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Home Publications Blogs Beat the Press Thomas Friedman's 401(k) Agenda

Thomas Friedman's 401(k) Agenda

Wednesday, 01 May 2013 11:51

Thomas Friedman is probably best ignored, but there are people who take him seriously. Today his NYT column touts the "401(k) world" where Friedman says:

"But this huge expansion in an individual’s ability to do all these things comes with one big difference: more now rests on you."

The gist of the argument is that people are more exposed to risk so that means that they can fall farther or, in principle, rise higher than before all the wonderful new technologies that leave Friedman breathless.

Naturally, just about everything Friedman has to say is wrong or misleading. First and foremost, wonderful new technologies are not new. We have been seeing breakthroughs in technology for the last two hundred years. Have the last decade's been more wonderful and awesome than the breakthroughs of prior decades?

How does the Internet compare to development of the telegraph, the telephone, radio, television?  I have a job, so I'll let the Thomas Friedmans of the world worry about that one.

The more fundamental point is that the 401(k) world is a policy choice. Other countries, some of which are doing much better than the United States by most measures (e.g. Germany, Denmark, Canada), have much more extensive social welfare states, providing not only better retirement security, but national health care coverage, and substantial support for child care.

If we go the 401(k) world route it is not because of Friedman's connectivity or even hyper-connectivity; it's a policy choice. There are many good reasons for choosing the social welfare state route. Among others, it saves huge amounts of money because universal programs like Social Security and Medicare are far more efficient than their 401(k) private sector equivalents.

Friedman obviously prefers the 401(k) route, which happens to make some people in the financial and health care sector very rich. But no one should be confused by Friedman's confusion, this is his political preference, it has nothing to do with the type of world given us by technology.

Comments (23)Add Comment
written by RZ0, May 01, 2013 12:44
I think Mr. Friedman wrote his column believing that most people have big, fat 401(k)s. He sounds like he is trying to reassure people that the big scary world is really a safe one they are familiar with - it's no worse than the retirement account you've grown used to.
But a lot of people think the defined-contribution experiment of the last generation has been a failure. To these people, Mr. Friedman's column is pretty darn scary.
SS efficient?, Low-rated comment [Show]
Keep your iPad, just give me running water
written by Mike B., May 01, 2013 1:25
"Facebook, Twitter, 4G, iPhones, iPads, high-speech broadband, ubiquitous wireless and Web-enabled cellphones, the cloud, Big Data, cellphone apps and Skype" - I don't do any of this because I can't think of any reason I need to or would want to. Just give me running water, electricity, refrigeration and a microwave oven and you can keep all the other crap (OK - I occasionally find telephones, TV and the Internet useful also, and most of my work is done on a computer).

I also have significant retirement savings, which is invested very conservatively (after all, I'm going to need it so I don't want to risk losing it). Therefore, I put a big chunk of my pay into savings. If everyone did this, the economy would grind to a halt.
written by skeptonomist, May 01, 2013 1:56
Obviously capitalists have been doing much better than workers, so the return on the stock market has been better than the growth of wages, which is what supports SS (in addition to population growth). But is this a good thing? Corporate profits as a fraction of GDP are now higher than since WW I. It is unlikely that this will continue - there will be another crash eventually, but shouldn't wages rise and profits decrease anyway to make a fairer society? If inequality is to decrease the return on capital will have to be much less than what it has been for the last 30+ years (leaving aside the very low price level of stocks around 1980). This return has come in part from squeezing wages.
Thomas "Austen" Friedman
written by Ellen1910, May 01, 2013 1:58

IT is a truth universally acknowledged, that a man in possession of a snappy metaphor must be in want of a story -- any story.
is Friedman trolling us? that's the question
written by Peter K., May 01, 2013 2:33
Is he an evil genius? I always grind my teeth when I read his columns.

Read this parody of BoBo Brooks by Atrios to cleanse the palate and lower the blood pressure:
pete's point
written by Squeezed turnip, May 01, 2013 3:09
I know pete likes to kick the ant pile, but here's some food for thought. For one thing, low-income workers enjoy higher rates of return from their SS investment – by design, because Social Security's benefit formula is weighted toward lower-earning beneficiaries and their payroll tax contributions will be relatively lower. Also SS is not modeled on a stock portfolio, it's modeled on insurance. There is no way a low-income earner should be advised to invest in the stock market. I know many people who put off their retirement for 5 years thanks to the stock tankage in 2001, and then more people with the same problem in 2008. They had to wait for a market recovery: meanwhile they stayed on in a job that a younger (and frankly more productive-potential) unemployed person could have had.

