Allison's Ode to the Second Moment
Welcome to the thirty-seventh issue of Allison’s Ode to the Second Moment, a newsletter that is still written by a human--for now.
My first job was working in the textbook department at a university bookstore, a great job for a high school student. During summer vacation, we organized the books for the fall semester. At the end of the semester, we bought the books back to resell them in the spring. Even at 16, I was fascinated by the economics of textbooks—a more interesting topic than you might think. Each book is like an asset, with an uncertain resale price.
That experience might explain why I loved writing this story on the death of textbooks. My old summer job might soon be extinct, as instead of publishing physical books or creating digital editions of books, publishers like Pearson are developing interactive software that replaces textbooks. The software has half the words the books did, which means students read less text.
But the material is more engaging and interactive, which is apparently what the kids need these days. Instead of buying books, students buy a semester-long subscription. It totally upends the old economic model and the market for used textbooks. I feel a little sad that students won’t buy used books anymore with other students’ highlights and comments in them.
And there’s more to come. Artificial intelligence (AI) will one day be integrated into the software. Then all students will have a virtual tutor to answer their questions on demand (and the tutor will also question them). Machines will someday grade essays and do many of the most tedious teaching jobs. Does this mean that universities will need fewer teachers? Has AI cracked Baumol’s cost disease so that we can finally achieve economies of scale with education?
Perhaps. University education is ripe for disruption. The challenge today is for universities to educate more students because a college degree is so critical to higher earnings. But accepting more students also means servicing populations with different needs; for example, students who attended poorer high schools and aren’t prepared for college. Meeting their needs takes expensive labor, mentoring, and tutoring. Maybe AI holds the answer to how we can educate more people and still keep costs down.
Our future is demographics
Until recently, I had an unshakable faith that interest rates mean-revert. But rates kept falling and then stayed low. Now, even as the Fed normalizes and unwinds its balance sheet, a 7% yield on a T-bill seems crazy. Perhaps there is secular stagnation and a global savings glut after all and the natural rate of interest rates is forever lower.
Not so fast says Charles Goodhart and Manoj Pradhan in their paper for the Bank of International Settlements. They argue that demographics and opening up China and Eastern Europe pushed interest rates and wages down. But as these populations age and save less, rates and wages will go up, too.
Maybe it’s time to dust off those mean-reverting rate models—or not. Many others disagree. Conventional wisdom maintains we are in a new, lower productivity world where rates are lower. State Street’s Amlan Roy also thinks demographics are our destiny, but he also thinks the excess demand for long-term bonds will continue and keep rates low. He thinks the demographic story is too nuanced to know exactly how wages and consumption will change.
This trend story must die
I want to ease benefit consultant Ted Benna’s conscience and assure him that 401(k)s are not his fault. Personal pension accounts are a global trend, and they would have taken off in America with or without him. Defined benefit plans are expensive, and that’s why we have 401(k)s. We can stop writing at least one article a month about the man behind the 401(k) and his guilt about ruining retirement.
Besides, 401(k)s aren't so bad, and it is not clear if most Americans are destined for old-age poverty. On the bright side, 401(k)s are more common than defined benefit plans and have increased equity ownership. These “401(k)s are terrible” stories have to stop, too.
That said, we can still improve the current system. We can widen access to retirement accounts through state retirement accounts that feature auto-enrollment. We also need to help people spend down their assets after they retire.
As if Puerto Rico and the Virgin Islands didn’t have it bad enough. Puerto Rico was already dealing with a financial crisis with the Virgin Islands close behind. Now they face a humanitarian crisis following the catastrophic hurricanes. Moody’s isn’t optimistic and Fidelity reckons the hurricanes will “expedite the downward spiral in Puerto Rico.”
One silver lining. It always seemed to me that the islands needed more support from the federal government to get back on their feet and revive growth. Hopefully, now that Puerto Rico and the Virgin Islands need resources so desperately, the U.S. federal government will finally step up.
Where should a country live on the efficient frontier
I spent a good part of the financial crisis at the OECD and kept hearing people say the crisis proved the European model was superior as it offered less growth in exchange for less risk. This struck me as an odd takeaway not only because I am not sure that’s a fair characterization of the European model.
It also seems like a glib statement. Is a financial crisis a fair price to pay for the rise in living standards that we’ve experienced since the 1970s? I’d say so.
It is, nevertheless, hard to know if we could have experienced a similar standard of living with slightly less risk. Matt Klein offers some evidence. It seems, on the gold standard, there was less risk and lower growth (risk defined as skewness and kurtosis of GDP and consumption growth, or similar year to year variability, but with fewer extreme outcomes like the financial crisis).
I am still not convinced by the OECD workers' argument. Risk tolerance is personal and certain income groups bear the costs of risk more than others. The right balance of risk and reward for a society is a hard question. It probably varies depending on a country’s stage of economic development and culture.
Perhaps this is the question we should discuss more, but we never do.
Until next time, Pension Geeks!