The stars will flame out
The age-old struggle between institutions and the individual comes to a head
Photo by King's Church International on Unsplash
Welcome to Known Unknowns, a newsletter that is no longer worried that ChatGPT will ever take my job. It will never be a Pension Geek.
Can superstars and institutions co-exist?
I have an insatiable interest in celebrity gossip; I even spent a significant amount of time following the paparazzi around to learn their business, which was a lot of fun for me. But I could not bring myself to watch the Harry and Meghan documentary because it looks really boring.
However, I do think they represent something very interesting and important. And despite the palaces and Montecito mansions, it’s something we can all relate to. In every institution, especially big, storied ones, there is a rising tension between stars who seek (and monetize) the limelight and the institutions they work for/represent that made them a star in the first place. This is not only an issue in the Royal Family; it is happening in universities, media, public health, and even Goldman Sachs.
And you can’t entirely blame aspiring stars. The gains of being a star are much larger than they were before. When there was more wage compression, dedicating yourself to the institution was how you built your human capital, and the institution’s prestige was your prestige. But now, getting rich, and even extra job security, comes from being your own brand—though that brand is often built on your affiliation with the institution. Social media and other technology also make this possible.
However, this is not a stable equilibrium. Institutions can’t continue the way they have in the past if they are staffed with self-serving employees who want to stand out, not only within the company but now also in the outside world. They bring on controversy and embroil the institution in political disputes that alienate their customers and coworkers. The whole dynamic also undermines morale because staffers are not working toward a common good. So, the institution loses its value and can’t confer status on future stars.
What’s interesting is the one industry where stars make sense, the movie industry, is ditching the star model. Institutions, like Marvel, are now the star instead of individuals. Perhaps it’s because of changing tastes, or just that movie stars have become more expensive than they are worth.
If so, maybe stars will flame out in media and banking too.
On that note
I want to defend the paparazzi. Most of them are poor immigrants who spend hours waiting for their pictures, which sometimes they only get a few dollars for. The move to online gossip sites and away from print glossies hollowed out their business model, and it’s a real struggle to make a living. To make matters worse, stars use them for attention on the way up, (tipping them off, playing cat-and-mouse with the photogs), and then start to claim they need privacy once they are rich and famous. And yet, the paps are seen as the bad guys.
Every industry has its challenges when the economy is in a state of transformation, and the people who deserve sympathy are often unseen.
Interest rate risk
A few years ago, many economists pointed out that now was the time for big government spending. If interest rates are low, they argued, you can spend and grow. If growth from that spending exceeded interest rates, it paid for itself and would not increase deficits! In other words, they discovered leverage.
But like the many people who’ve been burned by leverage have learned, this does not work out so well if whatever you spent the money on does not pay off or the cost of financing goes up—as it has now with rising interest rates. These economists did have a point; rates were very low. But taking advantage of this would have meant locking in those rates by financing the spending by issuing long-term debt. We didn’t do that. And reading papers from only a few years ago, you can see economists (the same ones who wanted to spend big) arguing that borrowing short would save money because long rates were a few basis points higher. Then there is some handwaving about interest rate risk. Now interest rates are 200 basis points higher than they were a year ago!
And all I can say is—wow. Don’t we see this again and again? People believe that the current financial conditions will stay forever and that inflation and interest rates will never increase. These are the same people who should know better. And now the cost of financing the last three years of spending will be much higher and uncertain than it needed to be.
In other news
I spoke to Robert Lerman about apprenticeships. They often get lumped in with vocational training or community college, but they are different in a number of key ways. I suspect they are the answer to many of our economic and social problems.
Have a great holiday and see you in the New Year, Pension Geeks!
I don't know if apprenticeship is the solution to problems in skill training and education as much as less formalism is the answer. For instance, it may be a blessing that only $200 million goes to apprenticeship education. As soon as you start laying down endless regulations on top of what is an often informal, freewheeling type of education, you start losing out on what makes it special.
Setting aside the MMT concept, the main discussion I saw was about funding significant infrastructure spending with long-term bonds of 30+ years at the low interest rates over the past decade. These are productive assets where you pull the investment forward and can fund it over the long-term at low interest rates instead of rolling over the debt into higher rates (like now).
I try to match the duration of my debt to the longevity of the spending. Clothes, dinners out, vacations etc. need to match with current available income. Some spending can be smoothed over 2-3 months with credit cards. Houses can be funded over multi-decade periods because that investment is effectively replacing rent. I don't think of a house as an investment because it is like a horse in that it eats (repairs, etc.). I expect the house to maintain value with inflation over multi-decades, but I don't expect anything more than that so don't over-spend on the house (in retirement house will be 20% of our total assets). Other things like cars can be managed with 3-5 year debt.
Government needs to think in a similar way. Long-term debt (20-100 year) to cover long-term investments in infrastructure etc. would be smart. Annual spending on military, social programs etc. should be funded out of annual tax revenues with some smoothing over business cycles per Keynes. So that type of debt should be short-term with the goal of paying it off totally and not rolling it over over time frames of 1 to 7 years.