Tag: Allison Schrager

Paying more for less

Mary Pat Campbell

Link: https://allisonschrager.substack.com/p/paying-more-for-less

Excerpt:

Between the controversies at Disney, Bud Light, and Target, I think we need a return to shareholder primacy.

In 2019, many of the biggest American CEOs signed a manifesto declaring the end of shareholder primacy and embracing a new stakeholder model. With shareholder primacy, the main objective of a corporation is to maximize profits, both long- and short-term profits, because that is what boosts share prices and dividends, and shareholders like that. With the stakeholder model, a corporation has many other objectives: worker well-being, the environment, and the good of society. That may sound nice, but often, these stakeholders have competing objectives, and choosing who gets priority is a question of values.

When Milton Friedman argued for shareholder primacy, he said that a CEO should not forgo profits to exercise his personal values. It is not his money to spend, and not everyone shares his values, nor should they. And worse, I blame the multi-stakeholder model  for making everything feel more political.

Now, I realize even before 2019, companies were getting more political, but it got ramped up several notches in 2020. And now, everything you buy feels like a political statement. And even innocuous well-intentioned marketing campaigns that aim to give visibility to marginalized groups are taken as an explicit endorsement of a more divisive political agenda. I think shooting Bud Light cans in protest is stupid. But I get that people feel frustrated that everything is political and often not their politics.

And even if corporations mostly did pursue profits after 2019, and the stakeholder manifesto was a cynical ploy to appease young workers, get ESG capital, or avoid regulation, rhetoric matters. Before 2019, people could shrug at corporate pandering because it all seemed like a marketing ploy, and who can argue with selling lawn chairs and beer to the trans community? It is a growing demographic.

But in the context of announcing that you are doing it to make the world a better place, it strikes a different tone. And since stakeholder capitalism is about choosing between competing values, it is political. And now everything is worse for profits and society, since it adds to division and rancor.

Milton Friedman was right; shareholder primacy is better for corporations and society.

If CEOs really want to save the world, they should do the brave thing: announce an end to stakeholder capitalism and go back to just worrying about profits.

Author(s): Allison Schrager

Publication Date: 5 Jun 2023

Publication Site: Known Unknowns at substack

Can States and Cities Dig Themselves Out?

Mary Pat Campbell

Link: https://www.city-journal.org/multimedia/can-states-and-cities-dig-themselves-out

Excerpt:

David Schleicher: Yeah, absolutely. There’s an old joke that says, “The federal government is an insurance company with an army.” But anything you actually touch, can physically touch, any infrastructure of any sort, or services you consume and need to care about in one way or another are almost all directly provided by the state and local governments. They’re often funded sometimes with money from the federal government, but they are directly private and partially funded by state and local governments. The fiscal health of state and local governments is extremely important to, say, the question of state capacity in America.

Allison Schrager: It seems like we don’t talk about it until you’re Illinois or if you’re a municipality, Detroit, but it seems like we’ve been talking about this big shoe to drop on state municipal bankruptcies for a while and it doesn’t come, but that doesn’t mean we should be complacent.

David Schleicher: Yeah, absolutely. Two things. One is that it definitely would’ve come in the last couple of years had the federal government not dropped a ton of money on state and local governments. The pandemic created huge fiscal problems for a number of jurisdictions. The federal government responded by providing a huge amount of aid. The effect of that is that has had benefits and costs, which I’m sure we’ll talk about, but you can’t just look through the defaults or absence of defaults, to ask the question of “Are states and cities in fiscal trouble?” State and fiscal budgets are very procyclical. We end up cutting really important things during recessions and spending too much during non-recessions. Then we have the question of federal bailouts.

Allison Schrager: Yeah, it’s a very complicated issue, so what to do about this. But you have a very sort of organized, clean way to think about it. You describe it as this trilemma.

David Schleicher: Yeah. When a state or city faces a fiscal problem, fiscal crisis, take New York City in the 1970s or Detroit, or Puerto Rico or whatever it is. We’ve had, over the course of American history from Hamilton’s assumption of state debts, we’ve had a series of state and local fiscal crises. We have a lot of governments and some of them are going to have crises. The question is, what should the federal government do? Well, the federal government has three things it would like to achieve, which are, it doesn’t want to have too severe cuts during recessions, because that creates even bigger recessions. It doesn’t want to encourage state and local governments to think that the federal government will always stand behind them, a problem we call moral hazard. It wants federal state and local governments to be able to continue to borrow because state and local governments need to borrow to build infrastructure.

