Allison's ode to the second moment
Welcome to the fourteenth issue of Allison’s Ode to the Second Moment, a newsletter that spent two weeks in a brothel so you don't have to.
No Seriously, I really went to a brothel
This summer, I was invited to the Moonlite Bunny Ranch, a brothel just outside Carson City, Nevada, to see how they teach negotiation. In Nevada brothels, the sex worker and her client negotiate every transaction. Often the women, some in their early twenties, make deals for tens of thousands of dollars with rich, powerful men. I was told, like people in many industries, in the beginning the women don’t realize “their value” or feel comfortable “asking for it.” The brothel takes 50% of what they earn, so it has an incentive to offer an extensive negotiation-training program.
My time in the brothel certainly improved my negotiations skills. But several aspects of the story offers lessons for us pension geeks. Understanding risk requires anticipating the unexpected and possessing the humility to know things may go wrong in ways you’d never expect. To keep me on my toes, I never turn down the chance study obscure corners of the economy and learn how prices are set and what people will pay to avoid risk. There are often important subtleties, we can’t see, that make conventional markets function. These subtleties are often more apparent when we go outside our comfort zone. It helps us better understand risk everywhere.
And many things about this story made me uncomfortable and sometimes sad. You wouldn't want this job for your sister, daughter, or mother. And many of the women I met say their families were devastated when they found out. But you can't deny some positive things happen at the brothel too.
The brothel owner, Dennis Hof, offers the most effective financial literacy training I’ve ever seen. Many women come to the brothel unbanked and leave with improved credit, IRAs, index funds, top tier MBA skills, and financial empowerment. Hof says most of the women only stay a few years and will never make that much money again. He hopes they use the experience to launch themselves. Some do.
If nothing else, I spent many hours speaking with women who come from households where men don’t work, drug addiction is common, and few have bank accounts—let alone save. I am ashamed to admit that until I was in the brothel, it had been years since I had more than a passing conversation with someone who lives that reality; yet I write about these families often, and even offer advice. Spending hours with the women, discussing how they think about risk, money, and their financial aspirations was, in many ways, more interesting and informative than the fact we were in a brothel.
Do we really have a crisis?
The ladies in the brothel might be saving enough for retirement, but many other people are not. The Financial Times has declared the situation a crisis. Jack Bogle says "crisis" understates the problem, there are three crises: Social Security, Underfunded Defined Benefit Plans, and high fees in 401(k) plans.
Personally, I think there’s a big problem, but I am not sure it’s a crisis. Andrew Biggs points out most people who need to save are doing so. I worry they aren’t saving enough or investing their money efficiently. By efficiently, I don’t just mean low fees. It is also important to have a portfolio that targets the right objective and doesn’t take on unnecessary risk.
But neither of these problems are new. Defined benefit plans under-saved, now individuals are too. I am optimistic that DC plans are a better structure to increase saving because it’s easier to get the incentives right. The right balance of nudges and prodding can help people get back on track—and is probably more efficient than the nightmare we call DB pension regulation, that still left many pension plans underfunded.
The investment problem is still an issue. You might wonder if it is desirable to put so much risk on individuals. Well, we are only getting started with solutions—though I worry the recent fee obsession is distracting us from figuring out how to hedge risk and clarify investing goals in DC plans. Ask any DB manager, they'll tell you that carrying risk is expensive. We tend to minimize the cost. Megan McArdle reminds us, no matter what structure you choose, pension risk never totally goes away.
Your other big, risky asset
Like every generation before them, Millennials are convinced they got it worse than anyone else. True, it is hard to enter the labor market in the midst of a recession. It can mean lower earnings for decades. Many young college graduates had to take jobs that didn’t require a degree. But that's not so unusual. Underemployment was actually higher among GenXers when they finished college (remember Reality Bites?) and they all turned out just fine. Right?
But I do wonder that if there are more college grads in white-collar jobs that don’t need a degree (like office assistant, administrator), what happens to people without a degree. Are they pushed down the economic ladder even further?
Repeat after me...Monetary policy cannot fix structural economic problems.
People have such high expectations of the Fed. There was a huge sigh of relief they didn’t raise interest rates--out of fear the labor and stock market would collapse if they did. But the Fed is running out of tools. Now people are talking about (and in some countries actually using) negative rates (and pension geeks die a little inside) and some wonder if central banks should buy stocks. It all makes me worry about the future of Fed independence.
The remaining weakness in the labor market may be more structural than anyone wants to admit. I understand why we’re in denial. Keeping rates low is easy and we can believe we're doing something. But if people expect low rates to solve all their problems, they’ll be disappointed and rates will never normalize.
Alas, fixing structural economic problems is difficult. It requires taking a hard look at what’s wrong in our economy and having the courage, creativity, and political cooperation to get something done. But what choice do we have? We can’t leave fixing our economic problems to a Nevada pimp.
Until next time, Pension Geeks!