Reality Two: Many, Probably Most, Baby Boomers Already Blew It.

Social Security Reform: Time has run out

The “it” in the heading is “traditional retirement” where income comes from the proverbial three legged stool of retirement planning: 1) Social Security, 2) a retirement program (pension, IRA, 401(k), 403(b), etc.), and 3) savings (home equity, investments, etc.). 

Among social scientist there’s a lot of chatter about whether baby boomers will redefine retirement by opting for alternatives to traditional retirement.  In the media it often surfaces as a positive trend called the “second acts,” meaning a second career built on volunteerism, hobbies, or neglected interests.   It surfaces as a negative in articles like “Aging and Broke, More Lean on Family” about boomers who become a “burden” on family.  Other articles focus on budget problems that surface when the burden is shifted to strangers (a.k.a. the public).  The truth is that retirement HAS to be redefined.  By not planning for retirement, baby boomers are just forcing the issue, but ultimately it is life expectancies that are creating the change.

For boomers the dye has already been cast. The posting entitled “Now We Know Who the Rich Are” mentioned the foolishness of trying to find someone who can compensate for this failure to face reality. 

Collectively, all the options used to support retirement come up short.  They can help some people, but no amount of redistributing benefits can overcome the deficiency.  Boomers’ total contributions to and earnings in pensions, social security, savings, IRAs, 401(k)s, etc. aren’t enough to support their retirement (i.e., traditional retirement).   There are too many of them, and they are living too long.

The posting, “The 99%ers: Part 5,” illustrated the folly of ignoring employer pensions and health insurance benefits.  But, one doesn’t have to be an expert to know that pensions are largely a thing of the past.  Most of us experienced it firsthand.  The defined benefit pension was the first retirement approach that failed under the stress of greater life expectancies.  Baby boomers may be the last generation where pensions spare some portion of retirees from the consequences of the appeal of not planning.  But, as a generation, pensions are far from a solution for boomers.

“The 99%ers: Part 7” cited some articles (e.g., “US Wealth Gap Between Young and Old Is Widest Ever”) that indicate some encouraging information.  Interestingly, some of the articles about the phenomena greeted the news that some people actually save over time as if it were a class issue.  By contrast, “Oldest Baby Boomers Face Jobs Bust” by  E.S. Browning  (WALL STREET JOURNAL, 12/19/11) presents a starker picture by focusing on a specific demographic, the same age group addressed in “Retirement CrisisCloses In on Baby Boomers” by Tom Brown (Yahoo Finance, Reuters).  

Here’s the picture the Browning article paints; “The median household headed by someone aged 55 to 64 has $87,200 in retirement accounts and other financial assets, according to Strategic Business Insights' MacroMonitor database.”

“Financial planners often advise that retirement resources be large enough to provide 85% of a person's working income. Median households headed by a person aged 60 to 62 with a 401(k) account have saved less than one-quarter of what is needed in that account to live as well in retirement, according to Fed data analyzed for The Wall Street Journal by the Center for Retirement Research at Boston College.”

Keep in mind these quotes are providing data about people who were offered a retirement plan.  What do you think the picture would look like if those who worked for employers that didn’t offer a 401(k) were included?  It would be even worse.

From a policy perspective it shows that, at least as far as baby boomers are concerned, the joys of escaping responsibility for planning were decisive.  They overwhelmed retirement policies based on voluntary actions by individuals (either collectively through employer pension or individually through IRAs and 401(k)s).  Collectively pensions are often underfunded and are a very expensive way to invest.  Individually, (as shown in “Investing PART 5: Oldies: When looking back is most valuable” for IRAs and “Investing PART 6: Perhaps some seasonal music” for 401(k)s) the problem isn’t that the programs couldn’t work.  Combining the two programs could support a decent retirement plan.  However, positives like tax deductibility of most IRAs and 401(k) contributions, deferred taxes on all IRAs and 401(k)s, and potential employer matches just weren’t enough.   The ease of not planning won out over STRONG positive immediate financial returns.

The spreadsheets associated with those postings on investing PART 5 and PART 6 can be used to illustrate that increasing savings now is unlikely to be a total solution for most boomers, although it will help those who have already started.  Maxing out every available benefit would help, but the Browning article highlights another response   “… it also means that people are working longer, because they cannot afford to leave the workforce and lose much needed paychecks and benefits.”

