Known Unknowns


Welcome to Known Unknowns, a newsletter where structural change is the name of the game.

More people own stock

I don’t know if it was an unintended consequence, but one way 401(k)-type accounts have changed the American economy is that a lot more people now directly own stock.

In some ways this is great: More people get a piece of piece of prosperity, and, with lack luster wage growth, that’s not nothing. It is also good that households are becoming more diversified, as housing is now a smaller share of their portfolios. Alternatively, if you aren’t part of the 50% who own stock, you may be left further behind. It is consistent with the broader trend of a hollowing out of the middle. Changes in stock ownership could be contributing to a new, flatter wealth distribution. The once middle class becomes upper middle class and some of the wealthy become super-wealthy—and everyone else is comparatively poorer.

Now, to some extent, many households, the ones lucky enough to have defined benefit plans, always had some stock exposure from their pension plans. But, because their employers bore this risk, the impact on economic behavior from direct ownership will be different.

Households are exposed to the upside of stock ownership and also its volatility. And because there is evidence the wealth effect from stock ownership is significant, this can have implications for how the economy and monetary policy work. A rising stock market could result in more growth, at least in the short run because it will spur households to spend more. But unless the boost somehow results in higher productivity, it may not be real. A negative shock that sinks the market wipes out portfolios and spending. Crashes could result in more severe recessions that are harder to recover from. A more stock-owning economy has some upside, but also more volatility.

We All Need More Duration in Our Lives

The treasury is considering issuing ultra-long bonds, i.e., bonds with a 50- or 100-year maturity. Why not lock-in super-low interest rates? Rolling over your debt with short-term bills is risky if rates increase, and, because the government has some very long-term liabilities, rollover risk is not trivial.

Bond analysts argue that no one will want them, though I am not sure what that assertion is based on. I sometimes think long duration bonds are like TIPS, in that economists love them and are convinced the world is desperate for them because we like complete markets. But when the securities are actually sold, there’s a meh response from markets. In fairness, we finally got TIPs right before inflation became low and predictable, so their value has not been fully appreciated—yet.

Everyone else is skeptical about long bonds because they are focused on a different risk and worry about convexity/price volatility. Financial economists worry that everyone is short duration. We all need to finance our retirement someday, which is really just a stream of income far into the future—like a long-dated bond. The value of that consumption varies (a lot!) with interest rates. We can all hedge this risk by owning long-duration bonds (preferably TIPS).

If you are under 50, however, the odds are your future consumption duration is more than the duration of a 30-year bond or almost any bond for sale (unless you want to take a bet on Argentina not defaulting in the next 100 years). So we are all short duration and need more. It’s not just individuals, mind you; many pension funds and insurance companies are short duration, too.

But this doesn’t seem to bother people because, unless you are a pension fund who faces some regulatory requirement to hedge your liabilities, odds are you don’t care because you are more focused on asset balance than income risk.

No Free Lunch

The last 10 years have been challenging for economists. The economy has changed/is changing, and policy tools have been pushed to their limits or are not working the same way in a different environment.

When you have a structural change, it gets more complicated than low rates = growth/good and increasing rates = recession/bad because there are winners and loser in any policy. Us pension geeks tend to see the cost of low rates because they make pensions so much more expensive.

Now the ECB is questioning whether negative rates cause more harm than good. The political optics are bad. And it seems negative rates not only have a wealth effect on savers; unlike Americans who are buying stock, Germans tend to prefer safe assets; they also are undermining bank profitability.

It is worth noting that low rates don’t appear to have reduced lending, and the ECB is taking the view that low, even negative, rates have worked great so far, but going more negative may be a bad idea. That’s awfully convenient and a very central bank thing to say.


I have nothing against Andrew Yang, but I am concerned that every election for the rest of our lives will feature endless discussions about how awesome UBI will be. I am not a fan. I understand it may be a solution for a no-job future. But maybe we should wait and see if robots really will take all our jobs first. Why make the end-of-work self-fulfilling?

Though it is refreshing that someone is talking about the risks posed by automation and what policies can help (even if I think UBI is a bad idea). Gillian Tett is suspicious technology is not the boogey man everyone thinks it is—because there is not much evidence of an increased pace of job loss. Maybe we just need something to blame populism on. She reckons labor mobility is the real issue.

Or it could be there are still jobs—but unless you are highly skilled, the jobs aren’t that great. It’s hard to argue things are that bad, however, as so far standards of living have increased and employment rates are high. So, then, if it’s not job-killing robots, why are so many people anxious and turning to populism?

Perhaps it is just the uncertainty: I predict people will still have work, but the transition may be disruptive and fraught with risk. Even if you have more of something, the risk of losing it can be worse than never having anything to start with. And even if we have more, the threat of a job-killing robot can sow discontent.

But fear not, New York has an Automation Preparation Plan.

Until next time, Pension Geeks!