Author(s): David N. Schleicher, Allison Schrager

Publication Date: 2 Jun 2023

Publication Site: City Journal

Bond prices mean revert after all

Mary Pat Campbell

Link: https://allisonschrager.substack.com/p/bond-prices-mean-revert-after-all?utm_campaign=post&utm_medium=web

Excerpt:

On day one of Fixed Income School, you learn that bond prices mean-revert. While a stock or a house’s price can continue to increase as the company or land becomes more valuable, yields can only go so low. Nobody will pay to lend someone else money, or at least, they won’t pay much to do that. Bond prices can only climb so high before they fall. While some evidence shows that yields trended downward slightly as the world became less risky, they still tended to revert to a mean greater than zero.

It’s easy to blame Silicon Valley Bank for being blissfully ignorant of such details. They purchased long-term bonds and mortgage-backed securities when the Fed was doing QE on steroids! Did they expect that to last forever? Well, maybe that was a reasonable assumption, based on the last 15 years, but I digress.

Many of these smaller banks, particularly Silicon Valley, are in trouble because they were particularly exposed to rate risk since their depositors’ profit model relied on low rates. So, when rates increased, they needed their money—precisely when their asset values would also plummet. It’s terrible risk management. But, to be fair, even the Fed (the FED!) did not anticipate a significant rate rise. Stress tests didn’t even consider such a scenario, even as rates were already climbing. Why would we expect bankers in California to be smarter than all-knowing bank regulators?

According to the New York Times, Central Bankers still expect rates to fall back to 2.5%. Why? Because of inequality and an aging population. But how does that work, and what’s the mechanism behind it? No good answer, or not one that squares with data before 1985, but we can hope. Sometimes we just want something to be true and for it to be true for politically convenient reasons.

Author(s): Allison Schrager

Publication Date: 20 Mar 2023

Publication Site: Known Unknowns at Substack

Why Retirement Isn’t Necessarily the Same as Not Working

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/03/07/why-retirement-isnt-necessarily-the-same-as-not-working/

Graphic:

Excerpt:

If you claim Social Security at age 70 instead of 62 the sum total of your accrued benefits will be 17% higher if you make it to age 82 (which is the male life expectancy at 62). And remember that’s low risk, inflation-indexed income; there’s no better deal on the market.

Of course, delaying benefits means fewer years collecting them, but if you end up living to your early 80s you’ll come out ahead. The figure below plots how much you’ll get from Social Security (inflation-adjusted and discounted using today’s TIPS curve) at each age depending on when you retire.

And if you already claimed Social Security you can still change your mind and get higher benefits.

But if you are already retired (or resolved on it this year) and the market is down, it may seem like delaying Social Security isn’t an option. After all, you still need to eat.

Author(s): Allison Schrager

Publication Date: 7 Mar 2022

Publication Site: Think Advisor

Men left behind

Mary Pat Campbell

Link:https://allisonschrager.substack.com/p/known-unknowns-27b

Excerpt:

The economy is still short 4.2 million jobs, but as the virus (hopefully) recedes and remaining restrictions are lifted, these trends should continue. The labor market is on the road to recovery—or the cyclical piece of it is, anyway. But during each recession we see many prime-age men leave the labor force and never come back. This was the case during the last recession, too. Prime male labor force participation is still down nearly 1 percentage point from pre-pandemic levels, and this poses huge costs to the economy because a large number of productive workers are simply sitting out. This is terrible for social reasons as well, because work is important to feeling productive, for increasing stability, for marriage, and being fully productive members of society.

This is a difficult economic problem that falls under the category of “structural,” which means that the Fed’s tools are not well-equipped to deal with it. Even with a tight labor market and rising wages, men are simply not working.

