May 16, 2005
Recently an idea has been bandied about in the mainstream press--Americans are too immature and too stupid to invest carefully for their old age--that ranks near the top of the dopiest ideas I've ever seen serious people propose seriously. The Boston Globe has a version that relies heavily on the statements of financial planners and financial advisors. The Los Angeles Times goes further, citing the poor investment decisions of a modern Who's Who in economics: Markowitz, Akerlof, Prescott, North, Kahneman, and Granger. (And also citing in support of the proposition distinguished economists Shiller, Laibson, and Stiglitz.)
I'm sorry, but I need to rant about this. Here are four reasons why this is an utterly dopey idea:
1. The most obvious reason is that there is no limit to this indictment. If people can't be trusted to manage their retirement money, there must be many other decisions they shouldn't be making. Buying houses, for one. Did you ever try to read--just read--all the paperwork that comes with buying a house? How can the average person possibly understand all the ramifications of that decision? From which it follows that people don't have enough information, and can't possibly forecast well enough, to select their own careers. And how about figuring out who to marry and whether to have children? (Well, excuse me, Liberals believe that usually-incompetent-people-who-need-government-to-take-care-of-them magically become very competent when deciding whether to abort babies. My mistake.)
It may seem like a tired rhetorical device, but in this case it's really not: this idea denies a vital premise of both our economic and political systems.
2. The economists cited by the Times, with their nicely-compensated university positions, consulting, publications, Nobel Prize money and such, are, to be plain, rich. As some rich person--I can't find the cite--recently observed, "The main benefit of having money is that you don't have to worry about money." All that the poor investment decisions of certain university professors tell us is that they don't have to worry about money. It would be no different if we saw them buying $40 hamburgers or yachts: it would tell us absolutely nothing about what the average person does or should be doing.
3. If the average person can't plan his or her retirement, why would we think that 535 persons, known collectively as Congress, can do better? There's evidence that they can't. (More on that later this week.) (And if your reply is that without aid, there were many senior citizens who would have starved to death in the 30s and 40s: do yourself a favor and buy a calendar. It's 2005. The economic circumstances of the elderly are, for several reasons, d-i-f-f-e-r-e-n-t.)
4. The last, and by far the most important, reason is that the profound genius of markets is that most people, most of the time, don't need to be "smart". I don't know how to grow food, or make my own clothes, or build a computer, and maybe neither do you, but we have all those things, and much more, in great abundance, because markets are smart. That is why they are the most effective mechanism ever devised to make people richer. That is why we are prosperous beyond the wildest fantasies of people living only a century or two ago.
And in a lovely irony, the Times's own story makes just that point. Toward the end it notes, "TIAA-CREF and other giants like Fidelity Investments and the Vanguard Group have responded to evidence of people's faulty financial decision making — and the refusal of many to make any decisions at all — by rolling out accounts that make most decisions for investors." Similar to the way we hire farmers and tailors and real estate agents and lawyers and even economists to do jobs that we don't want to do, people who don't want to manage their investments carefully can hire people who will.
It works pretty well most of the time. Unless, perhaps, you're a reporter for the Boston Globe or the Los Angeles Times; they tend to be too stupid.