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Comment by tasty_freeze | Hacker News Reader

It would be great if

(a) elected officials could hold only cash, bonds, and index funds, specifically bonds and index funds that are open the general public and have at least $XX assets, to prevent engineering an index fund available only one one or a few people.

(b) pay them better to make up for the loss of gravy. Sure, the pay raise would not be sufficient to make up for the lost income, but it should be high enough that none of them could complain they can't live on the salary. Paying the senate majority leader under $200K / year is not enough, considering they often have living expenses in Washington and their home state. Lower ranking members get paid less. Pay the leader $1M/year and everyone else $500K/year and then prohibit anything but vanilla investments.

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It seems like you’re suggesting to pay them better to make up for the loss of an ability to insider trade without any risk. Allowing that behavior totally breaks the stock market system.

Elected officials should be forced to let go of all their assets to a neutral 3rd party asset manager who they’re allowed zero communication with during the time of their service.

He's suggesting we pay them better to make up for depriving them of vehicles private citizens can use. It's not unreasonable to strip them of those vehicles to prevent insider trading. It's not unreasonable to compensate them for losing those vehicles.

All their assets? How about their homes?

This seems like it would suffer from the principal-agent problem.

Zero communication is unfeasible. They can communicate public and express investment intentions through that.

Long only is actually a pretty terrible choice if you want a "solid" portfolio with risk hedging.

I work in "tech" and I'm substantially net short "tech" as a hedge for potential layoffs, via options. Unfortunately I can't hedge via my employer's stock directly (like most companies my employer very explicitly disallows it, plus I'd be running a high risk of an insider trade accusation; I think it's understandable and acceptable).

A better idea might be to force people's allocation way ahead of time, say any change must be pre-announced 6-12 months ahead of time. That's how responsible executives (for example Bill Gates) sell their stock - via long term stock sale programs. Once signed - has to happen, whether good news or bad news.

You’re missing the point. These people have (some, limited) control over the economy. Their financial incentives should be restricted to long-term, gradual growth only, so that they attempt to achieve that.

I understand, skin in the game. All I'm saying is that maybe it's a little restrictive, and perhaps not even working as intended.

It's pretty easy to cheat the system with a long only portfolio, if you're truly controlling the system: cause a deflation -> long treasures will be awesome (TMF just went +100% in the corona-crisis), cause inflation -> gold and maybe also stocks and real estate.

There's no single parameter that you can hook a leader to to assure progress. That's what voting is for. It is a very hard, very old, and probably impossible to solve problem: https://www.investopedia.com/terms/a/agencyproblem.asp

Things like this site from OP may work wonders. We need more disclosure and more pesky people prodding at leaders and executives, analyzing their every step. Journalism, serious journalism, even if done by non-professionals. Remember that since Markopolos & Madoff the SEC is giving substantial cash awards to whistleblowers (proportional to the penalty), which is fantastic. And they're paying out money all the time, so if you know of any fraud do yourself and the society some good: https://www.sec.gov/whistleblower

> It's pretty easy to cheat the system with a long only portfolio, if you're truly controlling the system: cause a deflation

Causing a deflation is very hard, unless possibly if you control the fed.

And that's for the government as a whole. I'd be very surprised if an individual senator can't affect that meaningfully.

Compare that to the current system where a senator hears about huge news that will move individual stock prices next week, and can easily make huge profits.

You agree with me that it's mostly about insider trading, not about skin in the game.

Deflation is not that hard, just dampen social security. Or stop half of military contracts and half of infrastructure spend. Or just go to the federal budget and do anything to reduce it by > 30%. You'll have a deflation (a recession) in a month, even before those changes actually go into effect.

> Deflation is not that hard, just dampen social security

classic HN backseat driver - everything is easy, "just" do XYZ.

The US federal budget is 21% of US GDP. Reduce it by 30%, that will cause a 7% drop in GDP and a deflationary recession. Reduce it by 50% and you have a 10% drop, very substantial. I really don't understand what's difficult about this.

You can also jack up taxes and start paying off govt debt instead of spending it on something new. Would have similar effects.

If you think I'm wrong please write why or post a link with some economic thought, would be curious to read.

