Wednesday, April 25, 2018

Teachers' Strikes: The Difference a River Makes

Last month, in a post about the West Virginia teachers' strike, I had this to say.
The union's lack of legal status is important. It can't enforce a closed shop, nor can it negotiate a real contract. All it can do is get a widely publicized agreement from the state. That is actually an appropriate role for a union. I support this kind of "union" activity.
Surprising even myself, I had something positive to say about unions. The West Virginians demanded only a 5% pay raise (which they got), along with lower medical premiums (I don't think they got that). All in all, reasonable requests.

But if you cross the Big Sandy River from West Virginia into Kentucky, the situation is very different, as described in this week's Militant by Susan Lamont. Turns out that Kentucky educators aren't primarily interested in higher wages, but rather in secure pensions.

Can't say as I blame them. The state tried to put one over on them by passing pension reform as part of a sewage bill. It was a very modest reform, not impacting any presently employed teachers. All it would do is put new teachers into a defined-contribution, 401K plan, instead of adding to the hugely underfunded state pension plan (defined benefits).

On its face the new law is unobjectionable. After all, the first rule of holes is, when you're in one, to stop digging. And that's all the state suggested. The fact is the new bill doesn't do anything to solve Kentucky's pension problem, but at least it stops it from getting worse.

The teachers went ballistic. Calling in sick, they skipped school in droves to show up at a huge rally in the state capitol, reminiscent of Wisconsin, 2011.

The reason for the response is obvious: the teachers are screwed, and they know it. They will never see even a fraction of their promised pensions. But they're still in denial, trying desperately hard to defeat the laws of both arithmetic and compound interest.

Turns out, according to Ms. Lamont, that neither the state nor teachers have been paying into Social Security, so they won't even get those benefits. That's gotta be one of the most shortsighted decisions ever! I recall when I was a grad student, for a few years I didn't have to pay social security taxes. I thought I was making out like a bandit. Fortunately it was only temporary, and thank God I've since put in enough that today the benefit covers my house payment. Kentucky teachers, meanwhile, have taken the short term savings and just spent it. Idiots!

Of course that's not the worst of it. According to Troy Vincent over at ZeroHedge, in an article entitled Kentucky Teachers Want a Bailout
The Kentucky state workers’ pension system is by some measures the worst funded pension in the entire country with an estimated $70 billion dollars of unfunded liabilities. A recent audit of the pension system found that the plan has had $6.9 billion in negative cash flows since 2005. 
At $40 billion, Kentucky teachers make up the largest portion of this unfunded liability. But even in the face of impending insolvency, many teachers in Kentucky are still protesting the slightest changes and cuts to their compensation that have been proposed in an effort to prevent catastrophe.
For example, Ms. Lamont interviews a certain Megan Berketis--a teacher with less understanding of economics than most high school students.
“They talk as if there is a giant pie, and if someone gets a bigger slice, then yours gets smaller,” Berketis said. “But there is no pie. We shouldn’t have to pay more taxes. Money for education should come from the companies that make a lot of profit.”
It surely is presumptuous for Ms. Berketis to allocate all corporate profits to teachers' pensions. Even a socialist won't agree with that--surely some money should be reserved for highways, health care, parks, and even prisons. Even if you accept the socialist premise that no profit should go to private individuals, by what right do Kentucky teachers get to claim everything?

To put it in scale, the richest man in Kentucky is not Colonel Sanders or Jack Daniels, but instead B. Wayne Hughes, worth $2.7 Billion. He's the founder of Public Storage, a nationwide storage locker provider. Sounds like he has a lot of money, but it's less than 4% of the state's pension hole. Of course the company operates in all states, not just Kentucky, so our teacher friends can only claim at most about $60 million of his fortune--or far less than 1% of the amount needed.

And that's only if the company is both bankrupted and liquidated, with all of its employees put out on the street and left unemployed, and with no pensions. All that just to bail out a bunch of clueless, very stupid teachers who couldn't even be bothered to pay into social security.

The fact is there simply aren't enough rich people in Kentucky to cover the hole that teachers have dug for themselves. So it will have to come from higher taxes.

Kentucky currently collects about $12 billion annually in tax revenue, or $2655 per person (not per household). If the pension deficit is to be filled over a decade, that means a tax hike of about $7 billion per year, which raises the bill per person to about $4200. Note that citizens wouldn't receive any additional services for all that money--all they'd be doing is reimbursing teachers for excess stupidity.