The Brown article highlights the same response: “Older Americans are already clinging to jobs at the highest rate since before Medicare - the federal health insurance plan for the elderly and disabled - was signed into law in 1965.”

“According to Labor Department statistics in an EBRI report, 31.5 percent of Americans aged 65-69 were still in the workforce in 2010, compared to 21 percent in 1990. Of those aged 70-74, 18 percent were still working in 2010, up from 11 percent in 1990. Labor Department (BLS) statistics also show that the workforce of people 65 and older nearly doubled in the last 20 years, rising to 6.7 million in 2010.”

An analysis reported on Bankrate.com found higher portions were still working.  The report states, “MetLife found that 45 percent of 65-year-old boomers are now fully retired….” and “Another 14 percent say they are officially retired but working part time or seasonally.”  Interestingly, the author somehow reached the conclusion that, as the title implies, “Boomers calling it quits by 65,” despite the fact that less than half have fully retired.

The boomers’ response of continuing to work may be the only realistic response to Reality Two: Most baby boomers already blew it.  Social Security reform needs to accommodate, even encourage, longer careers.  At a minimum, it should immediately remove all disincentives and penalties for working while receiving benefits, especially for the most productive members of the labor force.  We need their output to support the consumption that the system supports.

Reality One: Face It, Not Planning Is Easier.

Social Security Reform: Planning is a pain

Those who don’t plan for the future get the future they planned. However, they avoid the perils of planning. 

By not planning for retirement, people avoid the hassle of thinking ahead.  They get the hollow satisfaction of “spending ‘til they’re broke.”  They avoid the frustration of inevitably discovering weaknesses in their plan and having to adjust.  Planning for lengthy, twenty-first century retirement isn’t easy.

By contrast, the Social Security Administration updated their projections this May.  The update anticipates that the existing plan will support current benefits for fewer years than previously thought.  They, fortunately, don’t avoid the need to plan.  But, as will be discussed in the next few postings, they avoid addressing the important realities that determine whether Social Security is a realistic program or just a square peg we can fit into a round hole for a few more election cycles. 

Social Security is a part of retirement planning.  Now that upsets many liberals who want to use it as a method of redistribution.  It also constraints libertarians who want to get government out of the retirement-planning business.  Not surprisingly, neither extreme gets much support since everyone who has done any retirement planning starts by estimating what roll “their” Social Security payments will play.  So, how people plan for retirement is an important reality Social Security reformers need to consider.

What are elected officials doing instead of addressing the reality of the pleasure many people derive from unplanned behavior?  They too are avoiding serious planning.  While Romney is willing to propose some tinkering around the edge (e.g., inflation adjustment, retirement age, etc.), Obama’s clear message is he’ll attack anyone who dares to interrupt the joy of not planning. 

Social Security reform should take into account the benefits of not planning.  That may seem like an impossible task, but it’s not.  If it were impossible, the appropriate response would be to give up on the concept of social insurance. 

The retirement plan we seem to be pursuing is to ignore reality.  Instead we continue to pursue a fiction that will eventually end in failure.  Telling people they need to plan would be a good first step.  Yet, if positive incentives like tax deferrals on retirement plans can’t overcome the joy of not having to plan, advice isn’t going to do it.  It would, however, reflect, perhaps encourage, some responsible behavior on the part of politicians.  It would get in the way of those planning to run on the “don’t bother to plan, we’ll make others support you” rhetoric. Class warfare rhetoric is so much more appealing than even the most obvious truth.  Giving up the rhetoric is a small price to pay if it results in a realistic view of the problem. 

So, face it: not planning is easier, but it doesn’t work.  There is no reason it has to be that way. Just acknowledging the reality is an important first step.  There is ample research documenting that planning an activity can often be more fun than the activity itself.  Vacations are a well-researched and an often-cited example.  All that is required is the realization that without a plan the activity won’t occur.  Since Social Security isn’t and never was an adequate retirement plan, stop promising what can’t be deliver.

Social Security should have disclaimers just like other retirement products.  It should start with an acknowledgement that it doesn’t provide for retirement.  It’s a social insurance program not an individual retirement plan.  Social Security, including old age and survivors’ benefits and disability insurance, are good social policy.  However, to be viable as a retirement plan, Social Security would have to provide for the production of the goods and services consumed during retirement.  Currently, it pools risks but doesn’t generate the output retirees and the disabled consume.  Pooling risk, although useful, doesn’t satisfy society’s desire to support the old and disabled.  It’s a risk reduction plan, and an effective one, but it’s not a retirement plan.

