Welcome to the ninth issue of Allison’s Ode to the Second Moment, a newsletter that isn’t afraid to search out risk in the darkest corners of our economy.
Technology and risk
It is interesting that people associate technology with more risk. Often the point of a new invention is to reduce risk (think anti-lock breaks, air bags, and credit default swaps). I think it is because people fear change. It may also be because technology disrupts markets and makes some existing jobs less secure. I recently spoke with a woman who found a way to stay relevant even as technology displaced others in her industry.
Rita runs an online brothel. You might think that job would be unnecessary these days because one of the major benefits of working with a madam is her ability to procure clients. The Internet changed that. Prostitutes can advertise online and find clients themselves. Even in Nevada, where prostitution is legal, many brothels went out of business after selling sex services went online.
But as us pension geeks know all too well, risk never totally goes away--it just changes form or is transferred to someone else. And advertising online puts prostitutes in risky situations because it exposes them to unscreened customers who may be a lunatic or member of law enforcement. Rita saw an opportunity. She screens potential customers and keeps the women who work for her safe. In exchange for her risk minimization, she gets a 30% cut and job security.
Moral judgments aside, I think it’s important to study the economics of crime because crime is such a risky business. Criminals are often early adopters of technology because it is how they maintain their profits and hedge risk. Criminal markets can offer us a preview of how technology will diffuse into the rest of the economy and the future of jobs.
Darn our dynamically inconsistent preferences…
Baby Boomers get a bad rap. They are blamed for everything—including ruining the economy and cashing out to retirement just as the world goes south. But things aren’t really that great for them. The decline in interest rates is equivalent to a 30% drop in retirement consumption. It’s like a permanent Fall of 2008 if rates don’t go back up.
No wonder there is so much discontent. Tyler Cowen reckons bleak retirement prospects can explain why many older voters are angry and going populist. They experienced huge gains in their standard of living in their working years. But that means nothing if the gains aren’t sustainable.
What hope do they have? Not only do they have low savings, it’s hard to find good advice these days. Daniel Kahneman in a recent interview described a conversation he had with a financial advisor:
I went to a financial advisor in the States and said: "I don't really want to get richer, but I would like to continue to live like I do." She said: "I can't work with you.
Sigh…well at least Kahneman is on board with life cycle investing…
Speaking of retirement consumption, Vanguard published a fascinating report on how retirees actually spend. They compared two groups of retirees, traditional (who have predictable income sources like defined benefit pensions) and new (who rely on savings accounts like 401(k)s). And it turns out each group spends a similar amount each year. Not only that, they devote the same share of their budget to discretionary items like travel and entertainment. The data suggests the move to DC plans didn’t destroy retirement after all.
Still, retirees may be under-spending. Spending rates from pension accounts is very low. Asset balances rise (when you’d expect them to fall) post-retirement because many retirees are still saving. So the hot question is are they under-spending because they don’t know how much they can spend, are they content with their spending, or do they have an extreme precautionary motive?
And speaking of suboptimal consumption…
I normally wouldn’t use under-spending and American consumers in the same sentence. Another vexing question is are we consuming too much? Your first response is probably, “Yes! Of course—what a silly question. A book telling people to throw out almost everything they own is a best seller for goodness sake!”
But it’s hard to square over-consumption with the perception that most Americans can barely get by. I dug into the data this week. It looks like we consume more than we used to. No doubt we have achieved and expect higher living standards, in part because the prices of some goods fell, and because we spend more.
Better living standards + stagnant income = less saving
Some of our new consumption is reasonable. Some things that were once luxuries are now legitimate necessities (after this weekend I begrudge no one central air-conditioning). But we are probably all guilty of over-consumption too. Almost all households, even ones on the poverty line, have multiple TVs.
Maybe something went askew with our values and we don’t value the future and financial resiliency as much as a flat screen TV. I’d like to see a healthy savings account balance bring more people joy.
But what do I know? I am an economist and no one listens to us anymore.
Until next time, Pension Geeks.