Risk and Safety, in the Economy and Life

Last month, to mark the publication of Allison Schrager’s new book, Worth the Risk: The Seven Myths That Keep Us from Taking the Chances We Need to Take, the Manhattan Institute hosted a discussion between the author and Cliff Asness, founder, managing principal, and chief investment officer at AQR Capital Management. The following is a lightly edited transcription of their conversation.

CLIFF ASNESS: Let’s dive right in. As we heard in the introduction, you’re an economist who won’t ski and who won’t ride a bike in a city, and you’ve written a book telling us all that we should take more risk. How did that happen?

ALLISON SCHRAGER: Well, I guess, during the pandemic, it struck me how much we kept hearing the word “safety.” And as you know, we’re both financial economists, safety has a very special meaning in finance, and the value of safety changes over time. I was like, wow, we really value safety a lot more than we used to. And I have my own risk aversions—I think we all do—and it dawned on me that we’d really had this big change in our relationship with risk, and that we’d become much less tolerant of it. That coincided with zero interest rates, which got me thinking about doing another book—after the last one, about how I think financial—

ASNESS: What was the title of the last one again?

SCHRAGER: An Economist Walks into a Brothel.

ASNESS: I just wanted to hear you say it.

SCHRAGER: We can talk about brothels, too, if you want.

ASNESS: I’m good.

SCHRAGER: So it just got me thinking about what safety is and how it’s changed. And then when I dug into the book, I became more aware of just how much safer the world had become, yet also how much more we were valuing safety.

ASNESS: You go through seven myths in the book. Let me jump right to the conclusion. If this audience were to take away one, what’s the most important?

SCHRAGER: I think one of the myths is that we’re always being told we’re bad at risk—that we have these cognitive biases. And the fact is—

ASNESS: We’d better have them, or I couldn’t make a living. But go on.

SCHRAGER: We’ve thrived as a species for thousands of years, and we’re actually very good risk-takers. It’s just that when the world changes—particularly shocks to wealth or technology—our understanding of risk can get a little unmoored. The other thing that surprised me is, like the last book, I didn’t go into a brothel again, but I like colorful people. A book’s an excuse to meet interesting people, like the mob hitman or the bounty hunter. I was talking to Nik Wallenda, the tightrope walker . . .

ASNESS: The tightrope walker without a net.

SCHRAGER: And he walked across Niagara Falls without a net. Or, I think they made him use a net; he’s Canadian, and he was really upset about it. And the Grand Canyon. We were talking about life on the wire, and how the Wallendas—this famous tightrope-walking family—all get together at their compound in Sarasota and play around on the highwire. Then he tells me he’s terrified of investing in the stock market—which is what we do all the time. And it occurred to me that, I think other people like to argue there are categories of people who are risk-averse or risk-takers, and I don’t think that’s true. Like me, I won’t ride a Citi bike, but we all have a domain of risk we’re comfortable with, and we understand how to manage that and feel good about it. It’s just that people, that domain has gotten a lot smaller. I think if we learn some basic things, we can all feel comfortable investing in the stock market. I’ll never be a high tightrope walker, but we can all expand the pool of what we take risk in.

ASNESS: I’ve had years where I’d much prefer to be walking a tightrope over Niagara Falls to what I do. What is “risk delusion?” I like the term.

SCHRAGER: Yeah. I think it’s what haunts our society now. It’s a very seductive idea that comes up in finance again and again. I think your crusade against private equity is a great example.

ASNESS: I’m not against private equity. I’m simply against them saying their values don’t move when the stock market moves. Let me be clear.

SCHRAGER: Exactly—that’s the risk delusion.

ASNESS: I invest in these things; I just assume they’re as risky as equities.

SCHRAGER: But that’s part of the delusion—that you can beat the market and get a higher return without taking on risk.

ASNESS: People want to be sold that.