Social Security Reform

Let’s get real

Of our entitlement programs, Social Security should be the easiest to fix.  So the issue is timely.  When one looks closely at this program, one realizes it is based on political/social thinking from the last century.  In fact, the basic structure of the program hasn’t been changed since it was enacted over 75 years ago in 1935.  Not surprisingly, it is very out of date. 

Consequently, the greatest risk we face is not taking a serious look at how the program can be made viable in the twenty-first century.  Rather, we may just do the easy, quick fix instead.  A quick fix is likely because the program is extremely popular and has historically been successful at addressing an important need.  However, its very success argues for serious reform that will preserve its benefits.

The quick fix would be unfortunate.  The program ignores many twenty-first century realities.  It’s worth thinking about how Social Security can respond to those realities.  It is then that the irrelevance and shallowness of the current discussion become apparent.  The realities aren’t even being discussed, and reforms that are suggested by reality are radically different from what is being discussed.

A series of postings on Social Security reform will follow.  Because the issues the suggestions address totally depend on the importance of addressing reality, the postings start pointing out the realities that need to be addressed.  Only then are suggested reforms discussed.

Throughout the series of postings there will be references to data.  The references will be from coverage of research rather than the source research.  The coverage is generally more accessible.  Some of the source data is in proprietary research reports.  Some is in rather boring government documents.  However, the big benefit of using the reports is that they provide any interested readers with examples of how others are viewing the same information and frequently overlooking the important implications of the very data they are reporting.

The Fracking Debate Would Benefit from Logic

But we may need to teach reasoning skills

Let’s have Dr. Spock look at the debate.  He doesn’t get to decide the issue.  We just give him a cattle prod and let him zap those who get illogical. 

First let’s address the structure.  The Federal government is about to set rules for drilling on Federal land.  No problem there, but get the prod charged up. 

The Federal government seems to be gearing up to set a standard that will apply to all Federal land.  ZAP!  That makes no sense.  In some areas groundwater, which is what the rules are supposed to protect, is an important resource. In other areas, groundwater is not so important.  Geology isn’t vanilla.  The risks and impact of fracking varies with geology.  So should the regulations.

Further, in some areas other issues, like the use of surface water, may be more important than the risks to groundwater.  What is important isn’t the same on all Federal land. Also, there is no logical reason that regulations that protect groundwater would not be damaging to other concerns like surface water supply, carbon emissions, or economic growth.   They might or might not be. It’s an empirical question not a logical one.  Witness how dams create other environmental issues. It is logical to regulate what is important.

Keep that zapper handy.  Now we’ll look at lobbyists’ positions.  Let’s start with the Natural Resources Defense Council.  They state that they think that the Interior Department should have strong rules that “should not be weaker than what any state has on its books.”  They get a double for that statement. ZAP! ZAP!  One zap for the failure to distinguish between optimum and maximum. Logically they are saying they don’t want the best regulation (unless it’s the most). They get a second zap for applying maximization where it doesn’t apply.  One can’t assume that it is possible to have “strong rules” across diverse situations.  What is strong in one situation isn’t in others.  A single approach can only maximize uniform situations. They’re saying they don’t want the strongest rules for some situations unless that set of rules is strongest in all situations.  Never mind whether strongest is best.

But it doesn’t stop there.  Environmental groups say hydraulic fracturing should be stopped until experts can confirm it is environmentally safe.  ZAP!  The U.S. government hasn't produced any evidence that contamination occurs.  But that doesn’t mean damage couldn’t occur.  It is impossible to prove a negative. It is illogical to expect the impossible. 

Companies say state officials are in a better position than federal officials to regulate hydraulic fracturing because they understand the local geology and community concerns. That gets the same zap as the idea of a Federal set of rules.  Geology is no respecter of state boundaries. Groundwater flows.  But, it’s a lowercase zap because at the state level interstate agreements are possible. 

We have authorities for river basins.  If groundwater really were the concern, someone would raise the suggestion that we at least consider a similar approach for groundwater.