The gist is that you will not be able to move the needle with any effectiveness. Reduce the federal budget by 30% by force of will, or what? This is "first, convert 1kg lead to 1kg gold" level thinking.

I agree. That's what I mean by "it seems to be more for you guys about insider trading than about skin in the game".

Edit: I think I understood it. You mean that broad, "macro-like" allocation would prohibit shenanigans with assets in narrower domains, like for example when a congressman successfully pushes a particular drugs-related law that has very big impact on a some particular pharma company. It is more realistic that they can change a single paragraph in some act than they can throw out 30% of the federal budget to "finally start paying back our enormous national debt".

My understanding is that it’s easy to start deflation. But it’s hard to stop deflation.

screws anyone with a loan / mortgage

You can easily protect your portfolio while being net long using uncorrelated asset classes like a blend of stocks and bonds, or even long inverse ETFs. Look into risk parity portfolios. No need to keep your foot on the gas and the brake at the same time.

Inverse ETFs are shorts, let's be real for a second :). And I'm well familiar with risk parity.

Bonds+stocks only doesn't protect you from stagflation (inflation up, growth down) or a depression (inflation around zero, growth down).

Bonds+stocks+gold only doesn't protect you from a depression.

Both a depression and a stagflation can easily last for over 5 years, so it should be taken seriously, IMHO.

Related: https://www.artemiscm.com/ (see the paper linked below; note that this is also a sales pitch from a long vol fund, so possibly it's a little too optimistic about the strategy).

You're wrong. Bonds protect against depression and index-linked bonds protect against stagflation.

Risk parity has not fared well in this crisis.

Risk parity doesn't come fare well when all correlations go to 1.

All correlations did _not_ go to 1. Volatility was amazing and certainly anti-correlated.

Risk parity's fatal flaw is assuming all instruments must be generating continuous profits.

Can you tell a bit more how you use options to hedge against a downturn in tech? Seems expensive.

On the contrary. For example, MSFT is currently trading at ~$165. A single MSFT Put option expiring on March 19, 2021, which gives you the right (but not the obligation) to sell 100 shares of MSFT at $165 at any time before expiry currently costs less than $20. So for $20, you can protect your $16,500 asset from a market downturn for a year. Also, options were significantly cheaper before the recent increase in market volatility.

You need to multiply that 20 with 100. It costs $2000 to protect $16,500.

You are correct, my math was way off. Buying ITM options is definitely not the best way to protect capital.

If it actually costed $20 everyone would be playing Taleb on much of their portfolios :). It is not cheap, and also not so easy to size everything properly. Hedging is not user friendly at all.

Robert Shiller often complains about the lack of general public awareness when it comes to hedging. Rationally, if you work in an oil company you should be short oil, but the opposite is much more common to be found in the real world. Similarly with real estate - if you have a big mortgage maybe you should somehow be short on the real estate market elsewhere, just in case your city becomes the next Detroit.

For those unfamiliar with it: options are usually quoted per-share (even though almost all of them are sold in contracts of 100 shares), because it makes calculating the break even price a lot easier. For a put costing $20 on a $165 strike, the break even at expiration is $145.

Also, you never buy long dated puts ATM in bull markets with the intention of hedging. It's usually much further OTM, since it becomes a lot cheaper. Right now all options are very expensive due to high implied volatility.

When the stock market is booming, buy puts on a major index.

SPY (S&P 500 index exchange traded fund) was around 335 in February.

Buy, cheaply a put (right to sell 100 shares) at a price of 300, expiring in 60 or 90 days, for about $150.

A couple of weeks ago, SPY was at 240. Sell the put, for a gain of at least (300 - 240) times 100 times delta (a description of relation of the option gain to the stock change) of about 0.60, for a gain of at least $3500 to $4500.

Do this 4 times a year times 10 years (last bull run) and you expire worthless 39/40 times for a net loss.

You wouldn't do it in the beginning of a bull run, only once it's been going for a decade plus.

Black swan events don’t wait for a 10-year bull market to occur first. You strategy might hedge against a market bubble (still very questionable), but what about all of the other things that can crash the market?

