CFA Society Chicago Book Club:

GDP: A Brief but Affectionate History by Diane Coyle

Don’t confuse familiarity with understanding. That’s perhaps the biggest takeaway from Diane Coyle’s short and highly readable GDP: A Brief but Affectionate History. The official guidance for calculating GDP, the System of National Accounts (SNA), published by the United Nations runs 722 pages. That combined with the difficulties of executing the actual calculation makes one wonder how many people, even ostensible experts, really understand the quarterly numbers. In addition to the intricacies of defining and calculating GDP, Ms. Coyle takes the reader through the short yet turbulent history of the metric, its uses and mis-uses, and several possible improvements and alternatives. The CFA Society Chicago Book Club members who met to discuss the book at their March 2019 meeting agreed that the book left the reader with more questions than answers, which is perhaps one of the marks of a good book.

As for GDP’s short yet turbulent history, Ms. Coyle traces the origins of the modern metric to Colin Clark and his pioneering work at the United Kingdom’s National Economic Advisory Council, an organization based on the then-novel concept of providing economic advice to governments to combat problems, the most notable problem at that time being the Great Depression. On the other side of the pond, the famed U.S. economist Simon Kuznets applied Clark’s concepts to the U.S. economy at the National Bureau of Economic Research, work for which he was later awarded the Nobel Memorial Prize in Economic Science. From the very beginning, Kuznets grappled with using the metric to read into welfare, well-being, or happiness, a theme that’s repeated throughout the book and a problem that persists to this day. 

Spawned in depression, the concept of national accounting gained maturity in war. The Allies’ efforts to defeat the Axis powers required a complete mobilization of their nations’ resources, so it’s no surprise that understanding what those nations’ resources were was vital to that effort.  During that time economists started meaningfully incorporating government spending into GDP calculations for the first time. The reasons for neglecting it previously were numerous.  For one, as is easy to forget with our current bloated governments, government spending prior to the war was miniscule in comparison to aggregate economic output. A second reason for incorporating government spending was a matter of mathematical necessity. Without taking into account government spending, national income would fall short of the market value of goods and services produced. Kuznets again warned that incorporating government spending into GDP “’tautologically ensured that fiscal spending would increase measured economic growth regardless of whether it actually benefited individuals’ economic welfare.’”

Fast forward nearly a century later, and that recurring theme of reading too deeply into GDP notions of happiness or welfare is no less tractable. Efforts to combat that shortcoming include the Human Development Index (HDI), the Index of Sustainable Economic Welfare (ISEW), the Measure of Economic Welfare (HEW), and several others. Those indices try to account for, among other things, leisure time, environmental degradation, crime, the negative impacts of defense spending, and several others. The most compelling response to attempts to read welfare and happiness into GDP might come from Clayton Christensen’s How Will You Measure Your Life.  In that classic book he discusses “motivators” and “hygiene factors” in the context of one’s personal life. Motivators are, like the name suggests, factors that compel people to go above and beyond the call of duty and can include the sense of duty or purpose that comes from curing disease, educating people, or defending the innocent in the military or as first responders. Hygiene factors, like salary, are necessary but not sufficient conditions for happiness. Below a certain level, people are unable to meet basic human needs and their happiness is adversely affected.  After a certain level income level ($75,000, according to a study by Angus Deaton and Daniel Kahneman), there’s little relationship between income and happiness.  Perhaps the same can be said of GDP. Below a certain level of economic output, a country likely will be unable to meet the basic needs of its people, such as nutrition, sanitation, and vaccinations. After a certain point, GDP and happiness likely has a more tenuous relationship. It might even be a negative relationship. Anecdotally, demand for mental health counselling seems to rise with income.

Perhaps people wish too much of one metric. Not only can GDP not explain human happiness and prosperity, but it’s very hard to make it account for economic output. How should GDP account for nominally free services like search engines, Wikipedia, or open-source software? How should GDP account for unpaid labor such as the cleaning and child care services performed by stay-at-home spouses (mostly women), a perennial bugbear among feminists?  Perhaps most consequentially, how should GDP account for the changing variety and quality of goods over time? To account for the change in quality, Ms. Coyle discusses hedonic price measures.  Instead of just looking at the price of a good over time, hedonic price measures regress the price of a good on measures of quality, such as screen size and screen resolution in the case of televisions and computer monitors. The consequences of hedonic price measures for health care and education, two of the goods with the highest inflation rates, could be striking.  The cost of health care has increased markedly in this author’s lifetime, but so have the availability and efficacy of several treatments. Education, unfortunately, has probably suffered the opposite fate. Despite the rising cost of higher education, there’s little evidence that the average graduate has gotten smarter based on measures of verbal and quantitative competency.

Those are just a few of the questions raised in a remarkably short book, only 145 pages. Although those questions deserve careful thought, one should only undertake such contemplation with Ms. Coyle’s warning about GDP: “the ‘object’ being measured is only an idea, not something with an independent existence waiting to be discovered and counted.” With all the variation in definition and measurement, one is unlikely to come to stable and satisfactory conclusions about GDP, but knowing that before contemplating GDP is perhaps the greatest lesson from an excellent book with several such lessons.

CFA Society Chicago Book Club:

Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou

Silicon Valley and venture capital (VC) in the technology sector always offended this Midwesterner’s conservative sensibilities.  Having come of age during the dotcom boom, I’m skeptical every time a technological shiny thing catches the public’s attention, which seems to happen with alarming frequency given the regularity of fads and corresponding losses to come out of the sector.  John Carreyrou’s masterfully written Bad Blood confirmed my biases.  In addition, he weaved together a highly readable tragedy involving a deceptive and manipulative villain in the form of Theranos’s founder and CEO Elizabeth Holmes; a board that emphasized prestige of its directors to the near complete exclusion of any relevant industry expertise or meaningful control; a media and public blinded by the desire to see women entrepreneurs and women in Science, Engineering, and Technology (STEM) fields; and a group of similarly gullible investors that included Walgreens, Safeway, and several of the Valley’s most prestigious VC firms.