Instead, we need to think more creatively and just fix what’s broken. The common answer is that some of this is driven by a skill mismatch and that there just aren’t many good jobs for men without a college degree. I’m not sure that’s true, it’s very hard to find a good plumber or electrician, which are very well-paying jobs that don’t require a college degree. But they do require skills and training. Community college is often the answer we are given, but it has a terrible track record, primarily because it’s trying to paper over a bigger problem, namely the terrible quality of secondary school, which often fails to properly educate our teenagers. It seems like if we really wanted to keep men from leaving the labor market, this is the low-hanging fruit. Many people drop out of community college, but high school graduation rates are at record highs (or at least they were pre-pandemic). We can raise standards and accountability and fund more vocational high schools. However, tech education has become less popular from the 1980s to 2013, even if the skills are still in quite high demand.

Author(s): Allison Schrager

Publication Date: 7 Feb 2022

Publication Site: Known unknowns

What does risk really mean?

Mary Pat Campbell

Link: https://allisonschrager.substack.com/p/known-unknowns-c60

Excerpt:

In Bloomberg last week, I argued that the price of safety is mis-priced. Real yields have been negative for the better part of the last 10 years, and have been very negative since the pandemic. And the Fed has no plans to bring it above zero. I can understand a market negative real yield from time to time for convenience reasons. But all of the time? For decades? How can you explain that? Well, I blame the Fed and regulatory policy, as well as other countries buying lots of safe assets to manage their currencies. Lately, it’s been a lot of the Fed.

The risk-free rate is always being tinkered with by policymakers. Maybe it never actually equals the market price, but sometimes it’s more distorted than others, and it seems like it’s really off right now. And if that’s true, what does that say about the price of any risky asset? Perhaps that explains why crypto currencies are worth so much despite not offering much inherent value and having such a high Beta. When celebrities are hawking an esoteric risky asset, you know something is wrong.

Risk-free assets are the most systematically important asset in markets. They touch absolutely everything. And when it goes wrong, things get real. When market prices are not market prices for years at a time, risk gets distorted, and people subsequently take on more risk than they realize. I’m not predicting a financial crisis, but I do reckon that this could be why markets are just so weird right now.

Author(s): Allison Schrager

Publication Date: 24 Jan 2022

Publication Site: Known Unknowns

Wage Stagnation and Its Discontents: Rethinking the Safety Net to Encourage a More Dynamic Economy

Mary Pat Campbell

Link: https://www.manhattan-institute.org/schrager-wage-stagnation-rethinking-safety-net

Graphic:

Excerpt:

Guaranteed jobs or UBI are poorly targeted and do not match the needs of new workers and may even hold them back by offering the sort of guarantees that perpetuate wage stagnation. Instead, the new safety net should offer various programs to smooth out dips in income and offer benefits that are not tied to a single employer, including:

Wage insurance—benefits that account for a drop in income, not just a loss of employment

Income averaging—tax rates based on income over three or five years, not just a single year, which will make income more stable for workers in variable work arrangements

Providing contingent workers the opportunity to receive benefits, such as health care and sick leave, that are not tied to traditional employment

To protect themselves against income risk, Americans have resorted to stagnation. We can provide downside protection in alternate ways—so that Americans can feel more free to switch jobs, try alternative forms of work, or start new companies. The above-mentioned programs are a more cost-effective and efficient way to address the needs of the new labor force than the guarantee-oriented policies that receive more attention. These programs provide options that would provide more robust insurance that can help spur a more dynamic economy. The options are merely a starting point to think more creatively about how to support a changing economy and break the cycle of stagnation.

Author(s): Allison Schrager

Publication Date: 9 September 2021

Publication Site: Manhattan Institute

Behavioral Economics Doesn’t Have to Be a Total Loss

Mary Pat Campbell

Link: https://www.bloomberg.com/opinion/articles/2021-08-27/behavioral-economics-doesn-t-have-to-be-a-total-loss

Excerpt:

Economists are often reminded by well-meaning friends and strangers that economics is flawed for assuming people are rational when they’re not. It’s not always clear what these skeptics mean by rational — often it’s a propensity for making bad decisions. And there’s truth in that.  People struggle to make sense of probabilities, especially in the midst of uncertainty. Just look at the difficulty most people have had understanding the effectiveness of Covid-19 vaccines.

We humans also tend to exaggerate remote risks and ignore more likely events. Even when we accurately assess risk, sometimes we procrastinate doing what’s in our best interest or make snap decisions we regret later.

….

But generally, the idea we could nudge people to make better choices by exploiting their behavioral biases was always oversold. It’s hard to persuade people to do something they don’t want to do, especially when you don’t fully understand their unique motives. And if data isn’t presented clearly and honestly, attempts to nudge people can be self-defeating when they don’t trust you.