SCHRAGER: Yeah. A lot of really smart, knowledgeable people invested with Bernie Madoff, and they’re like, “Oh, he can beat the market and I’ll never lose money.” As we’ve both been trained, the most basic idea underlying all of finance is that you can’t get extra reward without taking on some risk. People like you find a way to take maybe less risk than everyone else.

ASNESS: It’s still risky.

SCHRAGER: Yeah, it’s still risky. There’s no beating the market without taking on extra risk. But somehow people in finance convince themselves of this anyway—they should know better. I think it’s now become a society-wide epidemic.

ASNESS: So it’s leaked from finance into society—or the same thing is just showing up more broadly?

SCHRAGER: Exactly. It’s like when young people complain: “I did everything right. I went to the right schools, I had the right job, the right internship—but I’m not thriving the way I thought I would.” Yes, because you took no risk. You expected upside and got so little. And that’s one reason I’m convinced socialism is catching on—this is a generation a lot less comfortable taking risk. So when someone says, “I can create a world with total equality, no downside risk, I’ll protect you against everything—”

ASNESS: Cradle to grave. Cradle to grave.

SCHRAGER: But you’re still going to prosper? It doesn’t work like that.

ASNESS: Yeah, that’s the part they don’t seem to understand.

SCHRAGER: But it’s the same risk delusion that people in finance fall for all the time—even a lot of smart people, with private equity right now. I’m also not against private equity, but—

ASNESS: You really seem to be. I have to tell you.

SCHRAGER: No, I write about this all the time. I think it’s gotten too big relative to what it should be.

ASNESS: That’s fair.

SCHRAGER: And I’m uncomfortable with any asset class that grows on the pretense that you can beat the market and take less risk.

ASNESS: Go the other way, from risk—you define “safety” in fairly interesting ways. Can you share?

SCHRAGER: Yeah. I was thinking a lot about safety because we heard the word “safe” so much during the pandemic—go outside when it’s safe, we want to make sure everyone stays safe. I’m a retirement economist by training, and the safe asset—what Bob Merton would always say to me—is the numeraire. It’s the foundation of everything; it’s how you define risk, because we don’t have a unifying definition of risk. Some people think it’s a bad thing that happens; some people think it’s an upside. You have these two different definitions. But there’s one thing that risk is: it’s what safe isn’t. It’s the complement of safety. And what safety is, is really hard to understand, too, because it’s really idiosyncratic. What struck me about the pandemic is that we were shoving down everyone’s throat that there’s one safety: it’s not getting Covid. When, for other people, safety was that their children were getting educated, or for other people it’s that their business doesn’t get shut down. And so we all have our own version of safety. Even in finance, the safe asset is idiosyncratic to you, to what your financial goals are, to your investment horizon. We always assume it’s just a T-bill, and I don’t think people understand how important the risk-free asset is in finance—it’s in every asset-pricing formula, it really does define what risk is. And yet we always assume it’s the same asset for everyone, when it’s really not.

ASNESS: Yeah, I would agree with that. Ninety-eight percent of the papers will use T-bills as the risk-free asset, when in some cases you could say 30-year TIPS should be the risk-free asset. You have some cool evidence, using Google, of how the world’s perception of the words “risk” and “safety” has changed. Can you tell us about that?

SCHRAGER: Yes. It wasn’t my evidence. A group of researchers at Gerd Gigerenzer’s institute in Germany looked at Google—

ASNESS: We’re giving you credit, not the Germans.

SCHRAGER: Well, they sent me the data, and a very nice collegiate associate at Manhattan Institute helped me graph it, so we’re going to take credit. They looked at the usage of the words “risk” and “safety” over time, using books and newspapers. What you see is just that the association with the word “risk” was quite positive in the early twentieth century, nineteenth century, and then, starting around 1970, around the time of the Great Society, or maybe the derivation of Black-Scholes, whatever you choose—all of a sudden “risk” took on a negative connotation, and you see this real takeoff in the positive connotation of “safety.” That word all of a sudden gets used way more than “risk.”

