Allison's ode to the second moment


Welcome to the twentieth issue of Allison’s Ode to the Second Moment, a newsletter that agrees institutions minimize risk, but thinks sometimes they are over-rated.

Institutions is the new-old buzz word

Remember the 90s? The ‘Washington consensus’ pushed liberal economics and warned that institutions mattered. Institutions became a vague and very important concept everyone talked about. They were this magic force that could make or break economic growth.

Nowadays it is popular to regard the neoliberal Washington Consensus as a great failure. I’d argue bringing a billion people out of poverty is nothing to sneeze at. And now, once again, there’s endless talk about institutions, now applied to politics.

The power of institutions will be a big theme in the Trump presidency. Two different stories in the New York Times claim our institutions are not strong enough to prevent a reign of tyranny. I don’t think that’s right. And it’s worth remembering that Trump was, in large part, elected because he promised to shake up our institutions.

America has some of the world’s best institutions, a stable government that keeps power in check, we’re a reliable ally, etc. But it could be argued some of our foreign policy institutions haven’t evolved since the Cold War. Some of our economic institutions were built for a world that pre-dates new technology and globalization. In the 90s everyone agreed good, resilient institutions are the bedrock of economic growth. But even good institutions grow dated and their resilience makes it hard to reform them.

It takes a big personality, unencumbered by partisan loyalties to change institutions. This is precisely why the Trump presidency excites some and terrifies others.

Hot take: Social Security privatization is totally under-rated

I don’t know about you, but I’ve never totally understood why Social Security privatization is so reviled. People reminisce about George Bush’s plan and say, “well that was a terrible idea.” Or they say, “imagine Social Security invested in the stock market—that would be crazy!”

Well, I disagree. Like all things, it comes down to execution. You can ‘privatize’ Social Security and put all the risk on the government. Or you can put all the risk on taxpayers and still have a government run DB plan.

A good DC plan is better than a bad DB plan. Whether pension is good or bad depends on how sustainable it is and if there is an efficient risk allocation. Right now, for every $1 you pay in Social Security taxes, you can expect (if you are a middle class earner born in 1985), between $0.92 and $0.80 back in benefits (depending on if we cut benefits or increase taxes). It might be better to have an account that’s invested in the stock market instead---the expected return is higher. But there is no free lunch. There is more risk and we still must pay benefits to current retirees.

The big advantage of private accounts is transparency. Right now, few Americans know what to expect from Social Security and how the benefit formula works. With private accounts, everyone knows what they’ve accrued. I am surprised progressives (who favor tax increases over benefit cuts) aren’t pushing the idea. After all—private accounts make it nearly impossible to cut benefits.

Too big to fail?

If you want an example of why DB plans aren’t so great—look at state and municipal pension plans. They are great for beneficiaries (assuming they are paid), but the money isn’t there to pay for them. The money comes from reduced services, higher taxes and, in the event of a debt crisis, bond holders.

No wonder I’ve seen a few people argue that state and municipal pensions are the next ‘too big to fail’. I am not sure that pensions pose a systemic financial risk. But the optics of reneging on promises made to police and fireman (who don’t have Social Security) may be a too big to fail from a political perspective.

In that vein, I’ve also seen a few people argue we need to ‘bail out’ Midwestern pension funds. I am not sure what that means exactly. Would the federal government take on the liability? Or do we just give Midwestern governments cash and not fix their incentives to over-promise and under-contribute? Why limit such a program to the Midwest? Connecticut’s economy is struggling and its pensions are in trouble too.

It sounds too vague to be a good idea to me. But right now we have a potential time bomb and we are encouraging local pensions to bulk up on risk. I don’t see how that can end well.


It is amazing that inequality has been declared the most important economic issue of our time. If we really believe the existence of inequality is so terrible then there’s a case for massive redistribution. Meanwhile there is scant evidence that inequality actually causes economic harm or that redistribution will juice growth. Yes, I know that’s the position of the IMF and the new Washington Consensus. But their empirical evidence less than convincing.

Deirdre McCloskey wrote an interesting essay about inequality. She argues that redistribution won’t improve lives--more growth will. The coverage of Raj Chetty’s absolute mobility study implied the opposite. Growth means little if it is not equally distributed. Chetty took a more nuanced position when he spoke to the Wall Street Journal; he implied it will take more than redistributing wealth and income to improve lives. It sounds like institutions that support economy-wide growth matter more.

The Trump victory was remarkable. For years, people said inequality is a very big problem because it entrenches power of the elites and robs the proletariat of their voice. Well, 2016 proved them wrong.

Inequality may be a big risk if it makes people so unhappy there's less trade and more strong-armed populism. Though it’s not clear if people are unhappy because of inequality or just more economic uncertainty.

I am feeling hopeful for 2017, maybe our bad institutions (occupational licensing, unwieldy tax code) will be reformed for the better. Or maybe I am wrong, and there will be less reverence for all institutions and the good ones (rule of law, checks and balances, election results) will weaken too.

Until next time, Pension Geeks! Have a happy New Year.