Energy experts say the new rules could serve as a template for States, and many people expect the rule for Federal land to become the model for a standard for natural-gas wells on all lands.  ZAP!  Federal land is almost by definition different -- different population densities, different ecological systems, often unique geological formations, etc.  It has different property structures by definition.  With Federal land, the government is saying how its land can be used.  On other land, the government is saying how other people can use their land.  The rules should only be uniform if property rights don’t exist. 

Often the issue arises around conflicting property rights: the private property rights of well owners specifically the rights of the owner of the water well verse the rights of the owner of the natural gas well.  It gets interesting when the government ventures into areas where they don’t own all mineral rights.  In many areas, groundwater protection involves protecting a private property right to a good that the owner often paid nothing to get, well water, verses a good that the owner bought, potential natural gas well output.  So, one is often a right to a good that the water well owner values because it is free while the other is often a right to a good for which the natural gas well owner will pay royalties.   It’s hard to imagine a one size fits all solution to such varied situations.

Spock, of course, would point out that the zapper itself is illogical.  Negative reinforcement is so much less efficient than positive feedback.  Incentives work.  People, however, are illogical.  So, a game that punishes deviations from logic comes close to being trapped by “It is illogical to expect the impossible.”  Those who expect fracking rules  that are logical will get zapped, but not by Spock.

Is a Vote for Obama a Vote for Inequality?

Lies, damn lies, and statistics

Two truths provide endless entertainment.  First, we all should know politicians are masters of using statistics to distort the truth.  It’s fun to watch, but it’s sad that so many voters don’t see through it.  The fun is trying to determine which politicians are good liars and which are so stupid that they believe their own lies.  As voters, we have to decide whose lies are most destructive.  Personally, who is more destructive seems more important than who’s the bigger liar. 

Second, journalists can be equally entertaining when they have to deal with numbers.  It’s easier to forgive journalist.  By definition, their expertise is words not numbers.  When a politician dismisses the trillion dollar deficits of the current administration as nothing different from the hundred billion dollar deficits of the last administration, one can forgive journalists for not noting the dollars to dimes difference on order of magnitude.  So, regardless of whether one thinks the differences are justified, it is foolish to look to the media to help one assess the difference.    

However, as with politicians, one has to wonder whether it is ignorance or intent that distorts journalistic endeavors.  It does become annoying when one suspects a supposed reporter is editorializing. It’s a major failing of our journalism schools that they don’t teach the difference between the editorial pages and the news pages.

“All well-and-good” you say, but what does that have to do with whether a vote for Obama is a vote for income inequality.  Simple.  Let’s turn to “lies, damn lies, and statistics” as it is reported by journalists and used by politicians.  A recent example is an article entitled “Wage Divide Grows Wider” in the April 18, 2012 print WALL STREET JOURNAL or “Workers' Pay Divide Persists” online.

The article starts out saying “The gap between America's highest- and lowest-paid workers is widening.” It cites: “Labor Department figures released Tuesday show that between the end of the recession in mid-2009 and the first quarter of 2012, earnings of Americans at the top—meaning those who earned more than 90% of all workers—rose 7%, before adjusting for inflation. During the same period, wages of those at the bottom—meaning those who earned less than 90% of all workers—rose 2.5%.”  

“Mid-2009” on!  That is Obama’s show any way you look at it.  There wasn’t an opposition at the Federal level worth mentioning until the legislatures elected in 2010 were seated the following year.  Even then it was only one house of Congress.   So, based only on the data, Obama is promoting income inequality. 

Alas, the truth is that most class warfare rhetoric about income inequality is just noise made to appeal to a constituency.   Nothing illustrates that better than the fact that Obama has made the gap between top and bottom a theme of his re-election campaign. To quote his State of the Union: "We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot."  Talk about hypocrisy.  Create inequality with a massive “stimulus,” then rail about it as if you would do something about it.  That’s the “lies.”

The article goes on to note: “That pay difference predates the global financial crisis: Between 2003 and 2007, wages grew 12.9% for high earners, compared with 8.4% for the lowest-paid 10% of workers.”  Those who keep score on a political basis might find it interesting that during the Bush recovery the bottom 10% did a better job of keeping up than during the Obama recovery.  The difference wasn’t small either. Under Bush the growth rate for the bottom 10% was about two thirds of that for the top 10%.  Under Obama it was one third.  The interesting thing is that since high incomes tend to grow faster during expansions, Obama’s failure to stimulate economic growth should have produced a convergence of income growth rates relative to the better economic performance under Bush.  That’s the “damn lies.”