ASNESS: Yeah, because risk is symmetric.

SCHRAGER: Yeah, and it is interesting how completely symmetric the risk and safety usage is just going like that.

ASNESS: Let’s talk about evidence. You make a strong assertion, with a lot of evidence in the book, that the world has gotten less risky. Can you give us a few examples?

SCHRAGER: I mean, obviously we’re not living in a world of cholera, and we live longer. I think everyone when they think about it kind of thinks that’s trivially true. But even in the last 40, 30, even 20 years—I don’t think people realize this, because we idealize the recent past. Certainly we idealize the 1960s. But if you look at wage variability—that’s how much wages go up and down. So if you think of your income as a financial asset, volatility would be how risky it is, how predictable, how volatile it is. It’s actually been trending down for everyone but the top 5 percent. This was actually kind of a shocking result. My Ph.D. dissertation, and the only thing I’ve ever published in an academic journal, was all about how retirement looks different because wages had gotten more variable—and everyone always believed that. This is like this huge myth that’s been going around, that workers have less security. It was because we were relying on survey data that turned out to be really faulty. It was a technological breakthrough that we were able to use big data, and when economists were able to look at Social Security records, which is perfect because you actually have to understand wage risk, you have go through someone’s entire lifespan, you can’t just look at aggregate populations year to year, which is what people usually do, you have to look at individuals and what happened to them—they found: oh my God, wages have never been more stable. And it’s trending down. It turns out the reason is that people change jobs a lot less frequently—because changing jobs is how you usually get a big wage boost.

So what we see is less volatility, which is great—everyone likes to know what their salary is going to be—but also less upside, so wages are growing less fast. There’s also evidence that people aren’t moving as much, aren’t forming businesses—even now, with the post-pandemic bump, people are still forming businesses less frequently and changing jobs less often. And then there’s all the evidence about teenagers not drinking, not driving at all, and all those sorts of things.

ASNESS: You make an interesting link—you mentioned the top 5 percent still have volatility in their wages— you make an interesting link to inequality. There are a lot of traditional explanations for inequality, but you tie it to risk. Can you take us through that?

SCHRAGER: Yeah—we’ve effectively shut lower-income people out of risk-taking, which I think we consider a great, noble thing. And it is, because they were traditionally more vulnerable to downside risk—if you only make $20,000 and you have a bad shock, that’s catastrophic. But it depends on how you structure benefits, and certainly since the Great Society we’ve been structuring benefits more like—you know, the difference between insurance and a hedge.

ASNESS: Take us through that.

SCHRAGER: Insurance is like a stock option, or fire insurance—if something bad happens, you get a payout. And so in the twentieth century we saw this growth of government benefits, and in the beginning it was very insurance-oriented—unemployment insurance, disability insurance—if something bad happened, you got a payout, and that was great. You could even argue, I’m not a big government person, but you could argue that’s the proper role of government: as we urbanized and industrialized, we faced more systemic risks.

ASNESS: Pool risk and insure.

SCHRAGER: And government is uniquely able to do that. So that was fine. And as everyone knows in finance, the picture you always learn in Finance 101 is that insurance maintains upside—you’re protected on the downside for a fee, but you still get the upside. A hedge is just taking risk off the table.

ASNESS: It narrows the distribution.

SCHRAGER: Exactly—it’s like investing more in the safe asset, whatever that is, and you lose upside. So what you see is policy, after the Great Society, becoming much more hedging-oriented. So you think, I once had an experience—the closest thing I’ve ever done to investigative journalism. Was it The Economist?

ASNESS: Did you wear a disguise?

SCHRAGER: I should have.

ASNESS: It’s not investigative journalism if you’re not wearing a disguise.

