Allison's Ode to the Second Moment


Welcome to the 51st issue of Allison’s Ode to the Second Moment, a newsletter that aspires to be as rational and patient as Swedish lottery winners.

A new study from Sweden casts doubt on the naive assumption that people aren't rational

A recent study estimates that winning the lottery makes people happy after all. This is not shocking, even if there exists a popular narrative that lottery winners are miserable. But buried in the paper is a stunning result: The Swedes don’t blow their lottery winnings all at once; instead, they invest it in low-risk bonds and spend it slowly over their lifetime.

The reason they are happy is they don’t change their lifestyle too much, they just have more financial security. Studies of Florida winners found something different: reckless spending, bankruptcy, and misery. The lesson here is clear. If you aren’t Swedish, then take the annuity.

The Swedish behavior is at odds with all the behavioral evidence about what people do: hyperbolic discounting and over-confidence in their investing ability. What's going on? Do Swedes have great financial literacy training, or is there something in the water? We must figure out what is happening in Sweden and replicate it everywhere.

A default by any other name

The latest Social Security Trustees Report came out and not much is new, other than the fact we are one year closer to Social Security falling short of covering full benefits. Andrew Biggs has a nice summary.

Social Security is a transparent program. There are clear rules on benefits, taxes, and lots of documentation on future financing, yet there is still so much confusion. People know current benefits aren’t sustainable. By 2034, payroll taxes will cover only 77% of the benefits. That’s why people often say, “Social Security won’t be there for me.”

It is not clear if these people think they’ll get $0 or 77% of what they were promised. Obviously, there is a big difference between something and nothing. Though to us Pension Geeks, any liability is a form of debt and a default is, well, a default. Cutting income by 23% is still a big deal. Biggs points out it is strange that activists who oppose cutting benefits, or even want to expand them, often say there is no crisis because even if nothing is done, benefits will only need to be reduced by 23%.

Modern wage insurance

The BLS finally released its long-anticipated data on gig work and found the share of contingent workers fell from 7.4% of all workers in 2005 to 6.9% in 2017. This contradicts years of media hype, earlier research, and surveys conducted by the Fed. The difference may be that the BLS only counted full-time contingent workers. People who supplemented their regular jobs by uber driving or task rabbit jobs weren’t counted. The Fed found part-time gig work is where most of the growth is.

These results raise bigger issues than measurement. Fewer full-time, contingent workers could mean less risk than we thought. Full-time, salaried, benefited jobs are less risky, though they offer less life satisfaction. More supplemental contingent work could be a sign of more insurance against wage shocks or job losses. Perhaps the data suggests less aggregate risk, or just stagnant wages.

A Near Miss for the Swiss

The Swiss voted on a referendum to end fractional reserve banking. This is when a bank takes a deposit and lends out most of it, which is also known as the foundation of our financial system. The referendum only got 24% of the votes. The proposal did not get support from any major party. Thomas Jordon, chairman of the Swiss National Bank, made a characteristic understatement when he called the initiative, “an unnecessary and dangerous experiment that would damage the Swiss economy.”

And you thought tariffs were bad.

But still, who are those 24% of the voters?! Why can’t we all be more like the Swedes? To be fair, Irving Fisher proposed something similar. But then people came up with deposit insurance instead. That’s what is great about insurance. You can reduce risk and still get the upside of nice things like economic growth and a functioning Central Bank.

I Shouldn’t Throw Stones

People believe all sorts of crazy things about monetary policy here, too, like that the Treasury can issue as much debt as it wants because the Fed can always monetize it later.

It all makes Larry Summers’ proposal to move to a nominal GDP target sound vaguely reasonable.

Where is all of this coming from anyhow? Monetary policy has been successful for the last 35 years—arguably the most successful it has ever been. I credit the success to the fact that, post-Volcker, the Fed had credibility that it could and would control inflation. I consider this the greatest triumph of modern monetary policy. Why do people want to throw that away?

Sure, there was a financial crisis (which monetary policy wouldn’t have prevented, except maybe through better regulation, but that’s a different story) and monetary policy responded darn well to that.

Larry Summers thinks it won’t work next time. But how do we know that when we have no idea what will cause the next recession? Besides, if the Fed can't achieve 2% inflation, why does anyone think it can pull off 5% nominal GDP growth?

Inflation uncertainty poses costs. We’ve done a good job eliminating these costs from the economy. Now, I realize inflation targeting gives up on grandiose fantasies that the Fed can control structural aspects of the economy, but no monetary policy can.

Well, no, that's not right. The whole run-up lots of debt and monetize it idea will bring structural changes, but not the good kind.

In Other News

  • I was a guest on Josh Brown’s youtube show. For some reason, when I suggested that future rate increases are already priced into markets, we all burst out laughing. Make of that what you will.

  • Genes determine risk taking and wealth.

  • People are still scarred from the financial crisis.

  • Nevada is considering banning legal brothels to ‘protect’ women. I’ve spent a considerable amount of time in various Hof brothels. I’ve interviewed dozens of women who work in the legal and illegal sex market. The legal, regulated market is unambiguously safer for sex workers.

  • Speaking of brothels….brothel owner, Dennis Hof, won the Republican primary for the state Legislature in Nevada.

Until next time, Pension Geeks!