It is a great honor to be back among my soon-to-be fellow alumni – UT economics grads. I am pleased that Dr. Dacy and Dr. Stahl invited me to return. You should all be proud, as I am, to hold an economics degree from this wonderful University.
I’m just off the plane from Singapore, where I taught microeconomics in a country run by economic principles, particularly the use of incentives. People in Singapore live and die by economics, and I mean that literally! For example, the entry visa states that the penalty for bringing drugs into Singapore is death. There is no equivocation. No “may possibly result in death after 15 years and 32 appeals.” This would weaken the disincentive. In case you’re wondering, I didn’t bring drugs into Singapore – not even an aspirin!
Singapore has lots of disincentives for doing bad things, all with clearly-stated penalties. There is a $500 fine for littering, a $1,000 fine for bringing a durian (a smelly tropical fruit) onto the subway. Dashboard transponders charge you a nickel a minute to drive into the center city and this fee jumps to a quarter a minute during rush hour. To discourage smoking, they have no wimpy US warnings like “smoking could possibly increase your time in the triathlon.” Instead they charge $12 a pack and the front of every pack must have a color photo of someone actually dying from the use of cigarettes. It’s gruesome …but effective!
There are positive incentives to do the right thing as well. These include huge and progressive tax rebates for having 2, 3 or more kids to fight an aging population. I have been told that if you have 4 kids, you never have to pay taxes again.
To encourage the social integration of people with different ethnicities, every government-subsidized apartment building must match overall Singapore demographics -- about 70% Chinese, 20% Malay and 10% Indian. They figure that if children with different backgrounds live and grow up together, they will get along together as adults. This is a powerful incentive since apartments that are not government subsidized cost an average of $1.5 million. Finally, to preclude corruption by government officials, cabinet ministers are each paid more than $1 million per year.
Singapore proves that economics works! Singaporeans are hard working, highly educated, productive people with a per capita income nearly equal to that of the U.S. and a much higher growth rate. See, you actually studied a useful subject! Tell that to mom and dad who wanted you to study art history or philosophy or something that could help you get a job.
Short of using the extreme incentives of Singapore, how can we get Americans to do the right things for themselves? To not overburden themselves with expensive credit card debt, to read and consider mortgage contracts before signing them, to save for retirement in a way that will let them retire.
When I studied economics, right here at the University of Texas, we were taught that consumers were rational and, if not knowledgeable, knowledgeable enough to know what they didn’t know. These days, behavioral economics teaches us that we’re not fully rational. We get fatter if our dishes at home are big rather than small and we won’t get rid of our stock losers because they are only “paper” losses until we sell.
More recently, studies have shown us that most folks are not financially literate enough to avoid making huge personal financial “mistakes.” The “silver bullet” crowd says let’s mandate the teaching of personal finance to all high school students to solve the problem. Unfortunately, seven national studies that I’ve conducted show that financial education doesn’t work. Kids have no incentive to retain information about financial products, such as home mortgages, that they won’t buy for 10 more years and which won’t look anything like those offered today.
Financial education works no better at the workplace where only the nerds (like us) show up for retirement seminars. My 2008 college survey shows college grads, regardless of area studied, are pretty financially literate. It is the other three quarters of the population that we must worry about, and they hate going to class.
Behavioral economics says more people will save for retirement if they are automatically enrolled in a 401k or IRA and have to opt out than if they have to opt in. However, risk-averse workers will still choose safe, low-return investments, even over long holding periods when stocks have always outperformed bonds.
This is why I created RS+ (real savings plus) with my colleagues at the Aspen Institute, to provide a low cost guarantee of real principle (contributions) with huge upside potential through investment in stocks. RS+ uses only TIPS (Treasury Inflation Protected Securities) and index ETFs to provide no risk and low cost to workers and no cost to our strapped government.
I am happy to be able to use the sophisticated tools of modern economics and finance to give back at the end of my career. I started life by trying to build wealth, which turns out to be a very smart life cycle choice for a young person. Recent articles in the economics journals explain the life-cycle hypothesis by pointing out the advantages of borrowing to invest when you are young. As Dr. Dacy, my dissertation supervisor, mentioned in his introduction, I started the first lecture note business at UT while I was a doctoral student. I sold it in 1968 for $16,000 which doesn’t seem like a lot of money.
The other day I calculated that, invested at the average S&P return over the period, $16,000 is worth nearly a million dollars today. In fact, compound interest is so powerful that money put aside for your retirement when you are 25 is worth 23 times the same amount put aside when you are 55. Parents, if you lend your children $10,000 to invest in their 401k or IRA now, they will be able to retire comfortably without putting aside another penny for their entire working lives.
On a personal note, I came to UT after I flunked out of the Peace Corps. Since I was such a failure at peace, I decided that I might as well try war, and was hitchhiking across America on my way home to become a Coast Guard officer in Viet Nam. The weather got cold in New Mexico in November so I stopped in Austin to visit a friend and warm up. I observed so many beautiful young women (wearing shorts) that I changed my mind again and decided to try making love instead of war. That worked -- and as a result, I am back here today with my wife, Nancy and my daughter, Alexis, both UT alums, both undergraduate economics majors.
The UT economics program has done very well for me and I sincerely wish that all of you enjoy as much success from your educations here as I have. Thank you.