SCHRAGER: I dressed in sloppy clothes. And I went into a homeless shelter to teach financial literacy. I’m a life-cycle finance economist, financial literacy is my thing, I study it. I was curious to learn, and I discovered it’s incredibly difficult, financially, to be poor, in a way that I never really understood. My utility function is roughly monotonic with income—I’m happier the more money I make. And all these women—very smart, though I don’t think I was useful to them at all, because I had nothing to offer them, because being poor is so complicated financially and I knew nothing about it. But they’re talking to each other and giving each other really fantastic financial advice. And you realize they don’t have that monotonic function—if they make more money, they lose money, and their financial lives are so complicated, because there’s no incentive to take a risk. If they move for a better job, if they make more money, they lose benefits. So we’ve just effectively removed the downside protection, but then how do they get ahead?

ASNESS: I think of it as: there is an incentive, if you’re able to think, which is very difficult, incredibly multiperiod, because you can raise your situation now but not actually benefit, because you lose your benefits and eventually get to a different state of the world. But that’s a real leap to ask people to take. So how would you design it differently?

SCHRAGER: Well, things like the Earned Income Tax Credit are great. I think you want to make benefits certainly less tied to income levels—get rid of the income tests. Things like that, ideally in my perfect world.

ASNESS: Am I getting benefits in your system? I’m kidding—go on.

SCHRAGER: No—I think you should get Social Security if you paid into it.

ASNESS: That ain’t happening.

SCHRAGER: But ideally, in a perfect world, what we would do is not tie health insurance to employment. Yeah—that’s a big reason wages aren’t growing as much. We’re getting paid more in benefits, which I wouldn’t even call insurance, because people don’t think of health benefits as something they use only when needed. They expect all their regular, predictable care. It’s not really insurance, so they want to be paid in benefits, so it’s risk reduction, but they’re also losing a lot of salary for it.

ASNESS: Yeah. I think employer-supplied health care, and the tax subsidy to it, is one of the original sins of American health care. I think you’re exactly right. I also think the point you raised, that people are risk-averse about changing jobs, is a contributor, because they get locked in and are afraid to lose their health care.

SCHRAGER: You have a family, you want to start your own business, and you don’t have health care anymore. It’s game over.

ASNESS: The whole model you talked about—insurance versus hedging—that’s a hedging model. An insurance model would be catastrophic health risk, and I think that would be better for most of the world. Insure the true disaster.

SCHRAGER: Yeah, not to plug someone else’s book, but Amy Finkelstein, a couple of years ago—one of the most talented benefits economists—wrote out her vision for what health care should be: government-provided catastrophic care, and then you pay for your own health insurance without a tax deduction. It would be better.

ASNESS: It’s the closest thing to left-wing I’ll say but I kind of agree with that.

SCHRAGER: Well—no, they want Medicare for All. Hers would be more like Medicaid for all in the sense of a floor—it’s not the same thing.

ASNESS: That’s very different.

SCHRAGER: Yeah—I think what some like Abdul El-Sayed are promising is really Cadillac health care for everyone, which is not insurance.

ASNESS: Big broad question: by almost any measure, when economists or even pundits look at the actual data, things are actually pretty good.

SCHRAGER: Hmm.

ASNESS: I wrote a piece with Michael Strain of AEI called “Have You Heard the Good News?”—a little bit of a religious callout—going through all this, and many other people have too. And yet—I wasn’t around in the Great Depression, I’m getting old, but not that old—people seem angrier about the economy than I can remember. They say it’s broken, all the time. How do you square the circle?

SCHRAGER: I’ve been thinking a lot about this lately. Why do people think the economy is not working? Why do they think it’s broken when it’s delivered so well? I guess I’m still a neoliberal, although no one wants to say that anymore.

ASNESS: You don’t want to be a neoliberal or a neocon. Yeah, you don’t want to be “neo” anything. Pretty sure I’m one of those two. Can you be both? I guess you can.

SCHRAGER: But it worked amazingly well—not only did it bring more than 1 billion people out of poverty in other countries, it brought people a much higher standard of living in our own country. Capitalism worked—that was the deal. But I think we’ve all been shaken by the mayoral race here, wondering why people feel like we have to do something so extreme if this economy isn’t working for them.