It's futile to try to make a strategy that will work 100% of time and still return the same or better than a non hedged strategy. If it's a black swan event, you won't be able to predict it by definition. I'm not sure what you're trying to argue.

https://en.wikipedia.org/wiki/Gambler%27s_fallacy

Except business cycles are a real thing

Yes, giving them more freedom would allow them to get more money.

But that isn't the objective. Allowing them to use only transparent, hard to game investments is offset by doubling or quadrupling their existing base salary. That is the trade off. Some will find other jobs because they want to become megarich. Fine, let them leave; others will be happy to run for their vacant office under the terms of the new deal.

Secondly, by investing only in bonds and broad index funds, their goal is to help the economy overall and in the long term. If someone is allowed to buy a ton of Lockheed stock, guess who they are going to steer projects to? If their money is parked in DJIA, to benefit themselves they should do what is right for a broad range of companies.

The DJIA is comprised of 30 companies, it’s not a very good option for this.

> Long only is actually a pretty terrible choice if you want a "solid" portfolio with risk hedging.

What if, in exchange for being one of the most powerful people in the most powerful nation on earth, you don't get to participate in the same wealth building schemes as everyone else?

Instead you get a hefty salary, and the people who say "Nah, I'd rather get rich in the stock market" are probably not the ones you want wielding all that power anyway.

I never quite understood how this is not obvious to everyone.

The primary driver and motivation for politicians should be altruism, do good for the sake of it. So many people in NGOs etc. are capable of doing just that; working for "the good" even though it pays bad, why should we not expect that from politicians?

The US (I'm Swiss) is in my opinion a primary example on why you want to keep the kind of people that care about their own personal finances as far away from politics as possible. Let them play real estate sharks or monopoly at wall street or whatever floats their boat; just don't let them anywhere close to positions where decisions are made that impact not just their life but everyone else's too.

Politics doesn't select for altruism. Politics requires lying, bribing and stealing so it's no wonder the very scum of the earth ends up in positions of power (same for most NGOs executives BTW). Power corrupts, so you will never be able to get altruistic individuals in power. You can't square that circle. The only solution is to severely limit their power.

Why do you think a position as an NGO executive selects for that? Executives in general, yes. NGOs too?

Because altruism alone doesn't get you special interest campaign financing and you gotta win first before you can do anything.

> The primary driver and motivation for politicians should be altruism, do good for the sake of it.

Any system that relies on people being good is a bad system. A good system is one that has good outcomes with weak and venal human beings. The US federal system has its merits but it’s far inferior to Switzerland’s.

> So many people in NGOs etc. are capable of doing just that; working for "the good" even though it pays bad, why should we not expect that from politicians?

Because the government is important. Ideally we want not the best of the people who are motivated by their conception of the good, we want the best, full stop. The average NGO is much less well run than the average company. At the extreme top level where you’re comparing the Gates Foundation with General Electric you’re dealing with at least roughly equivalent levels of competence but if you want the best and you can afford it you shouldn’t self handicap by only hiring those who don’t value money much.

Plenty of NGOs (charities and other humanitarian organizations) are also outright scams: https://smartasset.com/mortgage/the-50-worst-charities-in-am...

Altruism is complicated.

Plus, members of congress get a pension.

> (like most companies my employer very explicitly disallows it, plus I'd be running a high risk of an insider trade accusation

I've not seen that before. How is the rule structured? Can you buy otm puts?

I can't really imagine that a formulaic program, established in advance and rigorously followed could possibly run afoul of insider trading rules regardless of your position at the company.

Something like: "In order to hedge my undiversified finical interest in X: While I am employed at X, on days A and B each year I will purchase 1 year puts with strike at 50% of the spot price (or the next higher price available) with Y% of my take home pay and either hold them until the expiration date, until they produce a return of Z, or the time of my choice if my pay is reduced or I stop working at X."

In addition to trading windows and material information rules, my company has a blanket rule that the company stock cannot be shorted nor can derivatives of any kind be used on it. Additionally it warns that this rule may also apply to ETFs containing a high enough proportion of the stock (leaving unspecified what the max allowed proportion would be, but noting that derivatives/shorting a total market index fund is allowed).

