Allison's ode to the second moment


Welcome to the 28th issue of Allison’s Ode to the Second Moment, a newsletter that brings everyone together, even as the lure of free flights and elite status drives us further apart.

United no more

Many important things happened in the world this week, but people can’t stop talking about that United flight. I reckon it struck a cord with people, not only because it was shocking and horrific but also because it is a metaphor for how many people feel about the economy.

Don’t worry, I promise this is not one of those anti-capitalist rants the incident sparked—quite the opposite.

As air travel has become cheaper and more accessible over the years, we haven’t lowered our expectations of what we get to match the lower prices. True, not being brutally dragged off a plane is a reasonable expectation. United handled the situation terribly. However, these kinds of incidents often arise because of unaligned expectations.

To stay profitable, airlines practice more price discrimination, offering better seats to people who pay more and perks to regular high-revenue fliers. In the end, everyone gets to fly more often, but air travel increasingly reflects the growing inequality in our economy. Most people don’t realize it, but when they buy a discounted ticket they are selling an option that may require them to give up their seat. The lower your ticket price, the more likely that option will be in the money—and that is why passengers in cheaper seats are bumped more often.

To make matters worse, the airline loyalty programs are increasingly a winner-take-all game, not unlike active stock trading.

This is all not such a terrible outcome (assuming the airlines handle things in a more civil way). Just like the larger economy, we all have more of everything these days (and that’s great), but we also expect even more. Some people get what they expect, while others don’t, and sometimes getting more comes at the cost of your dignity.

Tyler Cowen has some more interesting thoughts. He also brings up a provocative question. Sometimes corporations must ration and claim they do so randomly. But randomly selecting people sometimes produces outcomes people think are unfair or discriminatory. Savvy business may need to avoid true randomness—all to foster the perception of fairness.

Where’s the volatility?

In addition to what’s behind our collective discontent, the other pressing question of our time is low volatility in the stock market. The world is full of uncertainty, but the stock market, both forward looking and current measures, barely register the heightened risk.

The FT is worried everyone is too complacent. Lots of investors are short volatility; for example, an ETF that gains when the VIX falls. The FT is worried once markets finally reflect the fact that the world has gone crazy, all these investors will be left holding the bag and this will further exacerbate volatility.

The Wall Street Journal makes a similar argument, sort of. They explain everyone wants to be short volatility, whoever takes the other side of that trade hedges their position. The WSJ thinks that hedging is why volatility is so low. But eventually, as that argument goes, there will be some tail event—and then all hell will break loose.

Good news on mortgages

Matt Klein has a great post on why mortgages, years after the crisis, are still so expensive. Spoiler alert: They were underpriced pre-crisis and how reflect something approaching sanity.

What the United controversy tells us about fiduciary risk

While I refuse to link to any of them, there have been a rash of reports in my inbox claiming delaying the fiduciary rule is costing American savers squillions of dollars a day. These estimates assume all 401(k) plans don’t charge fees and invest everyone in the lowest-cost index funds. Neither is true. They also assume all advisors do is convince their clients to leave these free 401(k) plans and invest in high-fee funds. I am sure that happens, still no one can put a precise estimate on it…

…or maybe not. It turns out these advisors, anticipating the rule, are already acting in their clients’ best interest, though I am still not sure what that means. Even fiduciaries have conflicts and no amount of ham-fisted regulations will get rid of them.

It is really true that the United flight has become a symbol of what's wrong with everything. I’ve even seen it argued that the incident shows how slippery the fiduciary concept is.

State of retirement

That’s too bad because people need good advice. Social Security is in trouble. Maybe we should invest the dwindling trust fund in equity to boost returns and make it last longer. That always works, right?

Well, maybe things aren’t so bad. Despite all the criticism, Kevin Drum points out the whole 401(k) experiment is working fairly well. In an ideal world, we would have different risk tiers and encourage people to save for themselves—and, well—that’s what we’ve got. Andrew Biggs is also a fan of the current system. I highly recommend his excellent and detailed description of everything that’s wrong and right with the state of retirement and what we can and should do to fix it.

I agree our retirement system really isn’t so bad. It just needs a few critical tweaks. When people compare today to the golden age to DB benefits, they make the same mistake those fiduciary nuts made. They compare the worst possible DC plan to the best possible DB plan—never mind some 401(k)s are fairly generous, or that DB plans weren’t widely available and had lots of hidden risks. Making these false comparisons isn’t helpful. We live in a 401(k) world now, and we can make it work for people.

401(k)s may even work out better. It is a complete disaster when DB plans run out of money and compete for scarce government resources. Just ask Puerto Rican civil servants and the Greeks.

Until next time, Pension Geeks