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Key takeaways
● When it comes to work displacement, most of the attention in the past two decades has been focused on lifelong education. Yet although it’s important, it is no magic bullet.
● In an age of constant career shifts, we must make it easier to enter regulated professions. It calls for reinventing occupational licensing based on an alliance between professionals and amateurs.
● Urban housing is the main problem when it comes to dealing with instability. It’s time we redesign the housing market around the more relevant categories of settlers and hunters.
Chapter 11
Institutions for Hunters
“We need to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart. We need to extend finance beyond our major financial capitals to the rest of the world. We need to extend the domain of finance beyond that of physical capital to human capital, and to cover the risks that really matter in our lives. Fortunately, the principles of financial management can now be expanded to include society as a whole. And if we are to thrive as a society, finance must be for all of us—in deep and fundamental ways.”
—Robert J. Shiller[444]
A new breed of consumer finance
My partners and I at The Family are constantly rooting for old incumbents to become more like tech companies. The reason is simple and very much in line with our mission of supporting entrepreneurs: startups cannot succeed in Europe until everyone in the business world is convinced that tech companies will win in the end in every industry. A healthy ecosystem requires that startups and entrepreneurship are taken very seriously by all participants.
Obviously, the financial services industry is one that has yet to convert fully to the new paradigm. And in the spirit of inspiring this industry to reposition in the Entrepreneurial Age, I often talk about innovating in finance in front of various audiences—corporate executives, entrepreneurs, policymakers. My key message is always that the revolution in finance is not about big data, machine learning, chatbots, or crypto protocols. Rather it is about the current paradigm shift and how the financial needs of businesses and households are changing as a result. The financial powerhouses of the Entrepreneurial Age won’t be the firms using the most cutting-edge technology. Rather the winners will be those who design financial products more in line with what the Entrepreneurial Age is about.
Take the case of consumer finance. An entire system has been designed to finance the typical middle class household of the age of the automobile and mass production: a married couple of salaried workers with 2.2 children whose financing needs are related to owning a suburban home and one or two cars, and occasionally borrowing money through a credit card to cover peaks in their consumption. This decades-old mechanism involves central banks, retail banks, payment processors, state subsidies, and various government-sponsored enterprises designed to complement the market.
But the Entrepreneurial Age requires a different mechanism for consumer finance. Widespread instability and constant pressure on workers make households’ financing needs different from what they used to be. How can an employed person ensure the continuity of their income when they found their own business? How can a self-employed person smooth out their income if their business is seasonal? How can a worker borrow money over the long term if they’re subjected to the impoverishing ‘Greater Wal-Mart Effect’? The value propositions of traditional players in consumer finance do not meet these needs which are only becoming more typical—the needs of hunters rather than of settlers.
Ballooning student loans in the US are a sign of the current system's inability to meet today's challenges. Investing heavily in initial training is relevant if the goal is to settle in one particular profession. But it is poor preparation for a career during which an individual will frequently switch jobs. In addition, entering one’s working life burdened with debt means ruling out entrepreneurial ambitions from Day One. The gap between the level of student indebtedness in the US and uncertainty in their future careers explains the diminishing rate of young people starting up new businesses and the related exhaustion of the US prosperity engine. It also inspires the hypothesis of a student loan bubble.
Housing is another example of the exhaustion of legacy consumer finance. Today this field is dominated by the model of homeownership, which has become a strong marker of middle class status and a cornerstone of the Great Safety Net 1.0. It relies on foundational institutions such as Fannie Mae and Freddie Mac, which were founded following the Great Depression with the purpose of securing the financing of home mortgages and raising levels of homeownership.
But in the Entrepreneurial Age in which hunting becomes the norm and settling more of the exception, the stake is not merely to buy a flat or a house close to the factory or office where an individual will hold a job for years. Rather, as previously discussed, it is to be able to move in and out without any hassle and without the upfront costs and potential asset depreciations that come with frequently switching jobs and changing your domicile.
The problem is that banks have not developed products beyond granting home-buying credit to households with savings and a high probability of a stable, single-source income in the future. Despite their purportedly high knowledge of the risk profile of their customers, banks are unable to guarantee rent payments to a landlord or attribute a high credit score based on an individual’s future earning power. The consumer finance we’ve inherited from the past has become irrelevant in an age marked by permanent instability and frequent career shifts.
Thus the financial system needs to deploy more capital in a new breed of consumer finance, one that is designed for hunters rather than for settlers. New value propositions should be to the Entrepreneurial Age what mortgages were to the age of the automobile and mass production.This means not a loan to buy your own house, but rather a loan to make it easier to switch careers in a world where economic security depends on one’s capacity to rebound[445]. As of this writing, hundreds of startups (some obviously more successful than the others) are providing us with an overview of what consumer finance could look like in the future, from paying for higher education with a fraction of your salary once you’re hired[446] to diversifying your assets beyond the home you’re living in[447].