ASNESS: You don’t subscribe to my theory that they’re just morons in New York?

SCHRAGER: I’m trying to be generous. Sometimes I’m pretty sure you’re right, but—so, they claim the economy is broken, it’s not working for them, but on paper it actually is—they’re still making more money than most people. . . . I think there’s also a misalignment between what people expect their twenties to be, economically. When I was in graduate school in my twenties, I had a $20,000 stipend, and yet I had very low expectations for what my living standard would be.

ASNESS: You had a bigger stipend than I did. I’m going to chalk that up to you being younger than me, and stipends going up. I get competitive.

SCHRAGER: Is it inflation-adjusted?

ASNESS: I don’t know. I’m not going to guess your age on stage. Let’s be serious.

SCHRAGER: Also, Hyde Park has a lower cost of living.

ASNESS: I was at Hyde Park.

SCHRAGER: That’s what I said, I was at Columbia.

ASNESS: That’s true, that’s probably it.

SCHRAGER: But I think part of the problem, other than, as I said, a misalignment of expectations, unrealistic ideas of what your twenties are going to be financially, is also that—I’m really worried about this generation because we’ve set them up to feel like, and this explains the enthusiasm for socialism, like they shouldn’t have to take risks. First of all, they weren’t raised to be good risk-takers. I think helicopter parenting ups the ante with each generation. I’m borderline Gen X/millennial, and people our age are obsessed with talking about how we had these feral childhoods—we drank from the hose, we were all hardcore—but we really weren’t. We were probably much more risk-averse than boomers, who were definitely more risk-averse than the Greatest Generation. So you get an increasing ratcheting up: each more risk-averse generation raises their kids to be even more risk-averse. I delved in to talking to neurologists and developmental psychologists about this—if you aren’t taking these risks as a kid. You know there’s this woman who just got arrested for letting her five-year-old collect feathers on his own, but this used to be very normal. What they call the “age of release,” when you’re allowed to be outside by yourself, used to be five, even a couple of decades ago.

ASNESS: Playing in front of your house.

SCHRAGER: Yeah. A psychology professor at Georgetown told me she asks her students when they were first able to be out on their own, and they say 14. The age of release has gone from five to 13 or 14.

ASNESS: You give the example of Japan in the book, where little kids wander around at five, alone, going to the store: that might be because Japan is a very safe place.

SCHRAGER: That could be, because they’re not known for being risk-takers in Japan.

ASNESS: Yeah. There are all these contradictions. Let’s talk about young people some more. You point out they drink less, work less, start fewer businesses—and yet, and this is maybe more male than female, just going by my own family, they bet on sports constantly. Square that circle.

SCHRAGER: I think that’s part of it. If you don’t take productive risks when you’re young—the stupid things you do as a teenager are actually a very important part of brain development, neurons form in your brain, where you’re betting on the Super Bowl, going into a little debt, is kind of dumb. If they didn’t have that experience, didn’t take healthy risks when they were young, then in their twenties they’re not good at gauging which risks are good or bad. I’m not someone who even goes to a casino, but some gambling can be okay in moderation if you look at it as entertainment. But they’re looking at it as an investment strategy—they don’t see the difference between that and an index fund, and that’s a failure.

ASNESS: One on average goes up.

SCHRAGER: Yeah, but they’re not able to make that assessment.

ASNESS: What I’ve said is that I’m fairly convinced that many of them cannot distinguish their FanDuel app from their RobinHood app. They’re just two different ways to gamble. One of them is a little better than the other but they probably don’t do too well at that, either.

SCHRAGER: And also, I mean, what we see, especially young men—not only maybe a lot of them not moving out of their parents’ homes, or taking the risk of getting into relationships, asking women out in person.

ASNESS: To be fair, that’s terrifying.

SCHRAGER: Especially now.

ASNESS: I did it once, I married her, it’s worked out.