Social Security wasn't meant as a solution to all retirement problems. But it does guarantee that poor seniors will not be left on the street to die, as happened to a shocking extent back in the 1930s. And the rate of return is low because the funds are invested super-low risk instruments nobody wants the government speculating with this social insurance policy, and we sure as hell don't want the sharks on Wall Street speculating with it either. It would be like giving cash to a street drunk: of course he's going to drink it away, not buy a meal with it.

So the idea is that those of us who can set up the 403/401s get the special insurance, a nice little plum on our nest egg, while making sure those with less good fortune or harder work are able to get a slightly better retirement (by making our plum slightly smaller). It's simple risk management applied to the aggregate.

So I think the system is pretty good, could be better. But at least there's a bit of a net (despite the efforts of Simpson and Bowles et al. ) . Also SS is administered more efficient than almost all funds (but definitely does not have as good a return as a SP500 Index fund with low management fees -- which is the way to go for most individuals). But that gets into the question of enter/exit times, not so easy to calculate (but the SSA actuaries did a good job of estimating it).
Gushing and Giddy: The Tiny Mind of Tom Friedman on Transactions Cost
written by Last Mover, May 01, 2013 3:53
From the NYT by Friedman:
What’s exciting is that this platform empowers individuals to access learning, retrain, engage in commerce, seek or advertise a job, invent, invest and crowd source — all online. But this huge expansion in an individual’s ability to do all these things comes with one big difference: more now rests on you.

If you are self-motivated, wow, this world is tailored for you. The boundaries are all gone. But if you’re not self-motivated, this world will be a challenge because the walls, ceilings and floors that protected people are also disappearing. That is what I mean when I say “it is a 401(k) world.” Government will do less for you. Companies will do less for you. Unions can do less for you. There will be fewer limits, but also fewer guarantees. Your specific contribution will define your specific benefits much more. Just showing up will not cut it.

Friedman doesn't realize he's talking largely about transactions cost. He wants readers to believe social networks combined with targeted data mining provide a new ability for employers and employees to sort through huge amounts of data and zero in on a utopian one-of-a-kind match made in heaven between job seekers and job providers.

It's not much different than what online dating services offer to find the perfect match, or what insurance companies offer to find the perfect match between personal habits and risk. It's largely about overcoming transactions cost by reducing search cost for what is already there if only it could be found.

Just because search costs are lower and results are faster doesn't necessarily mean the important data in question is new or better, especially when thrown around by a cheap motivational speaker like Friedman on how success in getting a job is about remaking oneself into the exact unique cog gear that fits into the one and only hi-tech machine and employer who needs it.

What Friedman is really selling here is structural unemployment over cyclical unemployment. He wants readers to think the latest gee whiz technology that has the potential to reduce search cost (which btw fails miserably when jobs already scarce are available only through whom one knows) somehow adds to ones skill set, or at least somehow finds the perfect match for existing skills.

Astonishingly, Friedman gushes and giddies it all up to a karma-like connection between the contribution structure of 401k's compared to the defined benefit structure of other retirement plans, girded cleverly with how the infamous Berlin wall of government and unions can now be torn down by individuals made free to seek gainful employment in that bastion of free speech, Facebook and other social networks.

Seriously, if the light bulbs keep going off in Friedman's head, any day now he will surely be offering up an explanation on how the discovery of dark matter finally explains the economic downfall of America - because the ratio of land mass to population is so much higher than other developed nations, and like transaction cost, it's only a matter of time till some genius comes up with an app to overcome the drag on the economy from dark matter.
Social Security is Efficient
written by Dean, May 01, 2013 4:00

I wasn't talking about returns -- that is a question of who appropriates resources, not the amount of resources used. The average fees, which is appropriate comparison, of a 401(k) are around 1.0 percent. The equivalent measure for SS would be around 0.05 percent.