But there are many institutional prerequisites for these new approaches to succeed. First, we need to innovate in the manner in which we assess individual creditworthiness—and on that front ventures such as LendUp[448] or Marcus by Goldman Sachs (a consumer-facing subsidiary of Goldman Sachs)[449] are aiming to help. Second, we should bring the government along, like once happened with Fannie Mae and Freddie Mac, to be the guarantor of a new kind of financial product—not one focused on expensive higher education or suburban homeownership, but one that covers the needs of the fast-growing population of hunters in the Entrepreneurial Age.
The usual objection is that if we give individuals credit to take a sabbatical and make a career shift, most of them will squander it on useless things and end up more miserable as a result. But we need to realize that this imperfection already existed in the times when mortgages were the pillar of consumer finance. Some people used mortgages to make wise investments on dynamic real estate markets; others squandered them buying a house in poorly chosen locations where the value of their asset could only go down. The 2008 crisis itself is the result of the housing economy running amok and enabling people to invest in overvalued assets that neither they nor their bank could recover at face value.
What would be the equivalent of mortgage origination in the case of a career shift credit? I think that the abundance of data creates value that makes it easier for banks to reach better allocation decisions. Much like Amazon in retail and Facebook in design[450], banks need to learn to exploit data so as to turn everything, including failure, into value-creating information. Beyond that, the more comprehensive tracking and predicting of individual income thanks to technol
ogy will make it easier for banks to claim loan reimbursement over longer periods of time.
This could appear as a nightmarish vision of crushing lifelong indebtedness, much like exists with student loans today. But it’s precisely where the government can make a truly beneficial difference once it realizes that this new approach to consumer credit should be an integral part of the Great Safety Net 2.0. As proved by mortgages in the past, there has never been a problem with many households borrowing lots of money over the long term. The real problem is the obsolescence of the old system: nowadays most households are borrowing money for obsolete or overpriced assets (such as a house in a sagging suburban area or too expensive a college education) or merely to compensate for the dissolving Great Safety Net of the past (Colin Crouch’s “Privatized Keynesianism”[451], the policy of sustaining consumer demand through the rise of private debt rather than public spending).
For the state, the goal should be to approach consumer finance in a more entrepreneurial way, starting with the needs of the fast-growing population of hunters and reshuffling the cards between the various players—including between the state and the financial system.
Take the case of unemployment insurance. In the past, when settling on the job and housing markets was the norm, unemployment was the dreaded exception. And as that risk struck mostly those who lacked a proper education, there were problems in covering it: potential insurers would have been tempted to practice adverse selection and cover only the more educated, while those with enough education simply wouldn’t have worried about purchasing such insurance. In that imperfect context (adverse selection against risky customers and lack of interest from the others), it was almost impossible for the market to sustainably cover the risks of career shifts. That’s why the government had to take over by providing unemployment insurance with a mandate, a fair price, and a single-payer mechanism.
Today, however, intermittent unemployment is no longer the exception but more and more the norm. It is a state through which most individuals will frequently pass in their professional life. As it becomes a common transitional situation for more intermittent workers, it also spreads the risks over a much larger population. And so it makes more business sense for bankers and insurers to develop products to address those who are exposed to that risk, providing them with the means to learn a new craft, move into a new home, or simply take the time to regroup and prepare their rebound.
We can find inspiration in various historical precedents, including in the business world. At the beginning of the twentieth century, Henry Goldman (the son of Marcus, the ‘Goldman’ in Goldman Sachs) found a way to underwrite securities for a new breed of companies that didn’t own tangible assets of substantial value: retailers and manufacturers of consumer goods. As recounted by Charles D. Ellis in The Partnership, his voluminous history of Goldman Sachs[452],
“The public securities markets, both debt and equity, had always been carefully based on the balance sheets and the capital assets of the corporations being financed—which is why railroads were such important clients. Henry Goldman showed his creativity in finance: he developed the pathbreaking concept that mercantile companies, such as wholesalers and retailers—having meager assets to serve as collateral for mortgage loans, the traditional foundation for any public financing of corporations—deserved and could obtain a market value for their business franchise with consumers: their earning power.”
Now is the time to reinvent consumer finance with the same spirit of creativity. We should learn to do for hunting individuals in the Entrepreneurial Age what Henry Goldman did for retailers a century ago: provide them with access to capital not based on what they own (the old paradigm of homeownership for settlers), but on what they might earn in the future (the new paradigm of assessing the future earning power of hunters).