Author(s): Allison Schrager

Publication Date: 27 August 2021

Publication Site: Bloomberg

Stay in Your Lane

Mary Pat Campbell

Link: https://www.city-journal.org/fed-is-not-the-right-institution-to-tackle-economic-inequality

Excerpt:

While the economic case for reducing inequality isn’t clear, a moral case can be made. One could argue that it’s wrong for the few to have so much while the many have so little. But it’s not the Fed’s job to make moral decisions about the ideal distributions of wealth. This is an inherently political calculation—one that should be addressed through institutions directly accountable to voters. Moreover, the tools at Congress’s disposal—tax rates and control over benefits, for example—are better suited for taking on inequality. And these policies involve costs, too, in terms of growth. Voters should be the ones to decide whether they want to pay them.

The Fed’s role is to balance short- and long-term interests, making the hard choices that may harm the economy now in exchange for long-term stability and expansion. Once politics are involved, however, it becomes difficult if not impossible to make this trade-off. The Fed can do what it does because it has a narrow mandate: reasonable inflation and maximum employment. It needs to stay in its lane.

Author(s): Allison Schrager

Publication Date: 2 September 2021

Publication Site: City Journal

Americans Should Quit Their Jobs More Often

Mary Pat Campbell

Link: https://www.bloomberg.com/opinion/articles/2021-07-07/americans-should-quit-their-jobs-more-often

Excerpt:

The pandemic and the work-from-home environment it spawned also led many economists to speculate that workers would become better adapted to technology, more efficient and strike a healthier balance between work and life. This, in turn, would leave them more mobile. A Microsoft Corp. workplace trends survey found that 40% of Americans are considering leaving their jobs this year. And many are doing just that, with 2.5% of the employed quitting their jobs in May, according to the Bureau of Labor Statistics’  Job Opening and Labor Turnover Survey. Although that’s down from the record 2.8% in April, it’s still higher than any other point since at least before 2001. Plus, consider that the quit rate was only 2.3% in 2019 when unemployment was just 3.6%, compared with 5.8% this May.

Author(s): Allison Schrager

Publication Date: 7 July 2021

Publication Site: Bloomberg

What is good tax policy?

Mary Pat Campbell

Link: https://allisonschrager.substack.com/p/known-unknowns-1c3?utm_medium=email&utm_campaign=cta

Excerpt:

So the goal of tax policy should be taking as much revenue as you can while trying to minimize distortions. Some kinds of taxes are more distortionary than others. In order of least to most harmful, it goes

1.     Consumption taxes

2.     Income taxes

3.     Wealth taxes

Cut to our current tax debate, where these concerns get no attention. The goal seems less about minimizing distortions/maximizing revenue and more about punishment, i.e., rich people for making too much in a zero-sum world and corporations for being greedy. Now, I think our tax system should be more progressive, too. But there are good and bad ways to achieve that goal.

Author(s): Allison Schrager

Publication Date: 6 July 2021

Publication Site: Known Unknowns at substack

What’s Keeping Women Out of the Workforce?

Mary Pat Campbell

Link: https://www.city-journal.org/government-policies-keeping-women-out-of-workforce

Excerpt:

Since last winter, 1.8 million women have left the labor force entirely—neither working nor looking for work. At first, closed schools and the high cost of child-care options seemed responsible. But economists who have crunched the numbers argue that closed schools can’t explain higher female unemployment. Women with young children make up only 12 percent of the labor force and were only slightly more likely to leave the labor force than were women without young children. The exception? Women with young children who don’t hold college degrees—they constitute only 6 percent of the labor force but saw the biggest drop in employment. Their employment rate has fallen by almost eight percentage points since the pandemic started.

This suggests that women aren’t working for various reasons. For most families, several factors—child-care options, how much a given job will pay, and their partner’s employment prospects—determine whether they will decide to return to work. Rarely in economics does a single cause explain a phenomenon; policies often affect behavior on the margins. If you’re struggling to find good, affordable child care and you are being paid more to stay at home, that extra factor can tip the scales.

Indeed, several current policies seem to be discouraging women from returning to work.

Author(s): Allison Schrager

Publication Date: 15 June 2021

Publication Site: City Journal