I'd recommend anyone who finds terms like that in an employment contract leverage it to try to negotiate for severance.

my company has the same rules, and i’d expect any publicly traded company that doesn't want to see their stock drop due to insiders activity or lawsuits against it would do the same.

i think it’s fair, you’re not restricted from trading other companies. this prevents unethical people from taking advantage of insider knowledge.

outside of c levels the average employee wont have enough stock to make this aplicable

I've never seen it before and I've seen the employment agreements for several fortune 500 companies-- though perhaps it's something that's only become common in the last ten years.

Obviously, restrictions on "restricted insiders" driven out of federal law exist... but I'm referring to restrictions that would prevent you from programmatically hedging your employment risks. You're not going to have an insider trading problem from such a program.

As far as fair goes-- it's fair if they compensate you for the loss of that freedom, otherwise it isn't. It's up to you to figure out what compensation is fair.

Employment is an extremely large undiversified risk. Through no fault of your own the company could go tits up with little notice, leaving you seeking new employment at the same time as many other people. Unemployment benefits are a rounding error for highly compensated employees. For good reason, you're generally prohibited from having alternative concurrent employment which would be the obvious way to reduce employment risk. It's prudent to take actions to hedge this risk. If the company takes one of the avenues off the table for that they it compensate you for or provide an alternative (like a good severance agreement).

No! Greenspan famously held only treasuries. Result? A long treasury bull market.

Seriously, the way it should work is that elected and appointed government officials, as well as civil servants with potential access to material non-public information (MNPI) should all be required to use only investment accounts managed by a manager with full discretion and with whom the official does not communicate.

The question is, what if they want to build an elevator for their car at their vacation home in Aspen and need to pull out some cash, and just happen to do so immediately prior to a recession they received a briefing about? Surely “give me cash” and “invest some cash” are acceptable communication to an investment manager, but still could abuse the MNPI.

They can borrow money using the portfolio as collateral, interest free or pegged to inflation, to be repaid either when the stock is released or over time. Although, it'd be a bit more complex than standard collateral since there'd have to be a "margin call" mechanism, where assets in the portfolio have to be sold to cover the debt if they drop too far.

The risk here is low. After all, the manager could easily have sniffed the coming recession and hedged against it. All assets do not lose value in a recession, you know.

Knowing only the returns the manager has yielded over several years tells the official very little about how the manager will perform in a recession, in a boom, or in a boring year.

By the way, that's how it works in financial companies. There's no reason it shouldn't work that way for government officials.

Stocks are a sideshow. It’s not how members get rich. It’s not how someone worth nothing leaves office worth millions.

Look at book deals and board seats.

Both of these options are wrong. Not so long ago, the people who entered government did so purely for civic duty. They didn't need to profit off of it.

Civic duty shouldn't mean their family and kids don't get the same opportunity as those of a software engineer. It is not "profit". It is a salary so that smart people don't have to sacrifice their family to do their civic duty. I am not saying any Senator is necessarily sacrificing, but that is where all these shady actions come in.

You still don't understand. It has nothing to do with material things like money. It is something much greater than that. Civic duty is the highest honor one can achieve in their life.

That's a great ideal, but the reality is that if you slash the salaries for being in elected office down to something token like $50k, you won't get more "civic minded" people in elected office, you'll get more rich assholes because they're the only ones who can afford to quit their job to campaign and hold office, fly back and forth to DC, and maintain two residences on that salary.

I've come around to the idea that we'd be way better off just paying them a lot more. I also think people should be able give their congressman a tax deductible 'tip' up to $20. Put a line on the Form 1040.

Ahh it would be fair for citizens to be able to bribe politicians the way lobbyists do.

It's not a bribe if they are supposed to be working for us.

I don’t think many people agree with that. I do. Most people don’t know what it means.

When is that "not so long ago", exactly? Corruption in republics is as old as republics themselves, and US was no exception.

I think if representatives in the Senate and Congress were focused on a salary payday, they would have chosen another career besides politics.

It’s the bennies and perks of being a representative that outweigh making $200k/yr. Plus so many of them already have cushy incomes by time they are in office, being a representative is really the cherry on top the cake.

> Plus so many of them already have cushy incomes by time they are in office, being a representative is really the cherry on top the cake.

Right, but I think the argument behind paying them more is that you shouldn't have to already have a cushy job to become a representative. We complain on here from time to time about how representatives don't understand technology, but it's no surprise when most folks who understand technology would be taking a pay cut to become a representative. Same with fields like medicine and management.