My sentiments during the majority of the book were similar to that of a cynic observing drug dealers fighting over territory: there were no innocent bystanders and the only people who got hurt deserved it.  Unfortunately, though, there were innocent bystanders.  The first casualty is the realities of success succumbing to the Horatio Alger-type myth of the college dropout cum tech entrepreneur.  Elizabeth Holmes, whose family tree includes the founders of Fleischmann Yeast and the Cincinnati Medical School, used her family connections for her initial funding.  Although America is still the land of opportunity, it’ll always be easier to score runs when one is born on third base.  The second casualty is the line workers and main street investors in Safeway and Walgreens who suffered the consequences of poor decisions to partner with Theranos that they had no control over.  Last and most importantly, Theranos made defective medical equipment that hurt the people upon whom it was used without their informed consent—a tenant of ethical medical practice.

First, the villain of our story, Ms. Holmes.  Mr. Carreyrou paints a portrait of unbridled ambition starting from a very young age.  Despite her shortcomings, no one should doubt Ms. Holmes’s  drive.  From a very young age she declared her ambition to be a billionaire and worked tirelessly starting in early high school, studying hard, sleeping little, and earning straight As, a pattern that continued through her brief stint at Stanford and throughout her tenure at the helm of Theranos.  Ms. Holmes seemed determined to emulate Steve Jobs’s path, a point emphasized in the chapter “Apple Envy,” noting Ms. Holmes’s wardrobe, modeled after the Mr. Jobs’s signature black turtleneck, her desire to make “the iPod of healthcare,” and her hiring of TBWA/Chiat/Day, the same advertising agency responsible for the Apple Macintosh’s “Think Different” campaign.  Her infatuation went so far that while reading Walter Isaacson’s biography Steve Jobs, colleagues were able to guess which chapter she was on based on her attempts to emulate Mr. Jobs at different stages of his career.

There are at least two lessons from the Jobs story that Ms. Holmes would have benefited from learning.  First, CEO of Apple was not Mr. Jobs’s first role.  By the time he led Apple, he had served in other roles at Apple, Atari, and Pixar, as well as having founded NeXT, Inc.  Ms. Holmes shortcomings as a manager were apparent throughout the book and she most likely would’ve benefited from the humility and experience gained from working outside the C-suite.  Throughout the book Ms. Holmes comes across as a tyrant who managed through intimidation and ruthlessly eliminated any employee who tried to attenuate Ms. Holmes unrealistic expectations or call attention to her fraudulent business practices.  The second lesson is that Apple isn’t a technology company, a point often made by Rupal Bhansali of Ariel Investments.  Apple didn’t invent the integrated circuit chip or the MP3 format.  It achieved its success through innovative design, novel strategy, and superior marketing—not through any technological breakthrough.  Even Apple’s most distinctive feature, its operating system, was modeled after Xerox’s operating system (Bill Gates benefited from third-mover advantage when he then applied the model to IBM-compatible machines).  Ms. Holmes probably would’ve benefited from staying in school and acquiring the expertise necessary to achieve medical breakthroughs or at least listening to the experts who advised her to develop a minimally viable product instead of swinging for the fence with what was and still is a fictitious miracle machine that fits in a shoe box and can run hundreds of medical diagnostic tests with only a drop of blood.

A second theme in the tragedy involves Theranos’s ineffectual show pony board of directors.  Long on prestige and short on oversight and expertise, the list of directors included then General and future Secretary of Defense James Mattis, a Navy Admiral, and not one but two former Secretaries of State, George Shultz and Henry Kissinger.  Not only did their decades of experience in war and diplomacy, while laudable, have almost nothing to do with blood testing, their collective influence was negligible.  Mr. Carreyrou notes in the Epilogue that Ms. Holmes forced through a resolution giving her 100 votes per share, effectively 99.7 of the votes.  He quotes Secretary Shultz as saying, “’We never took any votes at Theranos.  It was pointless.  Elizabeth was going to decide whatever she decided.’”  Ms. Holmes contempt for corporate governance and board oversight came through in another story.  An interviewee asked Ms. Holmes about the board’s role, to which she shot back, “’The board is just a placeholder…I make all the decisions here.’”  The board failed to notice or act on, among other things, that Ms. Holmes appointed her boyfriend, a similarly flawed individual, as number two at the company.  In perhaps the only time the board came close to taking decisive action, four members of the board met to discuss Ms. Holmes’s financial projections that “weren’t grounded in reality” and were “impossible to reconcile with the unfinished state of the product.”  Having resolved to replace Ms. Holmes, the directors confronted Ms. Holmes.  Then in a two-hour bravura performance of deception and charm, a recurring theme throughout the book, Ms. Holmes convinced the directors that she should remain as CEO.  Mr. Carreyrou raises the question of potential sociopathy but defers to the psychologists for the final answer.  Regardless of the clinical diagnosis, there’s little question that Ms. Holmes was a master manipulator. The last theme that this author will address—also the most important and the one most overlooked in this debacle—was how Theranos flaunted regulation and used faulty equipment on patients without their informed consent.  Since the Nazi experiments on prisoners in during World War II, informed consent has been a core tenant of ethical medical practice.  Right now all over the U.S., researchers are pleading their case before human subjects review committees in order to get approval to use human subjects for experiments as mundane as surveying consumer preferences, yet Theranos was able to use untested and faulty equipment to conduct tests on medical patients, many with terminal conditions.  That last fact receives far too little attention.  What happened at Theranos wasn’t a tragedy—it was a crime.  The culprits should be held to account.

CFA Society Chicago Book Club:

Bullsh*t Jobs by David Graeber

We’ve all had jobs that at times felt unnecessary, redundant, or even harmful.  David Graeber’s Bullshit Jobs (2018) provides numerous examples of such jobs such as “flunkies” who exist only to make others feel important and whose examples include some receptionists and chiefs of staff, “goons” who exist only to aggressively manipulate and whose examples include several public relations and marketing functions, “duct tapers” who exist to fix defective or inferior processes or work produced by others, “box tickers” who exist only so that organizations can claim that they’re doing work that they are not and whose examples include many compliance functions, and finally “taskmasters” who exist only to create unnecessary work for the previous BS job types and then to ensure that it is (or isn’t) completed.  There’s little controversy in claiming that those jobs exist and are often unnecessary or even harmful, but Graeber takes it a step farther by arguing that the political-capitalist class conspires to create and maintain these jobs to pacify the masses rather than re-distributing wealth more equitably and thereby freeing people to pursue their passions.

