Allison's Ode to the second moment


Welcome to the 38th issue of Allison’s Ode to the Second Moment, a newsletter about the risk of destroying the institutions that keep us safe…and the risk of keeping them.

Book smarts vs. street smarts

Do you remember season 3 of “The Apprentice?” That was the season when they shook up the original formula and pitted a “book-smart” team (people with college degrees) against a “street smart” team (people without BAs). It was great television and raised the age-old question of whether you really need a degree to be successful.

Speculation around the next Fed chair feels like a high-brow/high stakes version of the game. Does he or she need an economics PhD (with a deep knowledge of data, economic models, and the history and prevailing thought on monetary policy) or is it better to have someone with “street smarts” (time working in the pits of financial markets or the upper tiers of executive management at elite investment banks)? It seems President Trump has already made up his mind, as none of his candidates have a PhD.

I tend to be old-school when it comes to monetary policy. I still think central bank independence is important. I also think monetary policy has become more technical and needs a technocrat in charge.

Tyler Cowen disagrees and thinks the Fed chair needs to be, first and foremost, a political operator. Larry Summers thinks the new low-rate, low-growth world means the Fed’s independence isn’t so important anymore.

Maybe I am naive to the new reality. That’s the thing about institutions and their norms. They are what keep us safe from one personality or an unusual situation causing too much damage. On the other hand, institutions can become outdated and hold us back. Perhaps the Fed’s independence and technocracy doesn’t work in the new economy. Or maybe we are in extraordinary times and stability and reason are what we need to guide us.

The trick is knowing when institutions really need to change and when we need them most to preserve stability. It comes down to whether you think the new political/economic reality represents a structural change or is just a blip in our long history.

Speaking of “book smarts”

The final article in my series on the future of education is on the future of college. There is a structural change in the economy that demands our educational institutions adapt.

The first industrial revolution created the need for universal primary and later secondary education. The new economy means we must now rethink the post-secondary model. More people need more education and that education has to prepare them for a dynamic, self-directed, and constantly changing labor market. Education needs to be more available, cheaper, and more specialized to individual needs. Nothing about our current university structure can provide all of these things.

It seems impossible to get all three at the same time, but technology may offer a solution in the form of more online education, learning, and collaboration. Universities will still exist, but time and in-person mentorship from professors will come at a premium. Those who can pay for it will get the valuable skills only an in-person education offers.

It is always the same story for technology these days, everyone gets more of everything and it comes at the price of more inequality.

Puerto Rican bonds

Last time I speculated that the tragic situation in Puerto Rico would exacerbate what already was a slow-moving crisis. I was hopeful the attention would bring some relief. The president’s comments on Puerto Rican debt is just one example of that possibility. His comments roiled the Puerto Rican bond market until White House budget director Mick Mulvaney clarified that we shouldn’t take president Trump literally.

But things are still unclear. The fact is, even before the storms, Puerto Rico did not have the money to pay its creditors, especially if you include pensioners as creditors, which I do. Something has to be done. Either they default/restructure their obligations or the federal government pays Puerto Rico's debt.

The odds of a government bailout are small. They are not looking to set a precedent for other states and municipalities in dire financial shape. It seems weird to say that you get a pass on your financial crisis if you are struck by a natural disaster. The government does weird things, though.

Now that the Puerto Rican islands are finally getting the sympathy and attention they deserve, it is tempting to side with Puerto Rican citizens against the greedy Wall Street bondholders, and to blame the mainland for everything that’s wrong with the Puerto Rican economy. Of course, it is not that simple. There’s lots of blame to go around, and lots of those bondholders are pension funds and even Puerto Rican citizens.

Nonetheless, investors bought those bonds when it was clear they would never be paid back. Constitutional guarantee on general obligation bonds or not, investors were buying bonds when the pension funding ratio was less than 5%. The math suggested they would never get paid because when the money is gone, pensioners always get paid first.

Sadly, Puerto Rico has bigger problems than debt. Even before the hurricanes its residents were leaving the island. Now, more go each day and it's not clear how many will be back.

Retirement is expensive

Budget constraints are always tough to come to terms with, for countries, states, municipalities, and individuals. Buttonwood at The Economist points out the cold, hard truth that retirement is more expensive than people realize. We need enough money to replace work income and pay health expenses and may need long-term care.

It gets worse. A new study from TIAA points out retirees face too much risk because they don’t have enough guaranteed income. People wouldn’t tolerate huge swings in their income year-to-year while they are working. Yet standard retirement income strategies have people invest in the stock market and base their spending on market performance. TIAA thinks people should buy more annuities. But at these interest rates, guaranteed income is expensive and retirees feel compelled to take on risk.

Higher interest rates and cheaper annuities, in theory, should benefit retirees. But Olivia Mitchell points out that Boomers are entering retirement with more debt than ever. She worries that raising rates would throw many retirees into bankruptcy.

These are hard trade-offs. It sounds like we need a book-smart and street-smart Fed chairperson.

Argentinians need lots of therapy

Argentines are notorious for spending lots of time in therapy. The country has more psychologists per capita than any other country. Even Pope Francis used to see an analyst.

The Argentine president is not only fixing his country’s finances, he is also looking to cure its collective neurosis once and for all. A long-time therapy patient (ever since he was kidnapped and placed in a coffin), he is pushing for Argentines to use resources to pull themselves together and get over their issues. According to the FT,

Diego Sehinkman, a psychologist and journalist, likens Argentina to a patient with “borderline personality disorder.” That is someone who is emotionally unstable and, in this case, often seduced by strong, but also abusive partners or leaders.

I can imagine why living in Argentina has been so stressful. It has a long history of overthrowing institutions that promote stability. That causes lots of stress, even if sometimes change is necessary. It illustrates why we should be cautious each time we consider tossing aside our traditions.

They are all we've got keeping Western democracy from the brink of suicide.

Until next time, Pension Geeks!