Retirement: Modern Society’s Most Pernicious Ideal

Retirement is not just an obsolete concept.  It is downright destructive: By encouraging people to leave the workforce as they enter their seventh decade, we are taking human capital at the peak of its productive potential — with not only many years of training and experience, but also finally with fewer family obligations and concerns for the future — and telling it to just stop producing.

WSJ today has an interesting article on anti-aging research and technology.  In principle the ability to preserve the duration and vitality of human life is wonderful.  After all, the first 20 years or so of human life are almost entirely lost in development of a capable adult.  In most cases, the next 20-30 years are distracted by reproduction.  Ideally, humans reach their peak production potential around age 50, and all the years from then until they become too feeble to work could be “pure profit” to society.  That is, unless society encourages such people to “retire” and halt their production as soon as they are able.

Ongoing Moral Hazards in Money Management

There is a moral hazard for investment managers to take big unjustified risks:  They are gambling with other people’s money.  In general, managers share proportionally in the rewards when they succeed, but do not share proportionally in the losses when they fail.

For example, mutual fund managers are generally benchmarked to an index and they “succeed” to the degree that they outperform their index.  Success brings in more investors, which brings in more fees that the manager takes home.  Failure to beat the index may result in attrition of assets.  But in the worst case the manager doesn’t lose money they way his investors lose theirs.  He just has to start a new fund without the bad track record, or take another job.  Thus, the incentives for a new manager who wants to make a fortune, but who doesn’t have any special ability to beat the market, is to take a gamble with a portfolio that is riskier (higher beta) than his index.  Any such portfolio could outperform or underperform the index.

Suppose the manager has “won” his gamble and as a result has captured more investments.  Eventually, he may become content with his elevated position, at which point he will stop gambling, which means the investors who bought in expecting him to beat the index will now just be owning the index — but will still be paying extra management fees to their exceptional manager, who in fact is just a lucky gambler.

Hedge funds exacerbate this hazard, because the risks can be essentially unlimited, and the payoffs to managers from big wins are nearly immediate.  One would hope that after a hedge fund manager blows up with an unjustified gamble that would be the end of his career in the industry.  Today’s WSJ reveals that such a hope may be in vain:

Brian Hunter, the natural-gas trader behind last month’s massive losses at hedge fund Amaranth Advisors, is exploring whether to get back in the game, people familiar with his plans say.

He approached Wall Street contacts to gauge investor interest in backing him, these people say, and may decide whether to resume energy trading in a few months. …

Amaranth, based in Greenwich, Conn., is liquidating, after Mr. Hunter’s bad bets triggered roughly $6.4 billion in losses, or 70% of its assets.

An executive recruiter in contact with Mr. Hunter says he has offered to help introduce the once-highflying trader to investors. The recruiter sees opportunities for Mr. Hunter to make a fresh start with high-net-worth investors, possibly in Russia and the Middle East.

Mr. Hunter was estimated to have made at least $75 million in 2005.

So here’s a manager who took home something like $75MM in incentive fees for making enormous gambles with other people’s money.  He banked his fees, and the next year not only lost more than half his investors’ money but also destroyed his employer.  Not only does he not lose any of his own money, but apparently there are still people out there who want him to gamble their money.

Betting on fallen hedge-fund stars isn’t all that uncommon. John Meriwether, who led Long-Term Capital Management until its 1998 implosion, now runs another hedge fund.

Fine, Have it Your Way (In Iraq)

There is plenty of room for reasonable debate on strategy in Iraq:  Whatever we do or could have done, destroying wealthy tyrranies and building stable democracies in cultures and countries that seem ill-disposed to them is costly, risky business.  Given the resources at stake — both in terms of the cost of our military operations and in terms of the value of a democratic, oil-rich, Muslim country — it is worth constantly reevaluating our course of action.

But nothing excuses the left’s revisionist and hypocritical assault on the United States’ role in Iraq.  On the war to destroy Saddam Hussein’s regime, plenty of other pundits have contrasted Democratic politicians’ criticism now with their complicity then in the assessment that Saddam posed such a serious threat to American security that war was justified.

Less attention has been paid to the many liberals who believe things would be better now if we had left Saddam in power.  James Taranto today, following Hans Blix’s latest emanations on the subject, notes:

Blix is not the first to say that things would be better if Saddam Hussein still ruled Iraq. But if he and others really believe this, why don’t they advocate restoring Saddam to power, or at least employing Saddam-like methods to bring the situation closer to the supposedly preferable status quo ante?

Remember the furor over nude human pyramids at the Abu Ghraib prison?  If our Western conscience can’t even bear that, how can we countenance pundits’ nostalgia for Hussein’s notoriously brutal torture and murder of millions of Iraqis?  Just because he made the trains run on time?

Indeed, as Taranto suggests, if liberals are willing to tolerate human rights abuses I am certain our own military could impose order on Iraq with much less torture than Saddam ever used.

Stupid Tax Code – Part I

If you buy your own healthcare, you do so with after-tax dollars.  But a business that employs you can buy it for you with pre-tax dollars.

If you buy your own childcare, you do so with after-tax dollars.  Can an employer buy you childcare with pre-tax dollars?  It appears that the intent of the tax code is to restrict such a possibility.  But it seems easy to get around this if your employer hires you an “assistant.”

Continue reading “Stupid Tax Code – Part I”

A Mercenary Solution for World Security

Max Boot today offers good arguments in favor of paying mercenaries to undertake the peacekeeping roles that have so taxed the United States military, and that United Nations forces have so completely bungled.

I am such a libertarian that I believe, given proper incentives, the private sector could be entrusted with national defense, and even the management of a strategic nuclear arsenal (and, of course, that it would do so more cheaply and efficiently than the government).  But you don’t have to be a libertarian to acknowledge how effectively private mercenary firms can manage security and peacekeeping operations in political hotspots around the world:

Continue reading “A Mercenary Solution for World Security”

Why do employers subsidize unhealthy behavior?

Our wacky American taxcode has resulted in most people seeking health insurance through their employers.  And whether they self-insure or subcontract their health insurance benefits, most employers grant the same coverage at the same costs to all of their employees.  Which is unfair to either shareholders, employees, or both (to the degree the health insurance costs are born by each group).

This argument can be followed in many directions, but perhaps the easiest examples of why this is the case are smoking and obesity: Two voluntary behaviors that have been proven to increase healthcare costs.

Are employers allowed to charge different rates based on an employee’s smoking or obesity?  The answer seems to be yes:

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, generally prohibits employers from discriminating on the basis of health status or “health condition” of an employee in setting premiums or contributions. The Americans With Disabilities Act bars employers from denying disabled people the right to participate in programs or to receive benefits.

There are some ways around HIPAA’s restrictions, however. If an employer creates a “bona fide wellness program” aimed at reducing smoking or obesity among employees, it can apply some financial incentives and disincentives without running afoul of HIPAA rules.

Which leaves me wondering: Why do shareholders and employees tolerate having to subsidize the bad behavior of others?

Let Them Eat Health Insurance

All good slogans have three planks.  Basic human needs used to be, “Food, Shelter, Clothing.”  The French Revolution was “Liberte, Egalite, Fraternite.”  As best I can tell, the Democratic Party’s new slogan is, “Health Insurance, Taxes for the Rich, International Appeasement.”

Of the three, the most incongruous to me is the first, and yet these days every socialist pol and left-leaning pundit takes it for granted that health insurance is a basic human right.  As if simply noting that 45 million Americans don’t have health insurance is a definitive indictment of the present government.

I have written about this question before, and it’s worth discussing.  But until we have a national debate and write it into our Constitution as such I don’t think health insurance is a human right.

Health is an individual choice, and as long as we give individuals the right to subvert their health, we should not coerce others into subsidizing it.  If our government ever did get into the business of guaranteeing health care, I hope it would also outlaw obesity, tobacco consumption, hard liquor, and not exercising regularly.  In fact, let’s work on those first, and once we have all those unhealthy behaviors under control then we can talk about socializing healthcare.