If we want SS to have a higher return we could have it hold stock rather than government bonds. Note, this increases returns, but just changes who gets what returns, it would not lead to any higher return for the economy. This is why it is not an efficiency question.
written by skeptonomist, May 01, 2013 4:44
Any deficiency of SS with respect to return on stocks or any other type of investment could be fixed by changing the tax base and rates. Capital gains, dividends and interest can and should all be taxed - then those who rely on SS could be getting their share of the returns. As Dean says, this is a matter of political choice, not market structure or technology.
thats a weird efficiency argument.
written by pete, May 01, 2013 5:13
I guess burying money in the backyard is costless, so that is extremely efficient. Vanguard S&P is about .3%, way less than 1% over 45 years. Several others in this league. These are passive investments. There is no reason to choose a costlier 401 plan.

The last part I don't understand. I guess you are saying if SS had invested in stocks, rather than government bonds, it would have had a higher return, but then someone else would be holding low return bonds...and who would that be? Not the poor folks turnip says have no money. Thus, given the payout, this change in the portfolio would be a transfer from wealthy to less wealthy, and I guess could lead to lower payroll taxes, which is a good thing, no?

Of course this incentivizes the government to try make corporations more profitable...oops.

who holds the risk?
written by Squeezed turnip, May 02, 2013 3:06
Dean is right, SSA is about 300% times more efficiently managed than the Vanguard fund, if you just look at expense ratios. Of course, a mutual fund is a completely different creature than the SS trust fund which invests in risk-free securities (hence the low return). Since risk is notoriously difficult to quantify and price, it is best to continue with the successful and efficiently run SS program.

Anyway, what I mean to point out is that rate of return is based on volatility, past, present and future.
written by liberal, May 02, 2013 8:09
skeptonomist wrote,
Corporate profits as a fraction of GDP are now higher than since WW I. It is unlikely that this will continue - there will be another crash eventually...

That's what I think, and one would assume that earnings would "mean revert". But if one is careful about this, one has to ask, "maybe they won't mean revert".

GMO wrote a white paper saying why they think earnings will mean revert. It's very interesting: they use the Kalecki equation and make what appear to be reasonable assumptions about some other terms in this accounting identity. (See http://www.zerohedge.com/sites...e down.pdf.)

Take home message? Corporate profits are historically high because of the budget deficit.

This was written about a year ago. Now, in 2013, the deficit appears to be coming down (for better or worse). It will be interesting to see whether corporate profits come down, too.
written by liberal, May 02, 2013 8:15
Mike B. wrote,
Keep your iPad, just give me running water


Someone wrote recently, challenging the notion that all this $hit is so wonderful. The challenge: you get to keep either all these wonderful tech innovations from past year X (X was something like 2000 or 2003), or you get to keep indoor plumbing. But not both. Which would you choose?

...Big Data, ...

Hmm...I'm actually looking for a career change, and some of the applied stats techniques that commonly accompany "big data" are interesting. Looking around job boards, though, 90% of the positions involve crap like advertizing, search engine optimisation, recommender systems, etc.

I wouldn't mind doing something like fraud detection (it's always fun to chase bad guys), but most of this stuff (well, there's no accounting for taste) is just goddamn pointless and boring. Like the most important question facing the world is more efficiently placed intertube ads.
written by liberal, May 02, 2013 8:22
pete wrote,
As you point out repeatedly, the stock market should return 8% or so.

If you look at the Gordon equation, the claim that the stock market is going to do really well in the next few decades seems doubtful.

The ultimate driver of the stock market is corporate profits; the ultimate driver of corporate profits is economic growth. If you think that stocks are going to do really well, you're implicitly assuming the economy is going to do really well.

