The case for a weirder economy

And fewer labor economists at the Fed

Photo by Devilz . on Unsplash

Hello,

Welcome to Known Unknowns, the weirdest pension newsletter on Substack.

Not the Fed Board we need, but the one we deserve

A few of you asked me what I think about Biden’s new pick for the Fed Board, Adriana Kugler. Well, she seems to be an excellent labor economist, but as I wrote for Bloomberg, that is not what we need right now.

Monetary policy is at a potentially historic inflection point. It has been in a similar position before and the choices made then impacted the economy for decades. At present, we may be at the end of the low inflation/low rate world (while apparently John Williams [not a financial economist] thinks otherwise). If so, this may be the end of inflation targeting and forward guidance, since it appears that they did not work that well and that they may even constrain policy in an unhelpful way. If that is the case, and it would appear that we are not going back to rules anytime soon, what philosophy on monetary policy is guiding the Fed going forward?

Oh, and how monetary policy is conducted and works through the financial markets has totally changed in the last fifteen years, and we are still figuring out what that means. There is also the whole financial stability issue as the Fed tries to engineer a soft landing. It’s a mess; and it appears that having someone with macro-finance expertise and is an intellectual leader in this area would be useful. We don’t need a totally new Board, we just need one person who has expertise on these issues. Is that too much to ask?

I think the push to fill the Board with lawyers and labor economists reflects the idea that labor markets matter more than inflation or financial markets. But there is a false choice between inflation and unemployment, and how this all feeds through financial markets is what actually affects labor markets. Understanding financial markets is critical for the job.

I believe that politicians and 90% of journalists who cover the Fed don’t think any of this matters and that economist skills are interchangeable. Labor economist, micro theorist, financial economist—it’s all the same—we are just splitting hairs about politics. But, much like in other fields, expertise matters. And we have never needed it more.

Wealth and taxation

There was a strange article in the New York Times about the coming wealth transfer issue; that old people will be dying and leaving their money to their children. I thought the framing of it was worth noting. This article argues that the wealth transfer issue is concerning since people will leave money to their family members, which will perpetuate inequality. I could not help but think, “So what?”

I’d support larger inheritance taxes, and we need better enforcement on the taxes we do have. I also believe that we should eliminate the step-up in basis, not because I am against inheritances, but because we need more tax revenue and because inheritance taxes are less distortionary than capital gains taxes or absurdly high income taxes. It is the least bad option, and we need money from somewhere.

If you are going to argue that we need wealth redistribution simply for the sake of redistribution, you need to make a case that inequality is somehow harming the economy. But that last point is made as an article of faith and with the presumption that inequality is a problem that must be resolved, or that life is unfair and family wealth isn’t really owned by anyone. This is not a good direction for us to go down; tax policy should be about raising revenue not social engineering. Intentions matter. Misguided intentions result in bad policies.

Is there room for weirdness?

That may be a strange thing to say these days, but I am a weird economist, I always have been. I was not qualified for the PhD program I got into, I was an unusual student in grad school, and I then had an even weirder career. How many retirement economists end up in a brothel? I like to think that my weirdness added to the profession. I found some interesting angles on how things work and I now communicate economic ideas to the public. It has been weird; I am still not sure my graduate school advisor approves.

I wonder if weirdness is still possible. Today, you need a two-year pre-doc to get into a top PhD program. These pre-docs don’t take weirdos, and it will train the weirdness out of you anyway. And that makes me sad. This does not only apply to economists like me—Bob Lucas was a weird PhD student too, and economics would be so much worse without him.

And it’s not just economics. The economy has become so fixated on rewarding graduates of elite institutions, and getting into them requires, or seems to, making no mistakes and living a perfectly curated life.

Ultimately, I don’t believe that this is sustainable. Since the dawn of time, people have been told things are harder and different than before, and it was never true because the economy will always reward innovative thinkers, especially in an AI economy where novelty will be at a premium. But there is one thing that may be different, that is, while maybe you can’t be weird in elite institutions such as Harvard or McKinsey anymore, there are plenty of non-elite places that offer a great education, and training too. So maybe being at an elite institution won’t matter so much anymore, or may simply signal that you are a conventional thinker. And who wants that?

Paparazzi facing the same problems we all do

My weirdness was manifested when I spent some time following the New York paparazzi around to understand how the market for celebrity pictures works. I was surprised by the latest “high speed chase” through Manhattan. The market for celebrity pictures is not what it was in the days of Princess Diana. A picture that once got $20,000 will now only get $20. So, most paps simply don’t bother chasing anyone anymore.

Why? Because of the same thing that is squeezing workers in other industries, a shift to online media, as well as a consolidation of the photo agents, which means pictures are now sold on subscription, and that means less money for the paparazzi, fewer of them, and fewer car chases.

In some ways that is sad, because while industry changes are a part of progress, change does mean that certain cultures and communities end, and what is our culture if everything we see is perfectly curated?

Until next time, Pension Geeks!

Allison