Tuesday, July 01, 2003

Risk-shifting as Economic Stimulus-This is a question I've posed to my on-line Money and Banking class for discussion tomorrow.
One of the metatrends of the last quarter-century has been the increased shifting of risk from businesses and financial institutions to consumers. Here are three examples that come quickly to mind:

--Adjustable rate mortgages shifting interest rate risk to the consumer

--Defined contribution retirement plans, such as 401(K)s, replacing classic defined-benefit pension plans, shifting market risk to the consumer.

--Added copayments and deductibles on health insurance shifting the risks partly to the employee.

Is this trend good for the economy? Is it good for Joe Sixpack?
I'd say yes on both counts. ARMs have allowed people to afford houses they couldn't have afforded with a fixed-rate loan, and since rates have gone down in general since ARMs were popularized two decades ago, the consumer has benefited. Defined benefit plans have given people more power over their retirement. Without having to worry about vesting, they are free to move to better jobs without having to worry about vesting their retirement plan; they can also rest easy in that the company won't let them go just before they're about to vest in order to save putting money into the pension plan. I don't have data to back this up, but 401(K) money seems to be more aggressively invested then pension funds, giving more equity for companies to invest and less debt, thus allowing more risky projects to be done. The shift away from ask-no-questions fee-for-service insurance coverage seems to have reigned in health care costs. It means a bit more paperwork and a little more hassle that the old days, but it seems to have made health care more affordable than it would have been under the old system. Risk is good if it means that people have more flexability and access to higher returns (or lower interest costs in the case of an ARM), which is good both for the economy and for Joe Sixpack. The economy would be growing as a significnantly slower rate without that consumer risk-sharing. That's one of the reasons the US economy is outperforming the rest of the developed world in the long haul.

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