How many refrigerators do you have?
Welcome to Known Unknowns, a newsletter that won’t judge you for owning three refrigerators and nine TVs—or not too much, anyway.
How many refrigerators do we really need?
Last weekend, I achieved what few thought was possible: I managed to bring together the right and the left. It turns out that everyone feels very strongly that voracious consumption is as American as turkey on Thanksgiving, and that nothing—not supply-chain hiccups, trade wars, tensions with China, future VATs, or concern for the environment—should stop it. Even Edward Snowden confirmed (in these tense diplomatic times) that my argument also brought Europeans and Americans together.
But is this really such an outrageous things to say? I point out that it wasn’t always this way. Since the 1980s, consumption per capita has grown more than 65%! Americans have always consumed more than Europeans, but it has really taken off in the last 30 years. It’s now the norm to have several TVs, for example, even in low-income households. The average garment is only worn seven times before it is disposed of. Increased trade took comparative advantage to a new level, which meant that things got very, very cheap and accessible.
The problem with a hyper-efficient system is that it’s sometimes not so resilient. It’s cheap, but there’s tail risk involved. So now Americans are experiencing the first shortages of their lives. The supply chain induced shortages will pass, and soon we’ll once again get whatever we want when we want it—delivered straight to our doors.
But maybe we should use this time to rethink how and what we buy. I don’t even mean that we should spend less, but rather that we should just be more thoughtful about whether or not we really need so many refrigerators. We may not have a choice, anyway. If we pull back on trade, pay for all the spending with a consumption tax, or start really caring about the environment, then we may end up being more European in our consumption habits.
That needn’t mean that we should just accept a dryer that leaves your clothes damp, but there’s also a difference between quality and quantity in our consumption. This also needn’t be bad for the economy, either. Sustainable growth doesn’t come from going into debt just to buy low-quality goods. It comes from new products and ideas, and American openness to them as well. We’re a nation of early adopters, and that, not fast fashion, is what has fueled our growth.
I also discussed the story on the Indicator, and at the end, we were attacked by a bird. Even he disagreed!
Do book authors need protections?
Modern anti-trust feels like a solution in search of a problem. The latest is the government pausing the Simon Schuster/Penguin Random House merger because they’re worried about monopsony power, which occurs when there are only a few big employers that thus keep employee wages down.
The whole monopsony question is another solution in search of a problem. Economists keep writing papers demonstrating that more market concentration is bad for workers because it erodes their market power, but it’s not clear whether any harm is actually being done. First, there’s concentration at the national level, but not at the local level where wages are actually set. And much of the concentration is due to the super-star effect where one firm dominates the market. That may be because the economy has changed and rewards scale more. As the publishers argue they need the merger to compete with Amazon, and stopping the merger won’t change that. Besides, big firms pay more because they are more productive. Anti-trust may just make industries less productive, so that everyone is paid the same. And that seems unwise.
Also, are book authors the population that we should really be worried about? And I ask that question as a book author!
Death to the 4% rule
Inflation is back, and I worry about retirees. It has been gone so long that many don’t have a good inflation strategy, and some with defined benefits no longer had COLAs. That’s what happens when a risk stops feeling like a risk. Bu then of course it comes back.
This should be the end of the 4% rule, which dictates that you invest in a 50-50 stock bond split and take out 4% of your portfolio’s initial value (on what day—who knows???) each year to spend. I get it: people want something simple. But spending in retirement is a difficult, complex problem. There are many unknowns that are very hard to hedge. Just because you have a simple solution to a hard problem doesn’t mean that it’s necessarily the right solution—in fact, that’s usually a sign that it’s actually the wrong solution.
I don’t like the 4% rule because it doesn’t manage risk. It was created in the early 1990s when rates were 8%. Then it had to be revisited because rates went low and stayed there. And that’s what happens when you don’t have a risk strategy. Now, Morningstar (concerned about equity valuations, not inflation) says that retirees should cut consumption to 3.3% of their portfolio instead of 4%. That’s a big cut in income, especially when prices are up! Morningstar also advocates for varying the drawdown percentage with asset performance.
This is all crazy. First, how can we expect senior citizens to solve one of the most difficult and complex financial problems each year? And how can we expect them to tolerate huge swings in their incomes that no worker would willingly endure?
The problem with spenddown rules is that they assume that the objective of spending in retirement is simply not running out of money. Actually, the objective is… well, spending—and having some predictability around one’s income. Not running out of money is the constraint, not the objective.
And speaking of bad retirement finance, CalPERS is levering up to invest in riskier assets in order to justify its expected return assumption. This is what happens when your discount rate is your rate of return.
In other news
It’s a false choice between inflation and unemployment. And it’s not that economists are too focused on inflation and don’t care about jobs, because if they didn’t care about inflation, there would be no jobs, either.
Until next time, Pension Geeks!
>>Now, Morningstar (concerned about equity valuations, not inflation) says that retirees should cut consumption to 3.3% of their portfolio instead of 4%. That’s a big cut in income, especially when prices are up!<<
On the contrary, big portfolio gains in recent years means today's 3.3% wdwl rate is equal to or greater than 4% wdwl rate of a few years ago. MStar makes that argument.
Pleased to find your blog through Josh B (where I also found your book last year--the one with "Brothel" in the title). Good comments on 4% rule. But in its defense I would still say that is a much better place to start--esp for one of those "seniors"--than starting with . . . . nothing. But it remains a lousy place to stop.