Hello,

Welcome to Known Unknowns, a newsletter about the future where we will all work for ourselves and drive electric cars.

Biden’s budget

I’ve heard it said a budget is a “moral document” and the latest budget from the White House certainly makes a statement. At times it reads like a wish list that the Vox editorial staff came up with. Are we really spending $183 billion to “Spark widespread adoption of electric vehicles”? If the goal is saving the environment, then I can think of better ways to do it.

Most of the attention has been on how the proposed budget will impact our debt or on how it marks a return to expansionary fiscal policy, even if we are not in a recession. Both are important issues. My Bloomberg column tomorrow is about what jumps out at me; the big philosophical shift in economic policy making. Gone are the days of trickle-down economics, and now we have what appears to be trickle-up economics, otherwise known as taking lots of money from corporations and high earners and redistributing it to middle and low earners.

This approach stems from the idea that since consumption is 70% of GDP, if we just increase it, we can increase GDP and have a more equal and just society (because poorer people spend more of their income). But this doesn’t work well in the long run because resources are scarce, especially for electric car batteries. The only way to grow sustainably is to innovate and that takes investing—not spending. We also see money for innovation in the budget, but all of it is allocated toward favored industries (again, what’s up with the electric cars?) and pet projects.

Growth is tricky. Where it comes from is rarely predictable. If growth was predictable, no one would ever lose money in the markets, and so sometimes people we don’t like get rich. The budget to me reflects who we’d like to be our source of growth, rather than who historically actually brought forth growth. So maybe the situation reflects a new value that distribution matters more than increasing prosperity.

Entrepreneurship

But there is room for optimism. Business applications, which include anyone who got an EIN last year or formed an LLC or corporation, are way up (more than 20%)! This didn’t happen in the last recession. Though most of the applications were for businesses that probably won’t hire anyone. It could be people who turned to gig or contract work during the pandemic. Most of the applications were in food, retail or professional services. This happened even with generous unemployment benefits and stimulus checks. There were also more applications in more open states like Florida, Georgia, and Texas.

Perhaps we are seeing an acceleration of a trend to more contingent work. Many states and federal government are fighting this trend. They are passing laws to classify more workers as employees. But lots of people prefer the flexibility of contingent work and more may want it now.

I imagine that, after a year of working from home, lots of people still want to preserve that flexibility, though employers may not all be on board. There is already evidence that people would rather quit than return to their offices, and if they can do similar work for themselves, then why not? Perhaps this is contributing to labor shortages.

I am not sure why we fetishize traditional work. During the industrial revolution, people found the idea that they had to go somewhere and be told what to do unnatural and demeaning. The fact that factory bosses needed docile workers who’d do what they were told is one big reason we now have universal schooling. They realized we needed to condition people early to be good worker bees. 

Now we presume dignity is in having a boss. Perhaps we are just returning to how people worked for most of human history. Rather than make everyone an employee, maybe we should create new institutions that better fit the modern labor market.

Teacher salaries

Based on the latest jobs report, nominal wages are up, even as the pace of hiring is slowing and people are leaving the labor force. That’s very strange indeed. This is like no other recovery. But then, we had never turned the economy off and turned it on again.

As I argued above, a shock like this accelerates changes. Employers may end up paying higher salaries, but that money has to come from somewhere. Maybe wages will go higher, maybe there will be more automation, and maybe we’ll rethink how we restructure compensation.

 My colleague at Bloomberg writes we’ll have to pay teachers more to get them to return to work. Their pay has been stagnant for a decade. But their compensation has not been. A very large part of teachers’ compensation comes in the form of a massive risk-free asset—a defined benefit pension. The value of this pension increased as real interest rates fell. It not only took more resources for the states and municipalities to finance (assuming the pension funds were well funded—a big if) the pension when rates were low. The pension became more valuable.

So teachers really got large raises in the form of their more valuable pension. The problem is they don’t fully internalize how much more their pension is worth. Also, pensions are less valuable for young teachers who may change jobs one day. If we do want to increase teachers’ pay, we really need to reform the pensions. Reform would free up more money for salaries, and there’s evidence young teachers prefer more flexible compensation.

That probably won’t happen since the teachers’ union is very attached to its defined benefit plan. But you can’t have it all, even in this labor market.

Until next time, Pension Geeks!

Allison