SCHRAGER: So I think to some degree, the really big sports-gambling habit that takes over people’s lives might be their risk-taking outlet, because young men are wired to take risks. Evolutionarily, they are meant to be doing this.

ASNESS: So we have all these societal things and trends cramming safety, and this is the safety-valve outlet. Well, it hasn’t made the young men a lot of money, but it’s made someone a lot of money. Your Google Ngram evidence is very long-term, not recent—do you see a tie-in between your thoughts on risk and young people, and Jonathan Haidt’s work on technology? Is that an exacerbating force? Clearly not the main thing, since you show the trend goes back much longer, but is it part of it?

SCHRAGER: It’s definitely poured a lot of fuel on the fire. I argue there are two forces that change your perception of risk or safety: wealth and technology, and shocks to both make you feel very differently about what “safe” means. So it’s certainly one of the reasons we’re convinced the economy is awful and that neoliberalism failed—we see it on our phones constantly, we see that story all the time. Or we get hyped on terrible events, so we think the world is this incredibly dangerous place. So it’s certainly adding to that, but I don’t think . . . He’s more monocausal than I am. So I think it’s definitely exacerbated this trend, but I don’t give it all the weight.

ASNESS: Okay, that’s fair. Let’s talk about investing—near and dear to my heart. First of all, you open the investing section with a Tina Turner story. Tell us the Tina Turner story.

SCHRAGER: She explains everything. It is this idea we were talking about earlier, about what is a safe asset. What I always took away from the Tina Turner story, the movie, and the legend, is that when she left Ike Turner, she was already pretty successful. I think she was pushing 40 at that point, but she divorces him, she had four children to take care of, and in the divorce proceedings, she said, “I don’t want the money, I don’t want the royalties—I just want my name.” That struck me as her safe asset.

ASNESS: Legally he had some rights they had to negotiate over.

SCHRAGER: Her real name is Anna Mae Bullock, so that was the stage name, but she felt like the name was her safe asset. Not the fact that she had four children to support, and all this money. She was pushing middle age, and, like who’s going to become a pop star now? Like you would think that would be a declining asset, but she was like no, I don’t need the money, I just need my name. And then she had this career in her forties that was bigger than ever. So for me, that struck me how we don’t really understand what the safe asset is for everyone. It’s very idiosyncratic. It changes over time. It could be a T-bill, it could be a 30-year TIP, for some people it might even be an S&P index fund. It really is very unique to you, and if you don’t check in and know what “safe” means to you, you take the wrong risks—and you often feel a lot less secure taking risks and find out later that you weren’t protected when you thought you were.

ASNESS: One line you had that I absolutely loved—not that I didn’t love all of it—you call college “the most overpriced risk asset.” Now are you Peter Thiel level? You’re going to pay people not to go to college? Is it that people think it guarantees things it doesn’t? Is it the deterioration of what they’re teaching? Tell us about that.

SCHRAGER: It’s all connected. I’m not Peter Thiel-level—if you look at the data, if you go to college, odds are you’ll earn more money. You’re going to have more security. Unless you’re Peter Thiel’s child, most people want their kids to go to college. But the problem, where it all went wrong, is that we started assuming that because it does on average pay off, back when not that many people went to college, you could effectively go to college, study anything and get this huge wage premium. So we started treating it like a risk-free asset. That encouraged a lot of the subsidies, and people would take out any amount of debt thinking it’s a safe asset. It’s like if you think private equity always pays off, you can justify going into debt to lever up on it. So when you think something is a safe asset, there’s no amount you can’t borrow. And that also made colleges worse and less accountable, because they didn’t have to be price-sensitive, and they had seemingly unlimited resources to teach weird things.

ASNESS: And you have the Mark Perry chart where the price of college and various other government-touched assets, versus things the private world does are just different directions.

SCHRAGER: Totally. And it’s not to say it’s still not a good investment—I think it’s still a good investment—but it’s not risk-free, and it should be priced accordingly.

