Somehow it gets worse

And yet the economy is not so bad

Photo by Raquel Martínez on Unsplash

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Welcome to Known Unknowns, a newsletter where prices are still free.

Dark Days for Economists

Last time I observed that when it comes to policymaking in Washington, economists (and business people) are out, and Yale Law grads are running the show. The result? Economic policies that feel more tactical and less strategic.

First, the tax-free tips idea entered the mainstream and has been embraced by both parties. The Harris campaign is awfully keen on price controls and subsidizing housing demand. They talk a bit about increasing supply—something we all want. But more affordability won’t come from handouts; it will come from reforming local zoning to meaningfully increase supply. Harris said this is also on the agenda, which is great, but the subsidies risk undermining affordability. And there are even more tariffs from Trump and subsidies from Democrats in the form of industrial policy (which is the economic equivalent of tariffs). There’s little talk of growth and productivity, let alone the bringing down debt. It’s like the greatest hits of terrible economic policies I learned about in graduate school. Are we victims of our own success? Was 30 years of low inflation, low interest rates, and massive declines in poverty too much for everyone?

I don’t think we’re turning into Venezuela or becoming communist. But when you target “excessive profits,” it impacts investment decisions at the margin. Grocery chains make most of their money in more affluent areas and tend to lose money in poorer communities. The threat of lower profits (which are already small) and scrutiny from the FTC makes chains less inclined to operate in low-income areas. Richer people will be fine, but it is often the more vulnerable who suffer the most from populism.

I get it. This stuff polls well because people see higher prices and blame whoever they buy goods and services from. Both sides desperately want to win and can justify saying whatever it takes to do so. Also, if people want price controls and we live in a democracy, shouldn’t that be what we get? Economists might hate them, but there aren’t many of us—and we each only get one vote.

There are many policies that are popular in the short run but are not in our nation’s best interest, like giving everyone checks funded by debt. We elect people not just to give us what we want all the time, but to lead. That means having enough confidence in the electorate to explain trade-offs and do things that promote long-term prosperity rather than short-term sugar highs. I may be naive, but I think people want authentic leadership, and that requires taking risks and speaking hard truths. Leadership isn’t about pandering. Somehow, voters in the past were able to reject populism—why can’t they now? I have faith in them, less in our leaders, and even less in the Yale Law School of economics.

Tim Walz’s Investment Choices Are Weird

He, like 32% of Americans, doesn’t own any stock or investment assets. Actually, he might have a little bit in a 529 plan. I wrote for Bloomberg why this is a problem. It’s not that he doesn’t have money; he just doesn’t have much for a politician with his profile. But he’s worth about a million dollars when you include his state pension benefits, and he has a few hundred thousand in financial wealth—or so we think. The only financial asset we know about is a life insurance policy listed as an asset, so we can presume it’s an investment vehicle offering downside protection for a big fee. I suppose he doesn’t need to invest since he has such a big pension income coming his way. But the fact that he has such a big, safe asset in his portfolio in the form of pension wealth means he is well positioned take more risks with his investable assets.

I’ve heard several financial commentators argue that because his defined benefit pension is invested in stocks and private equity, he has stock exposure. This is wrong. Stock exposure means your wealth is correlated with the stock market in some way. If the state of Minnesota (really taxpayers) guarantees your income and ensures no downside risk at all—then you are not exposed to the stock market.

In all, it suggests someone who is very risk-averse and willing to pay a lot to reduce any risk from his life. And there’s nothing wrong with that for the average individual. But is that what we want from our leaders? Shouldn’t thoughtful risk-taking and engagement with global markets be qualities possessed by someone a heartbeat away from the presidency?

Some “normie” qualities are fine in life, but not in leadership—we should want our leaders to be financially literate and open to risk. Several commenters from my Bloomberg column noted that this is all fine; he has enough from his pension, so why should he bother with risky assets? They said the problem with this country is that people always want more. I bring this up because I think this is becoming a common sentiment.

I agree that Americans usually do push for more and are willing to take risks to do so, but is that a problem? I thought it was progress.

It may not be enough of a reason to not vote for Harris/Walz, if you are so inclined. No candidate is perfect—especially in this election. But ideally, our leaders should also be investors.

The State of the Economy

Despite all these problems, I’m bullish on the future of the U.S. economy. Maybe we are just the least dirty shirt on the floor, but we manage to be more innovative, and people want to come here and buy our debt. This creates lots of room for error when it comes to policies.

However, the outlook is less certain in the short to medium term. Things feel shaky, where one not-so-great employment report and down day in the market, and people are convinced we’re in a recession. I argued last week that even if a recession does come along, the economy is pretty resilient—so we’re probably not looking at a 2008 situation, more like a 2001-style recession. Three things determine how bad a recession will be:

1. How strong the economy is going in

2. What causes a recession

3. Policy response

Points 1 and 3 are both looking pretty solid. Balance sheets aren’t in terrible shape, especially for households, and policymakers certainly love expansionary policy—even when the economy is booming. I don’t know what would cause a recession; we rarely do. The only likely candidate I hear about is over-investment and dashed hopes around AI. In that case, the economy is reminiscent of 2001, which started with a big drop in equities. Not great, but it tends to cause fewer problems than a financial crisis stemming from the debt market.

We have some big long-term structural issues, but I’m bullish in the short run.

Until next time, Pension Geeks!

Allison