Known Unknowns

Just give it to me straight

Hello,

Welcome Known Unknowns, a newsletter that will always be straight with you and then trust you to use that information to make your own choices.

Jackson Hole

The Fed’s Jackson Hole Symposium kicked off on Friday. Most market watchers are trying to decipher Jay Powell’s cryptic words to figure out when tapering will happen. The answer appears to be soon, but not sure when, when it is time. He insisted that high inflation is entirely transitory and he’s monitoring inflation expectations (which is how inflation could take off), but didn’t explain what the Fed is doing to keep them anchored.

So much for clear, credible communication from the Fed as best-practice monetary policy. When I took Mishkin’s money seminar in grad school, I was taught that monetary policy can’t have an impact on the real economy, but it can smooth out rough edges if done properly. Properly is limited in scope and is humble. You can’t keep the market guessing and trick it into avoiding a downturn. If you try this, people catch on, and you squander your credibility when you need it. So, the best action is to pursue simple clear, achievable goals and honest credible communication – or not speaking in code out of fear the market may drop for a few days.

What’s crazy is that we aren’t even taking about tightening. Just slowing the pace of buying private and long-term assets, for what was supposed to be an emergency measure when financial markets have seized up. Trillions of dollars later, this is the new normal and in nonemergency situations.

Perpetual QE seems to pose more downsides than upsides, as is the belief that these policies can solve all our economic ills – from climate change to economic inequality.

Students of the history of monetary policy know this is dynamically inconsistent and how it turns out – an inept Fed no one trusts and more volatile cycles. But, if we’ve learned anything the last few weeks, it is that we don’t get wiser with each generation, we just repeat our mistakes. I wonder if the great moderation was a fluke, a golden era of good monetary policy we can’t sustain because we are too human.

Behavioral economics faces a reckoning

I suppose this intellectual turn in monetary policy is not surprising. After all, it occurred during the intellectual accent of behavioral economics. Now, to be fair, that is a broad term, and just about anyone can call themselves a behavioralist to land a plumb job in a corporation or the government under the pretense they can look at data and studies to trick/nudge people into more desirable/profitable behavior.

Turns out it doesn’t work. Many of the results don’t replicate, and you can’t trick people into doing something they don’t want to do, nudge or no nudge. This is bigger than the Ariely scandal. The field was oversold and overpromised and was probably too big.

I was never a fan. But no one can deny behavioral economics has some useful insights – and, in a more complex world with more data available, that can be valuable. But, instead of using the research to nudge, we should think harder about how to communicate risk in ways that are meaningful to people – or more meaningful than a vaccine that is “90% effective”. This is hard enough. We then need to trust people make decisions that are right for them.

Like monetary policy, behavioral economics works better when we are just clear, consistent, and straight with people.

Chinese non-Democracy

So, given everything that is going on, it may surprise you I am not that worried about Chinese hegemony. Why? Their tinkering in markets does not bode well for them. The government can’t choose how it grows and who makes money. Well, it can, but only if you put a billion people to work and import lots of new technology from the liberal world. But, after a while, you run out of people – especially if your population is shrinking and the world has no new ideas left to give you. Dominating the world takes dominating the global economy, and that requires being a leader in innovation. The CCP wants to grow 7% each year on its terms, and growth does not work that way. Innovation drives growth, and it is messy and unpredictable; sometimes the people you don’t like are the ones who come up with the new great thing or it does not seem so great for a hundred years. You can’t have total control and all the economic upside from the innovation only liberalism can deliver.

China has yet to prove its model can overcome the middle-income trap. If it doesn’t keep growing, it may run into problems at home that could limit its foreign ambitions.

But you never know. We used to think opening up the Chinese economy to the world would make the CCP cool with its people having more democracy and freedoms. That sounded totally plausible 10 years ago, now it sounds crazy. It also may take some time, and they may take us down with them. But they have some major challenges ahead.

The future is in the Villages

We buried the lede when the census came out a few weeks ago. The census is a snapshot of our population. It also tells us where we are going and where the locus of political power will be.

The big takeaway for me is the fastest-growing metro area is the Villages, a retirement community in Florida. If you dig around the CPS data, you’ll see that, in the last 20 years, Americans have become less inclined to move for just about any reason, especially for a better job. The only category of moving that has seen any growth is moving for retirement. There’s also been lots of growth there. Most of it is probably an aging boomer population, but we see more growth in moves than the number of retirees.

And there are political implications. When retired people live together, they tend to become more politically engaged and advocate for entitlements. They have lots of time to lobby, and it becomes a good social outlet. Of all the trends we see, this is the largest and most predictable.

So the future of America is in Florida, Texas, or Arizona, and lots of government resources and support jobs will be going there. If the new infrastructure package goes through, even more money will be going south. It includes large expansion of Medicare and well-paid jobs for caregivers.

Just a taste of what’s to come.

In other news

The Social Security Administration reports 400,000 more beneficiary deaths in 2020 compared to 2019.

Until next time, Pension Geeks!

Allison