Allison's Ode the Second Moment
Hello,
Welcome to the 60th issue of Allison’s Ode to the Second moment, a newsletter that admits it does not always know the right model for the right problem but is willing to criticize others who think they know.
The Very Wise Lars Hansen
The best thing about my job is I get to talk to very smart people and they help me make sense of the world. Last week, I published a recent interview with economist Lars Hansen. He is renowned among economists because he developed the tools that we use to measure risk and account for uncertainty.
The world certainly feels more uncertain these days. Technology may disrupt how we work and live and the political situation has, well, become less predictable. I asked Lars how to make sense of all this. I think the big takeaway is humility. We can measure risk, but we must be aware that we may be using the wrong model to measure it. All models are inherently wrong to begin with because they are merely abstractions of the world. The skill is in picking the right one, or the model that's the least wrong for the job at hand.
This may all sound a bit esoteric, but I think we should all be aware of the practical implications. Everyone is so sure these days that their view of the world is the right one and anyone else who uses a different model is totally wrong—or sometimes outright evil.
But no model is always right. Sure, it may be right for some problems or just as right depending on your values and objectives. The world is always full of risk and uncertainty, and none of us know the future. We therefore cling to models that give us some sense of order. But models should not be our religion. Instead, we need to be better at recognizing their limitations and be open to people who see the world completely differently than we do.
Regulating Technology the Wrong Way
Take technology. There’s an industry that is very confident in its worldview. I guess that happens when you have lots of success. No wonder they’ve made some mistakes and been less than tolerant of other people’s models of the world.
But the hot question now is what do we do about it? There is lots of chatter about regulating big technology firms. The concerns about the industry are they use our data in creepy ways, they spread bad information that incites violence or just poor voting choices, and they are so big they are suppressing any competition.
The answer to all these issues appears to be anti-trust. Another day another lawyer/legal scholar explains why big is bad and how we can find ways to justify breaking up companies, even if they don’t necessarily cause economic harm.
Here’s another version of a bad model. That model assumes big is bad, therefore, we can stop bad things from happening if we make tech firms smaller.
There are legitimate problems with new technology that do require regulation. But, as another smart ecomomist once told me, other than the competition issue (which is not even an unambiguous bad thing) anti-trust will not necessarily fix the problems we’ve identified. Anti-trust could even make the problems worse. After all, having more media companies did not improve the quality of information.
A few weeks ago, I went to the 2008 Financial Crisis: A Ten-Year Review Conference at NYU. Many top financial thinkers took stock of the crisis, future of risks, and how to best regulate the industry. Economists are far from perfect, but I wish we’d have a similar discussion for technology. That discussion needs to be, what are the problems new technology creates and which policies can reduce the risk they pose?
More regulation is not the answer, as we need good regulation that addresses the problems we are concerned about. Technology probably requires new forms of regulation.
401(k) Forty and Fabulous!
The 401(k) has turned 40! Like many things entering midlife, it is getting lots of unfair criticism for things that are not its fault—like undermining retirement security. It’s unfair because DC plans would have taken off with or without the 401(k). DB plans are expensive. Once companies realized that, they did not want to offer them anymore. DC plans are becoming the norm everywhere—even countries that don’t have 401(k) plans.
Actually, the creation of the 401(k) meant more people have a retirement plan, in part because it gave employers a lower-cost option. I think the 401(k) is fantastic, and we should celebrate its birthday.
I am DC/DB agnostic. I’d take a good DC plan over a bad DB plan any day, and it’s hard to find a good DB plan. There always exists incentives to underfund them. DC plans have their issues, but it is easier to get the incentives right.
But that does not mean 401(k)s are perfect. As they reach middle age, they could use some work. We need to figure out how to deal with decumulation, expand access, and improve investment options.
I don’t think there’s a retirement crisis, but it would be better if people saved more. A new paper explores if retirees regretted their saving choices. About 60% wished they saved more when they were younger, though many of those same people think they have enough for their retirement. Retirement saving is not their biggest regret. It was being unprepared for bad life shocks like divorce or illness. There is some evidence that retirement savings replaced other forms of saving. Before we go all in with nudges to increase retirement savings, we might want to think about how to encourage liquid savings, too. Perhaps nudges are over-rated.
Are Leveraged Loans the Next Crisis?
It is fashionable to say so. The IMF is a little worried. They note that low interest rates created an environment where lower-quality firms took on leverage to fund mergers, share buybacks, and dividends—and not productive growth-enhancing investments. Institutional investors are buying the debt because of their desire for higher-yielding investments. The low rate environment means less risky debt does not deliver the yields they want. The market for leveraged loans is $1.3 trillion.
The hot question is does this pose a systemic risk? It is hard to know because the problem goes beyond the scope of traditional regulation and risk measurement. Big banks are not directly exposed, but they may be through institutional investors.
It does not sound good. It probably won’t end well, though it is not obvious this will mean financial calamity either. It does demonstrate that more regulation does not prevent a crisis. We need smart regulation that promotes resilience.
Other News
Dennis Hof won two elections three weeks after he died.
The Fed has an accurate map on public sector pension funding.
We need more compromise on multi-employer pensions.
Amazon’s HQ2 talent problem is our talent problem.
Ultra-low rates may mean we needn’t fear inverted yield curves.
Until Next time, Pension Geeks!
Allison