Why not just insist on a firewall between themselves and investment decisions?

Lots of ways that could be implemented.

A wealthier congressman could employ a firm to manage their money.

On common way to protect against insider trading is to make irrevocable trades fat in advance.

For example, irrevocably say you buy $500 of an index fund every month.

As someone who worked at investment bank for years, and would have had to go to the trouble of getting preapproval for any individual trades, it was far less troublesome just to rely on managed accounts.

So, yeah, just make them use managed accounts.

I think it was Steven Landburg that had the idea that politicians and administrators should hold a broad-based index of their country's real estate, on the theory that better policies lead to land within the country being more valuable, and so it aligns incentives.

As a georgist I think this idea is very flawed.

(not building housing can increase existing house prices... but is not necessarily a good move)

Why? Georists support taxation of land rents, also in the expetation that good governance leads to higher (ground) rents (and thus higher government revenues).

Edit: If anything, the Landsburg policy is just a tepid approximation of Georgist finance.

House prices and land prices are quite separate things.

NIMBY policies increase house value, but decrease land value.

I don’t think we have a problem in this country where the interests of landowners are underrepresented.

That’s not the problem that that system is solving, and it’s not the typical kind of landownership that causes anti democratic effects; I think you’re just pattern matching there.

A) Still requires a blind trust. One can inside trade index funds if you know about news that’ll shake the entire market.

B) If you look at the salary of public officials inflation adjusted, the president would be making a few mil a year if they still made Washington’s salary. We’ve let public salaries atrophy badly.

100% agree. I'd be fine with 7 or 8 figure salaries for members of congress, the president, and top executives along with very strict rules on investments: treasuries with a small allocation to broad market, long only ETFs: S&P500, MSCI World, etc.

7/8 figures seems a bit much no?

535 members of congress, each making $10M/year adds up to about $15/year per American.

That seems like a lot to me though. You can make many expensive things look not that expensive if you put it in terms of “per American”. It’s just the there are many things and they all add up. E.g can’t you just pay them 1 million and use the 90% savings to buy X nurses?

I don’t have any data to inform my decision on what would be the best number though so I should shut up.

It's not a lot for any individual American.

The reason to oppose it can't be "I can't afford it". It's more "those bastards don't deserve it". And that's not how mature adults should think about things.

Compared to the impact the federal government has on all our lives, it's nothing. If it resulted in 1% better governance, it would be a really well spent $15.

Right, I'm just saying it's not clear to me where the 10 million figure came from? And it seems very high for a government salary. Obviously if it's justified to work then I'm for it.

Someone said "7/8 figures seems a bit much no?".

$10M is 8 figures.

I agree it's high :) $1M might be enough.

if the fact that paying them more results in a better society, it may be worth it. The absolute amount is irrelevant if the return on this investment is greater.

A higher paid politician is also less likely to be corrupt (since the agent causing the corruption will need to beat their high salary, which is risk free). A higher paid politician will not need to worry about blowbacks from policies that are good for society but bad for existing entrenched players.

And a higher paid politician may encourage people, even if they were poor initially, to work to become a career politician (and study it, the same way a neurosurgeon or any other professional trade would). High pay almost always equate to high intelligence, and i would hope that an intelligent person is also someone who can run things better.

The prime minister of Singapore has a salary of more than 2 million US dollars, and being a competent POTUS is a much more demanding job.

Not relative to their responsibilities. The US federal government takes in about $3.5T per year and employs about 2m people. Private sector executives routinely get 8 and 9 figure comp for running organizations 1/10th or even 1/100th that size.

Also, remember that this is "in exchange" for anyone who assumes office to mostly forgo income from individual investments and I'd add things like book deals and honoraria after office. Someone mentioned Singapore and that's my example case here.

Executives get that kind of salary because their tenure is short, they are under pressure, and they are (at least in theory) held accountable for performance by multiple stakeholders (employees, shareholders, the board, customers, etc). Members of Congress have a sky high re-election rate, have a much less stressful lifestyle, and are generally not held to such an account for their activity. We want to disincentivize choosing politics as a career, not encourage it.