It will never happen. Kentucky's state pension system is as good as bankrupt, and it is only a matter of time before it fails completely. There is no way that teachers will ever collect what they've been promised. So the logical thing to do is to extricate oneself as gracefully as possible from the system--at least try to recover fifty cents on the dollar. If I were a Kentucky teacher I'd try to negotiate buyout. At least I'd get something before the whole thing goes down.

Of course Kentucky teachers aren't the only ones in this predicament. New Jersey is worst off--their plan is only 30.9% funded. Kentucky is second, with 31.4% in the bank. Illinois, Connecticut, and Colorado round out the bottom five.

But that's not the end of the bad news: percent funded in both New Jersey and Kentucky declined by more than 6% in one year. (For Kentucky, the ratio went from 37.8% in 2015 to 31.4% in 2016.) The reason for the decline is that nearly all state pension plans assume a very high rate of return on their investments--typically 7.5%. A more accurate number is about 5%, but putting that into the arithmetic throws all pension plans far into the red. So even states like New York or California, which nominally are at or near fully funded, arrive at that result only by making unreasonably optimistic assumptions.

The bottom line is that teachers who trusted their kleptocratic politicians and con-artist union officials to manage their retirement portfolios for them are screwed. In only a few states will they come out whole. In Kentucky the likely outcome is something close to zero.

Me, I put my money into a 401K from the very beginning. Can't say as I regret the choice. The state of New York doesn't owe me a dime.

Further Reading:

Wednesday, April 11, 2018

How Low Can Bitcoin Go?

(This post is a bit technical. For a beginner's introduction to bitcoin and cryptocurrencies, the folks over at CoinCentral have put up a good resource, here.)

Zero, of course. Zero is the lower bound on lots of things: stock prices, minimum wages, retirement portfolios, etc.

Yeah, it's easy to imagine extinction events--an asteroid hitting the earth and eliminating humankind, for example. Or the commercialization of quantum computing--which at this point seems a very long way off (a few qubits at near absolute zero temperatures notwithstanding). Etc.

Yet I don't believe bitcoin will go to zero. The world is just not going to forget about cryptocurrencies--the technology will always be there. They may be more or less important in the future, but zero is not a likely outcome.

While many (most) of the so-called alt-coins will in fact go to zero, a few of them will undoubtedly survive and thrive. Bitcoin, if only because it has first-mover advantage, is the oldest and biggest of the bunch. Something substantial will have to happen before it gets displaced--and maybe not even then.

So let's eliminate zero as an option and ask: What is the lowest price bitcoin could fetch and still remain a viable cryptocurrency?

The cost of bitcoin depends on the expense of mining. Mining is the mechanism that cryptocurrencies use to verify each transaction. Transactions are signed cryptographically and put together in a block. Proving that the pass keys are all correct involves finding the solution to a cryptographic puzzle, which can only be done by trial and error--going through the billions and billions of possible solutions one at a time until the correct answer is found.

The miner who finds the correct solution today is rewarded by receiving 12.5 bitcoins, now worth around $85,000. The cost to the miner is the electricity used--on average in the US it costs an average of $4,758 per each bitcoin (in Louisiana the price averages $3,224). In South Korea, on the other hand, the bill runs $26,100--obviously there's no point in mining bitcoins there. The cheapest country for mining is Venezuela ($531), where electricity is highly subsidized.

So let's take Louisiana as representing the cheapest, readily available rate--and round up to $3,500. That cost corresponds to about $44,000 per block (leaving a bit over $20,000 as profit to the miner). So how many transactions are in a block? That depends on the demand for transactions, but if we go back to the "bubble" period last year transactions were at a max. On December 18th, 2017 over 2700 transactions were processed in one block.

That means each transaction cost about $16.30 to process. Note that this is per transaction and is not proportional to the amount transacted. Thus paying $2.50 at Starbucks is going to cost just as much as paying $5,000,000 to buy a NYC condo.

