Allison's Ode to the Second Moment
Hello,
Welcome to the 52nd issue of Allison’s Ode to the Second Moment, a newsletter that aims to alleviate your anxiety about technology and pension accounting.
How to Tame Technology
Large technology firms pose challenges we’ve never faced before. I always assumed large, unregulated monopolies were bad for consumers (in the form of high prices) and innovation (lack of it) because they did not face enough competition. This justified regulation, even at the expense of greater economies of scale.
But this reasoning does not necessarily apply to Facebook or Google. We use these services for free, or sort of free, because we hand over data on our darkest secrets. Personally, I think this is a fair transaction. I don’t have interesting secrets and they are even less interesting when they are aggregated with millions of other people’s secrets. Still, the lack privacy bothers lots of people and, for a variety a reasons good and bad, large powerful firms make people nervous. Concentrated power means more risk about things we can’t imagine.
It seems to me that the debates around big tech do not address these questions. The discussion often comes down to big firms are probably bad, we aren’t sure exactly why, and we must do something.
So, when I was offered the chance to ask Jean Tirole anything I wanted about the economy, I went for it. After all, he is one of the best thinkers on natural monopolies. Seizing the moment, I asked him everything I wanted to know about taming big tech.
He explains that because big tech poses new problems, the right solution will be different from traditional anti-trust, like breaking up companies or turning them into public utilities.
I think my interview with him offers readers something very powerful. Unlike 99% of commentary and articles that tell you want to think, Tirole offers insights on how to think about these issues. I wish there was more of that.
Tech Anxiety
While were are on the topic of tech anxiety, Bob Litan has four ideas that offer a compelling alterative to Xanax. He hones in on how to get the best from technology, such as higher living standards and more productivity, while still reducing the risk to individuals who might lose their jobs. His ideas include maintaining high employment (using monetary and fiscal policies), offering wage insurance (my personal favorite), targeting distressed communities with more tax incentives, and encouraging lifetime learning.
This last one got me thinking. It was history week at Quartz and we were asked to write about something from the past that can inform our future. I focused on the history of universal education. It evolved to train factory workers to be docile and show up on time. In short, education prepared people for the modern job as we know it. At that time, people had no concept of such a thing. A modern job, especially having a boss, felt demeaning.
Schools offered social conditioning, so we would become agreeable workers who did what our bosses told us. Early industrialists lobbied for more education to meet their needs.
Where are their equivalents today? Work is changing again and so is what we need from education, be it more adult education with constant retraining or individualized, tech-powered learning.
Everyone seems to agree education is ripe for reform, but there are too many competing interests and a lack of will. This was true in the mid-18th century, too. Landowners didn’t want the masses educated; they found that idea threatening. Factory owners fought hard and ultimately prevailed. Is anybody doing this today? Why not?
A Turning Point for Public Sector Pensions?
Public sector pensions are a white-hot mess. There is a lot of blame to go around because it all comes down to bad incentives. Public sector workers are paid two ways: salaries and benefits, including generous, risk-free pensions (or at least generous relative to workers’ salaries).
When a union and politicians negotiate pay, they both have an incentive to offer more generous pensions at the expense of lower salaries today. Politicians can promise workers more, but don’t actually have to raise taxes or cut spending from other sources to finance it—at least not while they are in office. Union leaders like pensions because they tie their members to their jobs and, by extension, to the union.
Neither the union nor politician have a short-run incentive (and they only live in the short run) to actually fund these promises. The whole thing is enabled by shoddy accounting standards and public-sector unions having lots of political power by funding political candidates.
So here we are with large and underfunded pension obligations starting to come due, cities don't have money to pay them, constitutional guarantees that benefits can’t be cut, and union bosses who will fight to keep it that way. They tend to resist any kind of pension reform. After all, large delayed compensation is a powerful tool for them. Something has to give, and this puts union members who are counting on their pensions, and gave up pay raises for them, in a tough spot.
The recent Supreme Court ruling on the Janus decision means public employees don’t have to contribute to unions in which they aren’t a member. This is expected to weaken the unions’ political power and could open the door to some pension reform…maybe.
No matter how you feel about unions, it is worth asking whether public sector union bosses served their members’ best interests or not.
Pension Freedom
I’ve been watching the UK’s Pension Freedom experiment. British retirees were forced to annuitize their savings. Now, they can do what they want. The Financial Times reports on the rising popularity of drawdown accounts. This is when retirees put money into an investment fund and spend it as they wish. They like the liquidity of these accounts, a feature that annuities don’t offer. But some of these accounts are opaque and expensive. British retirees are also investing in them without seeking any advice.
Hmm…sounds like we all need a better solution to the drawdown problem.
In Other News
Peter Coy on why interest rates on reserves is getting political.
An interesting paper on globalization and changing risk appetites.
The Wall Street Journal is worried there’s a retirement crisis and quotes everyone who thinks that’s true.
Andrew Biggs says not so fast, let’s take a harder look at the data.
Tipping in restaurants is bad economics, so let’s end it.
Until next time, Pension Geeks!
Allison