Known Unknows


Welcome to Known Unknowns, a newsletter about the finer things in life, like high-end art, big wave surfing, and, of course, pension accounting.

The super star economy

Last weekend, I made my debut in the New York Times. I wrote about the Christie’s auction where a Jeff Koons sculpture sold for more than $90 million! Now, it’s easy to dismiss this as another case of some rich guy spending way too much money for iffy art. But it really matters, because art not only reflects our culture (don’t know what a metal bunny says), the art market also reflects the broader economy. Almost every industry is now dominated by superstar firms and earners. The art market is growing, and sales have never been higher. But if you scratch just below the surface, there is actually a deep inequality at play. The gains are going to the big, elite galleries, and the big, famous artists. In the meantime, sales are down at smaller and midsize galleries; many are struggling and going out of business.

We don’t know what a superstar economy means for the economy as a whole. But in the art market, it means less mobility and fewer working artists. The smaller galleries are the ones who support up-and-coming artists and teach them valuable skills. It’s not clear where new artists will come from, except maybe the kind of artists who have trust funds and who promote themselves on Instagram.

Now, art is definitely different from other markets. One reason why the hollowing out has been so severe is that value is so uncertain in art because there is no objective way to measure a work’s worth. That makes buying art riskier and more extreme. In markets where prices have more meaning, the impact could be different. We just don’t know.

You may be wondering, what’s next? Three weeks ago, I published a story in the Wall Street Journal on horse inbreeding, then another story in the New York Times on high-end art. Pretty good for a Pension Geek! Keep an eye out for my story on the market for horse paintings in the Washington Post.

Student loans

I suppose retirement economists live in our own bubble. We think it’s perfectly reasonable to regard future earnings as an asset. You can invest in that asset with education or training, which typically increases the rate the asset appreciates and lowers the risk that it will fall in value, since more educated people have much lower rates of unemployment.

But some people don’t see it that way, and I think that’s coloring much of the student loan conversation, and why so many people think it’s a crisis. We take out loans to finance all kinds of assets, like houses and cars. Education has had a much better track record than either of those assets. I can't think of a better investment.

But that doesn’t mean that student debt isn’t a problem for some people, especially students, often from low-income families, who don’t finish their degree and thus never see an increase in their earnings. That’s why a bailout for everyone is not only inefficient, but it is also regressive. A better policy is income-based repayment plans, in which loan payments are based on the income of the borrower. These are not without their faults, but they may be the best option.

And while we’re at it: If we do come across a trillion dollars to relieve student loan debt, either from taxes or from well-intentioned billionaires, a better way to spend that money is address the drop-out problem. Evidence suggests that tuition doesn’t make students drop out; they drop out because of a lack of support. Interventions work, but they are expensive, labor-intensive, yet still a much better investment than universal debt relief.

Sensible retirement bill has passed through Congress

Believe it or not, the House passed a bill, the SECURE Act, which contains many useful provisions to improve retirement security. It’s like lawmakers actually listened to the consensus of experts for once. The bill creates a safe harbor for annuities in DC plans, allows small employers to band together when they offer retirement benefits (which will bring costs down), and allows people to contribute to their IRA after age 70. I’m not sure how it happened, but things are actually looking good for it passing the Senate. I suppose that despite all the chaos and infighting, some things are still working in Washington.

While yields make no sense

It’s generally true that the higher your odds of default, the higher the yield you must pay when you borrow. The logic follows (at least if you like math) that much higher debt levels (all else being equal) result in higher yields, too. Higher debt increases the risk of default, or at least it means less fiscal space when you need it. And yet… remember the late 90s? The U.S. ran a surplus, and yields were 5%. That sounds so high now. The 10-year yield today is just 2.6%, and no one gives a fig about fiscal responsibility anymore. Yes, I know that we have the savings glut and people fear risk more than before, so it’s not ceteris paribus, but still.

And get this… Greek 5-year bond yields are lower than U.S. yields. That sounds crazy. But maybe the market expects that the Germans will bail them out. They can’t afford any more defections from the Eurozone. Maybe that’s not so crazy after all.

Some other media

I’m very pleased to share this video of Robert Merton and me talking about the future of retirement. I learned almost everything I know about finance from the two of us having long talks just like this one. I’m thrilled that I now have one on video.

I also suggest that you listen to this podcast based on the surfing chapter from my book. I’ve attended my share of pension and financial conferences, but I heard one of the most thoughtful and sophisticated discussions of systemic risk at a big wave surfing risk conference. The Indicator interviewed one of its founders, Brian Keaulana, who is a self-taught risk scholar.

Until next time, Pension Geeks!