It's obvious that bitcoin makes no sense for small transactions--it adds multiples to the cost of your morning coffee. On the other hand, the overhead cost for the condo is trivial. So bitcoin makes sense for moving large amounts of money around, especially across international borders. No wonder institutions like banks and hedge funds have become really interested in bitcoin, while retail stores are generally not signing up. (Some apps are being developed to dramatically lower transactions costs for small purchases, albeit by sacrificing security.)

The higher the mining cost, the greater the security of the bitcoin blockchain. On the other hand, cheaper mining means saving money, but the miner can more easily cheat and steal your bitcoins. The cheapest possible mine is a database, where one person simply looks up how much bitcoin you have and keeps accounts. As long as that one person is honest everything will be fine. It's a trade-off: money for security. Bitcoin has opted for security--its blockchain has never been hacked.

For the moment, miners do their work for "free"--that is they are paid by creating new bitcoins rather than by charging users. But that will gradually change as fewer and fewer bitcoins remain to be mined. The last bitcoin will be mined in 2144. That's beyond my investment horizon, but in the meantime the rewards of mining gradually shrink. Beginning in 2020 each miner will only receive 6.75 bitcoins per block. Eventually transaction costs will be passed on to users as fees. 

So it's easy to conclude that it costs about $16.30 per transaction--and absent cheaper electricity and/or advances in computer technology that will remain true into the future. But it's not quite so simple. Note that mining is successful when, by trial and error, miners find the true solution from among billions and billions of possible answers. If there are more miners they find the answer quicker, but bitcoin has a mechanism so that a block is solved every 10 minutes. That is, if there are more miners, the difficulty of the puzzle is increased so that solutions are found about 10 minutes apart.

The bottom line is the fewer the number of miners, the cheaper the transaction costs because the mining gets easier. The larger the number of miners, the more expensive the transaction costs. That makes sense--all those miners require more electricity. And it repeats what we said above.

Since miners go into business to earn money, and since more money will be earned when bitcoin is at a high price, a higher cost of bitcoin will effectively raise the transaction cost. Conversely, cheap bitcoins will dissuade miners, lowering transaction costs.

There needs to be a minimum number of miners to guarantee the security of the system. Let's guesstimate that is half of today's number. That implies that bitcoin can sink to approximately $1250 (half of $3500) before it becomes totally uneconomic.

So I suggest the lowest low that bitcoin can go is about $1250. It can't even get that low because all that does is cover the transaction cost--why bother? Still, if it falls below that the next stop is definitely zero.

Further Reading:




Tuesday, April 3, 2018

Black Dispersal from Cities

Glen Ford, executive editor of Black Agenda Report, often has his work reprinted in Socialist Viewpoint. The post that caught my attention today is entitled Great, Bloody Black Dispersal from the Cities. It's typical of Mr. Ford--always one to take the most extreme, radical position possible, facts and logic be damned.

It is true that, since 2000, Blacks are gradually moving away from large cities, reversing a trend from the prior several decades.
The rapidly unfolding dispersal of Blacks from the cities, like the white invasion of the surrounding hinterlands in the previous era, is the result of deliberate state policies, dictated by finance capital. But, this time, the demographic makeover has been effectuated and politically finessed with the active collaboration of a Black misleadership class that, paradoxically, owes its existence to the concentration of Black populations during the Sixties and Seventies.
True to form, Mr. Ford sees it as a giant conspiracy, where some all-powerful racist/capitalist/government yokel has, for mysterious reasons, decided to depopulate America's cities.

He cites no real data, so I'll take data from Chicago, which I have close at hand. According to the Chicago Tribune, the city lost 186,000 Black residents between 2000 and 2010. The same article reports that the Chicagoland area lost 46,000 Black residents since 2010.

Mr. Ford speculates this is due to the destruction of housing projects. He writes
The de-Blackening of urban America is a wrenchingly painful and bloody amputation-in-progress. In a frenzy of demolition, the U.S. has lost a quarter-million units of public housing since the mid-1990s, only a small fraction of which has been replaced with new public housing, according to the Center on Budget and Policy Priorities. Black mayors and heavily Black city councils have, typically, bought into the notion that concentrations of poor Black people are, by definition, vectors of pathology, while concentrations of affluent whites are the indispensable ingredients of urban “renaissance.” It is the logic of apartheid, cloaked in phony economics.
Chicago's Robert Taylor Homes were the infamously inhumane high-rises alongside the Dan Ryan Expressway, containing 4,415 units. They were demolished between 1998 and 2007, replaced by 2,300 low-rise homes and apartments. (Wikipedia) So while Mr. Ford is correct that on net public housing was destroyed, the fraction that was replaced was more than 50%. Not really a "small fraction," especially if you consider that many apartments in the original towers weren't habitable.