But, it is just the beginning of “lies, damn lies, and statistics.” Why does the article ignore 2007 until mid-2009? The answer is because the writer isn't reporting meaningful data. Starting out with an agenda and finding data to support your conclusion is not quality reporting. Upper incomes are more volatile as in high beta wealth. By ignoring periods of recession the article turns the tendency of upper incomes to fluctuate most over the economic cycle into what looks like a trend.  That’s the “statistics.”

There are at least two unfortunate consequences of this game of “lies, damn lies, and statistics.” First, the game can be played while ignoring the volatility of incomes.  One suspects it is intentional. Politicians find it convenient to promote the notion of a plutocracy in order to support their class warfare substitute for serious thought.  Sort of a “keep ‘em stupid and in their place” approach.  

Reporters can avoid reporting information that would challenge peoples’ preconceptions.  Reporting news is much easier if the news isn’t unfamiliar.  Besides, avoiding things that are unfamiliar is easier for the mentally lazy. 

That it leads to stupid decisions is just an unfortunate side effect.   What if income gains for the poor and middle income groups can only occur when the upper income tail of the distribution goes up more?  (For the math geeks, what if the median, kurtosis and skew are all dependent of the same variables?  After all they are all a part of the same distribution).  It doesn’t decide any issues, but it’s worth knowing.

Second, we avoid addressing or even discussing the important issue of mobility and opportunity.  Scott Winship of the Brookings Institution is quoted in the same article as finding that “there aren't signs of weaker social mobility between the poor and the middle class over the past 60 years.” 

There is data relevant to mobility.  The best data is longitudinal data that tracks incomes of a large sample of people over time.  Follow up surveys and personal historical reconstructions have also been used to address the issue. My impression is we know mobility hasn’t changed a lot, but we are measuring with a yardstick.  That’s fine unless inches have major social implications.  What if inequality can only be reduced by eliminating mobility?  What if minor changes in mobility have major implications for the stability of a society?

Can a Controversy Exist If Only a Referee Participates?

Truly a head scratcher

One would think a controversy would require some new disagreement between people besides the referee. Evidently not. Seems the JOBS Act has created a controversy without new contesting opinions. Let’s start with a little background. The WALL STREET JOURNAL reported on April 12, 2012 (“JOBS Act Jolts Firms to Action”) that “Two companies have submitted confidential plans for initial public offerings under the JOBS Act that was signed into law last week, an indication that some firms and their backers are moving quickly to capitalize on the controversial measure.”

What’s the controversy? As always, there are those who might buy and those who might sell. Is that the controversy? One has to hope not. That is a market. There are people who participate in new offerings and people who don’t. Is that the controversy? Hardly. That’s true of any market unless the government enacts a mandate that everyone participate. Beside, as we saw when the government tried to open up IPOs during the tech bubble and then restrict IPOs when their actions backfired, it is dangerous to try to manage market participation.

One of the absurdities of those who want to report a controversy is what they use to justify the notion. One provision of the JOBS Act is that certain companies can file draft registration statements for their IPOs on a confidential basis for review by the SEC staff. Before it had to be made public in an initial filing, usually made several months before an IPO is actually priced and completed. The JOBS Act allows qualifying companies to postpone public disclosure of such information until 21 days before they launch a series of "roadshow" meetings to sell the IPO to investors. Because such meetings usually take about 10 days, the result is that investors may only have a month to scrutinize disclosures instead of three months or longer. That time difference is the great controversy.

To support the contention that the two month difference is controversial they use the example of online coupon company Groupon Inc. Groupon revised the first quarterly financial results it reported as a public company. It discovered that executives failed to set aside enough money for customer refunds. The changes reduced fourth-quarter revenue and widened its loss.

Alas, you respond, “Don’t companies that have been public for decades have to revise financial results?” Yep! “Didn’t Groupon go public under the rules that existed before the JOBS Act.” Yep! You got me again. Fact is Groupon is totally irrelevant.