ASNESS: And what you said before—the notion that if you jump through the right hoops, you’ll automatically achieve things—that’s just not the way the world works.

SCHRAGER: No.

ASNESS: But a fair number of people think it is the way the world works.

SCHRAGER: Well, they’ve been told that. That’s the risk delusion again, that I think everyone wants to believe, but I think the younger generation has been fed more.

ASNESS: Now, when it came to investing, you had some specific proposals—it’s a mouthful, so I’m going to read it: what are “principal-protected, index-linked government savings accounts,” and why are they good?

SCHRAGER: Did I come up with that?

ASNESS: You did.

SCHRAGER: Principally-indexed—

ASNESS: “Principal-protected, index-linked government savings accounts.”

SCHRAGER: Oh yeah, yeah. So this would be—

ASNESS: I stumped her!

SCHRAGER: I forgot about that. I was thinking about it because it’s similar to the Trump accounts, which I actually—

ASNESS: That’s on my list to ask you about—the Trump accounts.

SCHRAGER: Initially, when I wrote the book, this was before the Trump accounts came out, and we were talking about giving individuals baby bonds. I was like that wasn’t a bad idea, but the Cory Booker way of doing it, and the Democrats way of doing it—it was originally a Democratic idea—was that they all had to be in safe assets. I thought that was so not the point—they should be in riskier assets, which I think it’s great that the Trump accounts are. But people argue, and this is a legitimate argument—there’s a big debate in retirement economics about whether lower-income people should be in risky assets, because if you lose the money, it’s a much bigger deal. If you have a more volatile salary, more volatile life events, and all these things. So when people propose giving accounts to lower-income people’s children, and ask whether they should be in safe assets, my answer is no—but if we’re worried about downside risk, we could give everyone S&P 500 puts along with these accounts; therefore they also have some insurance. Again—insurance, not hedging. That’s how I want policy to work.

ASNESS: So it’s mostly risky, while trying to take out some of the downside.

SCHRAGER: Exactly.

ASNESS: All right—shifting gears. How much of what you’re talking about, when it comes to recommendations, overlaps with the so-called abundance agenda? Feel free to rip Ezra Klein a new one.

SCHRAGER: You know I think where they go wrong, to me, I mean—

ASNESS: Well, let’s back up and explain.

SCHRAGER: Let me explain what I think the abundance agenda is, which might be wrong, but it’s my understanding of it. And maybe this isn’t generous, we have to get out of the way so government can do more, and we’ll get abundance from government.

ASNESS: So they’re half right about getting out of the way.

SCHRAGER: But I think they misunderstand risk—as if we can just get out of the way and government can give us all these things risk-free. I think the real abundance agenda has to embrace the idea that there’s no more without loss. I honestly haven’t read the book that carefully, it kind of gave me a headache—but from what I read, it’s sort of “we can have it all, without any loss, if we just let the government do more.”

ASNESS: Yeah—I read it as: Democrats do lots of stupid things, we should do slightly fewer. Which is good.

SCHRAGER: Yeah, that is good—a step in the right direction.

ASNESS: You had other fairly specific recommendations—some about taxes, some about Social Security. Tell us what we should do about these problems.

SCHRAGER: Well, again, I think we have to be thoughtful. I’m frustrated, having studied retirement as long as I have, with where the Social Security conversation is going—which is, “we’ll never have to cut benefits, all we have to do is get rid of the cap on earnings.” I’m always thinking: why is the largest marginal tax increase in peacetime history not a big deal? I think we have to think more carefully about targeted benefit cuts, some progressive tax increases—but again, it’s really this principle of thinking about insurance rather than hedging. Social Security to me serves an important function—when I think about how I want to structure retirement income, you want different tiers of risk, and Social Security does serve an important function in giving people a risk-free foundation to take risks on top of.

ASNESS: A lower bound.

SCHRAGER: Yeah, a lower bound—though it’s a very generous program for that. If you look at what Social Security pays out relative to other countries, it’s quite high for an income floor.

