Notes from the inner sanctum

A Pension Geek goes to Davos

Photo by Evangeline Shaw on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter written by a quirky former outsider (she is obsessed with pension accounting and learned risk pricing in Nevada brothels after all), who is now officially a member of the global elite.

Thoughts from the World Economic Forum

A few weeks ago, I got a surprise invite to the World Economic Forum. I am not sure what surprised me more: the invite, or how genuinely excited I was to go. And I don’t care what anyone says on Twitter or in dark corners of the Internet, the Davos is a lot of fun as well as quite useful and productive. You do get a sense of where business leaders and policymakers see the economy going, and I am told many important deals are made there. There is also an intricate hierarchy there that merits academic study.

Lots of people said the mood was gloomy; others said it was upbeat. I don’t have much to compare it with, but I did notice that many people wanted to talk about one issue: labor (note the mountain background—I feel like such a baller). Their employees don’t want to go back to the office, people don’t want to work more than the bare minimum, and it is extremely hard to find good people to hire. Now, for as long as there have been workers, bosses have complained that young people are lazy and entitled—probably because adapting to work life is always hard. But this sounded different: it seems like workplace norms have changed. And it was true in every country. Even a Japanese executive at a large company told me he has trouble retaining and motivating talent—and traditionally, Japanese workers stay in their jobs for a very long time.

I am not sure if social media has made the world smaller or if the pandemic changed humans’ relationship with work. That happens. Or maybe it is just that workers have lots of power in the job market right now, and this is the natural reaction. Although it is notable that this labor market dynamic is global, how can every country have a labor shortage unless we all just experienced a major, sudden technological shock?  Maybe if there is a bad recession, that power might disappear, and so will indifferent employees.

Naturally, the other hot topic was the optimism that we will have a soft landing, or a mild recession, as inflation falls. I wrote for Bloomberg explaining how even a soft landing would not mean we dodged a bullet. A soft landing could just mean inflation will drag out longer, eroding household balance sheets, which will just make the economy more vulnerable if another bad shock comes along (then we get a hard landing). Or maybe inflation will fall a bit, then go up for a bit, and then fall again. In that case, the risk around inflation becomes more damaging than just the level of inflation and that increases risk premiums and makes investment and consumption decisions much more difficult.

It seems to me that markets expect everything that happens to be short and binary: a war in Ukraine should end quickly and decisively; inflation will go away on its own and return to sub-two percent levels within the next few years, and interest rates will fall too. But life and markets are rarely so clean. We may be at the peak of inflation or interest rates, but that does not mean we are going back to 2019. And just because Europe had a warm winter does not mean it’s out of the woods when it comes to energy. And I noticed lots of concern that things won’t be so simple after all.

Two other big topics were AI and inequality. What struck me about the conversation around AI was there was more doom and gloom about the potential downside risks it poses and much less excitement about the opportunities it offers. I think it could really be a game changer and transform the labor market. If it works, it will make us more productive, not useless or destitute. Perhaps ChatGPT won’t take all our jobs and become our robot overlord; maybe instead, it will just mean we’ll spend less time writing (which when done well is pretty tedious) and grammatical errors will be a thing of the past?

The worry is it will make some people more productive and other people much poorer and vainer. Inequality is a major obsession at Davos. It was the topic of the public panel I was on. The conversation focused on what should we do about it. And one solution, which two of the panelists were very enthusiastic about, was wealth taxes. That may decrease inequality, or make it appear that way because of rich people underreporting their wealth. But, to be honest, I am not too concerned about inequality. I am concerned about poverty and stagnating living standards. Inequality is often a symptom of these problems and it often becomes a distraction from the bigger issue of subpar growth and productivity.

Though I welcome a conversation about taxes, it is not because of inequality—the fact is, if we do end up in a higher interest rate regime, we’ll need to raise more tax revenue.

The question is, how do we increase taxes without harming growth and innovation? Since growth is the best (and only) way to increase living standards and reduce inequality, pulling it off requires a thoughtful tax policy.  I am not a fan of wealth taxes—especially 5% ones on top of large unrealized capital gains taxes. Growth requires letting people earn a positive return on risky investments. There are much better approaches out there. I wish they’d get more thought and attention, and I wish I had the chance to have that conversation with Joaquin Castro on my panel.

As he pointed out, the politics are hard. Just look at France: they can’t even raise the retirement age in 2030. How can we have efficient taxes? Maybe wiser heads will figure it out next year.

Until next time, Pension Geeks!

Allison