Graeber’s argument suffers from the fatal flaw that John Hulsman terms “the promised land fallacy” in his 2018 book To Dare More Boldly: The Audacious Story of Political Risk.  That fallacy describes the human tendency to seek over-arching single theories to explain complex phenomenon.  Compounding the damage is Graeber’s scant empirical support for his argument, save the unscientific collection of blog comments and email responses to his previous article on the same topic, his lack of policy responses to the problem except for a brief discussion of a Universal Basic Income (UBI), a solution with little political or empirical support, and in the fact that the one “promised land” explanation that he chose to go with is largely untestable and ignores myriad simpler and more mundane explanations, two of which I’ll highlight below.

The first explanation has particular relevance to the “flunkie” class in Graeber’s taxonomy of BS Jobs.  Fredrick Brooks Jr.’s The Mythical Man-Month (1995) is about computer programmers but the lessons apply to diverse professions.  The genesis of the book was the observation that top computer programmers were orders of magnitude more efficient than marginal, average, or even above average programmers.  What’s more, programming often isn’t amenable to multiple programmers because of the inter-relatedness of the parts, and communication between multiple programmers adds time both for the act itself and in the training so that it can be done effectively.  The question then becomes: does a firm hire several programmers of varying quality and then try to integrate their work of varying quality—or should firms focus on hiring the best programmers and then hire support staff to make those fewer programmers as efficient and productive as possible?  The book justifiably argues for the latter, and the concept can be scaled to any profession that has the following attributes: (1) the task can’t be easily divided, such as in trading, surgery, or being a nuclear submarine captain, (2) the consequences of sub-optimal performance are high, and (3) the overall need for the task is limited.  When those conditions are met, it makes the most sense for firms focus on hiring the best performers for the primary task and then focusing the remaining workers on making those workers performing the primary task as efficient as possible.  Picking up dry cleaning, replying to email, and keeping the mint bowl full aren’t necessarily glamourous roles, but they’re not the result of a bourgeoisie conspiracy either.

The second low-hanging fruit explanation for many of the phenomenon that Graeber describes, particularly those of what he terms the “box ticker” type of BS job, is what Nobel Prize winner Herbert Simon termed “the logic of consequences” and the “logic of appropriateness,” which has been used to explain numerous sub-optimal behaviors in complex organizations and even some of the events of the Cuban Missile Crisis (Graham Allison and Philip Zelikow, Essence of Decision [1999]).  Organizations are created to perform one or more tasks.  Processes are created to perform those tasks, including interim processes to ensure those tasks are completed and to measure the degree to which those processes are or aren’t being completed satisfactorily.  Over time, those interim processes become divorced from the primary processes that they were created to help facilitate and even become the object of firms efforts, hence performance measurement and compensation schemes that measure and reward performance based on  how many reports are completed versus whatever it is that the employee and the firm are ostensibly trying to accomplish.

Smaller and less complex firms are less susceptible to the logic of appropriateness.  Management consultants–another BS Job, according to Graeber–can also be useful in identifying outmoded processes or those that have otherwise become divorced from their original purpose.  Another solution is temporary organizations that sunset after whatever they were created to accomplish is accomplished. President Ronald Reagan said that a government program is the closest thing to perpetual life on this side of heaven.  Examples abound, including the Tennessee Valley Authority (TVA), an organization created to accomplish the long-since resolved task of electrifying the Tennessee Valley, which is approaching its centennial.  The corporation is a relatively modern form of organization.  Early corporations were most often created for a single purpose, such as building a canal, and were sunsetted after the project was completed.  Deviations from a firm’s original purpose required shareholder approval.  The modern perpetual corporation, such as the industrial conglomerate GE that transformed into a financial services firm, dabbled in television, and then came to its senses and got back to manufacturing were not possible.  Given GE stock’s recent performance and demotion from its place on the Dow Jones Index, the market seems sufficient to discipline such economic misadventurism.  The same, unfortunately, can’t be said for the TVA.

Perhaps Graeber fails more simply in that he sees lives half-unfulfilled rather than the other way around.  To paraphrase Sir Winston Churchill’s description of democracy, capitalism is the worst economic system that’s ever been created—except for all the other ones that’ve been tried.  The world has done at least three controlled experiments to determine the relative efficacy of market economies versus centrally planned ones by dividing countries in two and making one economy market-based and the other centrally planned: (1) Hong Kong and the Chinese mainland, (2) East and West Germany, and (3) North and South Korea.  Graeber makes the outlandish claim that the Soviet Union’s centrally-planned economy failed “because they were never able to develop computer technology efficient enough to coordinate such large amounts of data automatically.”  Now that computing power isn’t an issue, I wonder what Graeber’s excuse for North Korea is.  Those economies aren’t immune to BS jobs either.  The Soviet Union spawned the king of all BS jobs, waiting in lines on behalf of others.  It was one of the few black market jobs to earn extra cash in the Soviet Union and given the massive shortages of everything there were ample opportunities to ply the trade.

Graeber succeeds briefly in entertaining the reader with examples of BS jobs–most of which those of us who’ve had to earn a living are already familiar with—but in terms of identifying the causes and providing solutions he falls miserably short.

CFA Society Chicago Book Club:

How to Measure Anything: Finding the Value of Intangibles in Business by Douglas W. Hubbard

how-to-measure-anythingPath dependence is the phenomenon often used to explain why people sometimes persist with practices that are no longer optimal or economically rational. Statistics is another area where path dependence has struck. The statistical techniques that students learn in school, the ones that practitioners apply in industry, and the ones researchers use in journal publications often aren’t the best or the most appropriate ones but rather the ones that continue to be used because they’ve always been used.  Douglas Hubbard’s How to Measure Anything (2010) attempts to update some of those techniques for the 21st century.  In addition, he offers some refreshing perspectives on behavioral finance and the biases that adversely affect decision makers, even the so-called professional decision makers at the executive level in industry and government. Finally, he offers a unifying framework for decomposing complex problems into individual variables, assessing the value of reducing the uncertainty for each of those variables, measuring those variables, and finally determining probabilities through Monte Carlo simulations and Bayesian statistics.

Starting with antiquated statistical techniques, every former stats 101 student probably remembers going through some type of hypothesis testing exercise such as testing if a coin is fair, a drug works, voters prefer a candidate, etc. Those tests take a null hypothesis, such as assuming that a coin is fair, flipping it multiple times, and then determining the probability of observing a series of outcomes if the coin were fair. If the probability of observing a series of outcomes on a supposedly fair coin is less than some arbitrary threshold, usually five percent, the experimenter rejects the null hypothesis and concludes that the coin is not fair.  For example, the probability of observing five heads out of five flips on a fair coin is 3.13%, which would cause an experimenter using the five percent threshold to reject the null hypothesis that the coin is fair. The five percent shibboleth comes from the statistician Sir Ronald Fisher’s 1925 paper “Statistical Methods for Research Workers.” He wrote a year later in “The Arrangement of Field Experiments” (1926) that the threshold was arbitrary and that other thresholds may be used; however, the damage had been done and the five percent threshold remains as a venerated relic.