There's no reason to think that.
written by liberal, May 02, 2013 8:26
There's also this interesting passage from the "efficient frontier" guy, who gives reasonably good investment advice in general:
For starters, everybody cannot get rich investing in stocks at the same time. Consider the past 75 years in the capital markets. Yes, stocks have produced an 8% real return, but the real return of bonds has been only 2%. If you subsume the nation’s entire capital structure of stocks, bonds, real estate, and bank loans as a whole, its overall real return was probably closer to 5%-6%. The key point here is that a nation’s aggregate investment return is independent of its capital structure. In other words, if current stock valuations hold it is entirely possible that we may be sitting on the cusp of a new investment paradigm—one in which stock and bond returns are approximately equal. In addition, the flood of Social Security money into retirement and pension plans at the present demographic front end of the investment baby boom and the flood out at its back end in 20-30 years will further reduce the returns of both stocks and bonds. (For a fuller discussion of why everybody can't get rich with stocks at the same time, see The Heisenberg Equity Principle in the current issue of EF.)

See http://www.efficientfrontier.com/ef/900/ss.htm
401K Choice
written by JayR, May 02, 2013 8:58

Most employees get lots of very similar choices when deciding what to "invest" in when it comes to 401K.
liberal....well if there is little growth we are in big doo doo
written by pete, May 02, 2013 9:18
The market reflects growth. If there is no stuff so that equities are not valuable, there will be no stuff for SS either. Anyway Dean has used the 8% argument to say that pensions are not underfunded. Lets try for consistency.
written by liberal, May 02, 2013 10:07
pete wrote,
well if there is little growth we are in big doo doo

Yes, exactly.

Anyway Dean has used the 8% argument to say that pensions are not underfunded. Lets try for consistency.

Well, I think Dean is wrong about that. His argument depends on the claim that the market is reasonably valued. Unlike other commentators, his claim is reasonable, insofar as he uses reasonable measures of earnings (unlike gimmicks like using the historical average for trailing earnings, and comparing those to forward earning projections).

The problem though is that corporate earnings as a fraction of GDP are basically out the roof. If you believe that that can continue, then Dean's position is defendable. I don't think it will continue (though I'll admit to not having enough time to study this question to my own satisfaction---I'd like to know for my own personal finance!). If it doesn't continue and earnings mean revert, the market will be overvalued.

There's also the point I made above: not everyone can get rich in the market at the same time.
Chance the Columnist
written by Blue Meme, May 02, 2013 1:03
Every time I read about another Tom Friedman excrescence, I am reminded of the immortal character played by Peter Sellers in the 1979 film "Being There." Both characters babble meaningless drivel, which is received as sage wisdom by wealthy and powerful idiots who hear what they want to hear.

History: first as farce, then as tragedy.
Still missing the boat
written by David, May 02, 2013 10:50
8% mean return is meaningless unless you also factor into that the variance of the returns. And high volatility is a bad idea for insurances (ask AIG). Thus it makes sense for the trustees to invest in the closest thing to rock solid investments available. In a very real sense, the search for higher returns in the layer of retirement funds earmarked for subsistence is the search for greater chaos in the society of seniors. Most seniors I know want less chaos, not more.

By the way, thinking about Pete's point that there has to be some stuff to give value to equities, US Treasuries had value even before the NYSE existed (1789 versus 1792). In fact, I'd say those the Treasuries helped give investors confidence in US stocks in the first place.
written by watermelonpunch, May 03, 2013 7:51
I liked what that Yglesias said:
Planet 401(k) is a pretty sucky planet

A lot of people I know don't have them anymore, of course... had to cash them out, well before retirement, oh... around 5 years ago or thereabouts, when you know people needed money in the present to survive.

401ks, to many of us I think, just seem like, in retrospect, a big fat B.S. you were handed at some jobs, because they knew you remembered your parents & grandparents having something called pensions, and most people would be expecting SOMETHING along those lines as part of a pay package, so they offered 401K B.S..
Medicare efficient? So the Doctors' Lobby wants you to believe.
written by Rachel, May 04, 2013 6:31

Actually, it's the national health plan lobby I mean, the MDs who want their excess profits (which means hurting their fellow citizens), but also want to believe that they are Good People. So instead of addressing a complex situation honestly, they've invented an Efficient Medicare Myth. They're particularly fond of Medicare, I suggest, because of its deference to MDs: providing us with little control over medical abuses and anticompetitiveness, and showing little concern with medical fraud.

A clue to how careless some of these lobbyists are, was given some years back by Henry Aaron, NEJM (2003): a single flaw in their approach "results in an overestimate of about $50 billion." But what's a $50 billion error if can help keep doctors rich and feeling righteous at the same time?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.