ASNESS: That’s not the popular perception.

SCHRAGER: No, everyone thinks they’re getting less than everyone else, but they’re actually getting a lot more. And it’s very expensive to do that. This is, if you read my Bloomberg column, I titled it—they changed it because it was too provocative—about how “hell’s frozen over” because the Germans are now putting equities in their pension plans, which I never thought I’d see, because they’re super risk-averse about retirement. But they’re realizing that with an aging population, you just can’t afford to fund retirement with low-risk assets. So the idea that our foundation from Social Security can be so large and risk-free is nice, but it has a tremendous cost that I don’t think people want to acknowledge.

ASNESS: Interesting. Were you right to turn down that staff job at The Economist?

SCHRAGER: Oh yeah. Oh god.

ASNESS: Tell us the story.

SCHRAGER: So—this must have been around 2010, and I was having a good time. It was great to be at The Economist during the financial crisis, because people would come in for lunch and I got to ask whatever question I wanted—Jamie Dimon, John Mack, it was great.

ASNESS: And the world’s pain was your gain.

SCHRAGER: Yeah, it was fantastic.

ASNESS: I didn’t enjoy it as much.

SCHRAGER: I had this nice, cushy job at the OECD, was doing some consulting, it was great. But a lot of people want to write for The Economist—it’s like the best job in journalism. John Micklethwait said to me, “What do you want from us?”—because I was kind of a stringer, but a very regular stringer—and I was like, “I don’t want to work for you full-time.” And of course he was insulted, because he was offering me one of the best jobs in—wasn’t offering but suggesting we might have one of the best jobs in journalism for me, and I immediately said no—why would I go all-in with media at this stage, especially without a byline, giving up any sort of notoriety? And then he wrote me off, as any boss would, any reasonable person would.

In the end, it felt at first like I’d given up the keys to the kingdom. But I think this is a big issue, and part of what’s torturing young people—you want to keep optionality in some way, but you give up a lot, particularly with certain jobs, and there’s this tension of how much autonomy you want to maintain.

ASNESS: Yeah. I talk to my own kids about this—the price of failure when you’re young is just not that bad. And they’re raised in an environment where failure feels terrible. Well, Silicon Valley has the opposite attitude, but that’s about it in this country.

SCHRAGER: I think this is one of the problems this generation has—partially because they feel like everything is being recorded, and partially—

ASNESS: Well, they’re right.

SCHRAGER: Though if everything’s recorded, is anything really recorded? But they’re also taught, especially upper-middle-class kids, that there’s a very narrow path to success, and if you deviate from it at all, you fall off the path—if you don’t get into the right school, the right internship, you’re never going to be successful, you’re going to be working the mail room at some sad consulting firm. There’s nothing wrong with working in consulting.

ASNESS: I like that that’s the ultimate failure—and at a consulting firm specifically.

SCHRAGER: So I think that’s one of the reasons they’re so terrified of failure—and, in all fairness, they’ve been conditioned by almost everyone around them that this is true.

ASNESS: Last thing, and then I’m going to turn it over for questions. This tension—that economic statistics say things are good, and people say they are miserable—and the rise of populism on both sides. I’ll say: horseshoe theory has to be upgraded to horseshoe fact. I’ve never heard a populist say things were okay. It’s not sex that sells; it’s bad news that sells. Every populist tells people they’re getting screwed over by something. Do you think that’s part of it? Do you think it’s a compelling message?

SCHRAGER: It’s a compelling message because what they’re promising is more things for you, and that you’re going to get ahead. Like I said, that’s the start of every financial scam, same thing. That’s what they’re promising, so I imagine it’s very compelling. And also you have this rising generation of people who’ve been promised they could get ahead without taking risk. When someone promises them that, it’s even more seductive than normal.

ASNESS: And then when someone comes along to explain who’s ruining nirvana for them, it’s attractive.

SCHRAGER: Someone who took a risk.

ASNESS: Someone who took a risk.