The whole process is a convoluted way to approximate the more useful question: What’s the probability of getting a heads on a given coin? The Bayesian approach to statistics, in contrast to the frequentist approach previously described, seeks to do just that. Mr. Hubbard notes that the term “Bayesian” was first used by Fischer himself as a derogatory reference to adherents of the approach named after Rev. Thomas Bayes. Rev. Bayes is credited with developing the first formulation of how new evidence can be used to update prior beliefs.  In the case of Bayesian statistics, new evidence is used to update prior assumptions about probabilities.

Once the distribution of the relevant variables or drivers is better known, Mr. Hubbard postulates a relationship between the variables and generates a hypothetical distribution of the phenomenon that one is trying to predict using Monte Carlo simulations. First developed to solve intractable problems in nuclear physics, modern computing power has made the technique accessible to anyone with a personal computer and an Excel spreadsheet. Instead of trying to compute the probability of a phenomenon such as rolling a two with a pair of dice (“snake eyes”), Monte Carlo simulations flip the problem by simulating thousand or perhaps millions of rolls and then determining what percentage of the rolls were twos. With an Excel spreadsheet, Mr. Hubbard shows how to calculate distributions and expected values for complex phenomenon after estimating the distribution of the underlying variables and their relationships. Monte Carlo simulations are seldom taught in introductory statistics courses. The topic is usually reserved for advanced classes and special topics classes even though the basics of the technique are no more complicated than regression modeling and several other topics that are covered in introductory classes.

With new statistical tools in tow, Mr. Hubbard then sets forth on finding what to measure.  Here Mr. Hubbard again notes a pernicious tendency among decision makers to either measure what’s easy to measure or what they’re already familiar with. The solution, Mr. Hubbard argues, is to triage variable before trying to reduce uncertainty about them by introducing metrics to quantify the costs and benefits of acquiring additional information about each variable. He starts with the Expected Value of Perfect Information (EVPI): What would it be worth to know a presently unknown quantity with complete certainty? He then works backwards to determine the incremental Expected Cost of Information (ECI) and the incremental Expected Value of Information (EVI). Finally, he adds a time component, noting that for some decisions the value of information is perishable. Mr. Hubbard notes that adding the time component can prevent what pioneering decision theorist Howard Raiffa called, “Solving the right problem too late.”

In addition to the tendency to measure the wrong things and measure in the wrong amounts, Mr. Hubbard notes several other behavioral and cognitive biases, such as expectancy bias and overconfidence. Instead of just rehashing problems that already have been noted extensively in the behavioral finance literature, Mr. Hubbard goes further and offers solutions, especially to the problem of overconfidence and quantifying uncertainty. When asked to calculate a 90% confidence interval for an unknown quantity, such as the wingspan of a Boeing 747 aircraft, most people choose too narrow a range. Mr. Hubbard shows that with training the average person can estimate ranges for unknown quantities such that on average the true value falls within their estimated range 90% of the time. The training, called “calibration training,” is simple to conduct and has a tremendous success rate.  Organizations should probably spend more time training their executives to become better decision makers given how much time and money as they spend sending them to conferences, hiring executive coaches, and giving them physical and psychological assessments.

When the CFA Society Chicago’s Book Club met to discuss Mr. Hubbard’s book in April 2017, most of the participants welcomed his fresh approach to quantitative and empirical problem solving. If there were any misgivings about the book, they were that it didn’t fully live up to its title: “Finding the Value of Intangibles in Business.” The participants would have welcomed more examples of how the techniques described could be used to value business units or firms that make intensive use of intangibles such as brand identity, intellectual property, or perhaps others.

Hopefully, this won’t be the last time that Mr. Hubbard crosses paths with the Society and we’ll get to fulfill that promise.

 

CFA Society Chicago Book Club:

The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore by Michele Wucker

thegrayrhino-3D-coverOverlooking or underestimating obvious dangers is a timeless tradition. A man is terrified of planes but gets in his car every day and drives with no seat belt. A woman pays the fire insurance premium on her home religiously but doesn’t floss her teeth. People play the lotto but don’t take advantage of their employers’ 401(k) matching contributions. Organizations, including governments, are as bad or worse.  Passengers remove their shoes at airports to prevent a shoe bombing, which has been attempted once in human history—unsuccessfully—while infrastructure is allowed to crumble to the point of collapse, such as the I-35W Bridge in Minneapolis, Minnesota, that collapsed under the weight of normal traffic and killed 13 people. That catastrophe didn’t occur because it was rare, hard to predict or even unpredictable, a black swan in modern parlance from Nassim Nicholas Taleb’s 2007 classic of the same name.  Instead, those dangers are obvious and imminent; much like the danger of a charging gray rhino, from which Michele Wucker’s The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore (2016) derives its name.

In February of 2017, the CFA Society Chicago’s Book Club had the privilege of hosting Ms. Wucker in person to discuss her Book. The conversation was wide ranging and included water shortages, global warming, the Challenger Shuttle disaster, and many other topics. Why do we spend resources worrying about and preventing rare events but ignore or do nothing about obvious, preventable dangers? Ms. Wucker has several explanations from the social sciences: taboos about raising alarms, groupthink, anchoring and confirmation biases. She notes the origins of the sobriquet Cassandra, an unflattering term used to describe people who warn others about potential dangers. The original Cassandra was given the power of prophecy from the god Apollo. When she didn’t reciprocate Apollo’s affections, he threw a curse on her that prevented others from believing her prophecies, including her prophecy that the Greeks would attack Troy, which is what ultimately happened. The negative connotations that are associated with the name of someone who correctly warned others about impending danger speaks to deep seated cultural aversions to raising alarms. That negativity combined with the fact that Cassandra was a woman who was punished for shunning the advances of a male superior is a similarly depressing statement about society.