Does Mr. Ford really think Chicago's Black citizens were better off living in the Robert Taylor Homes? The crime was building them in the first place--not their destruction.

He claims that Blacks have been forced out of the cities into the suburbs. "No mayor has been more intent on driving Blacks from his city than Chicago’s Rahm Emanuel," he says. But I think he's wrong.

1) Like whites, Black folks are richer than they were 40 years ago--they have more choices. Nobody with any money at all is gonna want to live anywhere close to the Robert Taylor Homes. Much better is a house and yard in the 'burbs. Like whites before them, Blacks want to lead civilized, suburban lives.

2) We're all getting older, and Black demographics are only slightly younger than us white folks. Old people, living on social security, want low prices, low crime, and quiet neighborhoods. One can live in Mississippi or Alabama quite comfortably on social security and a small pension. No wonder folks are leaving Illinois in droves (and not just Blacks).

3) Chicago has the highest sales taxes of any jurisdiction in the nation. And the city is so hard-up for revenue that they've resorted to stupid things, like soda taxes and red-light cameras. Of course these penalize poor people more than rich ones. Again, for people of modest means the suburbs or Mississippi look really good by comparison.

Then Mr. Ford condemns the city for closing 50 public schools. He never tells us about the drop in enrollment, described by the Sun-Times.
Chicago Public Schools on Friday announced another five-figure enrollment drop, counting 371,000 students in the country’s third largest school district. ...
CPS has lost about 21,000 students from its rolls in the last two years and now has just about 26,000 more students than the fourth largest, Miami-Dade County Public Schools in Florida.
Why should schools stay open when the district is losing 10,000+ pupils annually? Mr. Ford gives us a really silly reason.
The result [of school closings--ed] was catastrophic, as students were forced to transit unfamiliar gang turf to attend schools that were often no better than the shuttered ones in the old neighborhoods. Many kids died. “What people don’t understand is that if you are 16 years old and get on a bus, when you get off that bus you are gang-affiliated whether you are gang-affiliated or not,” said activist Jitu Brown.
Mr. Brown is certainly right--we whites don't understand that. I've never been in a gang, nor do I have any friends who have ever been in a gang. Gang membership is just one of those things we white people don't do (mostly). But now Mr. Ford will have the government enforce turf boundaries established by street gangs! Is that supposed to be the job of the school district? Are we taxpayers (people in housing projects don't generally pay taxes) now required to subsidize gang warfare by keeping unnecessary schools open?

Mr. Ford will likely respond by saying that gangs are the result of poverty/racism/capitalism, etc. He's sorta right, but he's got the causal arrow backwards. By coincidence there's an article in The Atlantic about "Brastell Travis, a 21-year-old who lives in the city’s Englewood neighborhood." He did all the things a young man is supposed to do--went to school to learn a trade: welding. But he can't find a job, "...because of where he went to high school, he can’t apply for jobs in certain neighborhoods, because he could become a target of violence if he goes to the wrong areas of town, he said." So in this case gangland crime causes poverty, not the other way round.

Mr. Travis should move to the suburbs. To do that he'd need a car (which he doesn't have) and money for a deposit on an apartment (which he doesn't have). His parents apparently have saved up zero capital to help get him started on life. And that's the real problem--no capital accumulation by Black families. (I'm not talking millions here--a couple thousand dollars would solve a lot of problems.) So he's screwed.

Mr. Ford's real concern is to maintain a majority Black population in large cities, such as St. Louis, where Blacks became a minority this century. He wants to use this majority to enact far-reaching reforms, one of which is the "Right to free education through post-graduate level."

I can't think of a stupider idea. Surely more education is not something that Mr. Travis, for example, actually needs right now. At best it would be a waste of time. And nothing is more a waste of time than "post-graduate" schooling. All it does is postpone becoming an adult until one turns 30. I think we're already waaaay over-invested in education at all levels. But apparently Mr. Ford thinks higher sales taxes and soda taxes are a fair price to pay for yet more silly schoolwork.

Further Reading: