude. I have been entitled to show compassion learned from hardship. And most importantly I have been entitled to believe we are entitled to something better than the lot we were given.

So yup, I’m entitled. And even if I’m not, that’s my story and I’m sticking to it.