With the manifold existence of Gray Rhinos and their causes firmly established, the question turns to their taxonomy and life-cycle. Ms. Wucker identifies eight types and five stages of a Gray Rhino.  The eight types include the “Inconvenient Truth” Gray Rhinos that are widely recognized but not acted upon due to denial, including manufactured denial, and high costs to fix.  Global warming is the classic example of an Inconvenient Truth Gray Rhino. There are also the “Creative Destruction” Gray Rhinos such as Kodachrome, where acceptance and orderly unwinding are the only tenable solutions. It was not mama but the inevitable march of time that took our Kodachrome away. For each of the eight types in the taxonomy, all follow a life cycle of five stages. The first stage is denial, the second is muddling or kicking the can down the road, followed by haphazard diagnostic exercises, the third, panic, the fourth, and finally action.

Ms. Wucker’s Taxonomy and Stages are invaluable contributions to the ongoing policy discussion. The Taxonomy and Stages also need to be viewed in the context of organizational motivations and individual incentives, though. A good example is the Challenger disaster that Ms. Wucker opens her book with.  When making go/no-go decisions, it’s helpful to look at data from previous failures as well as data from previous successes. Space shuttles relied on re-usable solid rocket boosters for their initial launch. The boosters were built in segments and each segment had o-rings that were supposed to keep hot gas from escaping. When o-rings get too cold, they become brittle and fail allowing hot gasses to escape, which is what caused the Challenger disaster. On the morning of the launch, one engineer spoke up against the launch. The coldest successful launch took place when the temperature was 53 degrees. In that launch, gas escaped passed the first ring and caused corrosion on the backup ring, but the backup ring contained the gases. Below 53 degrees, there were no data. On the morning of the Challenger launch, the temperature was 35 degrees.

On January 28, 1986, NASA got an additional data point. The backup ring failed and seven astronauts died.  The Challenger disaster didn’t happen because the world’s smartest people didn’t understand the threat of cold weather to the proper function of o-rings. It happened because of the tremendous pressures on NASA to proceed with the launch. The space shuttle was originally conceived as a way to easily and cheaply launch people into space and return them in a re-usable ship.  The term “space bus” was even used. In practice, the program proved to be more costly and inefficient than the shuttle’s predecessors. NASA was under tremendous pressure to demonstrate the viability of the program.  In addition, the Challenger was going to launch the first teacher, Christa McAuliffe, into space. Millions of people were tuned to their television sets to see a launch that had already been delayed several times.  The organizational and public relations pressure to proceed with the launch overwhelmed good judgement.

Organizational pressures and incentive structures are that root of several Gray Rhinos. Scarce public funds either can be used to pay teachers or fix bridges that seem to work fine (until they don’t). Publicly traded companies struggle to look past obstacles beyond meeting quarterly numbers. Politicians aren’t incentivized to deal with any problem such as global warming whose most detrimental effects are likely to occur after a two, four, or six year term.

The assembled Book Club members and Ms. Wucker did offer several solutions to the Gray Rhino problem.  First, align incentives. Executive compensation should vest fully over a period of years or even decades.  Investors should similarly hold companies to account for long term performance and be more forgiving of short term volatility. Allowing US banks to hold stocks as banks do in Japan and Germany might allow more steady capital into capital markets and reward longer term performance, too. Second, break the problem into small pieces. There’s an old expression: “How do you eat an elephant? One bite at a time.” The same logic applies to Rhinos. Instead of trying to fix all the nations crumbling infrastructure, prioritize. Fix one bridge at a time, starting with the most dilapidated. Third, to combat groupthink and denial, include diverse perspectives in one’s circle and allow multiple channels of access to leaders and decision makers.  Related to that third point, the group discussed the competing leadership styles of Presidents Reagan and Kennedy. President Kennedy’s administration followed a spokes-on-a-wheel format where multiple influencers had direct access to the President, which could explain his successful resolution of the Cuban Missile Crisis. President Reagan, on the other hand, had a more linear chain of command with multiple bottlenecks and chokepoints, which could explain how in the Iran-Contra Affair a few rogue elements of his administration where able to conduct arms sales and a covert war without knowledge or involvement from either the State or Defense Departments.

The Gray Rhino is a welcome addition to current policy debates and compliments established organizational behavior and social science literature well. At 304 pages, it’s also a manageable and enjoyable read. The Society is very grateful to Ms. Wucker for her book and for her attendance at our meeting.

CFA Society Chicago Book Club:

The Accidental Superpower: The Next Generation of American Preeminence and the Coming Global Disorder by Peter Zeihan

superpowerGeography is destiny.  Demography is second.  Everything else is a distant third.  That’s the takeaway from Peter Zeihan’s The Accidental Superpower: The Next Generation of American Preeminence and the Coming Global Disorder, which was the book of the month for the CFA Society Chicago’s Book Club in January 2017.  From settling the Nile Valley to deep water navigation and the shale oil revolution, Mr. Zeihan explains how geography influences almost every aspect of civilization from formation to eventual demise.  Landlocked countries tend not to have navies of any consequence.  Countries with neighboring threats tend not to have excess resources to project military power beyond their borders.  Countries lacking internal resources are more likely to engage in trade.  The fact that the US is facing two oceans and has no neighboring threats coupled with its need to secure energy and goods explains how she can—and has—projected her power abroad for decades in part to secure global trade.  The shale revolution and ample food supplies coupled with the rising costs of extra-continental labor and domestic supply chain alternatives such as 3D printing explain why she might no longer need or care to.  The conclusion is that a newly self-sufficient and relatively young US will withdraw from participating in global trade and security while the rest of the world collapses under the weight of its aging populations and competition for scarce food and energy.  How’d we get here?

To answer that question, rewind to the beginning of the book, which starts at the end of World War II, the most destructive war in human history, and the agreement that helped in part to ensure that it never happened again, the Bretton Woods Agreement, signed by 44 countries at the Mount Washington Hotel in Bretton Woods, New Hampshire.  In addition to the consequences of that momentous agreement, we learn that its namesake town and the Hotel at which it was signed were so overwhelmed the 730 delegates that descended upon it that the Hotel’s manager locked himself in his office with a case of whiskey at one point during the gathering and refused to come out.  Those anecdotes along with Mr. Zeihan’s wry sense of humor alone made the book well worth reading.  The Agreement’s consequences were threefold: (1) all the signatories’ currencies were to be freely convertible into US dollars at a fixed rate, and the US dollar was likewise to be exchangeable for gold at a fixed rate, (2) the US would protect maritime shipping, and (3) the signatories would be part of a “strategic umbrella” of protection against the common Soviet threat.

Just as geography had ordained that the WWII belligerents compete militarily to secure markets, resources, and shipping, the Bretton Woods Agreement with the stroke of a pen ensured that they would no longer need to.  Being freshly ravaged by war and facing a common Soviet threat further ensured their assentation to the agreement.  In addition to Bretton Woods, there was one more ingredient in the elixir that spawned the post-war boom: demography.  The signatories boasted youthful populations.  Few variables in economics are known with near certainty for any extended period of time.  Demographic variables are an exception.  At any given time in any given country, one can tell with reasonable certainty how many skilled young workers will be entering the workforce.  Skilled workers don’t magically fall from the sky ready to leave home and acquire gainful employment, as much as their parents may wish it. There is a pipeline from birth to school to adulthood.  Once in the workforce, laborers again follow a predictable life cycle. As they begin working, they begin paying taxes and saving.  As their savings grow, they deploy their savings into capital markets until they finally retire, spend down their savings, and increasingly rely on the next generation of tax payers for their welfare.  Here again the US, while still aging, is relatively young and demographically well positioned relative to the rest of the World, Mr. Zeihan argues.

The book club members welcomed Mr. Zeihan’s geographic and demographic analysis as a compliment to traditional economic and financial modes of analysis. The members did, however, cast doubt on some of his conclusions and predictions.  The first was the premise and title of the book, Accidental Superpower.  One member noted that the Founders were quite deliberate in their desires to build the US into a military and economic superpower, the subject of a recent popular musical.  No one gave serious credence to Mr. Zeihan’s prediction that Alberta, Canada, might become the 51st state.  If Mr. Zeihan had cast a critical eye towards the US and applied some of the same analysis that he applied to the rest of the world, he might have found similar fissures.  Many Western and Southern US States are net beneficiaries of federal aid and lament the federal government’s intrusions in their lives.  If armed standoffs like 2014 one with Amon Bundy in Nevada become more commonplace, it’s at least as plausible as some of Mr. Zeihan’s other claims that net-contributor states might leave those states to fend for themselves.  More importantly, Mr. Zeihan’s arguments about geography and physical capital didn’t seem as relevant to the Members as the author claimed them to be in the internet age, and one certainly doesn’t have to be a naval power to wreak havoc in the cyberwar era, as the US again learned in the 2016 election of Mr. Trump as President.

Alberta, Canada, might indeed become the 51st and prove the Club Members wrong, and even with its other potential omissions and shortcomings, Accidental Superpower was an eminently enjoyable and worthwhile read.

CFA Society Chicago Book Club:

The Only Game in Town by Mohamed El-Erian

the-only-game-in-townExtraordinary central bank interventions during economic crises aren’t new.  In his Pulitzer Prize-winning Lords of Finance, Liaquat Ahamed mentions Emperor Tiberius injecting one million gold pieces into the Roman economy to keep it from collapsing in 33 AD.  Extraordinary central bank policy coordination similarly isn’t new, as Mr. Ahamed notes with the frequent meetings between the heads of British, French, US, and German Central Banks and the resulting coordinated policy actions during the First World War and the Great Depression.  What is new is the extent and duration of those interventions and the absence of any corresponding fiscal or structural reforms. After Tiberius’s intervention, Rome soon returned its focus to commerce, conquest, and imperial assassination.  Roman merchants and farmers didn’t sit idly waiting for the next round of monetary stimulus and then dispose of their wares and crops in panicked fire sales when cheap money didn’t materialize.  Contrast that with our times.  Six years into an economic expansion, interest rates remain at historic lows—even negative in several major economies—with little hope of fiscal or structural reform.  A small uptick in volatility can elicit calls for further quantitative easing (college campuses apparently aren’t the only places where people are clamoring for safe spaces).  Central banks have become The Only Game in Town, the title of Dr. El-Erian’s book and the subject of the CFA Society Chicago’s July 19, 2016, Book Club meeting.

Dr. El-Erian brings uniquely diverse cultural, educational, and professional perspectives to the financial crisis and the ensuing central bank interventions.  His mother is French and his Father is Egyptian, and he spent time growing up in Egypt, in France, where his father was the Egyptian Ambassador to that country, and in New York City, where his father worked at the United Nations.  His enrichment continued in the United Kingdom where he attended boarding school, Cambridge, and finally Oxford, where he earned a doctorate in economics.  His professional resume is equally diverse and impressive.  It includes the International Monetary Fund (IMF), Harvard University’s endowment, and PIMCO, one of the world’s largest bond investors with approximately $2 trillion under management.  It’s there where Dr. El-Erian served as co-CIO along with PIMCO-founder Bill Gross.  That’s in addition to his numerous publications, boards and committees, and his previous book, When Markets Collide, which won the Financial Times and Goldman Sachs Business Book of the Year Award as well as The Economist’s Book of the Year Award in 2008.

In addition to his qualifications to write on the subject, Mr. El-Erian served as CFA Society Chicago’s keynote speaker at its 2015 Annual Dinner, which further piqued Book Club members’ interest.  In his exposition of the issues facing global markets and central banks’ responses to them, Dr El-Erian didn’t disappoint the assembled Book Club Members.  In the plain-spoken fashion that made When Markets Collide a classic, he explained complex, interdisciplinary phenomenon in simple terms with the assistance of helpful metaphors.

For example, he explained the collapse in confidence and liquidity during the crisis in terms of a drive through: Customers pay at the first window and receive their food at the second.  When customers aren’t confident that they’ll receive their food at the second window, they’ll demand it at the first window.  When restaurants don’t relent, both parties that otherwise wish to transact will walk away – market failure.  As another example, he explained that trying to push certain products and activities out of the banking system was like pushing on a waterbed.  Rather than remove the activity, pushing simply displaces the activity to elsewhere in the bank and non-bank financial sectors.

Dr. El-Erian also noted the increase in the size and power of the end-users of capital, the buy-side, relative to financial intermediaries, the sell-side.  The phenomenon has been noted, among others, by John Rogers, the former CEO and President of the CFA Institute, in A New Era of Fiduciary Capitalism? Let’s Hope So, which appeared in the May/June 2014 edition of the Financial Analysts Journal.  Dr. El-Erian explained the consequence of that transformation, namely that the growing end-users are trying to force more transactions through the shrinking pipes of the financial intermediaries.  The result in the financial world is as calamitous as the result in the plumbing world.

