Guest post by Richard Berner, Executive-in-Residence (Center for Global Economy and Business) and Adjunct Professor, NYU Stern School of Business
America faces two interrelated long-term challenges: rising longevity and inadequate retirement saving. The combination of declining private, defined-benefit pension plans and concerns about the viability of federal entitlements has intensified these challenges. While the economic recovery has raised confidence about retirement resources at the margin (see here), workers and retirees remain concerned about how they will meet future basic expenses, medical needs or the cost of long-term care.
Those developments mean that achieving saving goals increasingly must rely on individuals’ thrift and intelligent, efficient investing. Tax-advantaged vehicles that encourage saving (like 401k and IRA accounts), and efficient investment vehicles like mutual funds that follow market-wide stock price indexes are cornerstones of that system.
Yet, some scholars of industrial organization claim that collective investment vehicles―mutual funds, exchange-traded funds (ETFs), and the like―involve “common ownership” that results in softened competition by the firms included in their portfolios (see here, here and here). And, key antitrust enforcers, like the European Competition Commissioner, are looking carefully at this issue. In this post, I argue that the evidence for a causal link between the rise of collective investment vehicles and diminished competition is weak, and far from sufficient to justify interventions that would diminish the attractiveness of these saving mechanisms…. Read More
Gross government debt in advanced economies has surpassed 105% of GDP, up from less than 75% a decade ago. Some countries with especially large debts—including Greece (177%), Italy (133%) and Portugal (129%)—are viewed not only as a risk to the countries themselves, but to others as well. As a result, policymakers and economists have been looking for ways to make it easier to manage these heavier debt burdens.
One prominent suggestion is that countries should issue GDP-linked bonds that tie the size of debt payments to their economy's well-being. We find this idea attractive, and see the expanding discussion of the viability of GDP-linked bonds both warranted and useful (see here and here). However, the practical issues associated with GDP data revision remain a formidable obstacle to the broad issuance and acceptance of these instruments.... Read More
At least since Harry Markowitz’s work in the 1950s, diversification has been viewed as the key to an efficient portfolio that minimizes risk for a given expected rate of return. When James Tobin received his Nobel Prize in 1981 – in part for his work on the subject – he summarized portfolio selection theory in the classic fashion: “don’t put all your eggs in one basket.”
Over the years, academicians and market professionals extended this fundamental principle to the global asset universe, highlighting the benefits of going beyond simply holding a broad group of domestic instruments to the idea of international diversification. In the case of equity portfolios, they also observed that people typically hold a smaller share of foreign stocks than simple portfolio selection models prescribe. This gap between actual and model-based optimal allocations of equity portfolios has become known in finance as the equity home bias puzzle. Read More