Perhaps these races would be more competitive if there were a few million more reasons to win.

Why do we want to disincentivize career politics? I feel like raising the incentives will improve the ability of the average politician.

People don't go into politics for the paycheck.

This wouldn't change if the salaries went up 10x, or even 100x.

Influence is worth far more than cash ever could be.

One of the problems that creates is only certain types of people can afford to go into politics. Improving the pay for staffers might go a long way to reduce some of the revolving door cycles that many people find so distasteful

I don't see how it helps.

The expensive part is GETTING elected, not serving. If you don't have the resources to win, the salary doesn't help you.

People don’t go into politics for the paycheck because only the wealthy and the incumbents have the ability to sustain a months-long campaign. That’s the real reason we have people in Washington who represent Wall Street instead of Main Street.

Indeed, campaigns should be in the public interest. Nobody should be able to accept donations from anyone for a run for office. They should receive budgets from the FEC and it should be illegal to use any money for the campaign above and beyond that, even their own. That would solve a lot of problems. Run out? Tough. This eliminates an awful lot of conflicts of interest and allows candidates to run on their own merits.

That's meaningless without doing away with Citizens United. All the real money goes into the slush funds and not the campaigns.

I agree completely. They should not exist either.

My fear is that the FEC rules would be written in a way that discourages third parties, or non-incumbents.

You mean like they are now?

You’re solving the wrong problem

Getting what you just proposed (or any of the many other obvious ways to prevent insider trading) through a senate full of insider traders is the problem

Solve that one

How would you deal with their family, friends, etc.?

Same way SEC deals with everyone else.

Then why can't SEC have the authority to deal with congresspeople too, though?

Because obviously the congresspeople don’t want to pass such a law

I mean isn't that a problem with the original proposal too?

> why can't SEC have the authority to deal with congresspeople too

Because congress wrote the law.

But they somehow wrote the original proposal?

They will just get hired as 'consultants' at large companies after they are out of politics

That problem already exists. My half-baked proposal doesn't claim to solve all the hazards. :-)

Index funds are still too aggressive. You buy some defence contractor and vote for war.

TBH, $10M per senator per year is only $1 billion/year - a rounding error for America. And when a senator has F-U money, there is little incentive for him to take dirty money (true sociopaths will take both, of course).

How do we select for normal, non-sociopath humanoids for political office?

Random selection. It's like jury duty, but longer!

To me this seems to be no worse and possibly more efficient than our current system.

Ancient Athens did it: https://en.m.wikipedia.org/wiki/Sortition

I would argue significantly better than our current system. It would allow more diversity as well as bring knowledge about government back into communities.

> pay them better

Nancy Pelosi's net worth is $160M. You can't pay her "better" to compensate for loss of "gravy".

Nancy Pelosi's estimated net worth is $16M, not $160M.

https://en.wikipedia.org/wiki/List_of_current_members_of_the...

Her husband + her net worth is about 160M. Which is the same thing - you can't pay her enough to compensate her for the cessation of movement on the gravy train. If you're suggesting that having a wife who's been in congress for decades in no way helps her husband's endeavors, I have some wonderful Florida swampland for sale.

Let me make a different suggestion:

Keep your part A.

Throw away your part B. Nobody deserves to make more money because they either screwed their country or refrained from screwing their country.

> pay them better to make up for the loss of gravy

You went the wrong way. If anything they should take a vow of poverty.

What’s that? Then no one will want to be a Senator? Good.

Functionally impossible. Even if they aren't allowed to own anything, you can't stop people from doing them favors of one sort or another. You'd basically be making it a rule that their reward for their work is getting discreet favors from special interests. It'd be hard to establish a set of rules airtight enough to stop it from happening entirely, companies would find ways around whatever basic regulations are put in place just like they do now.

> You'd basically be making it a rule that their reward for their work is getting discreet favors from special interests.

So you’re saying today’s state of affairs is unavoidable and there’s absolutely nothing we can do. How defeatist!

There are options other than an impossible-to-enforce vow of poverty.

I’ll be generous and they can keep their current salary. But no additional income streams allowed. And all investments must be held double-blind and only invest in broad index funds.

That’d be a good start. An unforceable but public vow of poverty upon swearing in would still be good.

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