In all, Dr. El-Erian noted nine challenging trends in global economies related to extraordinary extended central bank interventions, the subject of Part Three of his book: inadequate growth models, high unemployment, increased inequality, decreased institutional credibility, political gridlock, increased trade imbalances and tensions between the core and the periphery of the global economy, the rise of shadow banking, decreased liquidity (the pipes mentioned above), and finally the increased complacency among market participants due to a perceived central bank put.  In that exposition Dr. El-Erian touched on several insightful points.  For example, he noted the Bank of International Settlements (BIS) meetings allowing for back-channel discussions and problem solving between the monetary authorities of different economies.  A similar mechanism for averting armed conflicts through international organizations such as the United Nations has been noted in Bruce Russett and John O’Neal’s Triangulating Peace.  Perhaps a longer book would have allowed those points to be developed further.  The Only Game in Town is only 296 pages, including appendix.

That largely concluded the exposition of the problem, where Book Club Members gave Dr. El-Erian high marks.  The remainder of the book was a meandering attempt to solve the problems noted in the first part of the book, which left members disappointed.  The desultory journey covered bi-modal distributions, behavioral finance, several other topics, and even a section on diversity in the workplace.  One member quipped that the last chapter of the book was probably a last-gasp effort to fulfill a contractual minimum page requirement with the publisher.  Dr. El-Erian had a similar chapter on organizational leadership at the end of When Markets Collide.  In that book he also noted the failure of macro-prudential regulators such as the IMF, his former employer, to balance their academic training with technical knowledge gleaned from actual market participants.  Perhaps better institutional leadership and reforms, including more diversity, could foster economic stability and growth, but Dr. El-Erian failed to argue the point persuasively, at least in the judgement of the participating Book Club members.

The Only Game in Town is a worthwhile addition to the discussion about the continued role of central banks in the current economy and the potential pitfalls of continuing down the current path.  Even though Dr. El-Erian ultimately failed to solve the problems he elucidated, he’s hardly alone in that regard.

CFA Society Chicago Book Club:

Age of Ambition: Chasing Fortune, Truth, and Faith in the New China by Evan Osnos

age of ambitionMost of us have a well-formed macro perspective on China. It’s the world’s second largest economy and a key U.S. trading partner with growing influence in Asia and globally. In Age of Ambition Evan Osnos takes us beyond the statistics, building a complex portrait of China through its people. The author introduces us to citizens from all walks of life with widely different views on politics, the economy, social issues and the Country’s future. He reveals the monumental changes, challenges and contradictions China faces by telling their stories, tracing their lives over the years and exploring their goals, aspirations and attitudes. It’s an up close and personal look that’s highly engaging.

We follow several progressive reformers like Ai Weiwei, a famous artist who publicly mocks inequities; Han Han, a snarky and wildly popular blogger who takes aim at rampant hypocrisy; Liu Xiaobo, a leading voice for human rights who won a Nobel Peace Prize while imprisoned for advocating political reforms; and Chen Guangcheng, the “blind peasant lawyer” who helps his poor rural neighbors fight injustice by local officials.

We also meet conservative nationalists like Lin Yifu who defected from Taiwan to China in 1979 with the dream of helping China reclaim its greatness. He became a chief economist at World Bank and evangelized China’s central planning methods. Tang Jie is a graduate student whose viral patriotic video inspired Chinese people to stand against protests of China’s repression in Tibet. He and other nationalists view foreign criticism as part of an ongoing plot to encircle and weaken China. Interviews with these and other personalities span years and it’s fascinating to observe how their views develop as the country rapidly evolves.

The author takes us beyond the headlines of scandals and disasters like China’s real estate boom, organized crime and explosive growth in Macau, riots in the Uighur region, earthquake in Sichuan, conflict with Japan over the Diaoyu Islands and the “Harmony Express” bullet train crash. State controlled media tries to shape these stories but is often undermined when details emerge. The collapse of schools in the Sichuan earthquake and the “Harmony Express” crash were eventually linked to corruption that allowed shoddy building practices. Fraud was so widespread in the railroad ministry that its chief Liu Zhijun was convicted of taking kickbacks and bribery to win a Party Central Committee post. However, the truth-seeking public also can pay a price. After the Sichuan earthquake, parents who demanded information about missing children were detained.

Several book club attendees thought the author could have quantified the material better. And we also noted he doesn’t take a position or recommend action to resolve the country’s challenges. It’s true, Age of Ambition isn’t China-by-the-numbers, but it does offer rich insight into the Chinese worldview and their perspective on the country’s challenges. Our discussion was made especially interesting having Yunjin Wang and Yang Xu, CFA, add clarity and context about their home country. Both felt the book was accurate, but also noted significant changes have occurred in the short time since it was published in 2014, including the crack down on fraud and tightening of the “Great Firewall” by incoming President Xi Jinping, as well as the profound effects of ongoing economic shifts.

Key takeaways from Age of Ambition were the existential threats facing the Communist Party and their hold on power:

EXTREME WEALTH INEQUALITY

Market-based policies have created dramatic growth, but the benefits have gone mostly to politically connected businessmen and officials. China’s true Gini coefficient of wealth distribution is estimated at 0.61, among the world’s worst. This inequality stands in stark contrast to the Party’s ideal of a classless society. There’s growing frustration with the lack of social mobility. Wages for college grads have been flat since 2003 and there are six million new college grads per year. Meanwhile economic growth is slowing. “Parental connections” were found to be the most decisive factor in a child’s earning potential instead of “parental education,” the typical factor in other countries.

THE INTERNET

The Party is wary of fast-moving ideas, even those that support the government. Control of information is absolutely crucial to them and the book gives a fascinating look at their methods: the “Great Firewall,” text message monitoring, “Fifty Centers” paid to disrupt sensitive online conversations, orders issued to news outlets and publishers on forbidden words and topics, etc. But despite this censorship we see how artists, bloggers and activists use the internet to expose corruption and express their views, often with tragic consequences. Internet and mobile phone penetration are growing fast, so this challenge will continue.

INNOVATION

To transition its economy toward domestic consumption and grow its service industries, China needs to foster innovation, but official propaganda aiming to have citizens “sing as one voice” and a deeply-rooted requirement for conformity work directly against building a culture of creativity and innovation.

INDIVIDUALITY

The Party controls the legal system, education, industry, media, communications and faith groups, but as Chinese people become educated, urbanized and wealthier they’re craving more autonomy in their work, family and spiritual lives. This works against Party efforts to “harmonize” society.

Overall, Age of Ambition is a well-written and highly insightful book that’s sure to enrich your understanding of China’s people, challenges and future.