Will some people lose money investing in the IPOs made possible by the JOBS Act? For sure. Hopefully, that’s not controversial. It’s true of all investments. No matter how good an investment is, someone will figure out a way to lose money on it. Investing is risky. IPOs are particularly risky, and most investors should avoid them. No regulation can change that. They can have a roll in a diversified portfolio, but as has been argued in previous postings, angel investing is probably a better portfolio fit for many investors.

The JOBS Act shouldn’t be subjected to contrived controversy based on the referees’ aspirations for power. Startups are too important to be made the political football of power hungry regulators or their mouthpieces.

Predictions: Win Some, Lose Some.

So what if it’s not January.

The last posting, “Investing PART 15,” mentioned that volatility this year would be different from last year. The difference affects the return on the investment strategy discussed in that posting. The logic: One of the factors determining option prices is volatility. So far this year, volatility has been more like the second half of 2010 than 2011. Thus, it seems the prediction that volatility this year wouldn’t resemble 2011 has been borne out, and it has affected the return on the strategy. Nevertheless, the nickels are still there to be picked up.

My second fearless forecast looks more questionable. Logic would suggest that sometime this year financial economists should recognize that the concept of (and purported measure of) the risk-free rate of return is a joke. It seems logical since both the President and congressional leaders (of both parties) openly discussed defaulting on Treasuries. (Treasuries are the traditional definition of the risk-free rate of return). So, default risk is there. (If you think not, look at how the voluntary Greek rescheduling was structured. One has to be increditably naïve to think that the US government wouldn’t resort to the same sort of picking winners and losers. Just make it politically advantageous and it will happen).

Bernanke and other Fed official regularly debate when rates will rise. That will affect the price of existing bonds. So, interest rate risk is apparent. To argue there is no downgrade-risk is counter factual. The currency risk was highlighted earlier last year when we saw an international flap over the currency impact of Fed policy. In the April 1, 2010 posting on this blog, “Beware the risk-free return,” other risks were discussed.

Yet, financial economists persist in misinterpreting risk in order to defend the theoretical edifice they’ve built. This blog has often pointed out how that theoretical structure yields some very useful ideas that can be employed to increase return and reduce risk. However, keep in mind that the mathematics of the structure are often employed to fabricate a quantitative precision that just doesn’t exist in the real world of investing. More importantly than false precision, the edifice is misleading investors regarding risk.

To illustrate, the ECONOMIST (3/17-23/2012) had an article on the spread (i.e., difference in returns) between stocks and Treasuries (“Shares and shibboleths: How much should people get paid for investing in the stock-market?”). The spread is known as the equity risk premium. The article first discusses before the fact verses after the fact risk assessment. That investors are sometimes wrong isn’t a very enlightening explanation of the spread. Then the article provides the following very traditional definition:

“Another explanation for the high returns is a paradoxical one: that equities have become less risky.”
“The first step is to define the equity risk premium more exactly….break it down into the following components: the dividend yield, plus the real dividend growth rate, plus or minus any change in the price/dividend ratio (the inverse of the dividend yield), minus the real risk-free interest rate.”

This is all well and good EXCEPT that the conclusion that equity risk is the total explanation is wrong mathematically and factually.

Mathematically the spread is the difference. It is wrong to attribute a difference to the value of only one of the two numbers that generate the differences. The math is wrong if one focuses just on the risk in equities. One can’t solve a - b = c and d - e = f and c > f for a, b, d, or e. The equations say nothing about the relationship between a and d. Just assuming that b = e is a copout. The result is simply a restatement of the assumption.

Factually, 1) Treasuries have been downgraded from their almost default risk-free status. But, even when Treasuries where triple A, there was always some default risk. 2) Short maturities reduce but do not eliminate interest rate risk. 3) Especially since, as implied in the WALL STREET JOURNAL (3/26/2012) article entitled “Treasuries Pile Up With Dealers,” the assumption of perfect liquidity is violated. When dealers have to accumulate Treasuries beyond levels they require in order to maintain a liquid market, they are creating the illusion of liquidity by suppressing price discovery. The violation of the assumption of market liquidity should be the nail in the coffin of risk-free return nonsense. Risk-free without market liquidity that supports price discovery is a contradiction. As Spock would say, “that is illogical.”

In short, Treasuries have risk and a change in the level of that risk is an equally logical explanation for changes in the equity risk premium. Investors would be well served if financial economists would sacrifice their quantitative precision and actually address risk.