Death, Taxes, and a Few Other Things

Life guarantees:

1. A perpetually moving goalpost

Median family income adjusted for inflation was $29,000 in 1955. In 1965 it was $42,000. Today it’s just over $62,000.

There’s widespread belief that the 1950s and ‘60s were peak time for middle America to secure a good-paying job. But it’s a quantitative fact that the median American household earned more in 2018 than they did at any point in the 1950s or 1960s, adjusted for inflation. That’s true for hourly wages too.

Part of the disconnect between feelings and reality can be explained by the shift in expectations over the last 60 years.

To generalize only a little: In the 1950s camping was an acceptable vacation. Hand-me-downs were acceptable clothes. A 983 square foot house was an acceptable size. Kids sharing a room was an acceptable arrangement. A tire swing was acceptable entertainment. Few of those things would be acceptable baselines by most households today.

But – and this is the important part – they were acceptable back then because other median households accepted it.

John D. Rockefeller never had penicillin, sunscreen, or Advil. But you can’t say a low-income American with Advil and sunscreen should feel better off than Rockefeller, because that’s not how people’s heads work. People gauge their wellbeing relative to those around them. Everyone does. And goalposts move both ways: Sebastian Junger’s book Tribes details the long history of comradery during shared disasters, like soldiers during war and neighbors during natural disasters. Hardship is more palatable when everyone around you is in the same boat.

You can be an optimist and say living standards will keep improving, which I think is likely. But you can’t say that people will feel proportionally better off, because the goalpost will always move up with improvements in living standards. There is a correlation between money and happiness, but it diminishes with each additional dollar gained. This is especially true at the micro level where people live their day to day – the hedge fund manager who makes $100 million a year compares their life to other hedge fund managers who make $100 million per year, so their life doesn’t feel nearly as amazing as others imagine. Their goalpost moved to the next town over.

If the 1950s and 1960s felt like a better time, it’s because there was less dispersion between income groups, with fewer extremely wealthy people inflating the lifestyle aspirations of everyone else. But that highlights the point here: when you watch other people live a better life, your benchmark for normal and acceptable rises. The goalposts moves. This isn’t necessarily bad or good, and I don’t have a solution; it’s one of those things that just is. Like death and taxes.

2. Periods of excess

After each bubble there’s well-meaning attempt to ensure it never happens again. Governments make new regulations, and individuals say “I’ve learned my lesson and I’ll never do that again.”

But you will do it again. Maybe not you. But the drive toward financial excess is an inevitable part of how markets work.

There are two reasons why.

One is that the most important variables of investment returns are unknown. How much will investors pay for this asset? How much debt is too much? How high do interest rates need to go before businesses stop investing? These are more psychological than analytical, so there are no predictable answers. And when there are no predictable answers the only way we can identify the “breaking point” is to go beyond it, then look back and say, “Oh, OK, apparently 50 times earnings was too much,” which is something we didn’t know at 49 times earnings. The only way to know how much food you can eat is to eat until you’re sick. Same for markets, which occasionally vomit. And we have to find that breaking point because until we find it there’s potential profit on the table, and market potential will always be tested. Put up a sign that says “There’s potentially a prize in this box” and someone will eventually open the box. Human nature.

The second has to do with volatility. If returns came at predictable times there would be no risk, because you could just show up, collect the prize, and go home. If there’s no risk, investors will bid up the price of an asset until there’s no reward, because free money on the sidewalk is always picked up. Then, once there’s no reward, the people who show up to collect their predictable prize realize they’ve been stiffed, so they get mad and storm off and the asset price falls. Which is to say: If markets weren’t volatile, prices would rise until volatility is triggered. Which is why there’s volatility, and always will be. As certain as death and taxes.

3. Intense debate about economic policy

In late 2009 the unemployment rate for African American males age 16 to 19 without a high school diploma was 48.5%. For Caucasian females over age 45 with a college degree it was 3.7%.

That’s the most extreme unemployment skew you can find. But the point is that when there’s such a wide disparity of personal experiences it’s very hard to get everyone on the same page about economic policy, financial goals, or philosophies around things like risk-taking and opportunity.

Some argue certain economic policies with bad faith, knowing they’re talking their own book. But more common and potentially more dangerous are those whose personal experience makes it hard to even fathom those who have experienced a different world, in a way that innocently makes their arguments oppose huge groups of other people. Empathy and putting-yourself-in-others’-shoes only go so far. Daniel Kahneman put it recently, “Anything you experience is so much more vivid than if you’re just told about it.”

This is not the case for something like, say, physics, which everyone experiences more or less equally. There are physics debates, down to the Flat Earthers. But they aren’t as widespread or passionate as economic debates, which can rival religious debates.

There is an implicit feeling by many that if you can just get the other side to hear you out, listen to your story, look at your data, they’ll be able to agree with your economic view. That’s sometimes the case. But as long as people have wildly different economic experiences there will be wildly different economic views. As reliable as death and taxes.


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