CFA Society Chicago Book Club:

The Green and the Black: The Complete Story of the Shale Revolution, the Fight Over Fracking, and the Future of Energy by Gary Senovitz

GreenBlackOne of the benefits of being a part of the book club is learning about industries, markets, or products that are outside one’s normal course of life.  I know little of the oil and gas industry, having spent most of my life researching and working in the financial service industry.  I would encourage everyone to keep an eye on the Book Club upcoming lists, and choose one or two that would increase your breadth of knowledge and join us for the discussion.

What happens when a self-described New York liberal (the Green) meets an oilman (the Black)?  Or in an interesting twist of fate they are the same person?  Senovitz is a Managing Director of a Private Equity firm (Lime Rock) in New York that specializes in the oil and gas industry, and is also a devout liberal worried about environmental issues and the future effects of climate change.   The end result is a very entertaining and even handed account of hydraulic fracking and a great story of its history and development.

The book begins with the history of hydraulic fracking and with riveting accounts of its biggest pioneers such as Audrey McClendon of Chesapeake Energy, George Mitchell of Mitchell Energy, Mark Papa of EOG Resources  and Harold Hamm of Continental Resources.  The four are described as the Mount Rushmore of the Shale Revolution.  Their stories are a big part of the boom that led to the success of fracking: risk takers always seemingly on the edge of bankruptcy.  They persevered by staying true to their beliefs and their refusal to give up while others scoffed and laughed at them.  Many accomplished their success, simply because they did not know what else to do but continue to try.

The narrative continues to wind through many of the issues surrounding fracking.  The author breaks down the Documentary Gasland as more staged propaganda than facts and leading to an unneeded public hysteria, but also highlights real concerns such as surface contamination and noise which are very damaging and must be properly managed.  Senovitz remains tortured that fracking will lead to more carbon use, but he runs through large amount of statistics to make his case that it is really a natural gas boom that has led to the United States greatly reducing its dependence on coal and lowering its carbon emissions.  Other benefits include creating jobs, reducing American dependency on foreign energy and improving lives globally by spreading cheaper energy worldwide.

The author also describes the ongoing battle between the Yes in My Backyard (YIMBY) vs. the Not in My Backyard (NIMBY) factions.  States like New York and California (NIMBYs) have no problem utilizing massive amounts of the energy from states like North Dakota and Pennsylvania (YIMBYs), but refuse to let fracking on their home turf.  This visible hypocrisy is well discussed, and the author leaves no doubt that the NIMBY’s arguments are more political than sensible economic or scientific positions.

We found the book to be quick paced, and enjoyable.  The narrative provides a wealth of information that is important for all to consider on this controversial activity.  The Green and the Black is one of those special books which keep many of us returning to the book club.  Please join us in the future; we believe you will not regret the time.

CFA Society Chicago Book Club:

While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Looms as the Next Financial Crisis by Roger Lowenstein

While America AgedThe specter of unfunded pension liabilities haunts many of our major cities and a large number of public companies. This is especially true in the city of Chicago as public unions continue to threaten to strike over benefits and unfunded pension liabilities. We discussed Roger Lowenstein’s book about this topic at a well-attended CFA Society Chicago Book Club meeting held in April. The book attempts to answer why the private pension system as conceived in the United States has failed.

Mr. Lowenstein divides his book into three parts. Each part addresses the pension crisis from the perspective of; a public company (General Motors), public service workers in New York, and the public service worker pension plan for the city of San Diego.

Part One: Who Owns General Motors?

The question asks whether it is the shareholders or workers who own a publicly traded company.  GM was one of the most successful companies in the world, however due to labor union gains at the bargaining table, its future cash flow would not accrue to its shareholders, but rather to its pension obligations.

This part of the book revolves around Walter Reuther and the UAW. Mr. Reuther became the visionary leader of the UAW in the 1930’s. In 1950 Mr. Reuther crafted what Fortune Magazine dubbed the “Treaty of Detroit”. It was a 5-year agreement which committed GM to guarantee a pension, wage increases with a cost of living formula and hospital and medical insurance at half cost. It was the inability to fund these ever-growing commitments which eventually led to the downfall of GM.

Part Two: The Public Freight

Pension plans for city workers help to guarantee a stable work force; a highly desirable trait for teachers, firemen and transportation workers. Reliable bus and train service is critical for the economy of a city. The second part of the book examines the history of wages and pensions for the public workers of New York City.

The most effective union leader was Michael Quill, an Irish immigrant who was a member of the IRA and fought in the rebellion against the British. In the 1930’s, the Transit Workers Union (“TWU”) was led by a coalition of Communists and former IRA activists. In 1937, Mr. Quill became President of the TWU. A 13-day strike in 1965 permanently changed the dynamic between the unions and the city. New Yorkers endured the worst traffic-jams in its history during this strike. The state government reacted by passing stricter laws prohibiting strikes by public workers. These laws were ignored as union leaders happily went to jail. The citizens of any municipality are captive customers and are unable to shop elsewhere for subway service or police protection.

Part Three: Debacle in San Diego

The risk that the government will put the expense of a pension plan onto future generations is illustrated by the city of San Diego. By the summer of 2005, the municipal pension fund in San Diego, the San Diego City Employees Retirement System (“SDCERS”) was underfunded by $1.7 billion. How it got that way is addressed in the third part of this book.

In 2005 the national press referred to San Diego as “Enron-by-the-Sea”. The cause of the underfunding was the extreme reluctance of local politicians to raise money by increasing taxes. The political climate in the city was very conservative with a mistrust of any tax. The city covered its cash shortfalls by continuing to avoid making the required pension contributions.

Labor unions in the city began to contribute heavily to political campaigns; this was more effective in San Diego which had a weak form of city government where a relatively small amount of votes could sway elections. In the end, public employee unions had political clout on par with business interests. City managers became more adept at structuring solutions which circumvented state laws regarding the required funding of SDCERS.

Conclusion: The Way Out?

The author has a few suggestions as to how to mitigate some of the risks endemic to these pension and health care schemes. However, most participants at the Book Club thought they were rather weak. The author is of the opinion that the 401K is not an adequate substitution for a pension and advocates a “national” 401K offering matching credits to lower wage earners. He also suggests that 401K providers be required to offer an annuity as a default option. The author ends the book with a plea to strengthen social security by raising taxes, an unpopular but perhaps necessary measure.

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