As technology makes it easier to enter the banking market, we can count on entrepreneurs to radically shake up the financial system and imagine this new consumer finance for the Entrepreneurial Age. In the old days, being a commercial bank provided a firm with access to the infinite pool of household savings. But it came with a serious price tag. If they wanted to attract household savings, such banks had to operate a vast, dense, and costly network of local branches and comply with tight regulatory frameworks. This is why bankers who had a taste for inventing new things were forced to renounce large consumer markets and fall back on the narrower segment of investment banking—a part of the financial system that, for better or for worse[453], was much more welcoming to financial innovation.
Today, this trade-off between serving households and innovating in banking has all but disappeared for two reasons. First, it has become easier for innovative new entrants to comply with the industry’s regulatory framework, notably because most of the old rules, particularly the separation between commercial banking and investment banking[454], have been dismantled and replaced by prudential rules that simply force banks to tie up capital in proportion with the assets they hold.
Second (and this is where technology truly makes a difference), operating on larger retail markets doesn’t require physical branches anymore. This leads incumbents to close down many branches[455] (suppressing jobs in the process). But it also makes it easier for new entrants to serve customers through digital channels and to design new products that meet the needs of the day. We can see this in the innovations in retail banking brought about by Western startups as well as the widespread disruption of asset management orchestrated by WeChat and Alipay in China[456].
With adequate institutions, households can be better and better served by a financial system tailored for the Entrepreneurial Age rather than for the age of the automobile and mass production. It only needs a helping hand from the state and the complementary contribution of other pillars of the Great Safety Net, including social insurance.
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Dealing a new hand in insurance
We are all exposed to risks in our daily life. And in some cases, they are critical enough that we hire insurers to do the job of covering them. The business of an insurer is to collect premiums in exchange for the promise to compensate its customers for a possible loss. A claim can lead to a payment linked to the temporary lack of income (“I have to stop working due to illness”) or the destruction of an asset (“My house burned down”). It can also lead to providing much-needed services operated by a third party or the insurance company itself.
The reason why governments are involved in insurance is because, as seen above with unemployment insurance, not all risks can be covered by the market in a fair and effective way. In fact, the market of risk coverage is widely affected by many imperfections. Moral hazard is one, as it leads to people taking more risks because someone else supposedly bears the cost of potential damage. Another imperfection is adverse selection. If given the choice, an insurer will refuse to cover those who present individual signs of wider risk exposure. It leads to a somewhat absurd situation: insurance is provided only to those who eventually don’t need it.
The primary level of government intervention on the insurance market is when it makes it mandatory to buy a policy covering a certain risk. In the presence of a mandate, everyone is expected to find an insurer, pay premiums and be covered in case of damage. Car insurance is a well-known example. The existence of a mandate is a guarantee that if an accident occurs, any damage to the cars and their occupants can be paid for—even if, as is often the case, the damages exceed the capacity of the one who provoked the accident to pay them. Insurance mandates exist in real estate as well, notably to cover the risk of fire, and in certain professions subject to occupational licensing, such as law. The outcome of such a mandate is clear: it makes coverage universal and thus broadens the market considerably, attracting many insurers and (in theory) stimulating competition.
The reason why mandatory car insurance is not called social insurance is that insurers are allowed to practice selection. As a result, individuals with a long history of damages ar
e forced to find specialized insurers covering only the riskiest drivers and to pay very high premiums to comply with the mandate.
However this selective approach is not acceptable for every risk. In the case of healthcare, for instance, all individuals will at some point be exposed to terrible situations of distress. The associated cost is so high that an insurer will typically refuse to cover a person who is already ill or likely to become so due to a pre-existing condition. And the problem is that if exclusion (or price-hiking) is an option for insurers, the market is flawed. Most insurers will prefer to exclude potential customers rather than incur the risk of having to pay in case of illness. This is the reason why a cornerstone of the Affordable Care Act of 2010 was to forbid insurers from refusing customers with pre-existing conditions.
In many ways, the mandate and the non-selection rule are two sides of the same coin. The mandate (which makes the insurance universal) provides insurers with the guarantee that everyone will seek to purchase insurance. The no-selection rule (which is an extended version of mutual insurance) unhitches the price from the individual risk profile and makes insurance affordable for everyone instead of only a few. Insurers can afford to not select customers only because the mandate is a guarantee that they’ll have lots of them, collecting enough premiums to cover the losses of those more exposed to risk. Conversely, the mandate is effective because thanks to the non-selection rule everyone, whatever their risk profile, can afford to be insured against a given risk. In the presence of both a mandate and a non-selection rule, the insurance can rightly be called a social insurance.
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